The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A, Risk Factors."

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide the reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. Our MD&A is presented in six sections:

º •
º Executive Summary º •
º Results of Operations º •
º Liquidity and Capital Resources º •
º Contractual Obligations and Commitments º •
º Summary of Critical Accounting Policies and Estimates º •
º New Accounting Standards

EXECUTIVE SUMMARY

TrueBlue, Inc. ("TrueBlue," "we," "us," "our") is an international provider of temporary blue-collar staffing. In 2008, we put approximately 500,000 people to work through the following brands: Labor Ready for general labor, Spartan Staffing for light industrial services, and CLP Resources, PlaneTechs, and TLC for skilled trades. Headquartered in Tacoma, Washington, we serve approximately 250,000 small to mid-sized businesses in the construction, warehousing, hospitality, landscaping, transportation, light manufacturing, retail, wholesale, facilities, sanitation, and aviation industries.

Revenue for 2008 was $1.4 billion, a decrease of 0.1% over the prior year. The decline for the year consisted of 15.6% growth from acquisitions completed within the last 12 months offset by a 15.7% decrease in organic revenue. Growth from acquisitions included several acquisitions. In 2007 we purchased Skilled Services Corporation, a skilled construction trades staffing provider and PlaneTechs, LLC, a skilled staffing provider for aviation maintenance and aero space manufacturing. In 2008 we purchased TLC Services Group, Inc., a professional truck driver staffing provider and Personnel Management, Inc., a light industrial staffing company. The decline in demand for our services accelerated in the fourth quarter. Revenue for the quarter ended December 26, 2008 was $302 million, a decrease of 14.7% compared to the fourth quarter of 2007. The 14.7% revenue decline for the quarter consisted of 12.8% growth from acquisitions completed within the last 12 months offset by a 27.5% decrease in organic revenue.

The U.S. economy is in a recession and as a result we have experienced a significant decrease in demand for blue collar staffing which has negatively impacted our performance. We believe the markets we serve will continue to remain under pressure until the overall economy stabilizes and begins to grow again. In response to the recession we have increased the number of branch closings. Primary factors influencing which branches to close included financial performance, ability to consolidate with another branch, tenure and quality of branch management, market potential of branch location, and long-term potential of the location. During 2008, we closed 73 branches and sold the remaining 29 branches in the United Kingdom. We will continue our focus on aggressive cost management and maintaining a strong balance sheet.

Gross profit as a percentage of revenue decreased during 2008. Gross profit as a percentage of revenue was 29.8% in 2008 compared to 31.9% of revenue during 2007. The impact of acquisitions, pricing pressures resulting from the current economic slowdown, and increased wages paid to our temporary workers due to statutory minimum wage increases are the primary causes for the decline in gross profit as a percentage of revenue. The gross profit as a percentage of revenue of acquired companies has been less than that of our core business creating a decrease in the overall blended gross profit as a percentage of revenue. While we have increased the bill rates to our customers for these pay increases, we have not fully passed through the amount of our standard markup due to an increased level of price sensitivity with our customers associated with slower economic conditions. Pricing pressure on gross profit as a percentage of revenue was partially offset by the improvement in workers' compensation expense which is primarily due to continued improvements in accident prevention and risk management.

Selling, General and Administrative ("SG&A") expenses decreased to 24.0% of revenue for 2008 compared to 24.3% of revenue during 2007. The decrease in SG&A expense as a percentage of revenue was largely attributed to the impact of acquisitions and cost control measures offset by a decline in organic revenue. SG&A expense as a percentage of revenue for acquired companies was lower than that of our core business creating a decrease in the overall blended gross margin. A variety of cost control measures were also implemented in 2008 to decrease SG&A expense. However, the impact of a lower organic revenue base to spread our fixed costs across largely offset the impact from acquisitions and cost control measures. Cost management will remain a focus during this recession.

Net loss for 2008 was $4.2 million, or $0.10 per diluted share, compared to net income of $66.2 million or $1.44 per diluted share for 2007. Results for 2008 include a goodwill and intangible asset impairment charge of $61 million ($49.3 million after tax) or $1.15 per diluted share related to the company's acquisitions over the past five years. Excluding this impairment charge, net income would have been $45.2 million or $1.05 per diluted share. The charge is largely a result of the adverse impact on expected future cash flows related to the current state of the economy. The charge does not impact the company's current cash, liquidity, or banking covenants.

We expect to continue to face a very difficult economic environment throughout fiscal 2009, both in the U.S. and internationally. As the global financial crisis has broadened and intensified, other sectors of the global economy have been adversely impacted and a severe global recession of uncertain length now appears likely. During an economic downturn, businesses generally reduce their use of temporary staffing as they experience a lower level of demand from consumers. As a result, we expect to face a challenging fiscal 2009 because of these economic conditions. Accordingly, we expect to report negative comparable branch sales for fiscal 2009. We plan to be disciplined in our approach to new branch openings and closures and adjust as needed in response to further worsening in the economy.

RESULTS OF OPERATIONS

The following table presents selected consolidated financial data for each of the past three years (in thousands, except per share amounts):

                                                   2008          2007          2006
     Revenue from services                      $ 1,384,269   $ 1,385,656   $ 1,349,118
     Total revenue growth (decline) %                (0.1%)          2.7%          9.1%
     Gross profit as a % of revenue                   29.8%         31.9%         32.1%
     SG&A as a % of revenue                           24.0%         24.3%         23.6%
     Income from operations                     $     2,625   $    93,650   $   104,300
     Income from operations as % of revenue            0.2%          6.8%          7.7%
     Goodwill and intangible asset impairment   $    61,000             -             -
     Depreciation and amortization              $    16,774   $    12,223   $    10,364
     Interest and other income, net             $     5,530   $    10,953   $    11,873
     Effective income tax rate                       151.0%         36.7%         34.2%
     Net income (loss)                          $   (4,159)   $    66,198   $    76,472
     Net income (loss) as a % of revenue             (0.3%)          4.8%          5.7%
     Net income (loss) per diluted share        $    (0.10)   $      1.44   $      1.45

Revenue from services. Revenue for 2008 was $1.4 billion, a decrease of 0.1% over the prior year. The revenue decline for the year consisted of 15.6% growth from acquisitions completed within the last 12 months offset by a 15.7% decrease in organic revenue. Growth from acquisitions included several acquisitions. In 2007 we purchased Skilled Services Corporation, a skilled construction trades staffing provider and PlaneTechs, LLC, a skilled staffing provider for aviation maintenance and aero space manufacturing. In 2008 we purchased TLC Services Group, Inc, a professional truck driver staffing provider and Personnel Management, Inc., a light industrial staffing company. The slowdown in demand for our services accelerated during the fourth quarter. Revenue for the quarter ended December 26, 2008 of $302 million decreased 14.7% compared to the fourth quarter of 2007. The 14.7% revenue decline for the quarter consisted of 12.8% growth from acquisitions completed within the last 12 months offset by a 27.5% decrease in organic revenue. We will continue our focus on aggressive cost management and maintaining a strong balance sheet. In response to the recession we have increased the number of branch closings. Primary factors influencing which branches to close included financial performance, ability to consolidate with another branch, tenure and quality of branch management, market potential of branch location, and long-term potential of the location. During 2008, we closed 73 branches. In December 2008, we sold the remaining 29 branches in the United Kingdom for a total reduction of 102 branches for 2008.

The change in revenue for 2008 compared to 2007 and 2006, respectively, is made up of the following five components:

                                                     2008       2007      2006
           Same branch (1)                            (13.4 %)   (0.2 %)    4.0 %
           New branches (2)                             0.8 %     1.3 %     1.5 %
           Closed branches                             (3.0 %)   (1.7 %)   (0.8 %)
           Currency and other                          (0.1 %)    0.6 %     0.1 %

           Total organic revenue growth (decline)     (15.7 %)    0.0 %     4.8 %
           Acquisitions within last 12 months          15.6 %     2.7 %     4.3 %

           Total sales growth (decline)                (0.1 %)    2.7 %     9.1 %

Revenue from our international operations for 2008 was approximately 5.5% of our total revenue compared to 7.0% and 6.3%, respectively, for 2007 and 2006.

Gross profit. Gross profit as a percentage of revenue was 29.8% for 2008 compared to 31.9% for 2007. Workers' compensation costs as a percentage of revenue for 2008 were approximately 4.1% compared to 4.7% for 2007. The improvement in workers' compensation expense is due primarily due to the continued success of our accident prevention and risk management programs that have been implemented over several years. The decrease in workers' compensation costs was partially offset by an increase in wages paid to temporary workers. There were 48 state minimum wage increases during 2008 as well as minimum wage increases in our international operations. While we have increased the bill rates to our customers for these pay increases, we have not yet fully passed through our standard markup due to an increased level of price sensitivity with our customers associated with slower economic conditions. As a result, our average pay rate increased 3.2% while our average bill rate increased 2.3%.

Gross profit as a percentage of revenue was 31.9% for 2007 compared to 32.1% in 2006. Workers' compensation costs as a percentage of revenue for 2007 were approximately 4.7% compared to 5.6% for 2006. The improvement in workers' compensation expense is primarily due to the success of our accident prevention and risk management programs that have been implemented over several years. The decrease in workers' compensation costs was partially offset by an increase in wages paid to temporary workers. There were 45 state minimum wage increases during 2007 as well as minimum wage increases in our international operations. While we increased the bill rates to our customers for these pay increases, we did not fully pass through our standard markup due to an increased level of price sensitivity with our customers associated with slowing economic conditions. As a result, our average pay rate increased 4.0% while our average bill rate increased 2.3%.

Selling, general, and administrative expenses. SG&A expenses as a percentage of revenue were 24.0% for 2008 and 24.3% and 23.6% for 2007 and 2006, respectively. The decrease in SG&A expense as a percentage of revenue was largely attributed to the impact of acquisitions and cost control measures offset by a decline in organic revenue. SG&A expense as a percentage of revenue for acquired companies was lower than that of our core business creating a decrease in the overall blended SG&A. A variety of cost control measures were also implemented in 2008 to decrease SG&A expense. However, the impact of a lower organic revenue base to spread our fixed costs across largely offset the impact from acquisitions and cost control measures.

The increase in SG&A expenses during 2007 compared to 2006 was primarily due to the decrease in same store branch revenue coupled with general increases in our cost structure. Cost control measures commenced in the prior year were partially offset by lease termination and other costs related to closing 58 branches, transition and integration costs related to acquisitions, and sales development expenses.

Goodwill and Intangible Asset Impairment. Net loss for 2008 includes a goodwill and intangible asset impairment charge of $61 million. We test goodwill and indefinite-lived intangible assets for impairment annually and whenever events or circumstances arise that indicate an impairment may exist such as a significant adverse change in the business climate. Our annual impairment test is performed during the fourth fiscal quarter. Our annual impairment test did not indicate an impairment of our goodwill and indefinite-lived intangible assets. However, in the fourth quarter of 2008, we experienced a significant decline in our stock price. As a result of the decline in stock price, our market capitalization fell significantly below the recorded value of our consolidated net assets. The reduced market capitalization reflected, in part, the current economic climate as well as expected continued weakness in pricing and demand for our temporary staffing services. Further,

the decline in demand for our services accelerated in the fourth quarter. Revenue for the quarter decreased by 14.7% compared to the same quarter a year ago. The 14.7% revenue decline consisted of growth from acquisitions completed within the last 12 months of 12.8%, offset by a decline in organic revenue of 27.5%. On a monthly same branch basis, the year over year decline dropped from 19.8% in October to 29.0% in December. This decline was not isolated to a particular brand or market. The decline in revenue and the corresponding decline in operating results as well as expected continued weakness in pricing and demand for our temporary staffing services is expected to continue during the current recession. Accordingly, we performed an interim assessment of goodwill for impairment. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are our brands based on our organizational structure and the financial information that is provided to and reviewed by management. As a result of this analysis, we concluded that the carrying amounts of goodwill for the CLP Resources (which includes SSC), Spartan Staffing (which includes PMI) and TLC reporting units exceeded their implied fair values and we recorded non-cash impairment losses of $46 million, which is included in impairment of goodwill and intangible assets on TrueBlue's Consolidated Statement of Operations. Our assessment of goodwill impairment indicated that as of December 26, 2008, the fair value of each of the Labor Ready and PlaneTechs reporting units exceeded its carrying value and therefore goodwill was not impaired.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that long-lived assets, including amortizable intangible assets, be reviewed for impairment whenever events and circumstances indicate the carrying value may not be recoverable. As a result of the indicators discussed above, we tested our amortizable intangible assets for impairment and determined that certain intangible assets associated with the CLP Resources (which includes SSC), Spartan Staffing (which includes PMI) and TLC asset groups, primarily customer relationships, were impaired mainly due to the revised lower revenue and profit forecasts associated with those customer relationships acquired with the acquisitions of CLP, Spartan Staffing and TLC. We measured the amount of impairment by calculating the amount by which the carrying value of these assets exceeded their estimated fair values, which were based on projected undiscounted future net cash flows. As a result of this review, we recorded non-cash impairment losses totaling $15 million prior to our SFAS 142 impairment test. The non-cash impairment loss is included in impairment of goodwill and intangible assets on TrueBlue's Consolidated Statement of Operations.

Depreciation and amortization expense. Depreciation and amortization expense is $16.8 million for 2008 and $12.2 million and $10.4 million for 2007 and 2006, respectively. The portion of the $16.8 million in depreciation and amortization related to the amortization of intangibles as a result of our acquisitions over the past 5 years is $7.0 million for 2008. The portion of the 2007 and 2006 depreciation of acquired intangibles is $3.1 million and $2.5 million, respectively. The increase during 2008 was primarily due to depreciation of our investments in technology and increased amortization of intangibles as a result of the TLC and PMI acquisitions as well as a full year of amortization of intangibles related to the acquisition of PlaneTechs in 2007. The increase during 2007 as compared to 2006 was primarily attributable to the increased amortization of intangibles as a result of the SSC acquisition and depreciation of our investments in technology.

Interest and other income, net. We recorded net interest and other income of $5.5 million for 2008 compared to $11.0 million for 2007 and $11.9 million for 2006. Net interest income was lower primarily due to lower yields on invested cash. The decrease during 2007 compared to 2006 was attributable to the use of cash to purchase our common stock and for the acquisition of SSC and PlaneTechs which resulted in a decrease in the amount of cash available for investment.

Income tax. Our effective income tax rate was 151% in 2008. Results for 2008 include a goodwill and intangible asset impairment charge of $61 million. Excluding this impairment charge, net income would have been $45.2 million or an effective tax rate of 34.7% as compared to 36.7% in 2007 and 34.2% in 2006. The principal difference between the statutory federal income tax rate of 35.0% and our effective income tax rate results from state income taxes, federal tax credits, tax exempt interest income, and certain non-deductible expenses. Our 2008 effective tax rate of 34.7% excluding the effect of the impairment charge was lower than our 2007 rate primarily due to the favorable resolution of certain state income tax matters during the second quarter of 2008. Our 2006 effective tax rate was lower than our 2007 rate due to the retroactive renewal of certain tax credits and favorable resolution of other income tax matters during the fourth quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is operating cash flows. Our net income and, consequently, our cash provided from operations are impacted by sales volume, seasonal sales patterns and profit margins. Over the past three years, cash from operations provided approximately $299.2 million.

Cash flows from operating activities

Our cash flows provided by operating activities were as follows (in thousands):

                                                       2008        2007        2006
     Net income (loss)                               $  (4,159 ) $  66,198   $  76,472
     Goodwill and intangible asset impairment           61,000           -           -
     Depreciation and amortization                      16,774      12,223      10,364
     Provision for doubtful accounts                     9,374       9,987       7,215
     Stock-based compensation                            7,706       6,943       6,377
     Excess tax benefits from stock-based
     compensation                                            -      (1,451 )    (3,527 )
     Deferred income taxes                               2,960      (8,696 )    (3,169 )
     Other operating activities                           (311 )       401          56
  Changes in operating assets and liabilities,
  exclusive of businesses acquired:
     Accounts receivable                                36,602     (10,897 )    (5,429 )
     Income taxes                                      (25,170 )    12,359       4,797
     Workers' compensation                               1,680       5,748      21,576
     Accounts payable and accrued expenses             (14,014 )    (2,271 )    (3,866 )
     Other                                                  (4 )     8,110      (2,715 )

  Net cash provided by operating activities          $  92,438   $  98,654   $ 108,151

º •
º Results for 2008 include a goodwill and intangible asset impairment charge of $61 million related to the company's acquisitions over the past five years. Excluding this impairment charge, net income would have been $45.2 million. The charge is largely a result of the adverse impact on expected future cash flows related to the current state of the economy. The charge does not impact the company's current cash, liquidity, or banking covenants. º •
º The increased depreciation and amortization is primarily due to amortization of intangibles resulting from our acquisitions over the past 5 years. Amortization of acquired intangibles is $7.0 million, $3.1 million and $2.5 million for 2008, 2007 and 2006, respectively. In February 2008, we acquired TLC which specializes in providing professional truck drivers and logistics personnel to the transportation and distribution industries. In April 2008, we added 44 branches to our light industrial temporary services with the purchase of PMI. PMI was integrated with the Spartan Staffing brand effective December 27, 2008. In December 2007, we acquired PlaneTechs which provides skilled staffing to the aviation maintenance, repair and overhaul, and aerospace manufacturing and assembly industries. In April 2007, we acquired SSC, a skilled construction trades staffing provider. SSC was integrated with the CLP Resources brand. º •
º The change in deferred taxes during 2007 is due to increases in deferred tax assets related to the increases in the workers' compensation reserve, reserves related to branch closures and contingencies that are not deductible until paid. º •
º Changes in accounts receivable during 2008 are primarily due to the economic recession and resulting declines in sales and associated receivables. º •
º Changes in accounts payable and accrued expenses during 2008 are primarily due to the cost control measures and response to the economic recession. º •
º Generally, our workers' compensation reserve for estimated claims increases as we increase temporary labor services provided. The rate of increase has slowed with the success of our accident prevention programs and the economic down turn. º •
º The change in income tax receivable during 2008 is primarily due to current tax deductions for internally developed software and a corresponding claim for refund of estimated tax payments.

Cash flows from investing activities

Our cash flows used in investing activities were as follows (in thousands):

                                                        2008         2007        2006
   Capital expenditures                               $ (26,137 ) $  (21,040 ) $ (13,007 )
   Purchases of marketable securities                   (27,158 )   (191,032 )   (88,266 )
   Maturities of marketable securities                   38,087      271,580      90,301
   Acquisitions of businesses, net of cash acquired     (22,390 )    (76,902 )         -
   Change in restricted cash                             12,174       11,234       8,948
   Other                                                    (11 )       (167 )       214

 Net cash used in investing activities                $ (25,435 ) $   (6,327 ) $  (1,810 )

º •
º Capital expenditures in 2008, 2007 and 2006 increased primarily due to significant investments made to upgrade our proprietary systems. We anticipate that total capital expenditures will be approximately $14.0 million in 2009. º •
º We had net maturities of marketable securities in 2008, 2007 and 2006. Net maturities of marketable securities were higher in 2008 and 2007 as funds that would have been used to purchase additional marketable securities were used to fund share purchases and the acquisitions of SSC, PlaneTechs, TLC, and PMI. º •
º In March 2008, we purchased substantially all of the assets of TLC, a skilled truck-driver staffing provider for $5.4 million. In April 2008, we purchased PMI, a privately-held industrial staffing provider for $17.0 million. º •
º In April 2007, we purchased SSC, a skilled construction trades staffing provider for $26.3 million. In December 2007, we purchased substantially all of the assets of PlaneTechs, a leading provider of aircraft maintenance staffing for $50.5 million. º •
º The change in restricted cash is primarily due to a decrease in the collateral requirements for our workers' compensation program.

Cash flows from financing activities

Our cash flows used in financing activities were as follows (in thousands):

                                                      2008         2007        2006
    Purchases and retirement of common stock        $ (15,997 ) $ (150,310 ) $ (88,744 )
. . .