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

# _________________FORM 10-K _________________

ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934



For the fiscal year
ended December 31, 2005Commission File Number
0-21886

# BARRETT BUSINESS SERVICES,
INC.

(Exact name of
registrant as specified in its charter)

|                                                                 |                                 
|---------------------------------------------------------------- | --------------------------------
|Maryland                                                         | 52-0812977                      
|(State or other jurisdiction of   incorporation or organization) | (IRS EmployerIdentification No.)
|8100 NE Parkway Drive, Suite 200 Vancouver, Washington           | 98662                           
|(Address of principal executive offices)                         | (Zip Code)                      

(360) 828-0700(Registrants
telephone number, including area code)

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

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, Par Value
$.01 Per Share

(Title of class)

Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No __

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.  __

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer
(as indicated by Exchange Act Rule
12 b-2).

Large accelerated filer __
      Accelerated filer __       Non-accelerated filer X

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

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

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

State the aggregate market value of
the common equity held by non-affiliates of the registrant: $63,305,608 at June 30, 2005.

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

|                                       |                                 
|-------------------------------------- | --------------------------------
|Class                                  | Outstanding at February 28, 2006
|Common Stock, Par Value $.01 Per Share | 11,088,395 Shares               

DOCUMENTS INCORPORATED
BY REFERENCE

Portions of the definitive Proxy
Statement for the 2006 Annual Meeting of Stockholders are hereby incorporated by
reference into Part III of Form 10-K.

---



# BARRETT BUSINESS
SERVICES, INC.2005 ANNUAL REPORT ON
FORM 10-K TABLE OF CONTENTS

|                     | PART I                                                                                                       | Page 
|-------------------- | ------------------------------------------------------------------------------------------------------------ | -----
|Item 1.              | Business                                                                                                     | 2    
|Item 1A.             | Risk Factors                                                                                                 | 12   
|Item 1B.             | Unresolved Staff Comments                                                                                    | 18   
|Item 2.              | Properties                                                                                                   | 19   
|Item 3.              | Legal Proceedings                                                                                            | 19   
|Item 4.              | Submission of Matters to a Vote of Security Holders                                                          | 19   
|                     | Executive Officers of the Registrant                                                                         | 19   
|                     | PART II                                                                                                      |      
|Item 5.              | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 21   
|Item 6.              | Selected Financial Data                                                                                      | 22   
|Item 7.              | Management's Discussion and Analysis of Financial Conditions and Results of Operations                       | 23   
|Item 7A.             | Quantitative and Qualitative Disclosures About Market Risk                                                   | 33   
|Item 8.              | Financial Statements and Supplementary Data                                                                  | 33   
|Item 9.              | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         | 33   
|Item 9A.             | Controls and Procedures                                                                                      | 33   
|Item 9B.             | Other Information                                                                                            | 33   
|                     | PART III                                                                                                     |      
|Item 10.             | Directors and Executive Officers of the Registrant                                                           | 34   
|Item 11.             | Executive Compensation                                                                                       | 34   
|Item 12.             | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 34   
|Item 13.             | Certain Relationships and Related Transactions                                                               | 34   
|Item 14.             | Principal Accountant Fees and Services                                                                       | 34   
|                     | PART IV                                                                                                      |      
|Item 15.             | Exhibits and Financial Statement Schedules                                                                   | 35   
|Financial Statements |                                                                                                              | F - 1
|Signatures           |                                                                                                              |      
|Exhibit Index        |                                                                                                              |      

- 1 -

---



# PART I

# Item 1. BUSINESS

General

Barrett
Business Services, Inc. (Barrett, the Company, our or
we), was incorporated in the state of Maryland in 1965. We offer 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. Our principal services, Professional Employer Organization
(PEO) and staffing, assist our clients in leveraging their investment in human
capital. We believe that the combination of these two principal services enables us to
provide our clients with a unique blend of services not offered by our competition. Our
platform of outsourced human resource management services is built upon our expertise in
payroll processing, employee benefits and administration, workers compensation
coverage, effective risk management and workplace safety programs and human resource
administration.

In
a PEO arrangement, we enter into a contract to become a co-employer of the clients
existing workforce and assume responsibility for some or all of the clients human
resource management responsibilities. Staffing services include on-demand or short-term
staffing assignments, long-term or indefinite-term contract staffing and comprehensive
on-site management. Our staffing services also include direct placement services, which
involve fee-based search efforts for specific employee candidates at the request of our
PEO clients, staffing customers or other companies.

Our
ability to offer clients a broad mix of services allows us to effectively become the human
resource department and a strategic business partner for our clients. We believe our
approach to human resource management services is designed to positively affect our
clients business results by:

| |  | allowing
our clients to focus on core business activities instead of human resource matters;
| | - | --------------------------------------------------------------------------------------------

| |  | increasing
our clients' productivity by improving employee satisfaction and generating greater
employee retention;
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | reducing
overall payroll expenses due to lower workers' compensation costs; and
| | - | -------------------------------------------------------------------------------

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

We
provide services to a diverse array of customers, including, among others, electronics
manufacturers, various light-manufacturing industries, forest products and
agriculture-based companies, transportation and shipping enterprises, food processing,
telecommunications, public utilities, general contractors in numerous construction-related
fields and various professional services firms. During 2005, we provided staffing services
to approximately 2,000 staffing services customers, which was similar to 2004. In
addition, at December 31, 2005, we served approximately 810 PEO clients and employed
approximately 21,200 employees pursuant to PEO contracts, as compared to 600 PEO clients
and approximately 15,500 employees as of December 31, 2004. We serve our clients, who have
employees located in 17 states and the District of Columbia, through a network of 36
branch offices in California, Oregon, Washington, Idaho, Arizona, Maryland, Delaware and
North Carolina. We also have several smaller recruiting offices in our general market
areas, which are under the direction of a branch office. Effective January 1, 2006, we
added two more offices in Idaho and one in Colorado through the acquisition of Pro HR,
LLC.

- 2 -

---



Market Opportunity

The
human resource outsourcing industry is large and growing rapidly. Some of the key factors
driving growth include the desire of businesses to outsource non-core business functions,
to reduce regulatory compliance risk, to rationalize the number of service providers that
they use, and to reduce costs by integrating human resource systems and processes.

The
outsourcing of business processes represents a growing trend within the United States. By
utilizing the expertise of outsourcing service providers, businesses are able to reduce
processing costs and administrative burdens while at the same time offering competitive
benefits for their employees. The technical capabilities, knowledge and operational
expertise that we have built, along with our broad portfolio of services for clients, have
enabled us to capitalize on the growing business processing outsourcing trend.

We
believe that the small and medium-sized business segment of the human resource outsourcing
market is particularly attractive because:

| |  | this
segment is large and has a low penetration rate by providers of outsourced comprehensive
human          resource services;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | small
and medium-sized businesses typically have fewer in-house resources than larger
businesses and, as a result, are generally more dependent on their service providers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | quality
of service, ease-of-use and responsiveness to clients needs are key considerations
of this business segment in selecting a service provider;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | small
and medium-sized businesses generally do not require customized solutions, enabling
service providers to achieve significant economies of scale through an integrated
technology and service platform; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | this
segment is generally characterized by a relatively high client retention rate and lower
client acquisition costs.
| | - | ----------------------------------------------------------------------------------------------------------------------

Our Strategic Approach

Our
long-term goal is to become the leading provider of human resource outsourcing services
for small and medium-sized businesses. We seek to differentiate our strategic position by
offering a full spectrum of PEO and staffing services. We believe that the integrated
nature of our service platform assists our clients and customers in successfully aligning
and strengthening their organizational structure to meet the demands of their businesses.
In pursuit of this goal, we have adopted the operating and growth strategies described
below to provide the framework for our future growth, while maintaining the quality and
integrity of our current service offerings.

Operating Strategy

| |  | Provide
a broad scope of services. We provide our clients with a broad range of human
resource management tools and professional services that meet their critical human
resource needs. We believe that most human resource service providers offer discrete
services, requiring client companies to engage and manage multiple vendors in order to
obtain a comprehensive human resource management solution. Companies that purchase
services from multiple vendors typically fail to realize the benefits and economies of
scale of having a single, integrated source of human resource information. Our
comprehensive solutions allow our clients to maximize the value realized from integrating
information and establishing a partnership with a single vendor to address all of their
human resource needs. We believe that the aggregate cost of purchasing discrete services
from multiple vendors is greater than the cost of purchasing our integrated solution,
such that we can offer cost savings and managerial efficiencies to our clients.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 3 -

---



| |  | Promote
a decentralized and autonomous management philosophy and structure. We hire
senior-level managers to oversee, develop and expand our business at the branch-office
level. We believe that highly experienced senior-level branch managers possess the
skillset to handle the day-to-day demands of our business and still be proactive in
solving client needs and focusing on further business development. We believe that by
making significant investments in the best management talent available, within their
respective areas of expertise, we can leverage the value of this investment many times
over. We have also found that this philosophy facilitates our ability to attract and
retain additional experienced senior-level managers to oversee our branch offices.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Motivate
employees through a competitive compensation package. We offer a very competitive
base salary structure at the branch-office level and provide the opportunity to earn
additional profit sharing on a quarterly basis. This profit sharing is earned by each
branch-level employee based upon branch office profitability after achieving certain
minimum profitability standards. Our risk managers have an opportunity to earn incentive
compensation based upon the workers compensation claims experience of their
specific client base. All profit sharing and incentive compensation measures are tangible
and objective, with few subjective components.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Control
workers compensation costs through effective risk management. We are committed
to the proactive mitigation of workers compensation risk through stringent
underwriting and disciplined management processes. Our chief executive officer defines
and maintains our strict underwriting standards. Our underwriting process begins with the
selection of only the best candidate companies with which to work. Next, our professional
risk managers in the field corroborate the underwriting data by assessing the candidates
operating culture, workplace safety standards and human resource administration
philosophies, including compensation rates and benefit levels. If the candidate company
satisfies all underwriting standards, then we accept the company and immediately
implement a plan to further strengthen their workplace safety standards and practices. If
the clients safe-work culture or adherence to workplace safety procedures declines
to unsatisfactory levels, we will terminate the relationship under the terms of our
contract.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Growth Strategy

| |  | Support,
strengthen and expand branch office operations. We believe that increasing the
penetration of our existing markets is an effective and cost-efficient means of growth as
we are able to capitalize on our reputation and growing brand awareness in the
territories in which we operate. We believe that there is substantial opportunity to
further penetrate these territories. We intend to increase our penetration in our
existing markets by continued growth through the effective use of insurance broker
networks, referrals from current clients and marketing efforts within the local business
community.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increase
client utilization of our services. We believe that we will be able to continue to
maintain our average level of professional service fees per client employee and improve
client retention as our clients more fully utilize our current service offerings. We
invest substantial time integrating our services into our client organizations to
optimize their effectiveness and measure their results. Our long-term partnership
philosophy provides us with the opportunity to expand our PEO and staffing services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 4 -

---



| |  | Enhance
management information systems. We continue to invest in developing our information
technology infrastructure. We believe that our platform gives us a competitive advantage
by allowing us to provide a high level of flexibility in meeting a variety of demands of
our small and medium-sized business clients on a cost-effective basis. Furthermore, we
believe that our current technology platform is capable of supporting our planned
development of new business units and increased market share in the foreseeable future.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Penetrate
other selected markets. We intend to open additional branch offices in new geographic
markets as opportunities arise. Since the beginning of 2003, we have opened four new
offices in California to expand our presence in select geographic markets, including
Bakersfield, Fresno, Redding and San Diego. We have developed a well-defined approach to
geographic expansion which we will use as a guide for entering new markets.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Pursue
strategic acquisitions. Since our initial public offering in June 1993, we have
completed 23 acquisitions of complementary businesses. In 2004, we completed the
acquisition of certain assets of SRTC, a staffing services company with nine offices in
Central Washington, Eastern Oregon and Southern Idaho. Effective January 1, 2006, we
acquired certain assets of Pro HR, LLC, a privately held PEO company with three offices,
two of which are in Idaho and one in Western Colorado. In order to increase our client
base, expand our presence in existing markets, enter new markets and broaden our service
offerings, we may continue to pursue strategic acquisitions, particularly in the staffing
area.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Services

Our
services are typically provided under a variety of contractual arrangements through which
we offer a continuum of proactive human resource management services. While some services
are more frequently associated with our PEO arrangements, our expertise in such areas as
safety services and personnel-related regulatory compliance may also be used by our
staffing services customers. Our human resource management services are built upon the
following five areas of expertise:

| |  | Payroll
Processing. For both our PEO and staffing services employees, we assist our clients
in managing employment-related administration by providing payroll processing,
employment-related tax filings and administration. These services are administered at
each branch, as well as centralized at our headquarters in Vancouver, Washington.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Employee
Benefits and Administration. We assist our PEO clients in retaining the best
employees for their businesses by providing comprehensive health benefits, including
medical, dental and vision benefits, life and accident insurance, short-term and
long-term disability, a 401(k) retirement savings plan, a Section 125 cafeteria plan
and employee assistance programs.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Human
Resource Management. We focus on developing and implementing a client-specific
proactive human resource management system for each PEO client company. Through these
efforts, clients achieve a more productive workforce through the disciplined application
of standards for hiring and firing. Specifically, we assist our clients in attracting the
right people by providing recruitment best practices, job description development, skills
testing, salary information, drug testing, interview guidelines and assistance,
evaluating job applications and references and compliance with a broad range of
employment regulations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Risk
Management. We focus on developing and implementing a client-specific proactive risk
management program so as to further mitigate risk of injury associated with workplace
practices. These efforts enable our clients and us to achieve a reduction in accidents
and workers compensation claims. We provide such tactical services as safety
training and safety manuals for both workers and supervisors, job-site visits and
meetings, improvements in workplace procedures and equipment to further reduce the risk
of injury, compliance with OSHA requirements, environmental regulations, and workplace
regulations of the U.S. Department of Labor and state agencies and leading accident
investigations. We have at least one risk manager available at each branch office to
perform workplace safety assessments for each prospective client and to implement systems
to improve work practices. All risk managers report directly to our Chief Executive
Officer. Each risk manager has the authority to cancel our business relationship with any
customer or client company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 5 -

---



| |  | Workers Compensation
Coverage. We assist our clients in protecting their businesses from
employment-related injury claims by providing workers compensation coverage.
Through our third-party administrators, we provide claims management services for our PEO
clients. We work aggressively to manage and reduce job injury claims, including
identifying fraudulent claims and taking advantage of our staffing services to return
injured workers to active employment earlier. As a result of our efforts to manage workers compensation
costs, we are often able to reduce our clients overall expenses arising out of
job-related injuries and insurance.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PEO
Services. In a PEO services arrangement, we enter into a contract to become a
co-employer of the clients existing workforce and assume responsibility for some or
all of the human resource management responsibilities, including payroll and payroll
taxes, employee benefits, health insurance, workers compensation coverage, workplace
safety programs, compliance with federal and state employment laws, labor and workplace
regulatory requirements, and related administrative responsibilities. We have the right to
hire and fire our PEO employees, although the client remains responsible for day-to-day
assignments, supervision and training and, in most cases, recruiting.

We
began offering PEO services to Oregon customers in 1990 and subsequently expanded these
services to other states, primarily California. In 2005, approximately 90% of our PEO
service fee revenues were generated from customers in California, while 7% of those
revenues were generated in Oregon.

We
have entered into co-employer arrangements with a wide variety of clients, including
companies involved in moving and shipping, professional firms, construction, retail,
manufacturing and distribution businesses. PEO clients are typically small to mid-sized
businesses with up to several hundred employees. None of our PEO clients represented more
than 4% of our total revenues in 2005.

Prior
to entering into a co-employer arrangement, we perform an analysis of the potential
clients actual personnel and workers compensation costs based on information
provided by the prospect. We introduce our workplace safety program and recommend
improvements in procedures and equipment following a risk assessment of the
prospects facilities. The potential client must agree to implement recommended
changes as part of the co-employer arrangement. We also offer financial incentives to PEO
clients to maintain a safe-work environment.

Our
standard PEO services agreement typically provides for an initial term of one year with
automatic renewal for one-year periods. Our agreements generally permit cancellation by
either party upon 30 days written notice. In addition, we may terminate the
agreement at any time for specified reasons, including nonpayment or failure to follow our
workplace safety program.

The
form of PEO services agreement also provides for indemnification of us by the client
against losses arising out of any default by the client under the agreement, including
failure to comply with any employment-related, health and safety, or immigration laws or
regulations. We also require our PEO clients to maintain comprehensive liability coverage
in the amount of $1.0 million for acts of our work-site employees. In addition, we
have excess liability insurance coverage. Although no claims exceeding such policy limits
have been paid by us to date, the possibility exists that claims for amounts in excess of
sums available to us through indemnification or insurance may be asserted in the future,
which could adversely affect our profitability.

- 6 -

---



Staffing
Services. Our staffing services include on-demand or short-term staffing assignments,
contract staffing, long-term or indefinite-term on-site management, direct placement and
human resource administration. Short-term staffing involves demands for employees caused
by such factors as seasonality, fluctuations in customer demand, vacations, illnesses,
parental leave and special projects without incurring the ongoing expense and
administrative responsibilities associated with recruiting, hiring and retaining
additional permanent employees. As more and more companies focus on effectively managing
variable costs and reducing fixed overhead, the use of employees on a short-term basis
allows firms to utilize the just-in-time approach for their personnel needs,
thereby converting a portion of their fixed personnel costs to a variable expense.

Contract
staffing refers to our responsibilities to provide employees for our clients for a period
of more than three months or an indefinite period. This type of arrangement often involves
outsourcing an entire department in a large corporation or providing the workforce for a
large project.

In
an on-site management arrangement, we place an experienced manager on site at a
clients place of business. The manager is responsible for conducting all recruiting,
screening, interviewing, testing, hiring and employee placement functions at the
clients facility for a long-term or indefinite period.

Direct
placement services involve fee-based search efforts for specific employee candidates at
the request of our PEO clients, staffing customers or other companies.

Our
staffing services customers operate in a broad range of businesses, including
agriculture-based companies, electronic manufacturers, transportation and logistics
companies, food processors, professional firms and construction. Such customers generally
range in size from small local firms to companies with international operations that use
our services on a domestic basis. None of our staffing services customers represented more
than 4% of our total revenues in 2005.

In
2005, the light industrial sector generated approximately 84% of our staffing services
revenues, while clerical office staff accounted for 12% of such revenues and technical
personnel represented the balance of 4%. Our light industrial workers perform such tasks
as operation of machinery, manufacturing, loading and shipping, site preparation for
special events, construction-site cleanup and janitorial services. Technical personnel
include electronic parts assembly workers and designers of electronic parts.

We
employ a variety of methods to recruit our work force for staffing services, including
among others, referrals by existing employees, online job boards, our Web site for job
postings, newspaper advertising, and marketing brochures distributed at colleges and
vocational schools. The employee application process may include an interview, skills
assessment test, reference verification, drug screening, criminal background checks and
pre-employment physicals. The recruiting of qualified employees requires more effort when
unemployment rates are low. We use a comprehensive pre-employment screening test to ensure
that applicants are appropriately qualified for employment.

Our
staffing services employees are not under our direct control while working at a
customers business. We have not experienced any significant liability due to claims
arising out of negligent acts or misconduct by our staffing services employees. Claims
could be asserted against us that may exceed our liability insurance coverage, which could
have a material adverse effect on our financial condition and results of operations.

- 7 -

---



Sales and Marketing

Our
sales and marketing efforts are led by our branch managers and a small team of sales
professionals, coupled with strong ties with the insurance brokerage community. Our
marketing efforts are principally focused on branch-level development of local business
relationships. On a regional and national level, efforts are made to expand and align our
services to fulfill the needs of local customers with multiple locations, which may
include using our on-site personnel and the opening of additional offices to better serve
a customers broader geographic needs. We also rely on an extensive network of
insurance brokers for referrals for PEO services, particularly in California, in exchange
for an ongoing fee as a very small percentage of payroll. Business development is the
primary function of our branch managers.

Risk Assessment

All
prospective clients are evaluated individually on the basis of total predicted
profitability. This analysis takes into account workers compensation risk and claims
history, unemployment claims history and creditworthiness. The workers compensation
risk profile also includes an assessment of the prospects internal culture regarding
workplace safety, compensation rates and benefits provided to its employees.

Management Information
Systems

We
perform all functions associated with payroll administration through our internal
management information system. Each branch office performs payroll data entry functions
and maintains an independent database of employees and customers, as well as payroll and
invoicing records. All processing functions are centralized at our corporate headquarters
in Vancouver, Washington.

Acquisitions

We
have completed 23 acquisitions since our initial public offering in June 1993. At the
beginning of 2004, we acquired certain assets of SRTC, a staffing services company with
nine offices in Central Washington, Eastern Oregon and Southern Idaho. We paid
$3.0 million in cash for the assets of SRTC and the non-compete agreements of certain
SRTC shareholders and agreed to issue up to 203,597 shares of our common stock (the
Earnout Shares), with the actual number of Earnout Shares to be issued based
upon the level of financial performance achieved by the SRTC offices during calendar 2004.
The calculation of the Earnout Shares was finalized in February 2006; see Note 19 to the
audited consolidated financial statements included in Item 15 of this report at F-24. We
recorded an estimated total number of 79,200 shares with a value of $778,000 on our
consolidated balance sheet as of December 31, 2004, and issued an additional 19,197
Earnout Shares in February 2006, which increased the purchase price by an incremental
$167,000 to a total of $3.945 million; see Note 19. The Companys most recent
acquisition was completed effective January 1, 2006; see Note 19.

Competition

The
staffing services and PEO businesses are characterized by intense competition. The
staffing services market includes competitors of all sizes, including national competitors
such as Manpower, Inc. and Kelly Services, Inc., that have substantially greater
financial, marketing and other resources than we do. In addition to national companies, we
compete with numerous regional and local firms for both customers and employees. There are
relatively few barriers to entry into the staffing services business. The principal
competitive factors in the staffing services industry are price, the ability to provide
qualified workers in a timely manner and the monitoring of job performance. We attribute
our internal growth in staffing services revenues to the cost-efficiency of our
operations, which permits us to price our services competitively, and to our ability
through our branch office network to understand and satisfy the needs of our customers
with competent personnel.

- 8 -

---



We
may face additional PEO competition in the future from new entrants to the field,
including other staffing services companies, payroll processing companies and insurance
companies. Certain PEO companies that periodically compete with us in the same markets
have greater financial and marketing resources than we do, such as Administaff, Inc.,
Gevity HR, Inc., and Paychex, Inc., among others. Competition in the PEO
industry is based largely on price, although service and quality can also provide
competitive advantages. A significant limiting factor to the growth of the PEO industry is
the perception of potential clients that they have the capacity to handle human resource
issues internally. We believe that our past growth in PEO service fee revenues is
attributable to our ability to provide small and medium-sized companies with the
opportunity to reduce workers compensation costs and to provide enhanced benefits to
their employees while reducing their overall personnel administration costs. Our
competitive advantage may be adversely affected by a substantial increase in the costs of
maintaining our self-insured workers compensation program, or changes in the
regulatory environment, particularly in California. A general market decrease in the level
of workers compensation insurance premiums may also decrease demand for PEO
services.

Self-Insured
Workers Compensation Program

A
principal service we provide to our customers, particularly our PEO clients, is
workers compensation coverage. As the employer of record, we are responsible for
complying with applicable statutory requirements for workers compensation coverage.
Our workplace safety services are closely tied to our approach to the management of
workers compensation risk.

Elements
of Workers Compensation System. State law (and for certain types of employees,
federal law) generally mandates that an employer reimburse its employees for the costs of
medical care and other specified benefits for injuries or illnesses, including
catastrophic injuries and fatalities, incurred in the course and scope of employment. The
benefits payable for various categories of claims are determined by state regulation and
vary with the severity and nature of the injury or illness and other specified factors. In
return for this guaranteed protection, workers compensation is an exclusive remedy
and employees are generally precluded from seeking other damages from their employer for
workplace injuries. Most states require employers to maintain workers compensation
insurance or otherwise demonstrate financial responsibility to meet workers
compensation obligations to employees. In many states, employers who meet certain
financial and other requirements are permitted to self-insure.

Self
Insurance for Workers Compensation.In August 1987, we became
a self-insured employer for workers compensation coverage in Oregon. We subsequently
obtained self-insured employer status for workers compensation in three additional
states, California, Delaware and Maryland, as well as in Washington for our non-PEO
services. Regulations governing self-insured employers in each jurisdiction typically
require the employer to maintain surety deposits of government securities, letters of
credit or other financial instruments to cover workers claims in the event the
employer is unable to pay for such claims.

To
manage our financial exposure from the incidence of catastrophic injuries and fatalities,
we maintain excess workers compensation insurance pursuant to an annual policy with
a major insurance company. Beginning January 1, 2002, our excess workers
compensation insurance policy provided coverage for single occurrences exceeding $750,000
with statutory limits. Effective January 1, 2004, the per occurrence retention
increased to $1.0 million and the policy limit was increased to $25.0 million
and such policy parameters remained in effect for the January 1, 2006 renewal. The higher
per occurrence retention may result in higher workers compensation costs to us with
a corresponding negative effect on our operating results.

Claims
Management.As a self-insured employer, our workers compensation
expense is tied directly to the incidence and severity of workplace injuries to our
employees. We seek to contain our workers compensation costs through an aggressive
approach to claims management. We use managed-care systems to reduce medical costs and
keep time-loss costs to a minimum by assigning injured workers, whenever possible, to
short-term assignments which accommodate the workers physical limitations. We
believe that these assignments minimize both time actually lost from work and covered
time-loss costs. We engage TPAs to provide the principal claims management expertise.
Typical management procedures include performing thorough and prompt on-site
investigations of claims filed by employees, working with physicians to encourage
efficient medical management of cases, denying questionable claims and attempting to
negotiate early settlements to eliminate future case development and costs. We also
maintain a corporate-wide pre-employment drug screening program and a mandatory
post-injury drug test. The program is believed to have resulted in a reduction in the
frequency of fraudulent claims and in accidents in which the use of illegal drugs appears
to have been a contributing factor.

- 9 -

---



Elements
of Self-Insurance Costs.The costs associated with our self-insured
workers compensation program include case reserves for reported claims, an
additional expense provision for potential future increases in the cost of open injury
claims (known as adverse loss development) and claims incurred in prior
periods but not reported (referred to as IBNR), fees payable to our TPAs,
additional claims administration expenses, administrative fees payable to state and
federal workers compensation regulatory agencies, premiums for excess workers
compensation insurance, legal fees and broker commissions for business referrals. Although
not directly related to the size of our payroll, the number of claims and correlative loss
payments may be expected to increase with growth in the total number of employees. The
state assessments are typically based on payroll amounts and, to a limited extent, the
amount of permanent disability awards during the previous year. Excess insurance premiums
are also based in part on the size and risk profile of our payroll and loss experience.

Workers
Compensation Claims Experience and Reserves

We
recognize our liability for the ultimate payment of incurred claims and claims adjustment
expenses by accruing liabilities which represent estimates of future amounts necessary to
pay claims and related expenses with respect to covered events that have occurred. When a
claim involving a probable loss is reported, our TPA establishes a case reserve for the
estimated amount of ultimate loss. The estimate reflects an informed judgment based on
established case reserving practices and the experience and knowledge of the TPA regarding
the nature and expected value of the claim, as well as the estimated expense of settling
the claim, including legal and other fees and expenses of administering claims. The
adequacy of such case reserves depends on the professional judgment of each TPA to
properly and comprehensively evaluate the economic consequences of each claim. Also, on an
aggregate basis, we have established an additional reserve for both future adverse loss
development in excess of initial case reserves on open claims and for claims incurred but
not reported, referred to as the IBNR reserve.

As
part of the case reserving process, historical data is reviewed and consideration is given
to the anticipated effect of various factors, including known and anticipated legal
developments, inflation and economic conditions. Reserve amounts are necessarily based on
managements estimates, and as other data becomes available, these estimates are
revised, which may result in increases or decreases in existing case reserves. We have
engaged a nationally-recognized, independent actuary to annually assist management in
estimating the total future costs of claims, including potential future adverse loss
development. We believe our total accrued workers compensation claims liabilities at
December 31, 2005, are adequate. It is possible, however, that our actual future
workers compensation obligations may exceed the amount of our accrued liabilities,
with a corresponding negative effect on future earnings, due to such factors as
unanticipated adverse loss development of known claims, and to a much lesser extent, if
any, of claims incurred but not reported.

- 10 -

---



Failure
to successfully manage the severity and frequency of workers compensation injuries
would result in increased workers compensation expense and would have a negative
effect, which may be substantial, on our operating results and financial condition.
Management maintains clear guidelines for our branch office managers, account managers,
and risk managers directly tying their continued employment to their diligence in
understanding and addressing the risks of accident or injury associated with the
industries in which client companies operate and in monitoring the compliance by clients
with workplace safety requirements. We have a policy of zero tolerance for
avoidable workplace injuries. Each of our risk managers has the authority to cancel any
staffing customer or PEO client at any time based upon their assessment of their safe-work
practices or philosophies.

Employees and Employee
Benefits

At
December 31, 2005, we had approximately 27,400 employees, including approximately
6,200 staffing services employees, approximately 21,200 PEO employees, approximately 255
managerial, sales and administrative employees and five executive officers. The number of
employees at any given time may vary significantly due to business conditions at customer
or client companies. During 2005, approximately 3% of our employees were covered by a
collective bargaining agreement. Substantially all of our managerial, sales and
administrative employees have entered into a standard form of employment agreement which,
among other provisions, contains covenants not to engage in certain activities in
competition with us for 18 months following termination of employment and to maintain
the confidentiality of certain proprietary information. We believe our employee relations
are good.

Benefits
offered to our staffing services employees include group health insurance, a
Section 125 cafeteria plan which permits employees to use pretax earnings to fund
various services, including health insurance premiums and childcare expenses, and a
retirement savings plan (the 401(k) plan) under Section 401(k) of the
Internal Revenue Code pursuant to which employees may begin making contributions upon
reaching 21 years of age and completing 1,000 hours of service in any
consecutive 12-month period. We may also make contributions to the 401(k) plan, which vest
over six years and are subject to certain legal limits, at the sole discretion of our
board of directors. Employees subject to a co-employer arrangement may participate in our
benefit plans at the election of the co-employer. Beginning in 2006, we make matching contributions
to the 401(k) plan under a safe harbor provision, whereby we will match 100% of contributions
by management and staffing employees to the 401(k) plan up to 3% of each participating employee's annual compensation and 50% of the employee's
contributions up to an additional 2% of annual compensation.

Regulatory and
Legislative Issues

Business
Operations.We are subject to the laws and regulations of the
jurisdictions within which we operate, including those governing self-insured employers
under the workers compensation systems in Oregon, California, Maryland and Delaware,
as well as in Washington for non-PEO services. An Oregon PEO company is required to be
licensed as a worker-leasing company by the Workers Compensation Division of the
Oregon Department of Consumer and Business Services. We are in compliance with this
licensing requirement. Temporary staffing companies are expressly exempt from the Oregon
licensing requirement. Oregon PEO companies are also required to ensure that each PEO
client provides adequate training and supervision for its employees to comply with
statutory requirements for workplace safety and to give 30 days written notice
in the event of a termination of its obligation to provide workers compensation
coverage for PEO employees and other subject employees of a PEO client. Although
compliance with these requirements imposes some additional financial risk on us,
particularly with respect to those clients who breach their payment obligation to us, such
compliance has not had a material adverse effect on our business to date.

Employee
Benefit Plans. Our operations are affected by numerous federal and state laws relating
to labor, tax and employment matters. By entering into a co-employer relationship with
employees who are assigned to work at client locations (sometimes referred to as
work-site employees), we assume certain obligations and responsibilities of an
employer under these federal and state laws. Because many of these federal and state laws
were enacted prior to the development of nontraditional employment relationships, such as
professional employer, temporary employment, and outsourcing arrangements, many of these
laws do not specifically address the obligations and responsibilities of nontraditional
employers. In addition, the definition of employer under these laws is not
uniform.

- 11 -

---



As
an employer, we are subject to all federal statutes and regulations governing our
employer-employee relationships. Subject to the issues discussed below, we believe that
our operations are in compliance in all material respects with applicable federal statutes
and regulations.

We
offer various qualified employee benefit plans to our employees, including employees of
our PEO clients who so elect. These qualified employee benefit plans include our 401(k)
plan, a cafeteria plan under Section 125 of the Internal Revenue Code, and group
health, life insurance and disability insurance plans. Generally, qualified employee
benefit plans are subject to provisions of both the Internal Revenue Code and the Employee
Retirement Income Security Act of 1974 (ERISA). In order to qualify for
favorable tax treatment under the Internal Revenue Code, qualified plans must be
established and maintained by an employer for the exclusive benefit of its employees.
Effective December 1, 2002, we converted our 401(k) plan to a multiple employer
plan in compliance with directives to the PEO industry from the Internal Revenue
Service (IRS).

# Item 1A. RISK FACTORS

In
addition to other information contained in this report, the following risk factors should
be considered carefully in evaluating our business.

Our workers compensation
loss reserves may be inadequate to cover our ultimate liability for workers
compensation costs.

We
maintain reserves to cover our estimated liabilities for our self-insured workers
compensation program. The determination of these reserves is based upon a number of
factors, including current and historical claims activity, claims payment patterns and
medical cost trends and developments in existing claims. Accordingly, reserves do not
represent an exact calculation of liability. Reserves can be affected by both internal and
external events, such as adverse developments on existing claims or changes in medical
costs, claims handling procedures, administrative costs, inflation, and legal trends and
legislative changes. Reserves are adjusted from time to time to reflect new claims, claim
developments, or systemic changes, and such adjustments are reflected in the results of
the periods in which the reserves are changed. Because of the uncertainties that surround
estimating workers compensation loss reserves, we cannot be certain that our
reserves are adequate. If our reserves are insufficient to cover our actual losses, we
would have to increase our reserves and incur charges to our earnings that could be
material.

Changes in the market for
workers compensation insurance in the state of California could adversely affect our
business.

Our
PEO service revenues in California have grown rapidly over the last two years due in large
part to difficult market conditions for workers compensation insurance in California
and our status as a state-approved self-insured employer with respect to workers
compensation coverage in that state. Since 2002, California has enacted several
legislative reforms in an attempt to address the crisis in its workers compensation
system, and it may attempt additional legislative or regulatory reforms in the future. Any
successful legislative reforms or non-governmental changes in market conditions in
California could lessen a key advantage we have in that state, leading to a reduction in
our new business opportunities and a potential slowing in the growth of our PEO business
in California. Any such slowing would adversely affect our results of operations and
likely lead to declines in our stock price.

- 12 -

---



Because we assume the obligation
to make wage, tax and regulatory payments in respect of some employees, we are exposed to
client credit risks.

We
generally assume responsibility for and manage the risks associated with our clients
employee payroll obligations, including liability for payment of salaries and wages
(including payroll taxes), as well as group health and retirement benefits. These
obligations are fixed, whether or not the client makes payments required by our services
agreement, which exposes us to credit risks. We attempt to mitigate this risk by invoicing
our staffing customers weekly and our PEO clients at the end of their specific payroll
processing cycle. We also carefully monitor the timeliness of our clients payments
and impose strict credit standards on our customers. If we fail to successfully manage our
credit risk, our results of operations and financial condition could be materially and
adversely affected.

Our staffing business is
vulnerable to economic fluctuations. Companies tend to use fewer temporary employees as
economic activity slows, while recruiting employees to fill our customers needs
becomes increasingly difficult during economic booms.

Demand
for our staffing services is sensitive to changes in the level of economic activity in the
regions in which we do business. As economic activity begins to improve, temporary
employees are often added before full time employees are hired as companies cautiously
re-enter the labor market. As a result, our revenues derived from staffing services may be
highest at the beginning of an economic recovery. During strong economic periods, however,
we often experience shortages of qualified employees to meet customer needs. Also, as
economic activity begins to slow down, companies often reduce their use of temporary
employees before undertaking layoffs of permanent staff, resulting in decreased demand for
staffing services. A significant economic downturn, particularly in the Western United
States, could have a material adverse effect on our results of operations and financial
condition.

If we are determined not to be an
employer under certain laws and regulations, our clients may stop using our
services, and we may be subject to additional liabilities.

We
believe that we are an employer of employees provided to our PEO clients on a
co-employment basis under the various laws and regulations of the Internal Revenue Service
and the U.S. Department of Labor. If we are determined not to be an employer under such
laws and regulations and are therefore unable to assume obligations of our clients for
employment and other taxes, our clients may be held jointly and severally liable for
payment of such taxes. Some clients or prospective clients may view such potential
liability as an unacceptable risk, discouraging current clients from continuing a
relationship with us or prospective clients from entering into a new relationship with us.

Any
determination that we are not an employer for purposes of the Employee Retirement Income
Security Act (ERISA) could adversely affect our cafeteria benefits plan
operated under Section 125 of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), and result in liabilities to us under the plan.

- 13 -

---



We may be exposed to
employment-related claims and costs and periodic litigation that could adversely affect
our business and results of operations.

We
either co-employ employees in connection with our PEO arrangements or place our employees
in our customers workplace in connection with our staffing business. As such, we are
subject to a number of risks inherent to our status as an employer, including without
limitation:

| |  | claims
of misconduct or negligence on the part of our employees, discrimination or harassment
claims          against our employees, or claims by our employees of discrimination or
harassment by our clients;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | immigration-related
claims;
| | - | ---------------------------

| |  | claims
relating to violations of wage, hour and other workplace regulations;
| | - | ----------------------------------------------------------------------------

| |  | claims
relating to employee benefits, entitlements to employee benefits, or errors in the
calculation or          administration of such benefits; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | possible
claims relating to misuse of customer confidential information, misappropriation of
assets or other similar claims.
| | - | ----------------------------------------------------------------------------------------------------------------------------

If
we experience significant incidents involving any of the above-described risk areas we
could face substantial out-of-pocket losses, fines or negative publicity. In addition,
such claims may give rise to litigation, which may be time consuming, distracting and
costly, and could have a material adverse effect on our business. With respect to claims
involving our co-employer relationship with our PEO clients, although our PEO services
agreement provides that the client will indemnify us for any liability attributable to the
conduct of the client or its employees, we may not be able to enforce such contractual
indemnification, or the client may not have sufficient assets to satisfy its obligations
to us.

Adverse developments in the market
for excess workers compensation insurance could lead to increases in our costs.

We
are a state-approved self-insured employer for workers compensation coverage in
California, Oregon, Delaware and Maryland, as well as in Washington for our non-PEO
services. To manage our financial exposure in the event of catastrophic injuries or
fatalities, we maintain excess workers compensation insurance with a current per
occurrence retention of $1.0 million. Changes in the market for excess workers
compensation insurance may lead to limited availability of such coverage, additional
increases in our insurance costs or further increases in our self-insured retention, any
of which may have a material adverse effect on our financial condition.

We operate in a complex regulatory
environment, and failure to comply with applicable laws and regulations could adversely
affect our business.

Corporate
human resource operations are subject to a broad range of complex and evolving laws and
regulations, including those applicable to payroll practices, benefits administration,
employment practices and privacy. Because our clients have employees in many states
throughout the United States, we must perform our services in compliance with the legal
and regulatory requirements of multiple jurisdictions. Some of these laws and regulations
may be difficult to ascertain or interpret and may change from time to time. Violation of
such laws and regulations could subject us to fines and penalties, damage our reputation,
constitute a breach of our client agreements, impair our ability to obtain and renew
required licenses, and decrease our profitability or competitiveness. If any of these
effects were to occur, our operating results and financial condition could be adversely
affected.

- 14 -

---



Changes in government regulations
may result in restrictions or prohibitions applicable to the provision of employment
services or the imposition of additional licensing, regulatory or tax requirements.

Our
PEO and staffing businesses are heavily regulated in most jurisdictions in which we
operate. We cannot assure you that the states in which we conduct or seek to conduct
business will not:

| |  | impose
additional regulations that prohibit or restrict employment-related businesses like ours;
| | - | ------------------------------------------------------------------------------------------------

| |  | require
additional licensing or add restrictions on existing licenses to provide
employment-related          services; or
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | increase
taxes or make changes in the way in which taxes are calculated for providers of
         employment-related services.
| | - | ------------------------------------------------------------------------------------------------------------------------------

Any
changes in applicable laws and regulations may make it more difficult or expensive for us
to do business, inhibit expansion of our business, or result in additional expenses that
limit our profitability or decrease our ability to attract and retain clients.

We may find it difficult to expand
our business into additional states due to varying state regulatory requirements.

Future
growth in our operations depends, in part, on our ability to offer our services to
prospective clients in new states, which may subject us to different regulatory
requirements and standards. In order to operate effectively in a new state, we must obtain
all necessary regulatory approvals, adapt our procedures to that states regulatory
requirements and modify our service offerings to adapt to local market conditions. In the
event that we expand into additional states, we may not be able to duplicate in other
markets the financial performance experienced in our current markets.

Acquisitions subject us to various
risks, including risks relating to selection and pricing of acquisition targets,
integration of acquired companies into our business and assumption of unanticipated
liabilities.

We
have completed 23 acquisitions since 1993 and may pursue additional acquisitions and
investment opportunities. We cannot assure you that we will be able to identify or
consummate any additional acquisitions on favorable terms or at all. If we do pursue
acquisitions, we may not realize the anticipated benefits of such acquisitions.
Acquisitions involve many risks, including risks relating to the assumption of unforeseen
liabilities of an acquired business, adverse accounting charges resulting from the
acquisition, and difficulties in integrating acquired companies into our business, both
from a cultural perspective, as well as with respect to personnel and client retention and
technological integration. Acquired liabilities may be significant and may adversely
affect our financial condition and results of operations. Our inability to successfully
integrate acquired businesses may lead to increased costs, failure to generate expected
returns, accounting charges, or even a total loss of amounts invested, any of which could
have a material adverse effect on our financial condition and results of operations.

Our business is subject to risks
associated with geographic market concentration.

Our
California and Oregon operations accounted for approximately 53% and 21%, respectively, of
our total revenues in 2005. As a result of the current importance of our California and
Oregon operations and anticipated continued growth from these operations, our
profitability over the next several years is expected to be largely dependent on economic
and regulatory conditions in these markets, particularly in California. If these states
experience an economic downturn or growth rates slow, or if the regulatory environment
changes in a way that adversely affects our ability to do business in these states or
limits our competitive advantages in these markets, our profitability and growth prospects
may be materially and adversely affected.

- 15 -

---



# We face competition from
a number of other companies.

We
face competition from various companies that may provide all or some of the services we
offer. Our competitors include companies that are engaged in staffing services such as
Kelly Services, Inc. and Manpower Inc., companies that are focused on
co-employment, such as Administaff, Inc. and Gevity HR, Inc., and companies that
primarily provide payroll processing services, such as Automatic Data Processing, Inc. and
Paychex, Inc. We also face competition from information technology outsourcing firms
and broad-based outsourcing and consulting firms that perform individual projects.

Several
of our existing or potential competitors have substantially greater financial, technical
and marketing resources than we do, which may enable them to:

| |  | develop
and expand their infrastructure and service offerings more quickly and achieve greater
cost          efficiencies;
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | invest
in new technologies;
| | - | ---------------------------

| |  | expand
operations into new markets more rapidly;
| | - | ------------------------------------------------

| |  | devote
greater resources to marketing;
| | - | --------------------------------------

| |  | compete
for acquisitions more effectively and complete acquisitions more easily; and
| | - | ------------------------------------------------------------------------------------

| |  | aggressively
price products and services and increase benefits in ways that we may not be able to
match          economically.
| | - | ------------------------------------------------------------------------------------------------------------------------------

In
order to compete effectively in our markets, we must target our potential clients
carefully, continue to improve our efficiencies and the scope and quality of our services,
and rely on our service quality, innovation, education and program clarity. If our
competitive advantages are not compelling or sustainable, then we are unlikely to increase
or sustain profits and our stock price could decline.

We are dependent upon certain key
personnel and recruitment and retention of key employees may be difficult and expensive.

We
believe that the successful operation of our business is dependent upon our retention of
the services of key personnel, including our chief executive officer, other executive
officers and branch managers. We may not be able to retain all of our executives, senior
managers and key personnel in light of competition for their services. If we lose the
services of one of our executive officers or a significant number of our senior managers,
our operations and profitability likely would be adversely affected.

- 16 -

---



We do not have an expansive
in-house sales staff and therefore rely extensively on brokers to make referrals.

We
maintain only a minimal internal professional sales force. Instead, we rely heavily on
insurance brokers to provide referrals to new business, especially in California, although
each branch office manager is expected to be an effective leader in business development,
including marketing efforts and sales closures. In connection with these arrangements, we
pay a fee to brokers for new clients. As a result of our reliance on brokers, we are
dependent on firms and individuals that do not have an exclusive relationship with us. If
we are unable to maintain our relationships with brokers, if brokers increase their fees
or if brokers lose confidence in our services, we could face declines in our business and
additional costs and uncertainties as we attempt to hire and train an internal sales
force.

We depend on attracting and
retaining qualified employees; during periods of economic growth our costs to do so
increase and it becomes more difficult to attract and retain people.

The
success of our staffing services depends on our ability to attract and retain qualified
employees for placement with our customers. Our ability to attract and retain qualified
personnel could be impaired by rapid improvement in economic conditions resulting in lower
unemployment and increases in compensation. During periods of economic growth, we face
growing competition for retaining and recruiting qualified personnel, which in turn leads
to greater advertising and recruiting costs and increased salary expenses. If we cannot
attract and retain qualified employees, the quality of our services may deteriorate and
our reputation and results of operations could be adversely affected.

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 if business or regulatory conditions change or events
occur that negatively affect our reputation.

Our
PEO services agreements are generally terminable on 30 days notice by either us or
the client. As a result, our clients may terminate their agreement with us at any time,
making us particularly vulnerable to changing business or regulatory conditions or changes
affecting our reputation or the reputation of our industry.

Our industry has at times received
negative publicity and had some stigma associated with it that, if it were to predominate,
could cause our business to decline.

Both
PEOs and staffing services companies periodically have been tarnished by bad publicity or
scandals from bad business judgment or even outright fraud. If we or our industry face
negative publicity, customers confidence in the use of temporary personnel or
co-employed workers may deteriorate, and they may be unwilling to enter into or continue
our staffing or co-employment relationships. If a negative perception were to prevail, it
would be more difficult for us to attract and retain customers.

Changes in state unemployment tax
laws and regulations could adversely affect our business.

Recently,
there has been significant negative publicity relating to the use of staffing or PEO
companies to shield employers from poor unemployment history and high unemployment taxes.
New legislation enacted at the state or federal level to try to counter this perceived
problem could have a material adverse effect on our business by limiting our ability to
market our services or making our services less attractive to our customers and potential
customers.

- 17 -

---



We are dependent upon technology
services and if we experience damage, service interruptions or failures in our computer
and telecommunications systems, or if our security measures are breached, our client
relationships and our ability to attract new clients may be adversely affected.

Our
business could be interrupted by damage to or disruption of our computer and
telecommunications equipment and software systems, and we may lose data. Our clients
businesses may be adversely affected by any system or equipment failure we experience. As
a result of any of the foregoing, our relationships with our clients may be impaired, we
may lose clients, our ability to attract new clients may be adversely affected and we
could be exposed to contractual liability. Precautions in place to protect ourselves from,
or minimize the effect of, such events, may not be adequate.

In
addition, our business involves the storage and transmission of clients proprietary
information and security breaches could expose us to a risk of loss of this information,
litigation and possible liability. If our security measures are breached as a result of
third-party action, employee error, malfeasance or otherwise, and, as a result, someone
obtains unauthorized access to client data, our reputation will be damaged, our business
may suffer and we could incur significant liability. Techniques used to obtain
unauthorized access or to sabotage systems change frequently and are growing increasingly
sophisticated. As a result, we may be unable to anticipate these techniques or to
implement adequate preventative measures. If an actual or perceived breach of our security
occurs, we could be liable and the market perception of our services could be harmed.

The compliance costs associated
with Section 404 of the Sarbanes-Oxley Act regarding internal control over financial
reporting could be substantial, while failure to achieve and maintain compliance could
have an adverse effect on our stock price.

Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations,
beginning with our Annual Report on Form 10-K for the fiscal year ending
December 31, 2006, we expect to be required to furnish a report by our management on
our internal control over financial reporting. Such report will contain, among other
matters, an assessment of the effectiveness of our internal control over financial
reporting as of the end of 2006. We are engaged in the process of documenting and testing
our internal control procedures in order to satisfy these requirements, which is likely to
result in increased general and administrative expenses and may shift management time and
attention from revenue-generating activities to compliance activities. Also, during the
course of our internal control testing, we may identify deficiencies which we may not be
able to remediate in time to meet the reporting deadline under Section 404. Failure
to achieve and maintain an effective internal control environment or complete our
Section 404 certifications could have a material adverse effect on our stock price.

# Item 1B. UNRESOLVED
STAFF COMMENTS

None.

- 18 -

---



# Item 2. PROPERTIES

We
provide PEO and staffing services through all 36 of our branch offices. The following
table shows the number of branch offices located in each state in which we operate. We
also lease office space in other locations in our market areas which we use to recruit and
place employees.

|State          | Number of Branch Offices
|-------------- | ------------------------
|California     | 14                      
|Oregon         | 9                       
|Washington     | 4                       
|Idaho          | 3                       
|Maryland       | 2                       
|Arizona        | 1                       
|Colorado       | 1                       
|Delaware       | 1                       
|North Carolina | 1                       

We
lease office space for our branch offices. At December 31, 2005, our leases had
expiration dates ranging from less than one year to eight years, with total minimum
payments through 2013 of approximately $4.4 million. Effective March 11, 2006, we
relocated our corporate headquarters office to Vancouver, Washington. We now occupy
approximately 17 percent of the fully leased 63,500 square foot building we purchased
during the third quarter of 2005 at a price of $8.85 million.

# Item 3. LEGAL PROCEEDINGS

There
were no material legal proceedings pending against the Company at December 31, 2005,
or during the period beginning with that date through March 29, 2006.

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

No
matters were submitted to a vote of the Companys stockholders during the fourth
quarter of 2005.

EXECUTIVE OFFICERS OF THE
REGISTRANT

The
following table identifies, as of February 28, 2006, each executive officer of the
Company. Executive officers are elected annually and serve at the discretion of the Board
of Directors.

|Name                  | Age | Principal Positions and Business Experience                              | OfficerSince
|--------------------- | --- | ------------------------------------------------------------------------ | ------------
|William W. Sherertz   | 60  | President; Chief Executive Officer; Director                             | 1980        
|Michael L. Elich      | 40  | Vice President and Chief Operating Officer                               | 2005        
|Michael D. Mulholland | 54  | Vice President-Finance, Treasurer and Secretary; Chief Financial Officer | 1994        
|Gregory R. Vaughn     | 50  | Vice President                                                           | 1998        
|James D. Miller       | 42  | Controller and Assistant Secretary;Principal Accounting Officer          | 1994        

William
W. Sherertz has acted as Chief Executive Officer of the Company since 1980. He has also
been a director of the Company since 1980, and was appointed President of the Company in
March 1993. Mr. Sherertz also serves as Chairman of the Board of Directors.

- 19 -

---



Michael
L. Elich joined the Company in October 2001 as Director of Business Development. He
was appointed Vice President and Chief Operating Officer in May 2005. From 1995 to
2001, Mr. Elich served as Executive Vice President and Chief Operating Officer of
Skills Resource Training Center, a staffing services company with offices in Oregon,
Washington and Idaho that we acquired effective January 1, 2004.

Michael
D. Mulholland joined the Company in August 1994 as Vice President-Finance and Secretary
and was appointed to the additional position of Treasurer in May 2005. From 1988 to 1994,
Mr. Mulholland was employed by Sprouse-Reitz Stores Inc. (Sprouse), a former
Nasdaq-listed retail company, serving as its Executive Vice President, Chief Financial
Officer and Secretary. Prior to Sprouse, Mr. Mulholland held senior management positions
with Lamb-Weston, Inc., a food processing company, from 1985 to 1988, and Keil, Inc., a
regional retail company, from 1978 to 1985. Mr. Mulholland, a certified public accountant
on inactive status, was also employed by Touche Ross & Co., now known as Deloitte
& Touche LLP.

Gregory
R. Vaughn joined the Company in July 1997 as Operations Manager. Mr. Vaughn was appointed
Vice President in January 1998. Prior to joining Barrett, Mr. Vaughn was Chief Executive
Officer of Insource America, Inc., a privately-held human resource management company
headquartered in Portland, Oregon, since 1996. Mr. Vaughn has also held senior management
positions with Sundial Time Systems, Inc. from 1995 to 1996 and Continental Information
Systems, Inc. from 1990 to 1994. Previously, Mr. Vaughn was employed as a technology
consultant by Price Waterhouse LLP, now known as PricewaterhouseCoopers LLP.

James
D. Miller joined the Company in January 1994 as Controller. From 1991 to 1994, he was the
Corporate Accounting Manager for Christensen Motor Yacht Corporation. Mr. Miller, a
certified public accountant on inactive status, was employed by Price Waterhouse LLP, now
known as PricewaterhouseCoopers LLP, from 1987 to 1991.

- 20 -

---



# PART II

# Item 5. MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our
common stock (the Common Stock) trades on The Nasdaq Stock Markets
National Market tier under the symbol BBSI. At February 28, 2006, there
were 55 stockholders of record and approximately 2,360 beneficial owners of the Common
Stock. We have not declared or paid any cash dividends since the closing of our initial
public offering of Common Stock on June 18, 1993, and we have no present plan to pay any
cash dividends in the foreseeable future. The following table presents the high and low
sales prices of the Common Stock for each quarterly period during the last two fiscal
years, as reported by The Nasdaq Stock Market. All share prices listed below have been
adjusted for a 3-for-2 stock split effected on May 19, 2005, by way of a 50% stock
dividend.

|               | High | Low
|-------------- | ---- | ---
|2004           |      |    
|First Quarter  |      |    
|Second Quarter |      |    
|Third Quarter  |      |    
|Fourth Quarter |      |    
|2005           |      |    
|First Quarter  |      |    
|Second Quarter |      |    
|Third Quarter  |      |    
|Fourth Quarter |      |    

During
1999, the Companys Board of Directors authorized a stock repurchase program to
purchase common shares from time to time in open market purchases. In July 2005, the Board
terminated the Companys stock repurchase program.

- 21 -

---



# Item 6. SELECTED
FINANCIAL DATA

The
following selected financial data should be read in conjunction with the Companys
financial statements and the accompanying notes listed in Item 15 of this Report.

|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|
|Statement of operations:                  |                        
|Revenues:                                 |                        
|Staffing services                         |                        
|Professional employer service fees        |                        
|                                          |                        
|Total                                     |                        
|                                          |                        
|Cost of revenues:                         |                        
|Direct payroll costs                      |                        
|Payroll taxes and benefits                |                        
|Workers' compensation                     |                        
|                                          |                        
|Total                                     |                        
|                                          |                        
|Gross margin                              |                        
|Selling, general and administrative       |                        
|expenses                                  |                        
|Depreciation and amortization             |                        
|                                          |                        
|Income (loss) from operations             |                        
|                                          |                        
|Other (expense) income:                   |                        
|Interest expense                          |                        
|Interest income                           |                        
|Other, net                                |                        
|                                          |                        
|Total                                     |                        
|                                          |                        
|Income (loss) before income taxes         |                        
|Provision for (benefit from) income taxes |                        
|                                          |                        
|Net income (loss)                         |                        
|                                          |                        
|Basic earnings (loss) per share           |                        
|                                          |                        
|Weighted average number of basic          |                        
|shares outstanding                        |                        
|                                          |                        
|Diluted earnings (loss) per share         |                        
|                                          |                        
|Weighted average number of diluted        |                        
|shares  outstanding                       |                        
|                                          |                        
|Selected balance sheet data:              |                        
|Cash and marketable securities            |                        
|Working capital                           |                        
|Total assets                              |                        
|Long-term debt, net of current portion    |                        
|Stockholders' equity                      |                        

Note:  All share and per share
amounts have been adjusted for a 3-for-2 stock split effected on May 19, 2005 by way
           of a 50% stock dividend.

- 22 -

---



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

# Overview

We
provide human resource management services, comprised of staffing services and PEO
services. We generate staffing services revenues primarily from short-term staffing,
contract staffing, on-site management and direct placement services. Our PEO service fees
are generated from contractual agreements with our PEO clients under which we become a
co-employer of our clients workforce with responsibility for some or all of the
clients human resource functions. We recognize revenues from our staffing services
for all amounts invoiced, including direct payroll, employer payroll-related taxes,
workers compensation coverage and a service fee (equivalent to a mark-up
percentage). PEO service fee revenues are recognized on a net basis in accordance with
Emerging Issues Task Force No. 99-19, Reporting Revenues Gross as a
Principal Versus Net as an Agent (EITF No. 99-19). As such, our
PEO service fee revenues represent the gross margin generated from our PEO services after
deducting the amounts invoiced to PEO customers for direct payroll expenses such as
salaries, wages, health insurance and employee out-of-pocket expenses incurred incidental
to employment. These amounts are also excluded from cost of revenues. PEO service fees
also include amounts invoiced to our clients for employer payroll-related taxes and
workers compensation coverage.

Through
centralized operations at our headquarters in Vancouver, Washington, we prepare invoices
weekly for our staffing services customers and following the end of each payroll
processing cycle for PEO clients. We invoice our customers and clients as each payroll is
processed. Payment terms for staffing customers are generally 30 days, while PEO
clients invoices are generally due on the invoice date.

Our
business is concentrated in California and Oregon and we expect to continue to derive a
majority of our revenues from these markets in the future. Revenues generated in our
California and Oregon offices accounted for 74% of our total revenues in 2005, 72% in 2004
and 78% in 2003. Consequently, any weakness in economic conditions or changes in the
regulatory environments in these regions could have a material adverse effect on our
financial results.

We
offer cash safety incentives to certain PEO clients for maintaining safe-work practices in
order to minimize workplace injuries. The cash incentive is based on a percentage of
annual payroll and is paid annually to customers who meet predetermined workers
compensation claims cost objectives. Safety incentive payments are made only after closure
of all workers compensation claims incurred during the customers contract
period. The safety incentive expense is also netted against PEO revenues on our statements
of operations.

Our
cost of revenues is comprised of direct payroll costs for staffing services, employer
payroll-related taxes and employee benefits and workers compensation. Direct payroll
costs represent the gross payroll earned by staffing services employees based on salary or
hourly wages. Payroll taxes and employee benefits consist of the employers portion
of Social Security and Medicare taxes, federal unemployment taxes, state unemployment
taxes and staffing services employee reimbursements for materials, supplies and other
expenses, which are paid by the customer. Workers compensation expense consists
primarily of the costs associated with our self-insured workers compensation
program, such as claims reserves, claims administration fees, legal fees, state
administrative agency fees and excess insurance costs for catastrophic injuries. We also
maintain separate workers compensation insurance policies for employees working in
states where we are not self-insured.

- 23 -

---



The
largest portion of workers compensation expense is the cost of workplace injury
claims. When an injury occurs and is reported to us, our respective independent
third-party claims administrator (TPA) analyzes the details of the injury and
develops a case reserve, which is the TPAs estimate of the cost of the claim based
on similar injuries and their professional judgment. We then record or accrue an expense
and a corresponding liability based upon our estimate of the ultimate claim cost. As cash
payments are made by our TPA against specific case reserves, the accrued liability is
reduced by the corresponding payment amount. The TPA also reviews existing injury claims
on an on-going basis and adjusts the case reserves as new or additional information for
each claim becomes available. We have established an additional reserve for both future
unanticipated increases in costs (adverse loss development) of the claims
reserves for open claims and for claims incurred but not reported related to prior and
current periods. We believe our operational policies and internal claims reporting system
help to limit the occurrence of unreported incurred claims.

Selling,
general and administrative expenses represent both branch office and corporate-level
operating expenses. Branch operating expenses consist primarily of branch office staff
payroll and personnel related costs, advertising, rent, office supplies, depreciation and
branch incentive compensation. Corporate-level operating expenses consist primarily of
executive and office staff payroll and personnel related costs, professional and legal
fees, travel, depreciation, occupancy costs, information systems costs and executive and
corporate staff incentive compensation.

Amortization
of intangible assets consists of the amortization of software costs, and covenants not to
compete, which are amortized using the straight-line method over their estimated useful
lives, which range from two to ten years.

# Critical Accounting
Policies

We
have identified the following policies as critical to our business and the understanding
of our results of operations. For a detailed discussion of the application of these and
other accounting policies, see Note 1 to the audited consolidated financial statements
included in Item 15 of this report. Note that the preparation of this Annual Report on
Form 10-K requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Management bases its
estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

Self-Insured
Workers Compensation Reserves. We are self-insured for workers
compensation coverage in a majority of our employee work sites. Accruals for workers
compensation expense are made based upon our claims experience and an annual independent
actuarial analysis, utilizing past experience, as well as claim cost development trends
and current workers compensation industry loss information. As such, a majority of
our recorded expense for workers compensation is managements best estimate
after reviewing our annual independent actuarial analysis and evaluating subsequent claims
development. We believe the amount accrued is adequate to cover all known and unreported
claims at December 31, 2005. However, if the actual costs of such claims and related
expenses exceed the amount estimated, additional reserves may be required, which could
have a material adverse effect on our operating results.

Safety
Incentives Liability. Our accrued safety incentives represent cash incentives paid to
certain PEO client companies for maintaining safe-work practices in order to minimize
workplace injuries. The incentive is based on a percentage of annual payroll and is paid
annually to customers who meet predetermined workers compensation claims cost
objectives. Safety incentive payments are made only after closure of all workers
compensating claims incurred during the customers contract period. The liability is
estimated and accrued each month based upon the then-current amount of the customers
estimated workers compensation claims reserves as established by the Companys
third party administrator.

- 24 -

---



Allowance
for Doubtful Accounts. We are required to make estimates of the collectibility of
accounts receivables. Management analyzes historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes in the customers
payment tendencies when evaluating the adequacy of the allowance for doubtful accounts. If
the financial condition of our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required.

Intangible
Assets and Goodwill. We assess the recoverability of intangible assets and goodwill
annually and whenever events or changes in circumstances indicate that the carrying value
might be impaired. Factors that are considered include significant underperformance
relative to expected historical or projected future operating results, significant
negative industry trends and significant change in the manner of use of the acquired
assets. Managements current assessment of the carrying value of intangible assets
and goodwill indicates there was no impairment as of December 31, 2005. If these
estimates or their related assumptions change in the future, we may be required to record
impairment charges for these assets.

# Recent Accounting
Pronouncements

For
a discussion of recent accounting pronouncements and their potential effect on the
Companys results of operations and financial condition, refer to Note 1 in the Notes
to the Financial Statements beginning at page F-11 of this Annual Report on Form 10-K.

# Forward-Looking
Information

Statements
in this Item or in Item 1 of this report which are not historical in nature, including
discussion of economic conditions in the Companys market areas and effect on revenue
growth, 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 effectiveness of the Companys management information systems, and the
availability of financing and working capital to meet the Companys funding
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 net proceeds of
approximately $33.0 million and other effects of the Companys follow-on equity
offering in 2005, 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.

- 25 -

---



# Results of Operations

The
following table sets forth the percentages of total revenues represented by selected items
in the Companys Statements of Operations for the years ended December 31, 2005, 2004
and 2003, included in Item 15 of this report. References to the Notes to Financial
Statements appearing below are to the notes to the Companys financial statements
included in Item 15 of this Report.

|                                             | Percentage of Total Net Revenues
|-------------------------------------------- | --------------------------------
|
|
|Revenues:                                    |                                 
|Staffing services                            |                                 
|Professional employer service fees           |                                 
|                                             |                                 
|Total                                        |                                 
|                                             |                                 
|Cost of revenues:                            |                                 
|Direct payroll costs                         |                                 
|Payroll taxes and benefits                   |                                 
|Workers' compensation                        |                                 
|                                             |                                 
|Total                                        |                                 
|                                             |                                 
|Gross margin                                 |                                 
|Selling, general and administrative expenses |                                 
|Depreciation and amortization                |                                 
|                                             |                                 
|Income from operations                       |                                 
|Other income (expense)                       |                                 
|                                             |                                 
|Pretax income                                |                                 
|Provision for income taxes                   |                                 
|                                             |                                 
|Net income                                   |                                 
|                                             |                                 

We
report PEO revenues in accordance with the requirements of 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 for the years ended December 31, 2005 and 2004 set forth in the table
below. Although not in accordance with generally accepted accounting principles in the
United States (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.

- 26 -

---



|(in thousands)                 | Year Ended
December 31,
|------------------------------ | -----------------------
|
|Revenues:                      |                        
|Staffing services              |                        
|Professional employer services |                        
|                               |                        
|Total revenues                 |                        
|                               |                        
|Cost of revenues:              |                        
|Direct payroll costs           |                        
|Payroll taxes and benefits     |                        
|Workers' compensation          |                        
|                               |                        
|Total cost of revenues         |                        
|                               |                        
|Gross margin                   |                        
|                               |                        

A
reconciliation of non-GAAP gross revenues to net revenues is as follows for the years
ended December 31, 2005 and 2004 (in thousands):

|                      | Gross Revenue
Reporting Method | Reclassification | Net Revenue
Reporting Method
|--------------------- | ------------------------------ | ---------------- | ----------------------------
|
|Revenues:             |                                |                  |                             
|Staffing services     |                                |                  | $                           
|Professional employer |                                |                 
|services              |                                |                  |                             
|                      |                                |                  |                             
|Total revenues        |                                |                  | $                           
|                      |                                |                  |                             
|Cost of revenues:     |                                |                  | $                           
|                      |                                |                  |                             

# Years Ended December 31,
2005 and 2004

Net
income for 2005 amounted to $12.5 million, an improvement of 68.9% or
$5.1 million over net income of $7.4 million for 2004. The improvement for 2005 was
primarily due to higher gross margin dollars as a result of significant growth in
professional employer (PEO) services business, partially offset by higher
selling, general and administrative expenses. Diluted earnings per share for 2005 was
$1.21 compared to $.79 for 2004. The Companys improved operating results continue to
reflect, in part, growing market acceptance of the business process outsourcing model,
market share gains owing to strong branch-level management and the competitive advantage
of offering a broad array of human resource management services through its PEO
arrangements. The trend toward normalization of market conditions for California
workers compensation insurance initiated by limited legislature reforms has had
little effect on our PEO growth rates due to the increasing market acceptance of our broad
array of human resource management services. We expect this favorable trend to continue
for the foreseeable future.

- 27 -

---



Revenues
for 2005 totaled $231.4 million, an increase of approximately $36.4 million or
18.7%, which reflects significant growth in the Companys PEO service fee revenue,
combined with a 5.3% increase in staffing services revenue. PEO service fee revenue
increased approximately $29.9 million or 41.9% over 2004 primarily due to increased
demand for the Companys broad array of competitively priced human resource
management services. At December 31, 2005, the Company had approximately 810 PEO
clients as compared to approximately 600 PEO clients at December 31, 2004. Management
believes that the favorable trend in PEO revenues will continue for the foreseeable
future. Staffing services revenue increased approximately $6.6 million or 5.3% over
2004. During 2005, the Company served approximately 2,000 staffing services customers,
which compares to approximately the same number of customers during 2004. Although the
number of customers remained at a similar level in 2005 as compared to 2004, the increase
in staffing services revenues reflects increased business activity with certain customers
owing to their size of operation, as well as customers whose demand for the Companys
services increased. Management expects demand for the Companys staffing services
will continue to reflect overall economic conditions in its market areas.

Gross
margin for 2005 totaled approximately $45.8 million, which represented an increase of
$10.6 million or 30.1% over 2004, primarily due to the 18.7% increase in revenues.
The gross margin percent increased from 18.0% of revenues for 2004 to 19.8% for 2005. The
increase in the gross margin percentage was due to lower direct payroll costs and lower
workers compensation expense, offset in part by higher payroll taxes and benefits,
all expressed as a percent of revenues. The decline in direct payroll costs, as a
percentage of revenues, from 46.8% for 2004 to 41.9% for 2005 reflects the continuing
decline in the mix of staffing services due to an increase in PEO services in the
Companys customer base and the effect of each customers unique mark-up
percent. Workers compensation expense, as a percent of revenues, declined from 11.8%
in 2004 to 10.7% in 2005. Workers compensation expense for 2005 totaled
$24.7 million, which compares to $23.1 million for 2004. The moderate increase in
workers compensation expense in total dollars was generally due to increased
business activity in California. The increase in payroll taxes and benefits, as a
percentage of revenues, from 23.4% for 2004 to 27.6% for 2005, was largely due to the
effect of significant growth in PEO services, offset in part by slightly lower effective
state unemployment tax rates in various states in which the Company operates as compared
to 2004. We expect gross margin as a percentage of total revenues to continue to be
influenced by fluctuations in the mix between staffing and PEO services, as well as the
adequacy of our estimates for workers compensation liabilities.

In
connection with our self-insured workers compensation program, we have maintained an
excess workers compensation policy that limits the financial effect of costly
workers compensation claims. For 2003, such policies included a self-insured
retention or deductible of $750,000 per occurrence. Effective January 1, 2004, the
self-insured retention or deductible increased to $1.0 million per occurrence and
remained as such for the January 1, 2006 renewal, with a moderate decline in the
premium cost per $100 of payroll. Management believes that we obtained the most favorable
terms and conditions available given current market conditions.

Selling,
general and administrative (SG&A) expenses consist of compensation and
other expenses incident to the operation of our headquarters and our branch offices and
the marketing of our services. SG&A for 2005 amounted to approximately
$25.7 million, an increase of $3.4 million or 15.3% over 2004. The increase over 2004
was primarily attributable to increases in branch management personnel and related
expenses as a result of growth in the Companys PEO business. SG&A expenses, as a
percentage of revenues, declined from 11.4% in 2004 to 11.1% in 2005.

Other
income for 2005 was $747,000 compared to other income of $432,000 for 2004. The increase
in other income for 2005 was primarily attributable to increased investment income earned
on the Companys higher cash balances, offset in part by a realized loss of $383,000
on a prior investment in a bond fund, which was comprised of treasury inflation protected
securities, commonly known as TIPS.

- 28 -

---



Depreciation
and amortization totaled $1.0 million for 2005, which compares to a similar amount
for 2004. The depreciation and amortization expense level remained relatively comparable
to 2004 amounts due to our current low level of capital expenditures for operations.

Our
effective income tax rate for 2005 was 37.3%, as compared to 39.8% for 2004. The lower
2005 effective rate was primarily attributable to a significant increase in Federal
tax-exempt interest income.

At
December 31, 2005, we had net deferred income tax assets of $6.2 million, which
consist of temporary differences between taxable income for financial accounting and tax
purposes, which will reduce taxable income in future years. Pursuant to GAAP, we are
required to assess the realization of the deferred income tax assets as significant
changes in circumstances may require adjustments during future periods. Although
realization is not assured, management has concluded that it is more likely than not that
the remaining net deferred income tax assets will be realized, principally based upon
projected taxable income for the next two years. The amount of the net deferred income tax
assets actually realized could vary, if there are differences in the timing or amount of
future reversals of existing deferred income tax assets or changes in the actual amounts
of future taxable income as compared to operating forecasts. If our operating forecast is
determined to no longer be reliable due to uncertain market conditions, our long-term
forecast may require reassessment. As a result, in the future, a valuation allowance may
be required to be established for all or a portion of the net deferred income tax assets.
Such a valuation allowance could have a significant effect on our future results of
operations and financial position.

# Years Ended December 31,
2004 and 2003

Net
income for the year ended December 31, 2004 was $7.4 million, an improvement of
$5.3 million over net income of $2.1 million for 2003. The improvement in net
income was primarily attributable to higher gross margin dollars as a result of
significant growth in PEO services business, offset in part by an increase in SG&A
expenses to support the increase in business activity. Diluted income per share for 2004
was $0.79 as compared to diluted income per share of $0.24 for 2003.

Revenues
for 2004 totaled $195.0 million, an increase of approximately $72.2 million or
58.9% over 2003 revenues of $122.7 million. The increase in total revenues was due
primarily to the significant growth in our PEO service fee revenue in California due in
part to the competitive advantages available to us as a result of adverse conditions in
the workers compensation insurance market in that state, combined with an increase
in staffing services revenue.

PEO
service fee revenue increased $42.3 million or 144.9%, while staffing services
revenue increased $30.0 million or 32.0%, which resulted in an increase in the share
of PEO service fee revenue to 36.6% of total revenues for 2004, as compared to 23.8% for
2003. The increase in PEO service fee revenue for 2004 was primarily due to market
acceptance of the business process outsourcing model, market share gains owing to strong
branch-level management and to increased demand for our services, particularly in
California. At December 31, 2004, we had approximately 600 PEO clients as compared to
approximately 500 PEO clients at December 31, 2003. The increase in staffing services
revenue for 2004 was primarily due to our acquisition of certain assets of Skills Resource
Training Center (SRTC), a staffing services company with nine offices in
Central Washington, Eastern Oregon and Southern Idaho, effective January 1, 2004.
Operations of SRTC accounted for approximately $25.6 million or 85.3% of the increase
in staffing services revenue. During 2004, we served approximately 2,000 staffing services
customers as compared to 2,100 customers during 2003. Although the number of customers
declined in 2004 as compared to 2003, the increase in staffing services revenues reflects
increased business activity with certain customers owing to their size of operation, as
well as customers whose demand for our services increased. Staffing services revenues
decreased to 63.4% of total revenues for 2004 as compared to 76.2% for 2003.

- 29 -

---



Gross
margin for 2004 totaled $35.2 million, which represented an increase of $14.2 million
or 67.6% over 2003. The gross margin percentage increased from 17.1% of total revenues for
2003 to 18.0% for 2004. The increase in the gross margin percentage was due to lower
direct payroll costs, offset in part by higher payroll taxes and benefit costs and higher
workers compensation costs, as a percentage of total revenues. The decrease in
direct payroll costs as a percentage of total revenues from 56.3% for 2003 to 46.8% for
2004 primarily reflects the shift in relative mix of services to our customer base from
staffing to PEO services and to the effect of each customers unique mark-up percent.
The increase in payroll taxes and benefits as a percentage of total revenues from 18.7%
for 2003 to 23.4% for 2004 was primarily attributable to higher statutory state
unemployment tax rates in various states in which we operate, as well as to the effect of
significant growth in PEO services. Workers compensation expense for 2004 totaled
$23.1 million, which compares to $9.7 million for 2003. The increase in
workers compensation expense was generally due to increased business activity,
particularly in California, where injury claims are more costly as compared to other
states in which we operate, as well as to an increased provision for the future estimated
costs of existing claims. We expect gross margin as a percentage of total revenues to
continue to be influenced by fluctuations in the mix between staffing and PEO services,
including the mix within the staffing segment, as well as the adequacy of our estimates
for workers compensation liabilities.

SG&A
expenses for 2004 amounted to $22.3 million, an increase of $5.5 million or
32.7% over $16.8 million in 2003. SG&A expenses expressed as a percentage of
total revenues declined from 13.7% for 2003 to 11.4% for 2004. The increase in SG&A
dollars was primarily due to increases in branch management personnel and related expenses
as a result of the growth in our PEO business and, to a lesser extent, the incremental
SG&A expenses associated with the SRTC acquisition.

Depreciation
and amortization totaled $1.0 million for 2004, which compares to $1.1 million
for 2003. The depreciation and amortization expense level remained relatively comparable
to 2003 amounts due to our current low level of capital expenditures.

Our
effective income tax rate for 2004 was 39.8%, as compared to 29.9% for 2003. The higher
2004 effective rate was primarily attributable to a higher federal tax rate as a result of
higher taxable income, a higher weighted-average state tax rate due to increased taxable
income in California and a lower relative effect of tax credits due to higher taxable
income.

# Fluctuations in
Quarterly Operating Results

We
have historically experienced significant fluctuations in our quarterly operating results
and expect such fluctuations to continue in the future. Our operating results may
fluctuate due to a number of factors such as wage limits on statutory payroll taxes,
claims experience for workers compensation, demand for our services and competition.
Payroll taxes, as a component of cost of revenues, generally decline throughout a calendar
year as the applicable statutory wage bases for federal and state unemployment taxes and
Social Security taxes are exceeded on a per employee basis. Our revenue levels may be
higher in the third quarter due to the effect of increased business activity of our
customers businesses in the agriculture, food processing and forest products-related
industries. In addition, revenues in the fourth quarter may be affected by many
customers practice of operating on holiday-shortened schedules. 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. In
addition, 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.

- 30 -

---



# Liquidity and Capital
Resources

The
Companys cash position of $61.4 million at December 31, 2005, increased by
$49.2 million over December 31, 2004, which compares to an increase of $4.4
million for the comparable period in 2004. The increase in cash at December 31, 2005, as
compared to December 31, 2004, was primarily due to $33.0 million of net
proceeds generated from the Companys follow-on offering of its common stock
completed in early August 2005 and to net cash provided by operating activities. The
Company sold a total of 2,184,850 shares of common stock in the offering and received
total net proceeds of approximately $33.0 million after deducting underwriting
discounts, commissions and offering expenses.

Net
cash provided by operating activities for 2005 amounted to $24.7 million, as compared to
net cash provided by operating activities of $12.7 million for 2004. For 2005, cash flow
was provided by net income of $12.5 million, together with increases in accrued payroll
and related benefits of $11.2 million and increases in workers compensation claims
liabilities and safety incentives liabilities totaling $5.7 million, offset in part by
increases in trade accounts receivable, deferred income taxes, prepaid expenses and
customer deposits and other assets totaling $6.2 million.

Net
cash used in investing activities totaled $9.7 million for 2005, compared to net cash used
in investing activities of $10.0 million for 2004. For 2005, the principal uses of cash
for investing activities were for purchases of property and equipment of $9.7 million
primarily comprised of the Companys $8.85 million purchase of an office
building. The Company relocated its corporate headquarters to this building in mid-March
2006. The remaining uses of cash for investing activities were net purchases of restricted
marketable securities of $3.6 million and purchases of marketable securities of $1.5
million, offset by net proceeds totaling $3.3 million from maturities of restricted
marketable securities and $1.9 million in proceeds from sales of 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 provided by financing activities for 2005 was $34.2 million compared to net cash
provided by financing activities of $1.7 million for 2004. For 2005, the principal source
of cash from financing activities was $33.0 million in net proceeds from the
Companys follow-on offering of its common stock.

As
disclosed in Note 2 to the audited consolidated financial statements included in this
report, the Company acquired certain assets of Skills Resource Training Center
(SRTC), a staffing services company headquartered in Central Washington state,
effective January 1, 2004. As consideration for the acquisition, the Company paid $3.0
million in cash and agreed to issue up to 203,597 shares of its common stock
(Earnout Shares), with the actual number of Earnout Shares to be issued based
upon the level of financial performance achieved by the SRTC offices during calendar year
2004. Effective July 12, 2005, the Company issued 76,222 Earnout Shares to SRTC in partial
resolution of the remaining contingencies. The Company has recorded estimated Earnout
Shares of 79,200 with a value of $778,000 on its consolidated balance sheet as of December
31, 2005 and December 31, 2004. See Note 19 to the audited consolidated financial
statements included in Item 15 of this report.

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. As discussed in Note 19to the audited consolidated financial statements
included in Item 15 of this report, we completed the acquisition of the Pro HR, LLC
effective January 1, 2006.

- 31 -

---



The
Company entered into a new Credit Agreement (the Credit Agreement) with its
principal bank effective July 1, 2005. The Credit Agreement provides for an unsecured
revolving credit facility of up to $4.0 million, which includes a subfeature under the
line of credit for standby letters of credit up to $4.0 million. The interest rate on
advances, 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, 2006. Management
anticipates that if it chooses to renew the Credit Agreement, such terms and conditions
for a new agreement will not be less favorable than the current agreement.

Pursuant
to the Credit Agreement, the Company is required to maintain compliance with the following
covenants: (1) a Current Ratio not less than 1.10 to 1.0 with Current Ratio
defined as total current assets divided by total current liabilities; (2) net income after
taxes not less than $1.00 on an annual basis, determined as of each fiscal year end, and
(3) pre-tax profit of not less than $1.00 on a quarterly basis, determined as of each
fiscal quarter end. The Company was in compliance with all covenants at December 31, 2005.

Management
expects that current liquid assets, the funds anticipated to be generated from operations
and credit available under the Credit Agreement will be sufficient in the aggregate to
fund the Companys working capital needs for the foreseeable future.

# Contractual Obligations

The
Companys contractual obligations as of December 31, 2005, including long-term debt,
commitments for future payments under non-cancelable lease arrangements and long-term
workers compensation liabilities, are summarized below:

|(in thousands)                         | Payments Due by Period
|-------------------------------------- | ----------------------
|
|Long-term debt, principal only         |                       
|Operating leases                       |                       
|Long-term workers' compensation claims |                       
|liabilities for catastrophic injuries  |                       
|                                       |                       
|Total contractual cash obligations     |                       
|                                       |                       

# 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.

- 32 -

---



# Item 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We
are primarily exposed to market risks from fluctuations in interest rates and the effects
of those fluctuations on the market values of our cash and cash equivalents, our
available-for-sale marketable securities and our long-term debt. The cash and cash
equivalents consist primarily of tax-exempt money market funds and overnight investments
which are not significantly exposed to interest rate risk, except to the extent that
changes in interest rates will ultimately affect the amount of interest income earned on
these investments. The available-for-sale marketable securities are subject to interest
rate risk because these securities generally include a fixed interest rate. As a result,
the market values of these securities are affected by changes in prevailing interest
rates. As of December 31, 2005, the Company had interest-bearing debt obligations of
approximately $1.4 million, of which approximately $1.2 million bears interest at a
variable rate and approximately $0.2 million at a fixed rate of interest. The variable
rate debt is comprised of a $1.475 million note payable, of which approximately $1.2
million remained outstanding as of December 31, 2005 with a 10-year term, which bears
interest at the three-month LIBOR rate plus 240 basis points. Based on the Companys
overall interest exposure at December 31, 2005, a 100 basis point increase in market
interest rates would not have a material effect on the fair value of the Companys
long-term debt or its results of operations.

We
attempt to limit our exposure to interest rate risk primarily through diversification and
low investment turnover. Our investment policy is designed to maximize after-tax interest
income while preserving our principal investment. As a result, our marketable securities
consist primarily of short and intermediate-term debt securities. As of December 31, 2005,
the Company had not entered into any interest rate instruments to reduce its exposure to
interest rate risk.

# Item 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The
financial statements and notes thereto required by this item begin on page F-1 of this
report, as listed in Item 15.

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

None.

# Item 9A. CONTROLS AND
PROCEDURES

The
Companys disclosure controls and procedures are designed to ensure that information
the Company must disclose in its reports filed or submitted under the Securities Exchange
Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized, and reported on a timely basis. The Companys management has evaluated,
with the participation and under the supervision of our chief executive officer
(CEO) and chief financial officer (CFO), the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) as of the end of the period covered by this report. Based on this
evaluation, our CEO and CFO have concluded that, as of such date, the Companys
disclosure controls and procedures are effective in ensuring that information relating to
the Company required to be disclosed in reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and is communicated to our management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosures.

No
change in the Companys internal control over financial reporting occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.

Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC regulations,
beginning with our Annual Report on Form 10-K for the fiscal year ending
December 31, 2006, we expect to be required to furnish a report by our management on
our internal control over financial reporting. Such report will contain, among other
matters, an assessment of the effectiveness of our internal control over financial
reporting as of the end of 2006.

# Item 9B. OTHER
INFORMATION

None.

- 33 -

---



# PART III

# Item 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

Information
required by this Item 10 concerning directors and executive officers of the Company
appears under the heading Executive Officers of the Registrant on
page [12] of this report or is incorporated into this report by reference to the
Companys definitive Proxy Statement for its 2006 Annual Meeting of Stockholders to
be filed within 120 days of the Companys fiscal year end of December 31,
2005 (the Proxy Statement), in which additional required information is
included under the headings Election of Directors, Stock Ownership by
Principal Stockholders and Management  Section 16(a) Beneficial Ownership
Reporting Compliance, and Code of Ethics.

# Audit Committee

The
Company has a separately-designated standing audit committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act known as the Audit and Compliance Committee.
The members of the Audit and Compliance Committee are Thomas J. Carley, chairman, James B.
Hicks, Ph.D., and Anthony Meeker, each of whom is independent as that term is used in
Nasdaq listing standards applicable to the Company.

# Audit Committee
Financial Expert

The
Companys Board of Directors has determined that Thomas J. Carley, an audit committee
member, qualifies as an audit committee financial expert as defined by
Item 401(h) of Regulation S-K under the Exchange Act and is independent as that term
is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

# Item 11. EXECUTIVE
COMPENSATION

Information
required by this Item 11 concerning executive and director compensation is incorporated
into this report by reference to the Proxy Statement, in which required information is set
forth under the headings Executive Compensation and Meetings and
Committees of the Board of Directors  Compensation Committee Interlocks and Insider
Participation.

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

Information
required by this Item 12 concerning the security ownership of certain beneficial owners
and management is incorporated into this report by reference to the Proxy Statement, in
which required information is set forth under the headings Stock Ownership of
Principal Stockholders and Management  Beneficial Ownership Table and
Executive Compensation  Additional Equity Compensation Plan Information.

# Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

Information
required by this Item 13 concerning certain relationships and related transactions is
incorporated into this report by reference to the Proxy Statement, in which required
information is set forth under the headings Meetings and Committees of the Board of
Directors  Compensation Committee Interlocks and Insider Participation and
Transactions with Management.

# Item 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Information
required by this Item 14 concerning fees paid to our accountants is incorporated into this
report by reference to the Proxy Statement, in which required information is set forth
under the heading Matters Relating to Our Independent Registered Public Accounting
Firm.

- 34 -

---



# PART IV

# Item 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES

# Financial Statements and
Schedules

The
Financial Statements, together with the reports thereon of Moss Adams LLP and
PricewaterhouseCoopers LLP, are included on the pages indicated below:

|                                                                                        |     
|--------------------------------------------------------------------------------------- | ----
|                                                                                        | Page
|Report of Independent Registered Public Accounting Firm - Moss Adams LLP                | F-1 
|Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP    | F-2 
|Balance Sheets - December 31, 2005 and 2004                                             | F-3 
|Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003           | F-4 
|Statements of Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003 | F-5 
|Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003           | F-6 
|Notes to Financial Statements                                                           | F-7 

No schedules are required to be
filed herewith.

# Exhibits

Exhibits are listed in the Exhibit
Index that follows the signature page of this report.

- 35 -

---



# BARRETT BUSINESS
SERVICES, INC.AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS

# Report of Independent
Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Barrett Business Services, Inc.

We have audited the accompanying
consolidated balance sheet of Barrett Business Services, Inc. and subsidiary (the
Company) as of December 31, 2005, and the related consolidated statements of
operations, stockholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.

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 includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Barrett Business Services, Inc. and subsidiary as of
December 31, 2005, and the consolidated results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally accepted in
the United States of America.

/s/ Moss Adams LLP

Portland, Oregon March 30, 2006

F-1

---



# Report of Independent
Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Barrett Business Services, Inc.

In our opinion, the consolidated
balance sheet as of December 31, 2004 and the related consolidated statements of
operations, stockholders equity and cash flows for each of the two years in the
period ended December 31, 2004 present fairly, in all material respects, the financial
position of Barrett Business Services, Inc. and its subsidiary (the Company) at December
31, 2004, and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of
these statements 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. An audit 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, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

/s/ PricewaterhouseCoopers LLP

Portland, Oregon March 9, 2005

F-2

---



Barrett Business
Services, Inc.Consolidated Balance
SheetsDecember 31, 2005 and 2004(In Thousands, Except Par Value)

|                                                                      | 2005 | 2004
|--------------------------------------------------------------------- | ---- | ----
|ASSETS                                                                |      |     
|Current assets:                                                       |      |     
|Cash and cash equivalents                                             |      |     
|Marketable securities                                                 |      |     
|Trade accounts receivable, net                                        |      |     
|Prepaid expenses and other                                            |      |     
|Deferred income taxes                                                 |      |     
|Workers' compensation receivables for insured claims                  |      |     
|                                                                      |      |     
|Total current assets                                                  |      |     
|Marketable securities                                                 |      |     
|Goodwill, net                                                         |      |     
|Intangibles, net                                                      |      |     
|Property, equipment and software, net                                 |      |     
|Restricted marketable securities and workers' compensation deposits   |      |     
|Deferred income taxes                                                 |      |     
|Other assets                                                          |      |     
|Workers' compensation receivables for insured claims                  |      |     
|                                                                      |      |     
|                                                                      |      |     
|                                                                      |      |     
|LIABILITIES AND STOCKHOLDERS' EQUITY                                  |      |     
|Current liabilities:                                                  |      |     
|Accounts payable                                                      |      |     
|Accrued payroll, payroll taxes and related benefits                   |      |     
|Other accrued liabilities                                             |      |     
|Workers' compensation claims liabilities                              |      |     
|Workers' compensation claims liabilities for insured claims           |      |     
|Safety incentives liability                                           |      |     
|Current portion of long-term debt                                     |      |     
|                                                                      |      |     
|Total current liabilities                                             |      |     
|Long-term debt, net of current portion                                |      |     
|Customer deposits                                                     |      |     
|Long-term workers' compensation claims liabilities                    |      |     
|Long-term workers' compensation claims liabilities for insured claims |      |     
|Deferred gain on sale and leaseback                                   |      |     
|Commitments and contingencies (Notes 11 and 17)                       |      |     
|Stockholders' equity:                                                 |      |     
|Preferred stock, $.01 par value; 500,000 shares authorized; no shares |      |     
|issued and outstanding                                                |      |     
|Common stock, $.01 par value; 20,500 shares authorized, 11,047        |      |     
|and 8,612 shares issued and outstanding                               |      |     
|Additional paid-in capital                                            |      |     
|Other comprehensive loss                                              |      |     
|Retained earnings                                                     |      |     
|                                                                      |      |     
|                                                                      |      |     
|                                                                      |      |     
|                                                                      |      |     
|                                                                      |      |     

The accompanying notes are an integral part of these financial statements.

F-3

---

Barrett Business
Services, Inc.Consolidated Statements
of Operations Years Ended December 31, 2005, 2004 and 2003(In Thousands, Except
Per Share Amounts)

|                                                      | 2005 | 2004 | 2003
|----------------------------------------------------- | ---- | ---- | ----
|Revenues:                                             |      |      |     
|Staffing services                                     |      |      | $   
|Professional employer service fees                    |      |      |     
|                                                      |      |      |     
|                                                      |      |      |     
|                                                      |      |      |     
|Cost of revenues:                                     |      |     
|Direct payroll costs                                  |      |      |     
|Payroll taxes and benefits                            |      |      |     
|Workers' compensation                                 |      |      |     
|                                                      |      |      |     
|                                                      |      |      |     
|                                                      |      |      |     
|Gross margin                                          |      |      |     
|Selling, general and administrative expenses          |      |      |     
|Depreciation and amortization                         |      |      |     
|                                                      |      |      |     
|Income from operations                                |      |      |     
|                                                      |      |      |     
|Other income:                                         |      |     
|Interest expense                                      |      |      |     
|Investment income, net                                |      |      |     
|Other                                                 |      |      |     
|                                                      |      |      |     
|                                                      |      |      |     
|                                                      |      |      |     
|Income before income taxes                            |      |      |     
|Provision for income taxes                            |      |      |     
|                                                      |      |      |     
|Net income                                            |      |      | $   
|                                                      |      |      |     
|Basic earnings per share                              |      |      | $   
|                                                      |      |      |     
|Weighted average number of basic shares outstanding   |      |      |     
|                                                      |      |      |     
|Diluted earnings per share                            |      |      | $   
|                                                      |      |      |     
|Weighted average number of diluted shares outstanding |      |      |     
|                                                      |      |      |     

The accompanying notes are an integral part of these financial statements.

F-4

---



Barrett Business
Services, Inc.Consolidated Statements
of Stockholders Equity Years Ended December 31, 2005, 2004 and 2003(In Thousands)

|                                  | Common Stock | 
|--------------------------------- | ------------ | 
|
|Balance, December 31, 2002        |              | 
|Common stock issued on            |              | 
|exercise of options               |              | 
|Repurchase of common stock        |              | 
|Tax benefit of stock option       |              | 
|exercises                         |              | 
|Net income                        |              | 
|                                  |              | 
|Balance, December 31, 2003        |              | 
|Additional estimated purchase     |              | 
|price for acquisition             |              | 
|Common stock issued on            |              | 
|exercise of options               |              | 
|Repayment of employee loan        |              | 
|Tax benefit of stock option       |              | 
|exercises                         |              | 
|Unrealized holding losses on      |              | 
|marketable securities, net of tax |              | 
|Net income                        |              | 
|                                  |              | 
|Balance, December 31, 2004        |              | 
|Common stock issued               |              | 
|in follow-on offering             |              | 
|Common stock issued for           |              | 
|acquisition                       |              | 
|Common stock issued on            |              | 
|exercise of options               |              | 
|Tax benefit of stock option       |              | 
|exercises                         |              | 
|Unrealized holding gains on       |              | 
|marketable securities, net of tax |              | 
|Net income                        |              | 
|                                  |              | 
|Balance, December 31, 2005        |              | 
|                                  |              | 

The accompanying notes are an integral part of these financial statements.

F-5

---



Barrett Business
Services, Inc.Consolidated Statements
of Cash Flows Years Ended December 31, 2005, 2004 and 2003(In Thousands)

|                                                                            | 2005 | 2004 | 2003
|--------------------------------------------------------------------------- | ---- | ---- | ----
|Cash flows from operating activities:                                       |      |      |     
|Net income                                                                  |      |      | $   
|Reconciliations of net income to net cash provided by (used in)             |      |     
|operating activities:                                                       |      |     
|Depreciation and amortization                                               |      |      |     
|Losses (gains) recognized on marketable securities                          |      |      |     
|Purchase of marketable securities                                           |      |      |     
|Proceeds from sales of marketable securities                                |      |      |     
|Gain recognized on sale and leaseback                                       |      |      |     
|Deferred income taxes                                                       |      |      |     
|Changes in certain assets and liabilities, net of amounts purchased         |      |     
|in acquisitions:                                                            |      |     
|Trade accounts receivable, net                                              |      |      |     
|Income taxes receivable                                                     |      |      |     
|Prepaid expenses and other                                                  |      |      |     
|Accounts payable                                                            |      |      |     
|Accrued payroll, payroll taxes and related benefits                         |      |      |     
|Other accrued liabilities                                                   |      |      |     
|Workers' compensation claims liabilities                                    |      |      |     
|Safety incentives liability                                                 |      |      |     
|Customer deposits and other assets, net                                     |      |      |     
|Other long-term liabilities                                                 |      |      |     
|                                                                            |      |      |     
|Net cash provided by operating activities                                   |      |      |     
|                                                                            |      |      |     
|Cash flows from investing activities:                                       |      |     
|Proceeds from sale and leaseback of buildings                               |      |      |     
|Cash paid for acquisition, including other direct costs                     |      |      |     
|Purchase of property and equipment, net of amounts purchased in acquisition |      |      |     
|Proceeds from sales of marketable securities                                |      |      |     
|Purchase of marketable securities                                           |      |      |     
|Proceeds from maturities of restricted marketable securities                |      |      |     
|Proceeds from sales of restricted marketable securities                     |      |      |     
|Purchase of restricted marketable securities                                |      |      |     
|                                                                            |      |      |     
|Net cash (used in) provided by investing activities                         |      |      |     
|                                                                            |      |      |     
|Cash flows from financing activities:                                       |      |     
|Proceeds from issuance of common stock, net                                 |      |      |     
|Proceeds from issuance of debt                                              |      |      |     
|Proceeds from credit-line borrowings                                        |      |      |     
|Payments on credit-line borrowings                                          |      |      |     
|Payments on long-term debt                                                  |      |      |     
|Repurchase of common stock                                                  |      |      |     
|Proceeds from the exercise of stock options                                 |      |      |     
|Tax benefit of stock option exercises                                       |      |      |     
|                                                                            |      |      |     
|Net cash provided by (used in) financing activities                         |      |      |     
|                                                                            |      |      |     
|Net increase in cash and cash equivalents                                   |      |      |     
|Cash and cash equivalents, beginning of year                                |      |      |     
|                                                                            |      |      |     
|Cash and cash equivalents, end of year                                      |      |      | $   
|                                                                            |      |      |     
|Supplemental schedule of noncash investing activities:                      |      |     
|Acquisition of other businesses:                                            |      |     
|Cost of acquisition in excess of fair market value of net assets            |      |     
|acquired                                                                    |      |      | $   
|Tangible assets acquired                                                    |      |      |     
|Less stock issued in connection with acquisition                            |      |      |     
|                                                                            |      |      |     
|Net cash paid for acquisition                                               |      |      | $   
|                                                                            |      |      |     

The accompanying notes are an integral part of these financial statements.

F-6

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements

# 1. Summary of Operations
and Significant Accounting Policies

| | Nature of operationsBarrett Business Services, Inc. (Barrett or the Company), a Maryland
corporation, is engaged in providing both staffing and professional employer services to a
diversified group of customers through a network of branch offices throughout California,
Oregon, Washington, Idaho, Arizona, Maryland, Delaware and North Carolina. Approximately
74%, 72% and 78%, respectively, of the Companys revenues during 2005, 2004 and 2003
were attributable to its California and Oregon operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
May 2004, the Company formed a wholly-owned subsidiary which acquired an aircraft. The
subsidiary incurred debt of $1.5 million to finance the purchase of the aircraft. The
consolidated financial statements include the accounts of the subsidiary, after
elimination of intercompany accounts and transactions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue recognitionThe
Company recognizes revenue as services are rendered by its workforce. Staffing services
are engaged by customers to meet short-term and long-term personnel needs. Professional
employer services (PEO) 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. We report
PEO revenues in accordance with the requirements of 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys cost of revenues for staffing services is comprised of direct payroll
costs, employer payroll related taxes and employee benefits and workers
compensation. The Companys cost of revenues for PEO services includes employer
payroll related taxes and workers compensation. Direct payroll costs represent the
gross payroll earned by staffing services employees based on salary or hourly wages.
Payroll taxes and employee benefits consist of the employers portion of Social
Security and Medicare taxes, federal unemploy-ment taxes, state unemployment taxes and
staffing services employee reimbursements for materials, supplies and other expenses,
which are paid by the customer. Workers compensation costs consist primarily of the
costs associated with the Companys self-insured workers compensation program,
such as claims reserves, claims administration fees, legal fees, state and federal
administrative agency fees and reinsurance costs for catastrophic injuries. The Company
also maintains separate workers compensation insurance policies for employees
working in states where the Company is not self-insured. Safety incentives represent cash
incentives paid to certain PEO client companies for maintaining safe-work practices in
order to minimize workplace injuries. The incentive is based on a percentage of annual
payroll and is paid annually to customers who meet predetermined workers
compensation claims cost objectives.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash and cash equivalentsThe
Company considers non-restricted short-term investments, which are highly liquid, readily
convertible into cash, and have original maturities of less than three months, to be cash
equivalents for purposes of the statements of cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 1. Summary of Operations
and Significant Accounting Policies (Continued)

| | Marketable securities
At
December 31, 2005, marketable securities consisted of publicly-traded corporate stocks and
bonds. The Company determines the appropriate classification pursuant to Statement of
Financial Accounting Standard No. (SFAS) 115, Accounting for Certain
Investments in Debt and Equity Securities, of its marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and re-evaluates such
classification as of each balance sheet date. At December 31, 2005 a majority of the
Companys investments in marketable securities were classified as trading and
available-for-sale, and as a result, were reported at fair value. Unrealized gains and
losses for trading securities are reported in other income (expense) in the Companys
consolidated statements of operations. Unrealized gains and losses for available-for-sale
securities are reported as a component of other comprehensive income (loss) in
stockholders equity. Realized gains and losses on sales of marketable securities are
included in other income (expense) on the Companys consolidated statements of
operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allowance for doubtful accountsThe
Company had an allowance for doubtful accounts of $282,000 and $273,000 at December 31,
2005 and 2004, respectively. The Company must make estimates of the collectibility of
accounts receivables. Management analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic conditions and changes in customers
payment trends when evaluating the adequacy of the allowance for doubtful accounts.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred income taxesThe
Company calculates income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes, which requires recognition of deferred income tax assets and
liabilities for the expected tax consequences of events that have been included in the
financial statements and income tax returns. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Restricted marketable securitiesAt
December 31, 2005 and 2004, restricted marketable securities consisted primarily of
governmental debt instruments with maturities generally from 90 days to 16 years (see
Note 7). At December 31, 2005 and 2004, the approximate fair value of restricted
marketable securities equaled their approximate amortized cost. Restricted marketable
securities have been categorized as held-to-maturity and, as a result, are stated at
amortized cost. Realized gains and losses on sales of restricted marketable securities are
included in other income (expense) on the Companys consolidated statements of
operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IntangiblesIn
July 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. (SFAS) 141, Business Combinations and SFAS
142, Goodwill and Other Intangible Assets. With respect to SFAS 142, the
Company performed a goodwill impairment test at December 31, 2003, 2004 and 2005 and has
determined there was no impairment to its recorded goodwill. The Company will perform a
goodwill impairment test annually during the fourth quarter and whenever events or
circumstances
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 1. Summary of Operations
and Significant Accounting Policies (Continued)

| | Intangibles (Continued)occur
indicating that goodwill might be impaired. The Companys intangible assets are
comprised of covenants not to compete arising from acquisitions and have contractual lives
principally ranging from three to five years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Property and equipmentProperty
and equipment are stated at cost. Expenditures for maintenance and repairs are charged to
operating expense as incurred, and expenditures for additions and betterments are
capitalized. The cost of assets sold or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts, and any resulting gain or loss is reflected
in the statements of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
of property and equipment is calculated using either straight-line or accelerated methods
over estimated useful lives, of the related assets or lease terms, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Years        
|------------------------------ | -------------
|Building                       | 39           
|Office furniture and fixtures  | 7            
|Computer hardware and software | 3-10         
|Aircraft                       | 5            
|Leasehold improvements         | Life of lease

| | Safety incentives liabilitySafety
incentives represent cash incentives paid to certain PEO client companies for maintaining
safe-work practices in order to minimize workplace injuries. The incentive is based on a
percentage of annual payroll and is paid annually to customers who meet predetermined
workers compensation claims cost objectives. Safety incentive payments are made only
after closure of all workers compensation claims incurred during the customers
contract period. The liability is estimated and accrued each month based upon the
then-current amount of the customers estimated workers compensation claims
reserves as established by the Companys third party administrator.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Customer depositsThe
Company requires deposits from certain professional employer services customers to cover a
portion of its accounts receivable due from such customers in the event of default of
payment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comprehensive income (loss)Comprehensive
income (loss) includes all changes in equity during a period except those that resulted
from investments by or distributions to a companys stockholders. Comprehensive
income totaled $12.6 million, $7.0 million and $2.1 million for the years ended December
31, 2005, 2004 and 2003, respectively. Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income (loss), but excluded from net income as these amounts
are recorded directly as an adjustment to stockholders equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 1. Summary of Operations
and Significant Accounting Policies (Continued)

| | Comprehensive income (loss) (Continued)Barretts
other comprehensive income (loss) is comprised of unrealized holding gains and losses on
its publicly traded marketable securities, net of realized gains included in net income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Statements
of cash flowsInterest paid during 2005, 2004 and 2003 did not materially differ from
interest expense. Income taxes paid by the Company in 2005 and 2004 totaled $8.3 million
and $6.5 million, respectively, and no taxes were paid in 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Basic and diluted earnings per shareOn
April 15, 2005, the Company declared a 3-for-2 stock split payable as a 50% stock dividend
on May 19, 2005. All share and per share amounts have been adjusted to retroactively give
effect to the stock split.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Basic
earnings per share are computed based on the weighted average number of common shares
outstanding for each year. Diluted earnings per share reflect the potential effects of the
exercise of outstanding stock options. Basic and diluted shares outstanding are summarized
as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               | Year Ended
December 31,
|-------------------------------------------------------------- | -----------------------
|
|Weighted average number of basic shares outstanding            |                        
|Acquisition earnout shares                                     |                        
|Stock option plan shares to be issued at prices ranging from   |                        
|$0.97 to $17.50 per share                                      |                        
|Less:      Assumed purchase at average market price during the |                        
|period using proceeds received upon exercise of                |                        
|options and purchase of stock                                  |                        
|                                                               |                        
|Weighted average number of diluted shares outstanding          |                        
|                                                               |                        

| | Stock option compensationThe
Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB Opinion No. 25) and related interpretations in
accounting for its stock incentive plan. Accordingly, no compensation expense has been
recognized for its stock option grants issued at market price because the exercise price
of the Companys employee stock options equals the market price of the underlying
stock on the date of grant. If compensation expense for the Companys stock-based
compensation plan had been determined based on the fair market value at the grant date for
awards under the Plan consistent with SFAS No. 123, the Companys net income (loss)
and earnings (loss) per share would have been adjusted to the pro forma amounts indicated
below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 1. Summary of Operations
and Significant Accounting Policies (Continued)

| | Stock
option compensation (Continued)
| | -------------------------------------

|(in thousands, except per share amounts)                 | 2005 | 2004 | 2003
|-------------------------------------------------------- | ---- | ---- | ----
|Net income, as reported                                  |      |      | $   
|Deduct: Total stock-based  compensation expense          |      |     
|determined under fair value based method for all awards, |      |     
|net of related tax effects                               |      |      |     
|                                                         |      |      |     
|Net income, pro forma                                    |      |      | $   
|                                                         |      |      |     
|Basic earnings per share, as reported                    |      |      | $   
|Basic earnings per share, pro forma                      |      |      |     
|Diluted earnings per share, as reported                  |      |      |     
|Diluted earnings per share, pro forma                    |      |      |     

| | The
effects of applying SFAS No. 123 for providing pro forma disclosures for 2005, 2004 and
2003 will not be representative of the effects on reported net income for future years,
because all outstanding unvested options were vested on December 30, 2005 and, as such,
all future compensation expense to be recognized is expected to be immaterial.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ReclassificationsCertain
prior year amounts have been reclassified to conform with the 2005 presentation. Such
reclassifications had no impact on the Companys financial condition, operating
results, cash flows, working capital or stockholders equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting estimatesThe
preparation of the Companys financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenues and expenses during the reporting periods. Management
bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from such estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recent accounting pronouncementsOn
December 16, 2004, the FASB issued SFAS 123(R), Share-Based Payment, which is
a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R)
supersedes APB Opinion No. 25 and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123,
however, SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be expensed in the income statement over the requisite service
period based on their grant-date fair values. Pro forma disclosure is no longer an
alternative. SFAS 123(R) allows for either prospective or retrospective adoption and
requires that the unvested portion of all outstanding awards upon adoption be recognized
using the same fair value and attribution methodologies previously determined under SFAS
123. The Company is required to adopt SFAS 123(R) effective January 1, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 1. Summary of Operations
and Significant Accounting Policies (Continued)

| | Recent accounting pronouncements (Continued)Effective
with the close of business on December 30, 2005, the Compensation Committee of the
Companys Board of Directors approved accelerating the vesting of all stock options.
The primary purpose of accelerating vesting is to minimize future compensation expense the
Company would otherwise recognize in its future income statements with respect to unvested
outstanding stock options under SFAS 123(R). As a consequence, the adoption of SFAS 123(R)
is not expected to have a material impact on the Companys results of operations or
financial position. A separation of employment by an optionee may, however, trigger the
recognition of compensation expense related to the value of certain options that may not
have otherwise been available for exercise at the time of separation of employment had the
acceleration of vesting not occurred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
 a replacement of APB Opinion No. 20 and FASB Statement No. 3, (SFAS No. 154).
SFAS No. 154 changes the requirements for the accounting for and reporting of a change in
accounting principle, and applies to all voluntary changes in accounting principles. It
also applies to changes required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition provisions. This statement
requires retrospective application to prior periods financial statements for changes
in accounting principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective
for accounting changes made in fiscal years beginning after December 15, 2005. The Company
does not expect that adoption of this statement will have a material impact on its results
of operations or financial position.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2. Acquisition

| | Effective
January 1, 2004, the Company acquired certain assets of Skills Resource Training Center
(SRTC), a staffing services company with offices in Central Washington,
Eastern Oregon and Southern Idaho. The acquisition provides the Company with the
opportunity to geographically expand and diversify its business, particularly in the
agricultural, food packing and processing industries. The Company paid $3.0 million in
cash for the assets of SRTC and the selling shareholders noncompete agreements and
agreed to issue up to 203,597 shares of its common stock (Earnout Shares),
with the actual number of Earnout Shares to be issued based upon the level of financial
performance achieved by the SRTC offices during calendar 2004. Effective July 12, 2005,
the Company issued 76,222 Earnout Shares to SRTC in partial resolution of the remaining
contingencies. The Company has recorded estimated total Earnout Shares of 79,200 with a
value of $778,000 on its consolidated balance sheet as of December 31, 2005 and 2004. The
transaction resulted in $3.8 million of goodwill, $40,000 of intangible assets and $15,000
of fixed assets. The calculation of the Earnout Shares was finalized in February 2006; see
Note 19.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 2. Acquisition
(Continued)

| | Pro Forma Results of Operations (Unaudited)The
operating results of the SRTC acquisition are included in the Companys results of
operations since January 1, 2004. The following unaudited summary presents the combined
results of operations as if the SRTC acquisition had occurred at the beginning of 2003,
after giving effect to certain adjustments for the amortization of intangible assets,
taxation and cost of capital.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |  
|---------------------------------------- | -
|(in thousands, except per share amounts) |  
|                                         |  
|Revenue                                  | $
|                                         |  
|Net income                               | $
|                                         |  
|Basic earnings per share                 | $
|                                         |  
|Diluted earnings per share               | $
|                                         |  

| | The
unaudited pro forma results above have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition been made as
of January 1, 2003, or of results which may occur in the future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 3. Fair Value of
Financial Instruments and Concentration of Credit Risk

| | All
of the Companys financial instruments are recognized in its balance sheet. Carrying
values approximate fair market value of most financial assets and liabilities. The fair
market value of certain financial instruments was estimated as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Restricted marketable securities  Restricted marketable securities primarily
consist of U.S. Treasury bills and municipal bonds. The interest rates on the
Companys restricted marketable security investments approximate current market rates
for these types of investments; therefore, the recorded value of the restricted marketable
securities approximates fair market value.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Long-term debt  The interest rates on the Companys long-term debt
approximate current market rates, based upon similar obligations with like maturities;
therefore, the recorded value of long-term debt approximates the fair market value.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
instruments that potentially subject the Company to concentration of credit risk consist
primarily of temporary cash investments, marketable securities, restricted marketable
securities and trade accounts receivable. The Company restricts investment of temporary
cash investments and marketable securities to financial institutions with high credit
ratings and to investments in governmental debt instruments. Credit risk on trade
receivables is minimized as a result of the large and diverse nature of the Companys
customer base. At December 31, 2005, the Company had significant concentrations of
credit risk as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

3.    
          Fair Value of Financial Instruments and Concentration of Credit Risk
          (Continued)

| |  | Marketable securities  All investments are held in publicly-traded securities, which
includes $1.8 million, at fair value, in corporate bonds.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | Restricted marketable securities  $1.9 million of restricted marketable securities
at December 31, 2005 consisted of U.S. Treasury bills and U.S. Treasury notes.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Trade receivables  Trade receivables from two customers aggregated $2.0 million at
December 31, 2005 (8% of trade receivables outstanding at December 31, 2005).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

# 4. Marketable Securities

The
components of the Companys current marketable securities, as of December 31, 2005,
are as follows (in thousands):

|                    | Cost
Basis | Unrealized
Gains | Unrealized
(Losses) | Market
Value
|------------------- | ---------- | ---------------- | ------------------- | ------------
|Trading:            |            |                  |                     |             
|Common stocks       |            | $   138          |                     | $   32      
|                    |            |                  |                     |             
|Available-for-sale: |           
|Bond funds          |            | 2,175            |                     |            
|Corporate bond      |            | 1,491            |                     |            
|                    |            |                  |                     |             
|                    |            | 3,666            |                     |            
|                    |            |                  |                     |             
|                    |            | $3,804           |                     | $   32      
|                    |            |                  |                     |             

| | Investments
in securities classified as available-for-sale are reported at fair value, with unrealized
gains or losses reported net of tax in other comprehensive income (loss). The Company
considers available evidence in evaluating potential impairment of its investments,
including the duration and extent to which fair value is less than cost and the
Companys ability and intent to hold the investment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 5. Intangibles

Intangibles
consist of the following (in thousands):

|                              | December 31,
|----------------------------- | ------------
|
|Covenants not to compete      |             
|Less accumulated amortization |             
|                              |             
|                              |             
|                              |             

F-14

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 6. Property and Equipment

Property
and equipment consist of the following (in thousands):

|                                               | December 31,
|---------------------------------------------- | ------------
|
|Building                                       |             
|Office furniture and fixtures                  |             
|Computer hardware and software                 |             
|Aircraft                                       |             
|                                               |             
|                                               |             
|Less accumulated depreciation and amortization |             
|                                               |             
|                                               |             
|Land                                           |             
|                                               |             
|                                               |             
|                                               |             

# 7. Workers
Compensation Claims

| | The
Company is a self-insured employer with respect to workers compensation coverage for
all its employees (including employees subject to PEO contracts) working in Oregon,
Maryland, Delaware and California. In the state of Washington, state law allows only the
Companys staffing services and management employees to be covered under the
Companys self-insured workers compensation program.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has provided a total of $17.4 million and $14.2 million at December 31, 2005
and 2004, respectively, as an estimated liability for unsettled workers compensation
claims liabilities. The estimated liability for unsettled workers compensation
claims represents managements best estimate, which includes, in part, an evaluation
of information provided by the Companys third-party administrators for workers
compensation claims and its independent actuary, who annually assist management in
estimating the total future costs of all claims, including potential future adverse loss
development. Included in the claims liabilities are case reserve estimates for reported
losses, plus additional amounts based on projections for incurred but not reported claims,
anticipated increases in case reserve estimates and additional claims administration
expenses. These estimates are continually reviewed and adjustments to liabilities are
reflected in current operating results as they become known. The Company believes that the
difference between amounts recorded for its estimated liabilities and the possible range
of costs to settle related claims is not material to results of operations; nevertheless,
it is reasonably possible that adjustments required in future periods may be material to
results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liabilities
incurred for work-related employee fatalities, as determined by the state in which the
accident occurred, are recorded either at an agreed lump-sum settlement amount or the net
present value of future fixed and determinable payments over the actuarially determined
remaining life expectancy of the beneficiary, discounted at a rate that approximates a
long-term, high-quality corporate bond rate. During 2005 and 2004, the Company maintained
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 7. Workers
Compensation Claims (Continued)

| | excess
workers compensation insurance to limit its self-insurance exposure to $1,000,000
per occurrence in all states. The excess insurance provided statutory coverage above the
aforementioned exposures. The Company presents its accrued liabilities for workers
compensation claims on a gross basis along with a corresponding receivable from its
insurers, as the Company is the primary obligor for payment of the related insured claims.
The Company will continue its past practice of evaluating the financial capacity of its
insurers to assess the recoverability of the related insurer receivables.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2005, the Companys long-term workers compensation claims
liabilities in the accompanying balance sheet included $911,000 for work-related
fatalities. The aggregate undiscounted pay-out amount related to the catastrophic injuries
and fatalities is $1.6 million. The discount rates applied to the discounted liabilities
range from 4.70% to 9.00%. These rates represented the then-current rates for high quality
long-term debt securities available at the date of loss with maturities equal to the
length of the pay-out period to the beneficiaries. The actuarially determined pay-out
periods to the beneficiaries range from 5 to 36 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
states of Oregon, Maryland, Washington, Delaware and the United States Department of Labor
require the Company to maintain specified investment balances or other financial
instruments, totaling $4.2 million at December 31, 2005 and $4.0 million at
December 31, 2004, to cover potential claims losses. In partial satisfaction of these
requirements, at December 31, 2005, the Company has provided standby letters of
credit and a surety bond totaling $2.4 million. The investments are included in restricted
marketable securities and workers compensation deposits in the accompanying balance
sheets. The Company participates in Californias alternative security program
requiring the Company to pay the state an annual fee, which is determined by several
factors, including the amount of a future security deposit and the Companys overall
credit rating. The annual fee paid to the state of California for 2005 was $374,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 8. Credit Facility

| | The
Company entered into a new Credit Agreement (the Credit Agreement) with its
principal bank, effective July 1, 2005. The Credit Agreement provides for an unsecured
revolving credit facility of up to $4.0 million, which includes a subfeature under the
line of credit for standby letters of credit up to $4.0 million. The interest rate on
advances, 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, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Credit Agreement, the Company is required to maintain compliance with the following
financial covenants: (1) a Current Ratio not less than 1.10 to 1.0 with Current
Ratio defined as total current assets divided by total current liabilities; (2) net
income after taxes not less than $1.00 on an annual basis, determined as of each fiscal
year end, and (3) pre-tax profit not less than $1.00 on a quarterly basis, determined as
of each fiscal quarter end. The Company was in compliance with these covenants as of
December 31, 2005. The Company had letters of credit totaling approximately $2.3 million
outstanding at December 31, 2005, primarily in connection with various deposit
requirements for its self-
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 8. Credit Facility
(Continued)

| | insured
workers compensation programs. As of December 31, 2005, the Company had
approximately $1.7 million available under its $4.0 million credit facility and was in
compliance with all loan covenants.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended December 31, 2005, the maximum balance outstanding under the revolving
credit facility was $700,000 and the weighted average interest rate during the period was
5.5%. The weighted average interest rate during 2005 was calculated using daily weighted
averages.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 9. Long-Term Debt

Long-term
debt consists of the following (in thousands):

|                                                                               | December 31,
|------------------------------------------------------------------------------ | ------------
|
|
|Note payable in monthly installments of $12,292 plus interest at a rate        |             
|indexed to the London interbank offered rate for deposits plus 2.40%           |             
|Note payable in annual installments of $200,000, plus simple interest at 5.00% |             
|per annum through 2006                                                         |             
|                                                                               |             
|                                                                               |             
|Less portion due within one year                                               |             
|                                                                               |             
|                                                                               |             
|                                                                               |             

Maturities
on long-term debt are summarized as follows at December 31, 2005 (in thousands):

|Year endingDecember 31, | 
|----------------------- | 
|2006                    | 
|2007                    | 
|2008                    | 
|2009                    | 
|2010                    | 
|Thereafter              | 
|                        | 
|                        | 
|                        | 

# 10. 401(k) Savings Plan

| | The
Company has a Section 401(k) Retirement Savings Plan for the benefit of its eligible
employees. All staffing and management employees 21 years of age or older become eligible
to participate in the savings plan upon completion of 1,000 hours of service in any
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 10. 401(k) Savings Plan
(Continued)

| | consecutive
12-month period following the initial date of employment. Employees covered under a co-employer (PEO) arrangement
may participate in the plan at the sole discretion of the PEO client company. The determination of Company
contributions to the plan, if any, is subject to the sole discretion of the Companys
board of directors.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Participants
interests in Company contributions to the plan vest over a six-year period. No
discretionary company contributions were made to the plan for the years ended
December 31, 2005, 2004 and 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 11. Commitments

Lease commitmentsThe
Company leases its offices under operating lease agreements that require minimum annual
payments as follows (in thousands):

|Year ending
December 31, | 
|------------------------ | 
|2006                     | 
|2007                     | 
|2008                     | 
|2009                     | 
|2010                     | 
|2011 and thereafter      | 
|                         | 
|                         | 
|                         | 

| | Rent
expense for the years ended December 31, 2005, 2004 and 2003 was approximately $2.0
million, $1.8 million and $1.5 million, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

# 12. Related Party
Transactions

| | During
2001, pursuant to the approval of all disinterested outside directors, the Company agreed
to loan Mr. Sherertz up to $60,000 between December 2001 and June 2002 to assist Mr.
Sherertz in meeting his debt service obligations of interest only on a personal loan from
the Companys principal bank, which is secured by his holdings of Company stock. In
the spring of 2002, with the approval of all disinterested outside directors, the Company
agreed to extend its financial commitment to lend to Mr. Sherertz amounts equal to an
additional two quarterly interest-only payments in July and September 2002. The
Companys note receivable from Mr. Sherertz bears interest at prime less 50 basis
points, which is the same rate as Mr. Sherertzs personal loan from the bank. As of
December 31, 2003, the note receivable from Mr. Sherertz totaled approximately $107,000
and is shown as contra equity in the Statements of Stockholders Equity. During 2004,
pursuant to the approval of a majority of the Companys independent directors, Mr.
Sherertz tendered to the Company for cancellation and retirement 12,142 shares of common
stock valued at $11.23 per share. This transaction discharged Mr. Sherertzs
obligations to the Company totaling $136,274, including the principal and interest on the
employee loan of $107,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 12. Related Party
Transactions (Continued)

| | In
October 2001, the Company entered into an agreement with Mr. Sherertz to rent a residence
in La Quinta, California owned by Mr. Sherertz for marketing, customer relations and
business meeting purposes. During 2005, 2004 and 2003, the Company paid Mr. Sherertz
$95,000, $102,000 and $99,000, respectively, for rental of the property. Effective
December 12, 2005, the Company purchased the residence from Mr. Sherertz for $1.15 million
based upon the average of two independent appraisals. The purchase was approved by a
majority of the independent directors of the Company. The residence is recorded in other
assets on the Companys consolidated balance sheet at December 31, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 13. Income Taxes

The
provisions for income taxes are as follows (in thousands):

|                | Year ended December 31,
|--------------- | -----------------------
|
|Current:        |                        
|Federal         |                        
|State           |                        
|                |                        
|                |                        
|                |                        
|Deferred:       |                        
|Federal         |                        
|State           |                        
|                |                        
|                |                        
|                |                        
|Total provision |                        
|                |                        

F-19

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 13. Income Taxes
(Continued)

Deferred
income tax assets (liabilities) are comprised of the following components (in thousands):

|                                                | 2005 | 2004
|----------------------------------------------- | ---- | ----
|Gross deferred income tax assets:               |      |     
|Workers' compensation claims liabilities        |      |     
|Safety incentives payable                       |      |     
|Allowance for doubtful accounts                 |      |     
|Deferred compensation                           |      |     
|Tax effect of unrealized losses, net            |      |     
|Other                                           |      |     
|                                                |      |     
|                                                |      |     
|                                                |      |     
|Gross deferred income tax liabilities:          |      |     
|Tax depreciation in excess of book depreciation |      |     
|Amortization of intangibles                     |      |     
|                                                |      |     
|                                                |      |     
|                                                |      |     
|Net deferred income tax assets                  |      |     
|                                                |      |     

The
effective tax rate differed from the U.S. statutory federal tax rate due to the following:

|                                      | Year ended December 31,
|------------------------------------- | -----------------------
|
|Statutory federal tax rate            |                        
|State taxes, net of federal benefit   |                        
|Nondeductible expenses and other, net |                        
|Federal tax-exempt interest income    |                        
|Federal tax credits                   |                        
|                                      |                        
|                                      |                        
|                                      |                        

| | At
December 31, 2003, the Company had state tax loss carryforwards of $5,403,000, which
expire in varying amounts between 2008 and 2023. These state tax loss carryforwards were
fully utilized during 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the tax year ended December 31, 2003, the Company generated and utilized $177,000 and
$56,000 in U.S. Federal Work Opportunity Tax Credits and Welfare to Work Tax Credits,
respectively. At December 31, 2003, the Company had $304,000 and $88,000 of unused U.S.
Federal Work Opportunity Tax Credits and Welfare to Work Tax Credits. These unused tax
credits were fully utilized in 2004. The nondeductible expenses pertain to meals, certain
entertainment expenses and life insurance premiums.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 14. Stock Incentive Plans

| | The
Companys 2003 Stock Incentive Plan (the 2003 Plan) which provides for
stock-based awards to Company employees, non-employee directors and outside consultants or
advisors, was approved by shareholders on May 14, 2003. No options have been issued
to outside consultants or advisors. The number of shares of common stock reserved for
issuance under the 2003 Plan is 600,000. No new grants of stock options may be made under
the Companys 1993 Stock Incentive Plan (the 1993 Plan). At December 31,
2005, there were option awards covering 425,323 shares outstanding under the 1993 Plan,
which, to the extent they are terminated unexercised, are carried over to the 2003 Plan as
shares authorized to be issued under the 2003 Plan. Outstanding options under both plans
were generally exercisable in four equal annual installments beginning one year after the
date of grant and expire ten years after the date of grant, however, effective with the
close of business on December 30, 2005, the compensation committee of the board of
directors accelerated the vesting of all outstanding stock options. The exercise price of
incentive stock options must not be less than the fair market value of the Companys
stock on the date of grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Companys stock options at December 31, 2005, 2004 and
2003, together with changes during the periods then ended, are presented below:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Number
of
options | Weighted
average
exercise
price
|---------------------------------------- | ----------------- | -------------------------------
|Outstanding at December 31, 2002         |                   |                                
|Options granted at market price          |                   |                                
|Options exercised                        |                   |                                
|Options canceled or expired              |                   |                                
|                                         |                   |                                
|Outstanding at December 31, 2003         |                   |                                
|Options granted at market price          |                   |                                
|Options exercised                        |                   |                                
|Options canceled or expired              |                   |                                
|                                         |                   |                                
|Outstanding at December 31, 2004         |                   |                                
|Options granted at market price          |                   |                                
|Options exercised                        |                   |                                
|                                         |                   |                                
|Outstanding at December 31, 2005         |                   |                                
|                                         |                   |                                
|Available for grant at December 31, 2005 |                   |                                
|                                         |                   |                                

F-21

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 14. Stock Incentive
Plans (Continued)

| | The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model, with the following weighted-average assumptions used for grants in
2005, 2004 and 2003:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | 2005 | 2004 | 2003
|------------------------ | ---- | ---- | ----
|Expected volatility      |      |      |     
|Risk free rate of return |      |      |     
|Expected dividend yield  |      |      |     
|Expected life (years)    |      |      |     

| | Total
fair value of options granted at market price was computed to be $1.9 million, $379,000
and $369,000 for the years ended December 31, 2005, 2004 and 2003, respectively. There
were no options granted during 2005, 2004 and 2003 below market price. The weighted
average fair value per share of all options granted in 2005, 2004 and 2003 was $8.20,
$4.90 and $1.44, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following table summarizes information about stock options outstanding at
December 31, 2005:

|Options outstanding | Options exercisable
|------------------- | -------------------
|
|$         .97       | -                  
|2.42                | -                  
|8.33                | -                  
|                    |                    
|                    |                    
|                    |                    
|                    |                    

| | At
December 31, 2005, 2004 and 2003, 925,354, 320,109 and 155,292 options were exercisable at
weighted average per share exercise prices of $6.20, $2.99 and $2.88, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 15. Stockholders
Equity

| | In
August 2005, the Company completed a follow-on offering of its common stock. The Company
sold a total of 2,184,850 shares of common stock in the offering and received total net
proceeds of $33.0 million after deducting underwriting discounts, commissions and offering
expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2005, 2004 and 2003, the Company recognized a tax benefit of $1.0 million, $187,000 and
$137,000, respectively, resulting from disqualifying dispositions of stock acquired in
option exercises. The Company recorded this tax benefit in additional paid-in capital.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 16. Stock Repurchase
Program

| | The
Company has made no share repurchases since August 2003. During 2003, the Company
repurchased 169,050 shares at an aggregate price of $446,000. Since inception of the
repurchase program in 1999, the Company has repurchased 3.1 million shares for a weighted
average price of $2.98 per share. In accordance with Maryland corporation law, all
repurchased shares were immediately cancelled. In July 2005, the Board terminated the
repurchase program.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 17. Litigation

| | The
Company is subject to legal proceedings and claims, which arise in the ordinary course of
its business. In the opinion of management, the amount of ultimate liability with respect
to currently pending or threatened actions is not expected to materially affect the
financial position or results of operations of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23

---



Barrett Business
Services, Inc.Notes to Consolidated
Financial Statements (Continued)

# 18. Quarterly Financial
Information (Unaudited)

|                                  | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|--------------------------------- | ------------- | -------------- | ------------- | --------------
|Year ended December 31, 2003      |               |                |               |               
|Revenues                          |               |                | $             | 23,397        
|Cost of revenues                  |               |                |               | 20,028        
|Net (loss) income                 |               |                |               | (343          
|Basic (loss) earnings per share   |               |                |               | (.04          
|Diluted (loss) earnings per share |               |                |               | (.04          
|Common stock market prices:       |               |               
|High                              |               |                | $             | 2.50          
|Low                               |               |                |               | 1.54          
|Year ended December 31, 2004      |               |               
|Revenues                          |               |                | $             | 40,610        
|Cost of revenues                  |               |                |               | 34,205        
|Net income                        |               |                |               | 606           
|Basic earnings per share          |               |                |               | .07           
|Diluted earnings per share        |               |                |               | .07           
|Common stock market prices:       |               |               
|High                              |               |                | $             | 11.84         
|Low                               |               |                |               | 7.66          
|Year ended December 31, 2005      |               |               
|Revenues                          |               |                | $             | 49,244        
|Cost of revenues                  |               |                |               | 41,644        
|Net income                        |               |                |               | 931           
|Basic earnings per share          |               |                |               | .11           
|Diluted earnings per share        |               |                |               | .10           
|Common stock market prices:       |               |               
|High                              |               |                | $             | 16.59         
|Low                               |               |                |               | 8.99          

# 19. Subsequent Events

| | Subsequent
to year end, effective January 1, 2006, the Company acquired certain assets of
Pro HR, LLC, a privately-held PEO company with three offices in Idaho and Western
Colorado. The Company paid $4.0 million in cash for the assets of Pro HR and the selling
shareholders noncompete agreements and agreed to pay an additional $1.5 million in
cash contingent upon 2006 financial performance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequent
to year end, effective February 16, 2006, the Company issued an additional 19,971 Earnout
Shares to SRTC (see Note 2 above) in full satisfaction of the contingent consideration of
this acquisition, which will result in the recognition of an additional $167,000 of
goodwill in the first quarter of 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

---



# 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.

|                      | BARRETT BUSINESS SERVICES, INC.Registrant
|--------------------- | -----------------------------------------
|Date:  March 30, 2006 | By:  /s/ Michael D. Mulholland           
|                      | Michael D. Mulholland                    
|                      | Vice President-Finance and Secretary     

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 indicated on the 30th
day of March, 2006.

|                                                    |                                                  
|--------------------------------------------------- | -------------------------------------------------
|Principal Executive
Officer and Director:           |                                                  
|/s/ William W. SherertzWilliam W. Sherertz          | President and Chief Executive Officer andDirector
|Principal Financial Officer:                        |                                                  
|/s/ Michael D. MulhollandMichael D. Mulholland      | Vice President-Finance and Secretary             
|Principal Accounting Officer:                       |                                                  
|/s/ James D. MillerJames D. Miller                  | Controller and Assistant Secretary               
|Majority of Directors:                              |                                                  
|/s/ Thomas J. CarleyThomas J. Carley                | Director                                         
|______________________________James B. Hicks. Ph.D. | Director                                         
|/s/ Jon L. JustesenJon L. Justesen                  | Director                                         
|/s/ Anthony MeekerAnthony Meeker                    | Director                                         

---



# EXHIBIT INDEX

| | 3.1 | Charter
of the Registrant, as amended. Incorporated by reference to Exhibit 3 to the Registrants
Quarterly Report on Form 10Q for the quarter ended June 30, 1994.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Bylaws
of the Registrant, as amended through August 9, 2005. Incorporated by reference to
Exhibit 3.2 to the Registrants Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Registrant
has incurred long-term indebtedness as to which the amount involved is less than 10
percent of the Registrants total assets. The Registrant agrees to furnish copies of
the instruments relating to such indebtedness to the Commission upon request.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Second
Amended and Restated 1993 Stock Incentive Plan of the Registrant. Incorporated by
reference to Exhibit 10.1 to the Registrants Annual Report on Form 10-K for the
year ended December 31, 2001.*
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Form
of Indemnification Agreement with each director of the Registrant.  Incorporated by
reference to          Exhibit 10.8 to the Registrant's Registration Statement on Form S-1
(No. 33-61804).*
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | Summary
of annual cash incentive bonus award program for executive officers of the Registrant.
Incorporated by reference to Exhibit 10.3 to the Registrants Annual Report on Form
10-K for the year ended December 31, 2004 (the 2004 10-K).*
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Employment
Agreement between the Registrant and Michael D. Mulholland, dated January 26, 1999.
Incorporated by reference to Exhibit 10.4 to the Registrants Annual Report on Form
10-K for the year ended December 31, 1998.*
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | Summary
of compensation arrangements for non-employee directors of the Registrant. Incorporated
by reference to Exhibit 10.5 to the 2004 10-K.*
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6 | Credit
Agreement dated as of July 1, 2005, between the Registrant and Wells Fargo Bank, N.A.
Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K filed July 7, 2005 (the 2005 8-K).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 | Revolving
Line of Credit Note dated as of July 1, 2005, in the amount of $4,000,000 issued to Wells
Fargo Bank, N.A. Incorporated by reference to Exhibit 10.2 to the 2005 8-K.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



| | 10.8 | 2003
Stock Incentive Plan of the Registrant (the 2003 Plan). Incorporated by
reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003.*
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 | Form
of Incentive Stock Option Agreement under the 2003 Plan.  Incorporated by reference to
Exhibit          10.11 to the 2003 10-K.*
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 | Form
of Nonqualified Stock Option Agreement under the 2003 Plan.  Incorporated by reference to
Exhibit          10.12 to the 2003 10K.*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 | Form
of Incentive Stock Option Agreement relating to July 2005 option grants under the 2003
Plan.*
| | ----- | --------------------------------------------------------------------------------------------------

| | 10.12 | Form
of Nonqualified Stock Option Agreement relating to July 2005 option grants under the 2003
Plan.*
| | ----- | -----------------------------------------------------------------------------------------------------

| | 10.13 | Form
of Annual Director Option Agreement under the 2003 Plan. Incorporated by reference to
Exhibit 10.13 to the 2003 10-K.*
| | ----- | ---------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Form
of Annual Director Option Agreement for July 2005 option grants under the 2003 Plan.*
| | ----- | ------------------------------------------------------------------------------------------

| | 10.15 | Summary
of Compensatory Arrangement with William W. Sherertz. Incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004.*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Employment
Agreement between the Registrant and Michael L. Elich, dated September 25, 2001.
Incorporated by reference to Exhibit 10.17 to the Registrants Registration
Statement on Form S-2 (Registration No. 333-126496) filed July 11, 2005.*
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14 | Code
of Business Conduct.  Incorporated by reference to Exhibit 14 to the 2003 10-K.
| | -- | ------------------------------------------------------------------------------------

| | 23.1 | Consent
of Moss Adams LLP, Independent Registered Public Accounting Firm.
| | ---- | -------------------------------------------------------------------------

| | 23.2 | Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
| | ---- | -------------------------------------------------------------------------------------

| | 31.1 | Certification
of Chief Executive Officer pursuant to Rule 13a-14(a).
| | ---- | --------------------------------------------------------------------

| | 31.2 | Certification
of Chief Financial Officer pursuant to Rule 13a-14(a).
| | ---- | --------------------------------------------------------------------

| | 32 | Certification
pursuant to 18 U.S.C. Section 1350.
| | -- | -------------------------------------------------

* Denotes a management contract or a
compensatory plan or arrangement.

---