Overview

Barrett Business Services, Inc. ("Barrett", the "Company" or "we"), a Maryland corporation, offers a comprehensive range of human resource management services to help small and medium-sized businesses manage the increasing costs and complexities of a broad array of employment-related issues. The Company's principal services, professional employer organization ("PEO") services and staffing services, assist its clients in leveraging their investment in human capital. The Company believes that the combination of these two principal services enables it to provide clients with a unique blend of services not offered by the Company's competition. Barrett's platform of outsourced human resource management services is built upon expertise in payroll processing, employee benefits and administration, workers' compensation coverage, effective risk management and workplace safety programs, and human resource administration.

To provide PEO services to a client, the Company enters into a contract to become a co-employer of the client's existing workforce and Barrett assumes responsibility for some or all of the client's human resource management responsibilities. PEO services are normally used by organizations to satisfy ongoing human resource management needs and typically involve contracts with a minimum term of one year, renewable annually, which cover all employees at a particular work site. Staffing services include on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and comprehensive on-site management. The Company's staffing services also include direct placement services, which involve fee-based search efforts for specific employee candidates at the request of PEO clients, staffing customers or other companies.

The Company's ability to offer clients a broad mix of services allows Barrett to effectively become the human resource department and a strategic business partner for its clients. The Company believes its approach to human resource management services is designed to positively affect its clients' business results by:

• allowing clients to focus on core business activities instead of human resource matters;

• increasing clients' productivity by improving employee satisfaction and generating greater employee retention;

• reducing overall payroll expenses due to lower workers' compensation and health insurance costs; and

• assisting clients in complying with complex and evolving human resource-related regulatory and tax issues.

The Company serves a growing and diverse client base of small and medium-sized businesses in a wide variety of industries through a network of branch offices in California, Oregon, Washington, Idaho, Arizona, Utah, Colorado, Maryland, Delaware and North Carolina. Barrett also has several smaller recruiting offices in its general market areas, which are under the direction of a branch office.

                        BARRETT BUSINESS SERVICES, INC.



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


Results of Operations

The following table sets forth a percentages of total revenues represented by
selected items in the Company's Consolidated Statements of Operations for the
three months ended March 31, 2009 and 2008.



                                                   Percentage of Total Revenues
                                                        Three Months Ended
                                                             March 31,
                                                    2009                  2008
  Revenues:
  Staffing services                                     47.1 %                54.1 %
  Professional employer service fees                    52.9                  45.9

  Total revenues                                       100.0                 100.0

  Cost of revenues:
  Direct payroll costs                                  35.4                  39.9
  Payroll taxes and benefits                            44.3                  36.9
  Workers' compensation                                 13.1                  10.3

  Total cost of revenues                                92.8                  87.1

  Gross margin                                           7.2                  12.9
  Selling, general and administrative expenses          15.7                  13.1
  Depreciation and amortization                          0.8                   0.5

  Loss from operations                                  (9.3 )                (0.7 )
  Other income                                           0.3                   0.9

  (Loss) income before taxes                            (9.0 )                 0.2
  (Benefit from) provision for income taxes             (2.8 )                 0.1

  Net (loss) income                                     (6.2 )%                0.1 %

We report PEO revenues in accordance with the requirements of Emerging Issues Task Force No. 99-19, "Reporting Revenues Gross as a Principal Versus Net as an Agent" ("EITF No. 99-19"), which requires us to report such revenues on a net basis because we are not the primary obligor for the services provided by our PEO clients to their customers pursuant to our PEO contracts. We present for comparison purposes the gross revenues and cost of revenues information set forth in the table below. Although not in accordance with GAAP, management believes this information is more informative as to the level of our business activity and more illustrative of how we manage our operations, including the preparation of our internal operating forecasts, because it presents our PEO services on a basis comparable to our staffing services.

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

Results of Operations (Continued)

The presentation of revenues on a net basis and the relative contributions of staffing and PEO revenues can create volatility in our gross margin percentage. The general impact of fluctuations in our revenue mix is described below.

• A relative increase in staffing revenues will typically result in a lower gross margin percentage. Staffing revenues are presented at gross with the related direct costs reported in cost of sales. While staffing relationships typically have higher margins than PEO relationships, an increase in staffing revenues and related costs presented at gross dilutes the impact of the net PEO revenue on gross margin percentage.

• A relative increase in PEO revenue will result in a higher gross margin percentage. Improvement in gross margin percentage occurs because incremental PEO revenue dollars are reported as revenue net of all related direct costs.

                                                      Unaudited
                                                  Three Months Ended
                                                      March 31,
               (in thousands)                      2009        2008
               Revenues:
               Staffing services                $   24,042   $  35,819
               Professional employer services      203,825     223,761

               Total revenues                      227,867     259,580

               Cost of revenues:
               Direct payroll costs                193,556     217,853
               Payroll taxes and benefits           22,626      24,445
               Workers' compensation                 7,996       8,720

               Total cost of revenues              224,178     251,018

               Gross margin                     $    3,689   $   8,562

                        BARRETT BUSINESS SERVICES, INC.



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


Results of Operations (Continued)

A reconciliation of non-GAAP gross PEO revenues to net PEO revenues is as
follows:



                                                        Unaudited Three Months Ended March 31,
                                          Gross Revenue                                         Net Revenue
                                        Reporting Method          Reclassification            Reporting Method
(in thousands)                          2009        2008         2009           2008          2009        2008
Revenues:
Staffing services                     $  24,042   $  35,819   $       -      $       -      $  24,042   $ 35,819
Professional employer services          203,825     223,761     (176,795 )     (193,386 )      27,030     30,375

Total revenues                        $ 227,867   $ 259,580   $ (176,795 )   $ (193,386 )   $  51,072   $ 66,194

Cost of revenues                      $ 224,178   $ 251,018   $ (176,795 )   $ (193,386 )   $  47,383   $ 57,632

The amount of the reclassification is comprised of direct payroll costs and safety incentives attributable to our PEO client companies.

Three months ended March 31, 2009 and 2008

Net loss for the first quarter of 2009 amounted to $3.2 million, a decline of $3.3 million from net income of $91,000 for the first quarter of 2008. The decline for the first quarter of 2009 was primarily due to lower revenues and lower gross margin dollars. Diluted loss per share for the first quarter of 2009 was $.30 compared to a diluted earnings per share of $.01 for the comparable 2008 period.

Revenues for the first quarter of 2009 totaled $51.1 million, a decrease of approximately $15.1 million or 22.8%, which reflects a decrease in both the Company's staffing service revenue and PEO service fee revenue. Staffing services revenue decreased approximately $11.8 million or 32.9% due to a significant decline in demand for our staffing services from existing customers in the majority of our markets. Management expects demand for the Company's staffing services will continue to reflect overall economic conditions in its market areas. PEO service fee revenue decreased approximately $3.3 million or 11.0% from the comparable 2008 quarter primarily due to a decline in business as a result of decreased hours worked at existing PEO customer worksites.

Gross margin for the first quarter of 2009 totaled approximately $3.7 million, which represented a decrease of $4.9 million from the first quarter of 2008, primarily due to the 22.8% decline in revenues, higher payroll taxes and benefits and higher workers' compensation costs as a percentage of revenues. The gross margin percent decreased from 12.9% of revenues for the first quarter of 2008 to 7.2% for the first quarter of 2009. The increase in payroll taxes and benefits, as a percentage of revenues, from 36.9% for the first quarter of 2008 to 44.3% for the first quarter of 2009, was principally due to higher statutory state unemployment tax rates in various states in which the Company operates as compared to the first quarter of 2008.

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

Results of Operations (Continued)

Three months ended March 31, 2009 and 2008 (Continued)

Workers' compensation expense, as a percent of revenues, increased from 10.3% in the first quarter of 2008 to 13.1% in the first quarter of 2009. Workers' compensation expense for the first quarter of 2009 totaled $6.7 million, compared to $6.8 million for the first quarter of 2008. The increase in the expense as a percentage of revenues was primarily due to higher estimates for new claim costs and to increases in estimates for existing claims in states where the Company is self-insured. The decrease in direct payroll costs, as a percentage of revenues, from 39.9% for the first quarter of 2008 to 35.4% for the first quarter of 2009 was largely due to the significant decline in staffing services business.

Selling, general and administrative ("SG&A") expenses for the first quarter of 2009 amounted to approximately $8.0 million, a decline of $629,000 or 7.3% from the first quarter of 2008. The decrease from the first quarter of 2008 was primarily attributable to lower branch management payroll, lower profit sharing and an overall reduction in variable operating expenses due to the decline in business activity.

Other income for the first quarter of 2009 was $115,000 compared to other income of $626,000 for the first quarter of 2008. The decline in other income for the first quarter of 2009 was primarily attributable to decreased investment income earned on the Company's cash and investments resulting from a significant decline in investment yields.

The income tax rate for the 2009 first quarter was 31.3% compared to the 2008 first quarter rate of 36.2%. The decrease in the income tax rate for the 2009 first quarter is primarily due to an expected increase in federal tax credits and federal tax-exempt interest income as a percentage of taxable income.

Factors Affecting Quarterly Results

The Company has historically experienced significant fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company's operating results may fluctuate due to a number of factors such as seasonality, wage limits on statutory payroll taxes, claims experience for workers' compensation, demand and competition for the Company's services and the effect of acquisitions. The Company's revenue levels may fluctuate from quarter to quarter primarily due to the impact of seasonality on its staffing services business and on certain of its PEO clients in the agriculture, food processing and construction-related industries. As a result, the Company may have greater revenues and net income in the third quarter of its fiscal year. Revenue levels in the fourth quarter may be affected by many customers' practice of operating on holiday-shortened schedules. Payroll taxes and benefits fluctuate with the level of direct payroll costs, but tend to represent a smaller percentage of revenues and direct payroll later in the Company's fiscal year as federal and state statutory wage limits for unemployment and social security taxes are exceeded on a per employee basis. Workers' compensation expense varies with both the frequency and severity of workplace injury claims reported during a quarter and the estimated future costs of such claims. Adverse loss development of prior period claims during a subsequent quarter may also contribute to the volatility in the Company's estimated workers' compensation expense.

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

Liquidity and Capital Resources

The Company's cash position for the three months ended March 31, 2009 increased $2.9 million over December 31, 2008, which compares to a decrease of $8.3 million for the comparable period in 2008. The increase in cash at March 31, 2009 as compared to December 31, 2008, was primarily due to proceeds from sales and maturities of marketable securities of $6.0 million, offset in part by a net loss during the period of $3.2 million.

Net cash provided by operating activities for the three months ended March 31, 2009 amounted to $707,000, compared to cash used in operating activities of $1.1 million for the comparable 2008 period. For the three months ended March 31, 2009, cash flow was principally provided by an increase of $7.4 million in accrued payroll and benefits, offset in part by a net loss during the period of $3.2 million, an increase in trade accounts receivable of $2.0 million and a decrease in deferred income taxes of $1.4 million.

Net cash provided by investing activities totaled $5.2 million for the three months ended March 31, 2009 compared to cash used in investing activities of $4.8 million for the similar 2008 period. For the 2009 period, cash from investing activities was principally provided by the proceeds totaling $6.0 million from sales and maturities of marketable securities and proceeds totaling $1.2 million from sales and maturities of registered marketable securities, offset in part by purchases of $1.6 million of restricted marketable securities. The transactions related to restricted marketable securities were scheduled maturities and the related replacement of such securities held for workers' compensation surety deposit purposes. The Company presently has no material long-term capital commitments.

Net cash used in financing activities for the three-month period ended March 31, 2009 was $3.0 million as compared to $2.4 million for the similar 2008 period. For the 2009 period, the principal use of cash for financing activities was the Company's repurchase of 233,600 shares of its common stock for $2.2 million under the approved repurchase program and the payment of regular quarterly cash dividends totaling $844,000 to holders of the Company's Common Stock.

As disclosed in Note 3 to the consolidated financial statements in this report, the Company acquired certain assets of First Employment Services, Inc., a privately held staffing services company with offices in Tempe and Phoenix, Arizona, effective February 4, 2008. As consideration for the acquisition, the Company paid $3.8 million in cash and agreed to pay additional consideration of $1.2 million contingent upon the first 12 months of financial performance. Management completed the evaluation of the financial performance criteria for the 12-month period during the first quarter of 2009 and determined no additional consideration was due.

The Company's business strategy continues to focus on growth through the expansion of operations at existing offices, together with the selective acquisition of additional personnel-related business, both in its existing markets and other strategic geographic markets. The Company periodically evaluates proposals for various acquisition opportunities, but there can be no assurance that any additional transactions will be consummated.

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

Liquidity and Capital Resources (Continued)

The Company renewed its credit agreement (the "Credit Agreement") with its principal bank effective July 1, 2008. The Credit Agreement provides for an unsecured revolving credit facility of up to $7.0 million, which includes a subfeature under the line of credit for standby letters of credit up to $7.0 million as to which there were $6.7 million outstanding at March 31, 2008 in connection with various surety deposit requirements for workers' compensation purposes. The interest rate on advances against the revolving credit facility, if any, will be, at the Company's discretion, either (i) equal to the prime rate or (ii) LIBOR plus 1.50%. The Credit Agreement expires July 1, 2009.

Pursuant to the Credit Agreement, the Company is required to maintain compliance with the following covenants: (1) net income after taxes not less than $1.00 (one dollar) on an annual basis, determined as of each fiscal year end, and
(2) pre-tax profit of not less than $1.00 (one dollar) on a quarterly basis, determined as of each fiscal quarter end.

The Company has obtained the bank's agreement to waive the violation of the second financial covenant requiring pre-tax profit of not less than $1.00 on a quarterly basis as of March 31, 2009. The Company is currently negotiating revised terms with the bank that it expects will result in the elimination of its line of credit, extension of its existing standby letters of credit, with new or increased letters of credit subject to bank approval, and revised financial covenants focused on liquidity at quarter-end and annual profitability.

Management expects that current liquid assets and the funds anticipated to be generated from operations will be sufficient in the aggregate to fund the Company's working capital needs for the next twelve months.

Inflation

Inflation generally has not been a significant factor in the Company's operations during the periods discussed above. The Company has taken into account the impact of escalating medical and other costs in establishing reserves for future expenses for self-insured workers' compensation claims.

Forward-Looking Information

Statements in this report which are not historical in nature, including discussion of economic conditions in the Company's market areas and effect on revenue levels, the potential for and effect of past and future acquisitions, the effect of changes in the Company's mix of services on gross margin, the adequacy of the Company's workers' compensation reserves and allowance for doubtful accounts, the effect of the Company's formation of a wholly owned, fully licensed captive insurance subsidiary and becoming self-insured for certain business risks, the effectiveness of the Company's management information systems, payment of future dividends, and the availability of financing and working capital to meet the Company's funding

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

Forward-Looking Information (Continued)

requirements, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors with respect to the Company include difficulties associated with integrating acquired businesses and clients into the Company's operations, economic trends in the Company's service areas, material deviations from expected future workers' compensation claims experience, the effect of changes in the workers' compensation regulatory environment in one or more of the Company's primary markets, collectibility of accounts receivable, the carrying values of deferred income tax assets and goodwill, which may be affected by the Company's future operating results, the availability of capital or letters of credit necessary to meet state-mandated surety deposit requirements for maintaining the Company's status as a qualified self-insured employer for workers' compensation coverage, and the use of $57.0 million in cash and marketable securities, among others. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.