ANALYSTS INTERNATIONAL CORP - FORM 10-Q

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EX-32 - EX-32 - ANALYSTS INTERNATIONAL CORP	a09-31179_1ex32.htm
EX-4.2 - EX-4.2 - ANALYSTS INTERNATIONAL CORP	a09-31179_1ex4d2.htm
EX-31.2 - EX-31.2 - ANALYSTS INTERNATIONAL CORP	a09-31179_1ex31d2.htm
EX-31.1 - EX-31.1 - ANALYSTS INTERNATIONAL CORP	a09-31179_1ex31d1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 3, 2009

or

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 0-4090

ANALYSTS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-0905408
(State of Incorporation)		(IRS Employer Identification No.)

3601 West 76th Street
Minneapolis, MN		55435
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (952) 835-5900

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated Filer o

Non-accelerated Filer o		Smaller Reporting Company x

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

As of November 9, 2009, 24,925,076 shares of the registrant’s common stock were outstanding.

ANALYSTS INTERNATIONAL CORPORATION

INDEX

Part I.	FINANCIAL INFORMATION.	3

Item 1.	Financial Statements (Unaudited)	3

	Consolidated Balance Sheets as of October 3, 2009 and January 3, 2009	3

	Consolidated Statements of Operations for the Three and Nine Months Ended October 3, 2009 and September 27, 2008	4

	Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2009 and September 27, 2008	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4T.	Controls and Procedures	26

Part II.	OTHER INFORMATION	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

Signatures		30

Exhibit Index		31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Analysts International Corporation

Consolidated Balance Sheets

(Unaudited)

	October 3,			January 3,
(In thousands)	2009			2009

ASSETS

Current assets:
Cash and cash equivalents	$	7,261		$	2,288
Restricted cash	396			—
Accounts receivable, less allowance for doubtful accounts of $1,025 and $1,092, respectively	25,462			40,814
Prepaid expenses and other current assets	734			1,521
Total current assets	33,853			44,623

Property and equipment, net	1,972			3,081
Intangible assets, net of accumulated amortization of nil and $7,155, respectively	—			6,104
Other assets	583			446
Total assets	$	36,408		$	54,254

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	7,947		$	15,581
Line of credit	—			—
Salaries and benefits	4,764			3,249
Deferred revenue	418			1,473
Deferred compensation	347			275
Restructuring accrual	1,529			184
Other current liabilities	970			1,025
Total current liabilities	15,975			21,787

Non-current liabilities:
Deferred compensation	1,105			1,391
Restructuring accrual	958			65
Other long-term liabilities	424			616
Total non-current liabilities	2,487			2,072

Shareholders’ equity:
Common stock, par value $.10 a share; authorized 120,000,000 shares; issued and outstanding 24,925,076 and 24,913,076, respectively	2,492			2,491
Additional capital	23,442			23,145
Accumulated (deficit) earnings	(7,988		)	4,759
Total shareholders’ equity	17,946			30,395
Total liabilities and shareholders’ equity	$	36,408		$	54,254

See notes to consolidated financial statements.

Analysts International Corporation

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
	October 3,			September 27,			October 3,			September 27,
(In thousands except per share amounts)	2009			2008			2009			2008

Revenue:
Professional services provided directly	$	29,335		$	50,116		$	105,211		$	169,018
Professional services provided through subsuppliers	460			2,891			2,011			31,217
Product sales	1,106			9,610			9,339			27,175
Total revenue	30,901			62,617			116,561			227,410

Expenses:
Cost of services provided directly	23,595			39,167			83,704			133,275
Cost of services provided through subsuppliers	441			2,796			1,915			30,100
Cost of product sales	965			8,899			7,973			24,682
Selling, administrative and other operating costs	8,886			11,780			30,233			38,409
Restructuring costs and other severance related costs	917			291			2,708			2,659
Impairment of intangible assets	—			—			2,268			—
Amortization of intangible assets	44			235			491			793
Total expenses	34,848			63,168			129,292			229,918

Operating loss	(3,947		)	(551		)	(12,731		)	(2,508		)

Non-operating income	8			27			35			97
Interest expense	(9		)	(8		)	(20		)	(143		)

Loss before income taxes	(3,948		)	(532		)	(12,716		)	(2,554		)

Income tax expense	13			6			31			15

Net loss	$	(3,961	)	$	(538	)	$	(12,747	)	$	(2,569	)

Per common share (basic):
Net loss	$	(0.16	)	$	(0.02	)	$	(0.51	)	$	(0.10	)

Per common share (diluted):
Net loss	$	(0.16	)	$	(0.02	)	$	(0.51	)	$	(0.10	)

Weighted-average shares outstanding:
Basic	24,925			24,913			24,925			24,913
Diluted	24,925			24,913			24,925			24,913

See notes to consolidated financial statements.

Analysts International Corporation

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	October 3,			September 27,
(In thousands)	2009			2008

Cash flows from operating activities:
Net loss	$	(12,747	)	$	(2,569	)

Adjustments to net loss:
Depreciation	1,086			1,183
Amortization of intangible assets	491			793
Impairment of intangible assets	2,268			—
Gain on sale of assets	(399		)	—
Stock based compensation	298			389
Loss on asset disposal	5			43

Changes in:
Accounts receivable	15,933			15,132
Accounts payable	(7,158		)	(6,967		)
Salaries and benefits	1,517			(3,291		)
Restructuring accrual	2,238			(1,598		)
Deferred compensation	(214		)	(1,443		)
Prepaid expenses and other assets	404			665
Deferred revenue	(381		)	(987		)
Other accrued liabilities	(55		)	(91		)
Net cash provided by operating activities	3,286			1,259

Cash flows from investing activities:
Expended for property and equipment additions	(1,082		)	(1,063		)
Proceeds from asset sales, net	3,263			—
Change in restricted cash	(396		)	—
Net cash provided by (used in) investing activities	1,785			(1,063		)

Cash flows from financing activities:
Net change in line of credit	—			(121		)
Payment of capital lease obligation	(98		)	(80		)
Net cash used in financing activities	(98		)	(201		)

Net increase in cash and cash equivalents	4,973			(5		)

Cash and cash equivalents at beginning of period	2,288			91

Cash and cash equivalents at end of period	$	7,261		$	86

See notes to consolidated financial statements.

Analysts International Corporation

Notes to Consolidated Financial Statements

(Unaudited)

1. Organization and Nature of Business

Analysts International Corporation (“AIC,” “Company,” “we,” “us” or “our”) is an information technology (“IT”) services company that is focused on providing configured solutions for its clients. AIC serves a broad portfolio of clients throughout the United States with technology staffing, collaboration solutions, infrastructure solutions, project and application solutions and managed services offerings. We were incorporated under Minnesota law in 1966 and our corporate headquarters is located in Minneapolis, Minnesota. For a more complete description of our Company, please refer to our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

We operate on a fiscal year ending on the Saturday closest to December 31. Accordingly, fiscal 2009 will end on Saturday, January 2, 2010. The third quarter of fiscal 2009 ended on October 3, 2009 and the third quarter of fiscal 2008 ended on September 27, 2008. Fiscal 2009 will include 52 weeks while fiscal 2008 included 53 weeks.

2. Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying unaudited Consolidated Financial Statements of AIC have been prepared on the accrual basis of accounting and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“U.S. GAAP”) can be condensed or omitted. The Consolidated Financial Statements included in this document reflect, in the opinion of our management, all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the Notes to Consolidated Financial Statements) necessary for fair presentation of the results of operations for the interim periods presented. The following notes should be read in conjunction with the accounting policies and other disclosures in the Notes to the Consolidated Financial Statements incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Revenues, expenses, cash flows, assets and liabilities can and do vary during the year. Therefore, interim results are not necessarily indicative of the results to be expected for the full fiscal year.

Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Reclassifications

To maintain consistency and comparability, we reclassified certain prior-year amounts previously reported in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 to conform to the current-year presentation. The reclassifications affect only the grouping of line item balances within current liabilities and non-current liabilities. The reclassifications were deemed immaterial to the financial statements as they did not change the character of any liability and had no effect on total current and non-current liabilities, net income or cash flows.

Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Financial Staff Position (“FSP”) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (codified in FASB ASC Topic 805, Business Combinations) which amends and clarifies FASB Statement No. 141(R), Business Combinations, on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141R-1 is effective for business combinations occurring in fiscal years beginning on or after December 15, 2008. The impact on

our consolidated financial statements of adopting FSP FAS 141R-1 will depend on the nature, terms and size of business combinations completed after the effective date.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (both codified in FASB ASC Topic 825, Financial Instruments) to require an entity to provide disclosures about the fair value of financial instruments in interim financial information. FSP FAS 107-1 and APB 28-1 would apply to all financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. FSP FAS 107-1 and APB 28-1 will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on our financial statement disclosures.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (codified in FASB ASC Topic 855, Subsequent Events). FASB Statement No. 165 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). FASB Statement No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. FASB Statement No. 165 provides largely the same guidance on subsequent events which previously existed only in auditing literature. FASB Statement No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of FASB Statement No. 165 did not have a material impact on our financial statement disclosures.

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (codified in FASB ASC Topic 105, Generally Accepted Accounting Principles). FASB Statement No. 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative U.S. GAAP recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. FASB Statement No. 168 also replaces FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” given that once in effect, the Codification will carry the same level of authority. FASB Statement No. 168 will be effective for interim and annual periods ending after September 15, 2009. The adoption of this FASB Statement No. 168 did not have a material impact on our consolidated financial statement disclosures.

3. Fair Value Measurement

Effective January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements (codified in FASB ASC Topic 820, Fair Value Measurements and Disclosures). The adoption of FASB Statement No. 157 had no impact on our consolidated financial statements or the valuation methods consistently followed by the Company.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The levels of the fair value hierarchy are defined as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted market prices.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The type of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using observable inputs.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. The type of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation.

Short-term cash investments in money market accounts are considered to be cash equivalents. The estimated fair values for cash equivalents approximate their carrying values due to the short-term maturities of these instruments. Cash equivalents are classified as Level 1 and are recorded in our cash and cash equivalents line on our Consolidated Balance Sheets.

4. Sale of Assets

Sale of Value Added Reseller (“VAR”) assets

On August 4, 2009, AIC entered into and closed on an asset sale agreement for the Company’s VAR operations. In consideration for the assets sold, which are primarily customer contracts, and the liabilities transferred, the Company received $3.0 million in cash at closing and has the potential to receive up to an additional $0.75 million in cash in August 2010 depending on the number of customer contract assignments received prior to December 31, 2009.

The carrying value of the assets sold and liabilities transferred on the closing date of the transaction are as follows:

	Balance as of
(In thousands)	August 5, 2009
Assets:
Inventory	$	129
Property and equipment, net	769
Intangible assets	3,345
Other assets	4
Total assets sold	$	4,247

Liabilities:
Current liabilities	$	391
Deferred revenue	784
Total liabilities transferred	$	1,175

The Company recorded a gain on the sale of the net assets of $0.2 million which is included within Selling, Administrative and Other Operating Costs (“SG&A”) in the Consolidated Statement of Operations.

Sale of Medical Concepts Staffing (“MCS”) assets

On September 25, 2009, AIC entered into and closed on an asset sale agreement for the Company’s nurse staffing operations. In consideration for the assets sold and the liabilities transferred, the Company received $0.5 million in cash. The Company recorded a gain on the sale of the net assets of approximately $0.2 million which is included within SG&A in the Consolidated Statement of Operations.

5. Intangible Assets

In the third quarter of fiscal 2009, we incurred amortization expense related to intangible assets of $44,000 and disposed of the remaining balance of our customer lists. Our customer lists were sold as part of the VAR assets sale as described in the Sale of Assets footnote in the Notes to Consolidated Financial Statements.

For the nine month period ended October 3, 2009, we incurred amortization expense of $0.5 million, recorded an impairment of our customer lists of approximately $2.3 million, as described below, and disposed of the remaining balance of our customer lists of approximately $3.3 million.

As of October 3, 2009, we had no intangible assets.

	October 3, 2009						January 3, 2009
(In thousands)	Carrying Amount		Accumulated Amortization		Intangibles, Net		Carrying Amount		Accumulated Amortization			Intangibles, Net

Customer lists	$	—	$	—	$	—	$	13,259	$	(7,155	)	$	6,104

During the second quarter of fiscal 2009, we reviewed our customer lists in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (codified in FASB ASC Topic 360, Property, Plant, and Equipment), based on the expectation that the business with which the customer lists are associated would be sold significantly before the end of their previously estimated useful life. Based on this measurement, we recorded a $2.3 million impairment loss, which is the amount by which the carrying value of the customer lists exceeded the fair value. In determining fair value, we considered the expected consideration to be received from the sale of assets as described in the Sale of Assets footnote in the Notes to Consolidated Financial Statements. The impairment loss is included within Impairment of Intangible Assets in the Consolidated Statement of Operations.

6. Financing Agreement

On September 30, 2009, AIC entered into a revolving line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”) pursuant to which Wells Fargo will advance up to $15.0 million to AIC for working capital purposes and to facilitate the issuance of letters of credit. The Credit Facility replaces the Company’s existing $15.0 million credit facility with General Electric Capital Corporation (“GE Capital”). The total amount available for borrowing under the Credit Facility will fluctuate based on the Company’s level of eligible accounts receivable.

The Credit Facility carries an interest rate equal to the three-month LIBOR rate plus 3.5%. The Credit Facility has a one-time origination fee of $150,000 and an unused line fee of 0.50% annually on the daily average unused amount. The maturity date of the Credit Facility is September 30, 2012 and may be terminated or reduced by the Company on 90 days notice in exchange for a termination fee of 2% of the maximum line amount or reduction of the maximum line amount in the first year or 1% of such amounts in the second year (and no fee in the third year). Borrowings under the Credit Facility are secured by all of the Company’s assets.

The Credit Facility requires the Company to meet certain levels of year-to-date earnings/loss before taxes. The Credit Facility limits the Company’s annual capital expenditures to $2.0 million and requires the Company to maintain an excess borrowing base of at least $5.0 million and contains customary affirmative covenants, including covenants regarding annual, quarterly and projected financial reporting requirements, collateral and insurance maintenance, and compliance with applicable laws and regulations. Further, the facility contains customary negative covenants limiting the ability of the Company to grant liens, incur indebtedness, make investments, repurchase Company stock, create new subsidiaries, sell assets or engage in any change of control transaction without the consent of Wells Fargo.

Upon an event of default, Wells Fargo may terminate the facility or declare the entire amount outstanding under the facility to be immediately due and payable and exercise other rights under the agreement. The events of default under the facility include, among other things, payment defaults, breaches of covenants, a change in control of the Company and bankruptcy events.

As of October 3, 2009, we were in compliance with all the requirements and had no borrowing under the Credit Facility. Total availability of the Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $9.4 million as of October 3, 2009.

financing costs and transaction-related expenses were expensed in the third quarter of fiscal 2009 and included within SG&A in the Consolidated Statements of Operations.

In extinguishing our asset-based revolving credit facility, we were required to cash collateralize $0.4 million for a standby letter of credit issued by GE Capital until terminated in accordance with the provisions of the asset-based revolving credit facility. The cash collateralization of $0.4 million is reported as Restricted Cash in our Consolidated Balance Sheets. The GE Capital letter of credit has been terminated in accordance with the provisions of the asset-based revolving credit facility and we received our cash collateralization during the fourth quarter of fiscal 2009.

7. Restructuring Costs and Other Severance Related Costs

In the third quarter of fiscal 2009, we recorded workforce reduction and office closure charges totaling $0.9 million. Of these charges, $0.8 million related to severance and severance-related charges and $0.1 million related to future rent obligations (net of anticipated sub-lease income).

For the nine month period ended October 3, 2009, we recorded workforce reduction charges and office closure/consolidation charges totaling $2.7 million. Of these charges, $0.9 million related to severance and severance-related charges and $1.8 million related to future rent obligations.

In the third quarter of fiscal 2008, we recorded workforce reduction and office closure/consolidation charges totaling $0.3 million. Of these charges, $0.4 million of expense related to severance and severance-related charges and an expense reduction of $0.1 million related to adjustments and office closures.

For the nine months ended September 27, 2008, we recorded workforce reduction and office closure and consolidation charges totaling $2.7 million. Of these charges, $2.5 million related to severance and severance-related charges and $0.2 million related to future rent obligations (net of anticipated sub-lease income) for locations we closed or downsized prior to September 27, 2008.

A summary of the activity in the restructuring accrual for the nine months ended October 3, 2009 is as follows:

	Workforce			Office Closure/
(In thousands)	Reduction			Consolidation			Total
Balance as of January 3, 2009	$	28		$	221		$	249
Additional restructuring charges	922			1,786			2,708
Cash expenditures	(145		)	(325		)	(470		)
Balance as of October 3, 2009	$	805		$	1,682		$	2,487

8. Shareholders’ Equity

					Accumulated			Total
	Common		Additional		Earnings			Shareholders’
(In thousands)	Stock		Capital		(Deficit)			Equity

Balances as of January 3, 2009	$	2,491	$	23,145	$	4,759		$	30,395
Common stock issued - 12,000 shares	1		4		—			5
SFAS 123R share based compensation expense	—		293		—			293
Net loss	—		—		(12,747		)	(12,747		)
Balance as of October 3, 2009	$	2,492	$	23,442	$	(7,988	)	$	17,946

9. Equity Compensation Plans

Total equity-based compensation expense for the three and nine-month periods ended October 3, 2009 was approximately $0.1 million and $0.3 million, respectively. This includes compensation expense related to both stock options and stock awards. The tax benefit recorded for these same periods was approximately $6,000 and $28,000 respectively. The tax benefit is offset against our valuation allowance for our deferred tax asset.

Total equity-based compensation expense for the three and nine-month periods ended September 27, 2008, was approximately $0.1 million and $0.4 million, respectively. This includes compensation expense related to both stock options and stock awards. The tax benefit recorded for these same periods was approximately $11,000 and $42,000 respectively. The tax benefit is offset against our valuation allowance for our deferred tax asset.

No stock options were exercised during the three and nine-month periods ended October 3, 2009, and September 27, 2008. As of October 3, 2009, there was approximately $0.4 million of unrecognized compensation expense related to unvested option awards that are expected to vest over a weighted-average period of 1.4 years.

During the three and nine-month periods ended October 3, 2009, and September 27, 2008, we granted equity compensation awards as follows:


	Three Months Ended						Nine Months Ended
	October 3,			September 27,			October 3,			September 27,
	2009			2008			2009			2008
	Grants	Weighted- Average Grant Date Fair Value		Grants	Weighted- Average Grant Date Fair Value		Grants	Weighted- Average Grant Date Fair Value		Grants	Weighted- Average Grant Date Fair Value

Stock Options	590,000	$	0.43	250,000	$	0.55	894,000	$	0.39	1,313,000	$	0.58
Stock Awards	—	$	—	—	$	—	12,000	$	0.44	9,000	$	1.38

On June 2, 2009, the stockholders approved the Analysts International Corporation 2009 Equity Incentive Plan (the “2009 Plan”) for employees, officers, directors and non-employee consultants. Under the 2009 Plan, the Board of Directors (“Board”) or a committee appointed by the Board may award incentive stock options to employees and may award nonqualified stock options, restricted stock and other stock awards, restricted stock units, stock appreciation rights, performance share awards and other stock awards to directors and non-employee consultants. 2,500,000 shares of the Company’s common stock are available for grants of awards to participants directly or indirectly under the 2009 Plan. If any awards granted under the 2009 Plan expire or terminate prior to exercise or otherwise lapse, the shares subject to such portion of the award are available for subsequent grants of awards. The period during which an award may be exercised and whether the award will be exercisable immediately, in stages, or otherwise is set by the Board. An incentive stock option may not be exercisable more than ten years from the date of grant.

10. Loss Per Share

Basic and diluted loss per share is presented in accordance with SFAS No. 128, Earnings per Share (codified in FASB ASC Topic 260, Earnings Per Share). Basic loss per share excludes dilution and is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Options to purchase approximately 2,754,000 and 2,466,000 shares of common stock were outstanding at October 3, 2009 and September 27, 2008, respectively. All options were considered anti-dilutive and excluded from the computation of common equivalent shares at October 3, 2009 and September 27, 2008, because we reported a net loss. The computation of basic and diluted loss per share for the three- and nine-months ended October 3, 2009 and September 27, 2008, is as follows:

	Three Months Ended						Nine Months Ended
	October 3,			September 27,			October 3,			September 27,
(In thousands except per share amounts)	2009			2008			2009			2008

Net loss	$	(3,961	)	$	(538	)	$	(12,747	)	$	(2,569	)
Weighted-average number of common shares outstanding	24,925			24,913			24,925			24,913
Dilutive effect of equity compensation awards	—			—			—			—
Weighted-average number of common and common equivalent shares outstanding	24,925			24,913			24,925			24,913

Net loss per share:
Basic	$	(0.16	)	$	(0.02	)	$	(0.51	)	$	(0.10	)
Diluted	$	(0.16	)	$	(0.02	)	$	(0.51	)	$	(0.10	)

11. Subsequent Events

For the quarter ended October 3, 2009, AIC evaluated subsequent events through the date of filing this Form 10-Q with the SEC on November 11, 2009 and determined there to be no material subsequent events.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Three and nine-month periods ended October 3, 2009 and September 27, 2008

1. Company Overview

Analysts International Corporation (“AIC,” “Company,” “we,” “us” or “our”) is an information technology (“IT”) services company that is focused on providing configured solutions for our clients. We serve a broad portfolio of clients throughout the United States with technology staffing, collaboration solutions, infrastructure solutions, project and application solutions and managed services offerings. We were incorporated under Minnesota law in 1966 and our corporate headquarters is located in Minneapolis, Minnesota. For a more complete description of our Company, please refer to our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

2. Consequences and Challenges of the Economic Environment on Our Business and Our Strategic Plan

The sharp contraction in the U.S. economy that began in the second half of fiscal 2008 and continues today has had a significant and continuing impact on our business. The effects of this economic deterioration have presented significantly greater challenges than we previously anticipated, resulting in accelerating downward pressures on our revenues, margins, results of operations and cash flows. We expect the challenges we are facing to continue throughout the remainder of fiscal 2009 and into 2010. We expect operating losses to continue throughout fiscal 2009 and that the total operating loss incurred for the fiscal year will be significant. We believe that we are making progress on executing our strategic plan that should help us to weather the economic downturn and emerge as a stronger, more institutionally mature business that can serve as a platform for future growth. However, the economic downturn has made it more difficult to fulfill some of the stated objectives of our strategic plan, which difficulties we expect to continue. Further, if the economic downturn worsens or extends significantly into the future or we are unsuccessful in executing on our strategic plan, we would expect to incur additional losses from operations and reductions in our cash flows and liquidity.

3. Our Strategic Plan

In January 2008, we announced a long-term strategic plan (the “Plan”) intended to restore AIC to profitability and increase shareholder value. The Plan was built around four strategic goals:

1. Returning the Company to sustained profitability;

2. Focusing on business development and expanding our service offerings in key metro markets;

3. Attracting and retaining top talent; and

4. Aligning with our technology partners.

In our 2008 Annual Report, we communicated our annual objectives in support of our business strategy, placing the highest priority on protecting our business through these economic challenges. Our objectives for fiscal 2009 and our progress towards these objectives are as follows:

· Manage Cash Flow and Maintain a Strong Balance Sheet

We believe managing our cash flow activity and maintaining a strong balance sheet is necessary to mitigate the financial risks during the current economic recession.

· During the first nine months of fiscal 2009, cash provided by operations and investing activities was approximately $5.1 million. See “Liquidity and Capital Resources” in this Form 10-Q for further discussion regarding our changes in working capital.

· On September 30, 2009, we consummated a Credit and Security Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) for an asset-based revolving line of credit (“Credit Facility”) which provides us with up to $15.0 million of credit which can be used for working capital purposes and to facilitate the issuance of letters of credit. The term of the Credit Facility is three years.

· As of October 3, 2009, our cash balance, including restricted cash, was $7.7 million.

· As of October 3, 2009, our current ratio has improved to 2.12.

· As of October 3, 2009, we had no borrowing outstanding under our Credit Facility.

· Exit Non-Strategic or Non-Core Business

We believe exiting additional lines of business that are non-strategic or non-core to our future will allow us to focus on growing our business, provide the cash to fund our growth and aid in simplifying our business model.

· On August 4, 2009, we sold our value-added reseller (“VAR”) assets. The sale provided us with $3.0 million in cash at closing and may provide up to an additional $0.75 million in contingent cash consideration. In addition, we retained the working capital related to the VAR business which is expected to provide additional net cash to us upon settlement of approximately $1.7 million.

· On September 25, 2009, we sold the assets of our Medical Concepts Staffing (“MCS”) business. The sale provided us with $0.5 million in cash at closing.

· Strengthen our IT Staffing Business

Strengthening our IT staffing business is essential to the financial stability of the Company; however, we have experienced a further decline in the number of consultants and associated billable hours during fiscal 2009.

· On May 5, 2009, we appointed Eric Educate as Senior Vice President of Sales to enhance our sales performance, provide sales leadership and strengthen our brand and our business.

· On September 3, 2009, we appointed James Anderson as Senior Vice President of Client Services Operations to oversee the operations of our practices, recruiting and technology partner programs and enhance our client delivery and improve our client relationships.

· New systems and tools were implemented in the third quarter of fiscal 2009 and additional systems and tools will be implemented in the fourth quarter of fiscal 2009 to enhance our sales efforts and delivery processes.

· Expand our Public Sector Practice

The United States government has enacted substantial economic stimulus programs, including programs in practice areas where we provide services. We have experience in Justice & Public Safety engagements as well as existing governmental relationships, and are actively pursuing several opportunities in the public sector.

· We continue to actively pursue numerous opportunities due to the impact of the economic stimulus packages.

· During fiscal 2009, we entered into a Lawson Software Systems Integrator partnership agreement.

· Improve Gross Margins

We continue to focus on improving our gross margins. The improvements achieved in our gross margin percentage have been attenuated, however, by the lower volume of business.

· Our gross margin increased to 19.1% in the third quarter of fiscal 2009 and 19.7% during the first nine months of fiscal 2009. Our gross margins for the third quarter and first nine months of fiscal 2008 were 18.8% and 17.3%, respectively. The primary driver of the increase was the elimination or exit from low margin lines of business and customer relationships.

· Retain Clients and Develop Business

Retaining gross margins from existing clients as well as attracting new clients and developing business in key markets is vital to delivering long-term operating profits.

· We have increased our sales team by twelve people during the third quarter of fiscal 2009 and plan to continue to add sales headcount in the fourth quarter of fiscal 2009 as well.

· Continue To Reduce Selling, Administrative and Other Operating Expenses (“SG&A”)

Reducing our SG&A as a percentage of revenue through continued process improvements, cost reductions and controls and improved performance management will allow us to provide additional operating capital to support our business and fund future growth.

· We reduced our SG&A expenses in the third quarter and first nine months of fiscal 2009 by $2.9 million and $8.2 million when compared against the third quarter and first nine months of fiscal 2008, respectively; however, we expect the rate and amount of future SG&A reductions to

decline. As a percentage of revenue, our SG&A expense increased to 28.8% and 25.9% during the third quarter and first nine months of fiscal 2009 compared to 18.8% and 16.9% in the third quarter and first nine months of fiscal 2008, respectively, primarily due to a significantly lower revenue base and investments made in sales and delivery operations.

· During the third quarter and first nine months of fiscal 2009, we reduced our SG&A staff by approximately 27% and 41%, respectively.

4. Business Developments

Sale of the Company’s VAR assets

In line with our objective of exiting non-strategic or non-core businesses, we entered into and closed on an asset sale agreement on August 4, 2009 for the Company’s VAR operations.

In consideration for the assets sold, which were primarily customer contracts, and the liabilities transferred, we received $3.0 million in cash at closing and we have to potential to receive up to an additional $0.75 million in cash in August 2010 depending on the number of customer contract assignments received prior to December 31, 2009. We recorded a gain on the sale of the net assets of $0.2 million in the third quarter of fiscal 2009.

We believe the sale of the VAR assets will significantly impact our future operations. For the preceding 12 months before the sale date, the VAR operations generated revenues of approximately $35.1 million and had an unfavorable contribution margin of approximately $0.8 million.

We believe the sale of the VAR assets will help us achieve several of the objectives in support of our business strategy as outlined above. Exiting the lower margin product reseller operations, which is working capital intensive, should allow us to better manage our balance sheet and cash flows as well as improve our margins. The cash provided by the sale allows us to further invest in our core business offerings. In addition, the sale allowed us to further reduce our general and administrative costs to align our back office operations with the remaining business operations. We also expect lower capital expenditures and related depreciation expense as a result of the sale of assets.

Corporate Restructuring

On September 1, 2009, we announced and implemented a plan to reduce our general and administrative staff by approximately 20% or over 30 individuals. The reduction plan carries out a realignment of our workforce and operations consistent with our strategic plans.

More specifically, the reduction in workforce results primarily from (a) our decision to shift more of our resources to making the strategic investments required to grow our business, including sales, recruiting and client services; (b) our sale, on August 4, 2009, of our VAR assets; and (c) our ongoing efforts to reduce SG&A expenses as a percentage of revenue. We recorded restructuring charges in connection with the corporate staff reduction plan with respect to severance payments and benefits continuation of $0.8 million in the third quarter of 2009, consistent with the guidance contained in SFAS No. 146 (codified in FASB ASC Topic 420, Exit or Disposal Cost Obligations). Such charges are anticipated to be paid by the end of fiscal 2010. Substantially all of these charges will result in cash expenditures.

Sale of the Company’s MCS assets

In addition, on September 25, 2009, we entered into and closed on an asset sale agreement for our full service nurse staffing agency operations. In consideration for the assets sold and the liabilities transferred, we received $0.5 million in cash. We recorded a gain on the sale of the net assets of $0.2 million. For the preceding 12 months before the sale date, MCS generated revenues of approximately $3.1 million and had an unfavorable contribution margin of approximately $0.1 million.

Sale of the Company’s Managed Staffing Operations and Discontinuance of a Large Staffing Account

Early in the third quarter of fiscal 2008, we sold Symmetry Workforce Solutions (“Symmetry”), our managed staffing operations, to COMSYS Information Technology Services, Inc. and discontinued our staffing relationship with

one of our large staffing accounts. Together, business through Symmetry and the large staffing account represented approximately $15 million in quarterly revenue and $60 million in annualized revenue.

5. Overview of Results of Third Quarter Fiscal 2009 Operations

Our revenues decreased $31.7 million, or 50.7%, in the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008 primarily due to the negative impact the economic environment has had on the demand for our IT professional services (34.4%) and our planned exit from non-core and low-margin lines of business (16.3%).

Gross margins as a percentage of revenue increased due to the impact of implementing our strategy of exiting low margin lines of business and accounts and the reduction in lower margin product sales.

SG&A expenses declined in the third quarter of fiscal 2009 due largely to the execution of our Plan and the reduction in business volume. During the third quarter of fiscal 2009, we recorded $0.9 million of restructuring charges comprised of severance and severance related costs, future rent obligations (net of anticipated sub-lease income).

We generated cash from operations of $0.2 million and cash from investing activities of $2.5 million during the third quarter of fiscal 2009. As of October 3, 2009, we had a cash and cash equivalents and restricted cash balance of $7.7 million and no borrowing under our Credit Facility.

RESULTS OF OPERATIONS, THREE MONTHS ENDED OCTOBER 3, 2009 VS. SEPTEMBER 27, 2008

The following table illustrates the relationship between revenue and expense categories along with a count of employees and consultants for the three months ended October 3, 2009 and September 27, 2008.

	Three Months Ended					Three Months Ended
	October 3, 2009					September 27, 2008					Increase (Decrease)
				% of					% of
(Dollars in thousands)	Amount			Revenue		Amount			Revenue		Amount			%
Revenue:
Professional services provided directly	$	29,335		94.9	%	$	50,116		80.0	%	$	(20,781	)	(41.5	)%
Professional services provided through subsuppliers	460			1.5		2,891			4.6		(2,431		)	(84.1	)
Product sales	1,106			3.6		9,610			15.4		(8,504		)	(88.5	)
Total revenue	30,901			100.0		62,617			100.0		(31,716		)	(50.7	)

Expenses:
Cost of services provided directly	23,595			76.4		39,167			62.5		(15,572		)	(39.8	)
Cost of services provided through subsuppliers	441			1.4		2,796			4.5		(2,355		)	(84.2	)
Cost of product sales	965			3.1		8,899			14.2		(7,934		)	(89.2	)
Selling, administrative and other operating costs	8,886			28.8		11,780			18.8		(2,894		)	(24.6	)
Restructuring costs and other severance related costs	917			3.0		291			0.5		626			215.1
Amortization of intangible assets	44			0.1		235			0.4		(191		)	(81.3	)
Total expenses	34,848			112.8		63,168			100.9		(28,320		)	(44.8	)

Operating loss	(3,947		)	(12.8	)	(551		)	(0.9	)	3,396			616.3

Non-operating income	8			0.0		27			0.0		(19		)	(70.4	)
Interest expense	(9		)	0.0		(8		)	0.0		1			12.5

Loss before income taxes	(3,948		)	(12.8	)	(532		)	(0.9	)	3,416			642.1

Income tax expense	13			0.0		6			0.0		7			116.7

Net loss	$	(3,961	)	(12.8	)%	$	(538	)	(0.9	)%	$	3,423		636.2	%

Personnel:
Management and Administrative	153					274					(121		)	(44.2	)%
Consultants	877					1,472					(595		)	(40.4	)%

Revenue

Revenue from services provided directly for the three months ended October 3, 2009 declined 41.5% to $29.3 million from $50.1 million in the prior comparable period. The decline in revenue was primarily due to a reduction in the number of billable hours and consultants as a result of lower business volumes, the sale of our VAR operations and a 3.0% decrease in overall billing rates as compared to the prior year period. Our subsupplier revenue for the three months ended October 3, 2009, which is mainly pass-through revenue with associated fees, declined by 84.1% from the prior year period primarily due to the sale of Symmetry early in the third quarter of fiscal 2008. Product sales in the third quarter of fiscal 2009 declined by 88.5% from the prior year period primarily due to our sale of the VAR operations.

Cost of Services Provided Directly

Cost of services provided directly represents our payroll and benefit costs associated with our billable consultants. This category of expense as a percentage of direct services revenue increased to 80.4% in the third quarter of fiscal 2009 compared to 78.2% in the prior comparable period due to increased benefit costs and the impact of bill rate reductions without offsetting cost reductions.

Cost of Services Provided Through Subsuppliers

Cost of services provided through subsuppliers represents our cost when we utilize third parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services provided through subsuppliers was 95.9% for the third quarter of fiscal 2009 compared to 96.7% for the comparable period in fiscal 2008. The decrease in expense as a percentage of subsupplier revenue was primarily due to exiting lower margin subsupplier business.

Cost of Product Sales

Cost of product sales represents our cost when we resell hardware and software products. This category of expense, as a percentage of product sales, was 87.3% in the third quarter of fiscal 2009 compared to 92.6% in the third quarter of fiscal 2008. The decrease in expense as a percentage of revenue was primarily due to the mix of product sales between the comparable periods.

Selling, Administrative and Other Operating Costs

SG&A costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs decreased approximately $3.0 million in the third quarter of fiscal 2009 from the comparable period in 2008 and represented 28.8% of total revenue for the third quarter of fiscal 2009 compared to 18.8% for the third quarter in fiscal 2008. SG&A expenses decreased primarily due to the impact of personnel reductions and implementation of non-personnel cost reductions and a reduction of sales and recruiting incentive compensation expense due to the decrease in business volume. As a percentage of revenue, SG&A costs increased due to a significantly lower revenue base in the third quarter of fiscal 2009.

Restructuring Costs and Other Severance Related Costs

Amortization of Intangible Assets

Amortization of intangible assets relates to our customer lists. This category of expense decreased during the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 as a result of the impairment recorded in the second quarter of fiscal 2009 and the sale of assets of the VAR business on August 4, 2009 whereby we disposed of the remaining balance of our customer lists.

Non-operating Income

Non-operating income decreased slightly in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 as a result of less interest income earned from our cash balances due to lower interest rates and higher interest income related to a customer equipment lease in the prior year.

Interest Expense

We had no borrowings outstanding in the third quarter of fiscal 2009 compared to average borrowing outstanding under our credit facility of approximately $0.6 million for the third quarter of fiscal 2008 at an average interest rate of 5.00%.

Income Taxes

For both third quarters of fiscal 2009 and fiscal 2008, we recorded a provision for income taxes for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax benefit or expense associated with our net operating losses because any tax benefit or expense that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.

Personnel

Our consulting staff levels finished the third quarter of fiscal 2009 at 877, a 40.4% decline against the comparable prior period. The decline in consulting staff levels was due to the sale of assets of our VAR operations during the third quarter of fiscal 2009 and an overall decline in business volume. The decline in management and administrative personnel was due to our focus on reducing the number of management and administrative personnel that are necessary to support the business operations. The reported consulting staff levels exclude Medical Concepts Staffing, our medical staffing business, due to the separate industry focus of that business.

Certain Information Concerning Off-Balance Sheet Arrangements

For the three months ended October 3, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

RESULTS OF OPERATIONS, NINE MONTHS ENDED OCTOBER 3, 2009 VS. SEPTEMBER 27, 2008

The following table illustrates the relationship between revenue and expense categories along with a count of employees and consultants for the nine months ended October 3, 2009 and September 27, 2008.

	Nine Months Ended					Nine Months Ended
	October 3, 2009					September 27, 2008					Increase (Decrease)
(Dollars in thousands)	Amount			% of Revenue		Amount			% of Revenue		Amount			%
Revenue:
Professional services provided directly	$	105,211		90.3	%	$	169,018		74.3	%	$	(63,807	)	(37.8	)%
Professional services provided through subsuppliers	2,011			1.7		31,217			13.7		(29,206		)	(93.6	)
Product sales	9,339			8.0		27,175			12.0		(17,836		)	(65.6	)
Total revenue	116,561			100.0		227,410			100.0		(110,849		)	(48.7	)

Expenses:
Cost of services provided directly	83,704			71.8		133,275			58.6		(49,571		)	(37.2	)
Cost of services provided through subsuppliers	1,915			1.6		30,100			13.2		(28,185		)	(93.6	)
Cost of product sales	7,973			6.8		24,682			10.9		(16,709		)	(67.7	)
Selling, administrative and other operating costs	30,233			25.9		38,409			16.9		(8,176		)	(21.3	)
Restructuring costs and other severance related costs	2,708			2.3		2,659			1.2		49			1.8
Impairment of intangible assets	2,268			1.9		—			—		2,268			100.0
Amortization of intangible assets	491			0.4		793			0.3		(302		)	(38.1	)
Total expenses	129,292			110.9		229,918			101.1		(100,626		)	(43.8	)

Operating loss	(12,731		)	(10.9	)	(2,508		)	(1.1	)	10,223			407.6

Non-operating income	35			—		97			—		(62		)	(63.9	)
Interest expense	(20		)	—		(143		)	—		(123		)	(86.0	)

Loss before income taxes	(12,716		)	(10.9	)	(2,554		)	(1.1	)	10,162			397.9

Income tax expense	31			—		15			—		16			106.7

Net loss	$	(12,747	)	(10.9	)%	$	(2,569	)	(1.1	)%	$	10,178		396.2	%

Personnel:
Management and Administrative	153					274					(121		)	(44.2	)%
Consultants	877					1,472					(595		)	(40.4	)%

Revenue

Total revenue from services provided directly declined 37.8% to $105.2 million for the nine months ended October 3, 2009 from $169.0 million for the nine months ended September 27, 2008. The decline in revenue was primarily due to a reduction in the number of billable hours and consultants as a result of lower business volumes, our decision to discontinue our relationship with one of our large staffing accounts and the sale of the assets of the VAR operations on August 4, 2009, partially offset by an 4.9% increase in overall billing rates over the prior year period. Our subsupplier revenue, which is mainly pass-through revenue with associated fees, declined by 93.6% in 2009 compared to 2008 due to the sale of Symmetry early in the third quarter of fiscal 2008. Product sales declined 65.6 % to $9.3 million for the nine months ended October 3, 2009 from $27.2 million for the nine months ended October 3, 2008 due to an overall reduction in business volume and the sale of our VAR operations.

Cost of Services Provided Directly

Cost of services provided directly represents our payroll and benefit costs associated with our billable consultants. This category of expense as a percentage of direct services revenue increased slightly to 79.6% for the nine months ended October 3, 2009 from 78.9% for the nine months ended September 27, 2008 due to increased benefit costs and the impact of bill rate reductions without offsetting cost reductions.

Cost of Services Provided Through Subsuppliers

Cost of services provided through subsuppliers represents our cost when we utilize third parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services provided through subsuppliers was 95.2% for the nine months ended October 3, 2009 compared to 96.4% for the nine months ended September 27, 2008. The decrease in expense as a percentage of subsupplier revenue was primarily due to exiting lower margin subsupplier business during fiscal 2009.

Cost of Product Sales

Cost of product sales represents our cost when we resell hardware and software products. This category of expense, as a percentage of product sales, was 85.4% for the nine months ended October 3, 2009 compared to 90.8% for the nine months ended September 27, 2008. The decrease in expense as a percentage of revenue was primarily due to the mix of product sales between the comparable periods.

Selling, Administrative and Other Operating Costs

SG&A costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs decreased 21.3% from $38.4 million for the nine months ended September 27, 2008 to $30.2 million for the nine months ended October 3, 2009. These amounts represented 16.9% and 25.9% of total revenue for 2008 and 2009, respectively. SG&A expenses decreased primarily due to the impact of personnel reductions and implementation of non-personnel cost reductions and a reduction of sales and recruiting incentive compensation expense due to the decrease in business volume. As a percentage of revenue, SG&A costs increased due to a significantly lower revenue base for the nine months ended October 3, 2009.

Restructuring Costs and Other Severance Related Costs

Impairment of Intangible Assets

During the nine months ended October 3, 2009, we reviewed our customer lists in accordance with FASB SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (codified in FASB ASC Topic 360, Property, Plant, and Equipment), based on the expectation that the business with which the customer lists are associated would be sold significantly before the end of their previously estimated useful life. Based on this measurement, we recorded a $2.3 million impairment loss, which is the amount by which the carrying value of the customer lists exceeded the fair value. In determining fair value, we considered the expected consideration to be received from the sale of the VAR assets.

Amortization of Intangible Assets

Amortization of intangible assets primarily relates to our customer lists. This category of expense decreased during fiscal 2009 compared to fiscal 2008 due to the SequoiaNet.com trade name and a certain customer list becoming fully amortized during fiscal 2008, the impairment of intangible assets recorded in the second quarter of fiscal 2009 and

the sale of the assets of the VAR operations on August 4, 2009 whereby we disposed of the remaining balance of our customer lists.

Non-operating Income

Non-operating income decreased slightly for the nine months ended October 3, 2009 compared to the nine months ended September 27, 2009 as a result of less interest income earned from our cash balances due to lower interest rates and higher interest income earned related to a customer equipment lease in the prior year.

Interest Expense

Interest expense decreased to $20,000 for the nine months ended October 3, 2009 from $143,000 for the nine months ended September 27, 2008 primarily due to a decrease in the average borrowing base from $3.2 million for 2008 to $18,000 for 2009. A reduction in interest rates from 5.00% at the end of the third quarter of fiscal 2008 to 3.78% at the end of the third quarter of fiscal 2009 also contributed to the decrease in interest expense.

Income Taxes

For the nine months ended October 3, 2009 and September 27, 2008, we recorded a provision for income taxes for amounts due for certain state income taxes and changes in our reserves for tax obligations. We recorded no additional income tax expense or benefit because any tax expense or benefit which would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax assets, which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowance to realize the benefit of these assets.

Personnel

Our consulting staff levels finished the third quarter of fiscal 2009 at 877, a 40.4% decline against the comparable prior period. The decline in consulting staff levels was due to the sale of our VAR business during the third quarter of fiscal 2009 and an overall decline in business volume. The decline in management and administrative personnel was due to our focus on reducing the number of management and administrative personnel that are necessary to support the business operations. The reported consulting staff levels exclude Medical Concepts Staffing, our medical staffing business, due to the separate industry focus of that business.

Certain Information Concerning Off-Balance Sheet Arrangements

For the nine months ended October 3, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Liquidity and Capital Resources

The following table provides information relative to the liquidity of our business.

								Percentage
	October 3,		January 3,		Increase			Increase
(In thousands)	2009		2009		(Decrease)			(Decrease)

Cash and cash equivalents	$	7,261	$	2,288	$	4,973		217.4	%
Restricted cash	396		—		396			100	%
Accounts receivable	25,462		40,814		(15,352		)	(37.6	)
Other current assets	734		1,521		(787		)	(51.7	)
Total current assets	$	33,853	$	44,623	$	(10,770	)	(24.1	)%

Accounts payable	$	7,947	$	15,581	$	(7,634	)	(49.0	)%
Line of credit	—		—		—			—
Salaries and benefits	4,764		3,249		1,515			46.6
Deferred revenue	418		1,473		(1,055		)	(71.6	)
Deferred compensation	347		275		72			26.2
Restructuring accrual	1,529		184		1,345			731.0
Other current liabilities	970		1,025		(55		)	(5.4	)
Total current liabilities	$	15,975	$	21,787	$	(5,812	)	(26.7	)%

Working capital	$	17,878	$	22,836	$	(4,958	)	(21.7	)%
Current ratio	2.12		2.05		0.07			3.4	%

Total shareholders’ equity	$	17,946	$	30,395	$	(12,449	)	(41.0	)%

Change in Working Capital

Working capital was $17.9 million at October 3, 2009, down $5.0 million from January 3, 2009. The ratio of current assets to current liabilities increased to 2.12 at October 3, 2009 compared to 2.05 at January 3, 2009.

Our total current assets decreased approximately $10.8 million at October 3, 2009 compared to the beginning of the year as a result of lower accounts receivable offset slightly by an increase in our cash and cash equivalents. The primary reason for the 37.6% decrease in our accounts receivable from the beginning of the year is the 45.6% decline in revenues from the fourth quarter of fiscal 2008 to the third quarter of fiscal 2009 and the impact of the VAR and MCS asset sales.

Our total current liabilities decreased approximately $5.8 million at October 3, 2009 compared to the beginning of the year primarily due to fewer product purchases and less business volume.

We believe our working capital and availability under our Credit Facility, as described below, will be sufficient to support the cash flow needs of our business in fiscal 2009 and 2010. Continuing operating losses, a significant increase in bad debt experience, a significant lengthening of payment terms, or significant costs associated with restructuring activities could create a need for additional working capital. An inability to obtain additional working capital, should it be required, could have a material adverse effect on our business. We expect to be able to comply with the requirements of our new credit agreement; however, failure to do so could affect our ability to obtain necessary working capital and could have a material adverse effect on our business.

Sources and Uses of Cash/Credit Facility

Cash and cash equivalents increased by $5.4 million from January 3, 2009 to October 3, 2009. Our primary need for working capital is to support accounts receivable and to fund the time lag between payroll and vendor disbursements and receipt of fees billed to clients. Historically, we have been able to support internal growth in our business with internally generated funds and the use of our Credit Facility.

On September 30, upon consummating the Credit Facility with Wells Fargo, we extinguished our asset-based revolving credit facility with GE Capital. Extinguishment expenses of $40,000, relating to the remaining deferred financing costs and transaction-related expenses were expensed in the third quarter of fiscal 2009 and are included within SG&A in the Consolidated Statements of Operations.

On August 4, 2009, we entered into and closed on an asset sale agreement for our VAR operations. In consideration for the assets sold, which were primarily customer contracts, and the liabilities transferred, we received $3.0 million in cash at closing and have the potential to receive up to an additional $0.75 million in cash in August 2010 depending on the number of customer contract assignments received prior to December 31, 2009.

On September 25, 2009, we entered into and closed on an asset sale agreement for our full service nurse staffing agency operations. In consideration for the assets sold and the liabilities transferred, we received $0.5 million in cash.

We made capital expenditures of $0.3 million and $1.1 million during the third quarter and first nine months of fiscal 2009, respectively.

New Accounting Pronouncements

Forward-Looking Statements

This Form 10-Q contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) about: (i) our expectations and beliefs with respect to the recession, the volatility of the capital markets, the tightening of lending standards in the credit markets, and the general downturn in the global economy, as well as our assumptions with respect to the impact these economic conditions will have on our business, including an expectation of a reduction in business volume and continued operating losses through fiscal 2009, (ii) our Plan and the objectives of the Plan, including certain expense reduction initiatives, additions to sales headcount and the planned expansion into new geographic markets, (iii) the planned expansion of our public sector practice, (iv) our beliefs and expectations with respect to the impact of the VAR and MCS business sales, (v) our expectations with respect to growing our business, reducing expenses and achieving profitability, (vi) our beliefs regarding the adequacy of our

working capital and our ability to meet the requirements of our new credit facility, and (vii) our expectations with respect to our financial results and operating performance. You can identify these statements by the use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words and terms of similar meaning or import in connection with any discussion of future operating or financial performance. Among the factors that could cause actual results to differ materially are: (i) our inability, in whole or in part, to implement or execute the Plan, (ii) our inability to successfully recruit and hire qualified technical and sales personnel, (iii) our inability to successfully compete on a national basis with other companies in our industry by responding to our customers’ varied staffing needs, (iv) our inability to maintain key client relationships, (v) incorrect assumptions by management with respect to the impact of the VAR and MCS business sales, (vi) our inability to reduce operating costs, (vii) our inability to comply with the covenants in our new credit facilities, (viii) a prolonged or worsened downturn in the national or global economy, and (ix) our inability to effectively manage accounts receivable, as well as other economic, business, competitive and/or regulatory factors affecting our business generally, including those set forth in our most recent Annual Report on Form 10-K and our Current Reports on Form 8-K. All forward-looking statements included in this Form 10-Q are based on information available to us as of the date hereof. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4T. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including the President and Chief Executive Officer, Elmer N. Baldwin, and Chief Financial Officer and Treasurer, Randy W. Strobel, regarding the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that is required to be disclosed by us in reports that are filed under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission.

(b) Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which we are a party or to which any of our property is subject, other than routine litigation incidental to the business.

Item 1A. Risk Factors.

If we are unable to satisfy the Nasdaq Global Market’s continued listing requirements, including a minimum price per share of $1.00, our common stock may be delisted, which would likely impair the liquidity and the value of our common stock.

On September 15, 2009, we received a letter from the Nasdaq Listing Qualification department indicating that, for the last 30 consecutive business days, the bid price of our common stock has closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Market under Marketplace Rule 5450(a)(1) (the “Bid Price Rule”). In accordance with the Bid Price Rule, we have 180 calendar days, or until March 15, 2010, to regain compliance. At this time, this notification has no effect on the listing of our common stock.

To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a period of 10 consecutive business days. In the event the Company does not regain compliance with the Bid Price Rule by March 15, 2010, Nasdaq will determine whether we meet all other listing criteria for the Nasdaq Global Market. If we meet all other initial listing criteria, with the exception of the bid price requirement, we will be afforded an additional 180 calendar day grace period. If we are not eligible for an additional grace period, Nasdaq will provide us with written notification that our securities are subject to delisting. At that time, we may appeal Nasdaq’s delisting determination to a Nasdaq Listings Qualifications Panel pursuant to applicable Nasdaq rules.

Alternatively, we might be permitted under Nasdaq rules to transfer the listing of our common stock to the Nasdaq Capital Market if our common stock satisfies all criteria, other than compliance with the minimum bid price requirement, for initial inclusion on such market. In the event of such a transfer, the Nasdaq Marketplace Rules provide that we would be afforded an additional 180 calendar days to comply with the minimum bid price requirement while listed on the Nasdaq Capital Market.

If our common stock is delisted from the Nasdaq Global Market and the Nasdaq Capital Market, trading in our common stock would likely be conducted on the OTC Bulletin Board, a regulated quotation service. If our common stock is delisted from Nasdaq, the liquidity of our common stock may be reduced, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock. Delisting could also result in a loss of confidence by our suppliers, customers and employees.

We may be unsuccessful in executing the Plan and restoring the company to profitability and increasing shareholder value.

We announced a long-term strategic plan (the “Plan”) in January 2008 to restore profitability and increase shareholder value. The Plan requires us to achieve several objectives such as:

· increasing revenue, improving margins and adding sales personnel in higher-margin service areas;

· expanding our value-added services in key metro markets;

· strengthening relationships with technology partners;

· reducing corporate expenses through consolidation of back-office and other corporate overhead functions;

· exiting non-strategic, non-core lines of business;

· investing in our IT systems in order to simplify, streamline and automate our business process;

· attracting and retaining top talent;

· managing our cash flow and maintaining a strong balance sheet;

· delivering operating profits;

· continue to improve our gross margins; and

· building our public sector practice.

We have been unsuccessful in achieving our goal of increasing revenue over the first nine months of fiscal 2009. The improvements achieved in our gross margins have been attenuated by the lower volumes of business. In addition, we believe our ability to provide higher margin services will be limited as long as our clients continue to be impacted by the economic downturn. Finally, we may be unsuccessful in our ability to expand into key metro markets and strengthen relationships with technology partners. If we are unable to increase our revenues or achieve one or more of the other objectives listed above, we may fail to restore profitability and increase shareholder value.

Our business continues to be subject to material risks. See Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 for a listing of additional risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibit No.		Description

^2.1		Asset Purchase Agreement, dated August 4, 2009, by and between Netarx LLC and Analysts International Corporation (with Ex. K, Form of Promissory Note) (Exhibit 2.1 to Current Report on Form 8-K, filed August 5, 2009, Commission File No. 0-4090, incorporated by reference).
^ 3.1		Articles of Incorporation, as amended (Exhibit 3-a to Annual Report on Form 10-K for fiscal year 1988, Commission File No. 0-4090, incorporated by reference).
^ 3.2		Restated Bylaws (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000, Commission File No. 0-4090, incorporated by reference).
^ 3.3		Amendment to Articles of Incorporation to increase authorized shares to 40 million (Exhibit A to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference).
^ 3.4		Amendment to Articles of Incorporation to increase authorized shares to 60 million (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference).
^ 3.5		Amendment to Articles of Incorporation to increase authorized shares to 120 million (Exhibit A to Definitive Proxy Statement dated September 8, 1998, Commission File No. 0-4090, incorporated by reference).
^ 4.1		Amended and Restated Rights Agreement dated as of February 27, 2008 between the Company and Wells Fargo Bank N.A and Form of Right Certificate (Exhibit 4.1 to the Registrant’s Form 8-A12B dated February 27, 2008, Commission File No. 0-4090, incorporated by reference).

+4.2		Specimen Common Stock Certificate.
^10.1		Consent and Twelfth Amendment to Credit Agreement, dated August 4, 2009 (Exhibit 10.1 to Current Report on Form 8-K, filed August 5, 2009, Commission File No. 0-4090, incorporated by reference).
^*10.2		Credit and Security Agreement with Wells Fargo Bank, National Association acting through its Wells Fargo Business Credit operating division, dated September 30, 2009 (Exhibit 10.1 to Current Report on Form 8-K, filed August 5, 2009, Commission File No. 0-4090, incorporated by reference).
+ 31.1		Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
+ 31.2		Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
++ 32		Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

^		Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference.
+		Filed herewith.
++		Furnished herewith.
*		Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment. The entire exhibit has been separately filed with the Securities and Exchange Commission.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

	ANALYSTS INTERNATIONAL CORPORATION
	(Registrant)


Date: November 11, 2009	By:	/s/ Elmer N. Baldwin
		Elmer N. Baldwin
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: November 11, 2009	By:	/s/ Randy W. Strobel
		Randy W. Strobel
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description

^2.1		Asset Purchase Agreement, dated August 4, 2009, by and between Netarx LLC and Analysts International Corporation with Ex. K, Form of Promissory Note (Exhibit 2.1 to Current Report on Form 8-K, filed August 5, 2009, Commission File No. 0-4090, incorporated by reference).
^ 3.1		Articles of Incorporation, as amended (Exhibit 3-a to Annual Report on Form 10-K for fiscal year 1988, Commission File No. 0-4090, incorporated by reference).
^ 3.2		Restated Bylaws (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000, Commission File No. 0-4090, incorporated by reference).
^ 3.3		Amendment to Articles of Incorporation to increase authorized shares to 40 million (Exhibit A to Definitive Proxy Statement dated September 5, 1996, Commission File No. 0-4090, incorporated by reference).
^ 3.4		Amendment to Articles of Incorporation to increase authorized shares to 60 million (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998, Commission File No. 0-4090, incorporated by reference).
^ 3.5		Amendment to Articles of Incorporation to increase authorized shares to 120 million (Exhibit A to Definitive Proxy Statement dated September 8, 1998, Commission File No. 0-4090, incorporated by reference).
^ 4.1		Amended and Restated Rights Agreement dated as of February 27, 2008 between the Company and Wells Fargo Bank N.A. and Form of Right Certificate (Exhibit 4.1 to the Registrant’s Form 8-A12B dated February 27, 2008, Commission File No. 0-4090, incorporated by reference).
+ 4.2		Specimen Common Stock Certificate.
^10.1		Consent and Twelfth Amendment to Credit Agreement, dated August 4, 2009 (Exhibit 10.1 to Current Report on Form 8-K, filed August 5, 2009, Commission File No. 0-4090, incorporated by reference).
*10.2		Credit and Security Agreement with Wells Fargo Bank, National Association acting through its Wells Fargo Business Credit operating division, dated September 30, 2009 (Exhibit 10.1 to Current Report on Form 8-K, filed October 5, 2009, Commission File No. 0-4090, incorporated by reference).
+ 31.1		Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
+ 31.2		Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
++ 32		Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

^		Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference.
+		Filed herewith.
++		Furnished herewith.
*		Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment the entire exhibit has been separately filed with the Securities and Exchange Commission.

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