The navy was finding it difficult to sail, the air force had clipped wings, and the army would struggle to take part in combat, the 2007-08 Defence Force annual report reveals.
The report paints a picture of the New Zealand Defence Force hamstrung by a lack of staff and poor equipment.
The army said while land forces were "partially" prepared for low-level conflicts, the army was not equipped to meet higher threat situations - "nevertheless, a company group response was provided for Afghanistan".
"Deficiencies in command and control, firepower, and compatible protection and mobility for combat service support elements would impair effectiveness in conventional military operations, and the more challenging peace support operations," the report said.
The air force had "insufficient personnel" to meet air and ground crew levels and it was only "partially prepared" for complex maritime air operations.
The helicopter wing was also hit by crew shortages, which limited its availability.
When there were crews, the helicopters were limited in what they could do, and the performance of the Iroquois in bad weather, at night and in hot and high conditions was "unsatisfactory", the report said.
In the navy, few of the ships managed to get out to sea as often as planned.
This was due to a lack of personnel and "equipment and capability issues".
The navy also did not receive two expected offshore patrol vessels and four inshore patrol vessels during the year in question.
Defence Force chief Lieutenant-general Jerry Mateparae said in the report high standards had been achieved at home and abroad as the services struggled to retain staff.
New equipment and new employment strategies would help with the problems.
One of the main challenges was the high attrition rate - more than 15% - and the loss of trained staff.
Defence Minister Phil Goff said forces worldwide faced a major challenge to attract and retain staff.
The total number of personnel in the NZDF was at its highest level in seven years and since 2005 the Government had committed $4.6 billion in operational funding to develop capability.
It had also injected $4 billion since 2002 to replace outdated equipment in all three arms of the NZDF.
National Party defence spokesman Dr Wayne Mapp said the force was operating under terms laid out in 1999 when there was nothing like the tempo of sustained and diverse operations there was now, largely as a result of 9/11.
"It's absolutely clear [the Defence Force is] under stress. The Government don't seem to be changing required outputs in line with actual commitments."
Additional reporting by NZPA
