** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended October 2, 2010**

 

**or**

 

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

 

**For the transition period from         to         **

 

**Commission File Number: 0-4090**

 

**ANALYSTS INTERNATIONAL CORPORATION**

(Exactname 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’stelephone number, including area code: **(952)835-5900**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Date File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o |   | Accelerated  Filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  Filer o   |   | Smaller  Reporting Company x |

 

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

 

As of November 1, 2010,4,985,874 shares of the registrant’s common stock were outstanding.

 

 

 

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**ANALYSTS INTERNATIONAL CORPORATION**

 

**INDEX**

 
| **Part I.**   | ** ** | **FINANCIAL  INFORMATION.**                                                                                              |   | 3      |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------|--------|--------|
|               |       |                                                                                                                     |   |   |
| Item 1.            |       | Financial Statements  (Unaudited)                                                                                        |   | 3      |
|               |       |                                                                                                                     |   |   |
|               |       | Consolidated  Balance Sheets as of October 2, 2010 and January 2, 2010                                         |   | 3      |
|               |       |                                                                                                                     |   |   |
|               |       | Consolidated Statements of Operations for the Three  and Nine Months Ended October 2, 2010 and October 3, 2009 |   | 4      |
|               |       |                                                                                                                     |   |   |
|               |       | Consolidated Statements of Cash Flows for the Nine  Months Ended October 2, 2010 and October 3, 2009           |   | 5      |
|               |       |                                                                                                                     |   |   |
|               |       | Notes to Consolidated Financial Statements                                                                               |   | 6      |
|               |       |                                                                                                                     |   |   |
| Item 2.            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |   | 10     |
|               |       |                                                                                                                     |   |   |
| Item 3.            |       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 4T.           |       | Controls and  Procedures                                                                                                 |   | 19     |
|               |       |                                                                                                                     |   |   |
| **Part II.**  | ** ** | **OTHER INFORMATION**                                                                                                    |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 1.            |       | Legal Proceedings                                                                                                        |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 1A.           |       | Risk Factors                                                                                                             |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 2.            |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 3.            |       | Defaults Upon  Senior Securities                                                                                         |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 4.            |       | Submission of  Matters to a Vote of Security Holders                                                                     |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 5.            |       | Other Information                                                                                                        |   | 19     |
|               |       |                                                                                                                     |   |   |
| Item 6.            |       | Exhibits                                                                                                                 |   | 20     |
|               |       |                                                                                                                     |   |   |
| Signatures         |       | 21                                                                                                                       |
|               |       |                                                                                                                     |
| Exhibit Index |       | 22                                                                                                                       |
|                    |            |                                                                                                                          |        |        |  |  |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**AnalystsInternational Corporation**

**ConsolidatedBalance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                         | ** ** | **October 2,** | ** ** | **January 2,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| **(In thousands)**                                                                                                            | ** ** | **2010**            | ** ** | **2010**            | ** ** |
|                                                                                                                               |       |                |       |                |       |
| **ASSETS**                                                                                                                         |       |                |       |                |       |
|                                                                                                                               |       |                |       |                |       |
| Current assets:                                                                                                                    |       |                |       |                |       |
| Cash and cash equivalents                                                                                                          |       | $                   | 4,730      |                | $          | 3,818 |   |
| Accounts receivable, less allowance for doubtful  accounts of $750 and $958, respectively                                          |       | 18,457              |       | 23,028              |       |
| Prepaid expenses and other current assets                                                                                          |       | 693                 |       | 1,442               |       |
| Total current assets                                                                                                               |       | 23,880              |       | 28,288              |       |
|                                                                                                                               |       |                |       |                |       |
| Property and equipment, net of accumulated  depreciation of $8,261 and $10,774, respectively                                       |       | 954                 |       | 1,846               |       |
| Other assets                                                                                                                       |       | 441                 |       | 543                 |       |
| Total assets                                                                                                                       |       | $                   | 25,275     |                | $          | 30,677 |   |
|                                                                                                                               |       |                |       |                |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                     |       |                |       |                |       |
|                                                                                                                               |       |                |       |                |       |
| Current liabilities:                                                                                                               |       |                |       |                |       |
| Accounts payable                                                                                                                   |       | $                   | 4,419      |                | $          | 6,958 |   |
| Line of credit                                                                                                                     |       | —              |       | —              |       |
| Salaries and benefits                                                                                                              |       | 3,890               |       | 2,498               |       |
| Deferred revenue                                                                                                                   |       | 299                 |       | 310                 |       |
| Deferred compensation                                                                                                              |       | 205                 |       | 522                 |       |
| Restructuring accrual                                                                                                              |       | 776                 |       | 2,038               |       |
| Other current liabilities                                                                                                          |       | 785                 |       | 960                 |       |
| Total current liabilities                                                                                                          |       | 10,374              |       | 13,286              |       |
|                                                                                                                               |       |                |       |                |       |
| Non-current liabilities:                                                                                                           |       |                |       |                |       |
| Deferred compensation                                                                                                              |       | 977                 |       | 1,037               |       |
| Restructuring accrual                                                                                                              |       | 243                 |       | 1,045               |       |
| Other long-term liabilities                                                                                                        |       | 178                 |       | 361                 |       |
| Total non-current liabilities                                                                                                      |       | 1,398               |       | 2,443               |       |
|                                                                                                                               |       |                |       |                |       |
| Shareholders’ equity:                                                                                                         |       |                |       |                |       |
| Common stock, par value $.10 a share; authorized  24,000,000 shares; issued and outstanding 4,985,874 and 4,985,015,  respectively |       | 498                 |       | 498                 |       |
| Additional capital                                                                                                                 |       | 25,565              |       | 25,598              |       |
| Accumulated deficit                                                                                                                |       | (12,560             | )          | (11,148             | )          |
| Total shareholders’ equity                                                                                                    |       | 13,503              |       | 14,948              |       |
| Total liabilities and shareholders’ equity                                                                                    |       | $                   | 25,275     |                | $          | 30,677 |   |

 

Seenotes to consolidated financial statements.

 

3

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**Analysts International Corporation**

**Consolidated Statements of Operations**

***(Unaudited)***

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **October 2,**              | ** ** | **October 3,**             | ** ** | **October 2,** | ** ** | **October 3,** | ** ** |
| **(In thousands except per share amounts)** | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Revenue:                                                             |       |                             |       |                            |       |   |   |   |   |
| Professional services provided directly                              |       | $                                | 26,032     |                            | $          | 29,335 |   | $ | 80,731 |   | $ | 105,211 |   |
| Professional services provided through  subsuppliers                 |       | 17                               |       | 460                             |       | 616 |   | 2,011 |   |
| Product sales                                                        |       | —                           |       | 1,106                           |       | — |   | 9,339 |   |
| Total revenue                                                        |       | 26,049                           |       | 30,901                          |       | 81,347 |   | 116,561 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Expenses:                                                            |       |                             |       |                            |       |   |   |   |   |
| Cost of services provided directly                                   |       | 20,170                           |       | 23,595                          |       | 63,274 |   | 83,704 |   |
| Cost of services provided through subsuppliers                       |       | 17                               |       | 441                             |       | 582 |   | 1,915 |   |
| Cost of product sales                                                |       | —                           |       | 965                             |       | — |   | 7,973 |   |
| Selling, administrative and other operating costs                    |       | 5,772                            |       | 8,886                           |       | 19,209 |   | 30,233 |   |
| Restructuring costs and other severance related  costs               |       | (482                             | )          | 917                             |       | (300 | ) | 2,708 |   |
| Impairment of intangible assets                                      |       | —                           |       | —                          |       | — |   | 2,268 |   |
| Amortization of intangible assets                                    |       | —                           |       | 44                              |       | — |   | 491 |   |
| Total expenses                                                       |       | 25,477                           |       | 34,848                          |       | 82,765 |   | 129,292 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Operating income (loss)                                              |       | 572                              |       | (3,947                          | )          | (1,418 | ) | (12,731 | ) |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Non-operating income                                                 |       | 4                                |       | 8                               |       | 14 |   | 35 |   |
| Interest expense                                                     |       | (3                               | )          | (9                              | )          | (11 | ) | (20 | ) |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Income (loss) before income taxes                                    |       | 573                              |       | (3,948                          | )          | (1,415 | ) | (12,716 | ) |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Income tax (benefit) expense                                         |       | (14                              | )          | 13                              |       | 5 |   | 31 |   |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                    |       | $                                | 587        |                            | $          | (3,961 | ) | $ | (1,420 | ) | $ | (12,747 | ) |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Per common share (basic):                                            |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                    |       | $                                | 0.12       |                            | $          | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Per common share (diluted):                                          |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                    |       | $                                | 0.12       |                            | $          | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
|                                                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted-average shares outstanding:                                 |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                |       | 4,986                            |       | 4,985                           |       | 4,986 |   | 4,985 |   |
| Diluted                                                              |       | 4,988                            |       | 4,985                           |       | 4,986 |   | 4,985 |   |

 

Seenotes to consolidated financial statements.

 

4

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**Analysts International Corporation**

**Consolidated Statements of Cash Flows**

***(Unaudited)***

 
| ** **                                       | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **October 2,**             | ** ** | **October 3,** | ** ** |
| **(In thousands)**                          | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** **                                       | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash flows from operating activities:            |       |                            |       |   |   |
| Net loss                                         |       | $                               | (1,420     | ) | $ | (12,747 | ) |
|                                             |       |                            |       |   |   |
| Adjustments to net loss:                         |       |                            |       |   |   |
| Depreciation                                     |       | 677                             |       | 1,086 |   |
| Amortization of intangible assets                |       | —                          |       | 491 |   |
| Impairment of intangible assets                  |       | —                          |       | 2,268 |   |
| Stock based compensation                         |       | (33                             | )          | 298 |   |
| Loss (gain) on sale on assets and disposals      |       | 157                             |       | (394 | ) |
|                                             |       |                            |       |   |   |
| Changes in:                                      |       |                            |       |   |   |
| Accounts receivable                              |       | 4,571                           |       | 15,933 |   |
| Accounts payable                                 |       | (2,576                          | )          | (7,158 | ) |
| Salaries and benefits                            |       | 1,392                           |       | 1,517 |   |
| Restructuring accrual                            |       | (2,064                          | )          | 2,238 |   |
| Deferred compensation                            |       | (377                            | )          | (214 | ) |
| Prepaid expenses and other assets                |       | 851                             |       | 404 |   |
| Deferred revenue                                 |       | (11                             | )          | (381 | ) |
| Other accrued liabilities                        |       | (215                            | )          | (55 | ) |
| Net cash provided by operating activities        |       | 952                             |       | 3,286 |   |
|                                             |       |                            |       |   |   |
| Cash flows from investing activities:            |       |                            |       |   |   |
| Expended for property and equipment additions    |       | (91                             | )          | (1,082 | ) |
| Proceeds from asset sale, net                    |       | 186                             |       | 3,263 |   |
| Change in restricted cash                        |       | —                          |       | (396 | ) |
| Net cash provided by investing activities        |       | 95                              |       | 1,785 |   |
|                                             |       |                            |       |   |   |
| Cash flows from financing activities:            |       |                            |       |   |   |
| Net change in line of credit                     |       | —                          |       | — |   |
| Payment of capital lease obligation              |       | (135                            | )          | (98 | ) |
| Net cash used in financing activities            |       | (135                            | )          | (98 | ) |
|                                             |       |                            |       |   |   |
| Net increase in cash and cash equivalents        |       | 912                             |       | 4,973 |   |
|                                             |       |                            |       |   |   |
| Cash and cash equivalents at beginning of period |       | 3,818                           |       | 2,288 |   |
|                                             |       |                            |       |   |   |
| Cash and cash equivalents at end of period       |       | $                               | 4,730      |   | $ | 7,261 |   |

 

Seenotes to consolidated financial statements.

 

5

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**Analysts International Corporation**

 

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**1. ****Organization andNature of Business**

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us” or “our”) is an informationtechnology (“IT”) services company. We employ approximately 800 professionalsand are focused on serving the information technology needs of mid-market toFortune 500 companies and government agencies across North America. AIC wasincorporated in Minnesota in 1966 and our corporate headquarters is located inMinneapolis, Minnesota. For a more complete description of our Company, pleaserefer to our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2010.

 

We operate on a fiscal yearending on the Saturday closest to December 31. Accordingly, fiscal 2010will end on January 1, 2011. The third quarter of fiscal 2010 ended onOctober 2, 2010 and the third quarter of fiscal 2009 ended on October 3,2009.

 

**2.  Summary of Significant Accounting Policies**

 

*Basis ofConsolidation*

 

The accompanying unauditedConsolidated Financial Statements of AIC have been prepared on the accrualbasis of accounting and in accordance with the requirements of the Securitiesand Exchange Commission (“SEC”) for interim financial reporting. As permittedunder these rules, certain footnotes and other financial information that arenormally required by accounting principles generally accepted in the UnitedStates (“U.S. GAAP”) can be condensed or omitted. The Consolidated FinancialStatements included in this document reflect, in the opinion of our management,all adjustments (consisting of only normal recurring adjustments, except asnoted elsewhere in the Notes to Consolidated Financial Statements) necessaryfor fair presentation of the results of operations for the interim periodspresented. The following notes should be read in conjunction with theaccounting policies and other disclosures in the Notes to the ConsolidatedFinancial Statements incorporated by reference in our Annual Report onForm 10-K for the fiscal year ended January 2, 2010. 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 beexpected for the full fiscal year.

 

*Estimates*

 

The preparation ofConsolidated Financial Statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions affecting the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the Consolidated Financial Statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom these estimates.

 

**3.**  **Fair ValueMeasurement**

 

Accounting StandardsCodification (“ASC”) Topic 820, *Fair ValueMeasurements and Disclosures,* provides a fair value hierarchy whichgives the highest priority to unadjusted quoted prices in active markets foridentical assets or liabilities (Level 1) and the lowest priority tounobservable inputs (Level 3). A financial instrument’s level within thehierarchy is based on the lowest level of any input that is significant to thefair value measurement. The levels of the fair value hierarchy are defined asfollows:

 

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

 

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

 

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

 

6

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Short-term cash investmentsin money market accounts are considered to be cash equivalents. The estimatedfair values for cash equivalents approximate their carrying values due to theshort-term maturities of these instruments. Cash equivalents are classified asLevel 1 and are recorded in our cash and cash equivalents line on ourConsolidated Balance Sheets.

 

**4.  Sale of Assets**

 

*Sale ofCustomer Contracts*

 

On March 3, 2010, AICsold certain customer contracts, property and equipment and sublet a facility.In consideration for the assets sold and the liabilities transferred, theCompany received $0.2 million in cash. The Company recorded a loss on thesale of approximately $50,000 which is included within Selling, administrativeand other operating costs (“SG&A”) in our Consolidated Statement ofOperations.

 

**5.  Intangible Assets**

 

In the third quarter offiscal 2009, we incurred amortization expense related to intangible assets of$44,000 and disposed of the remaining balance of our customer lists of approximately$3.3 million. Our customer lists were sold as part of the Value Added Reseller(“VAR”) asset sale on August 4, 2009.

 

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

 

Duringthe second quarter of fiscal 2009, we reviewed our customer lists in accordancewith Financial Accounting Standards Board (“FASB”) ASC Topic 360, *Property, Plant, and Equipment*, based on the expectationthat the business with which the customer lists were associated would be soldsignificantly before the end of their previously estimated useful life. Basedon this measurement, we recorded a $2.3 million impairment loss, which is theamount by which the carrying value of the customer lists exceeded the fairvalue of the expected consideration to be received from the sale of assets. Theimpairment loss is included within Impairment of intangible assets in theConsolidated Statement of Operations.

 

**6. ** **Financing Agreement**

 

*RevolvingCredit Facility*

 

On September 30, 2009,AIC entered into a revolving line of credit (the “Credit Facility”) with Wells FargoBank, National Association (“Wells Fargo”) pursuant to which Wells Fargo willadvance up to $15.0 million to AIC for working capital purposes and tofacilitate the issuance of letters of credit.  The total amount availablefor borrowing under the Credit Facility fluctuates based on the Company’s levelof eligible accounts receivable.

 

The Credit Facility carriesan interest rate equal to the three month LIBOR rate plus 3.5%.  TheCredit Facility has an unused line fee of 0.50% annually on the daily averageunused amount.  The maturity date of the Credit Facility isSeptember 30, 2012. Borrowings under the Credit Facility are secured byall of the Company’s assets.

 

The Credit Facility requiresthe Company to meet certain levels of year-to-date earnings/loss before taxes.The Credit Facility limits the Company’s annual capital expenditures to $2.0million and requires the Company to maintain an excess borrowing base of atleast $5.0 million. The Credit Facility contains customary affirmative and negativecovenants and upon an event of default Wells Fargo may terminate the facilityor declare the entire amount outstanding under the Credit Facility to beimmediately due and payable and exercise other rights under the agreement.

 

As of October 2, 2010, wewere in compliance with all the requirements of, and had no borrowing under,the Credit Facility. Total availability of the Credit Facility, whichfluctuates based on our level of eligible accounts receivable, was $8.3 millionas of October 2, 2010. See *“Sources and Uses ofCash/Credit Facility,”* below, for further information.

 

**7.  Restructuring Costs and Other Severance RelatedCosts**

 

In the third quarter offiscal 2010, AIC recorded a net reversal of restructuring costs and otherseverance related costs of $0.5 million. The net reversal is comprised of a$0.2 million charge relating to severance and severance-related expenses and a reversalof $0.7 million, primarily relating to the modification of lease agreements foroffice space previously vacated.

 

For the nine month periodended October 2, 2010, AIC recorded a net reversal of restructuring costsand other severance-related costs of $0.3 million. The net reversal is comprisedof a $0.4 million charge relating to severance and severance-related expensesand a reversal of $0.7 million primarily relating to the modification of leaseagreements for office space previously vacated.

 

7

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

 

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

 

A summary of the activity inthe restructuring accrual for the nine months ended October 2, 2010 is asfollows:

 
| **(In thousands)**            | ** ** | **Workforce  Reduction** | ** ** | **Office Closure/  Consolidation** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------------------|------------|-----------|------------|
|                               |       |                     |       |                                    |       |      |       |   |   |   |
| Balance as of January 2, 2010 |       | $                        | 1,215      |                                    | $          | 1,868     |       | $ | 3,083 |   |
| Restructuring charges (reversals)  |       | 413                      |       | (713                                    | )          | (300      | )          |
| Cash expenditures                  |       | (1,225                   | )          | (539                                    | )          | (1,764    | )          |
| Balance as of October 2, 2010 |       | $                        | 403        |                                    | $          | 616       |       | $ | 1,019 |   |

 

**8. Reverse Stock Split and Amendment to Rights Plan**

 

On February 26, 2010,the Company amended its Articles of Incorporation to effect a one-for-fivereverse stock split (the “Reverse Stock Split”) of its common stock, par value$0.10 per share (the “Common Stock”). As a result of the Reverse Stock Split,every five shares of the Company’s Common Stock were automatically convertedinto one share of the Company’s Common Stock immediately prior to the openingof trading on March 1, 2010. All fractional shares were rounded down andany shareholder that would be entitled to receive a fractional share would bepaid the fair market value of the fractional share in cash.

 

To reflect the effect of theReverse Stock Split, the Company has retroactively adjusted all share and pershare data to reflect the Common stock and Additional capital line in itsConsolidated Balance Sheets as of January 2, 2010 and the weighted-averageshares outstanding in its Consolidated Statements of Operations and relateddisclosures for the periods presented.

 

The Reverse Stock Split alsoresulted in proportionate adjustments under the Company’s then-existing Amendedand Restated Rights Agreement having an effective date of February 27,2008 (the “Amended Rights Plan”) in (a) the number of shares issuableunder the Amended Rights Plan and (b) the Purchase Price.

 

On May 25, 2010, theCompany amended the Amended Rights Plan by entering into Amendment No. 1to the Amended Rights Plan with Wells Fargo Bank, N.A. as rights agent (“AmendmentNo. 1”). The principal purposes of Amendment No. 1 were to reflectthe Reverse Stock Split (by decreasing the Purchase Price for Common SharePurchase Rights to $30.00 per share), and to make certain other technical andconforming changes.

 

**9.  Shareholders’ Equity**

 
| ** **                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **      | ** ** | **Total**              | ** ** |
|-------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                          | ** ** | **Common** | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| **(In thousands)**             | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)**   | ** ** | **Equity**             | ** ** |
|                                |       |       |       |           |       |            |       |                   |       |
| Balances as of January 2, 2010 |       | $          | 498        |           | $          | 25,598          |       | $                      | (11,148    | ) | $ | 14,948 |   |
| Common stock issued - 1,200 shares  |       | —     |       | 4              |       | —          |       | 4                      |       |
| Stock Compensation                  |       | —     |       | (37            | )          | —          |       | (37                    | )          |
| Other Comprehensive Income          |       | —     |       | —         |       | 8               |       | 8                      |       |
| Net loss                            |       | —     |       | —         |       | (1,420          | )          | (1,420                 | )          |
| Balance as of October 2, 2010       |       | $          | 498        |           | $          | 25,565          |       | $                      | (12,560    | ) | $ | 13,503 |   |

 

8

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** **

**10.** **Equity CompensationPlans**

 

As a result of recent changesin our senior leadership personnel, AIC recorded a reversal of equity-basedcompensation expense for the three- and nine-month periods ended October 2,2010 of approximately $0.1 million and $33,000, respectively. This includescompensation expense related to both stock options and stock awards, and thereversal of compensation expense related to the forfeiture of unvested stockoptions in excess of original estimates. The reduction in tax benefit recordedfor third quarter of fiscal 2010 was approximately $5,000 and the tax benefitrecorded for the nine-month period ended October 2, 2010 was approximately$10,000. The tax benefit is offset against our valuation allowance for ourdeferred tax asset.

 

Total equity-basedcompensation expense for the three and nine-month periods ended October 3,2009 was approximately $0.1 million and $0.3 million, respectively. Thisincludes 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 allowancefor our deferred tax asset.

 

No stock options were exercisedduring the three and nine month periods ended October 2, 2010 or October 3,2009. As of October 2, 2010, there was approximately $0.2 million ofunrecognized compensation expense related to unvested option awards that areexpected to vest over a weighted-average period of 1.3 years. Options topurchase approximately 348,000 and 551,000 shares of common stock wereoutstanding at October 2, 2010 and October 3, 2009, respectively.

 

During the three and ninemonth periods ended October 2, 2010, and October 3, 2009, we grantedequity compensation awards as follows:

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**                          | ** ** |
|----------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **     | ** ** | **October 2,**              | ** ** | **October 3,**                                      | ** ** | **October 2,** | ** ** | **October 3,** | ** ** |
| ** **     | ** ** | **2010**                         | ** ** | **2009**                                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **     | ** ** | **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 |       | —                           |       | —                                                   |       | 118,000 |   | $ | 2.13 |   | 86,800 |   | 1.73 |   | 178,800 |   | $ | 1.93 |   |
| Stock  Awards  |       | —                           |       | —                                                   |       | — |   | $ | — |   | 1,200 |   | 3.36 |   | 2,400 |   | $ | 2.21 |   |

 

**11. Earnings(Loss) Per Share**

 

Basic and diluted earningsand loss per share are presented in accordance with ASC Topic 260, *Earnings Per Share*. Basic income (loss)per share excludes dilution and is computed by dividing income (loss) availableto common stockholders by the weighted-average number of common sharesoutstanding for the period. Diluted income (loss) per share includes dilutiveoptions and is computed by dividing income (loss) available to commonstockholders by the weighted-average number of common equivalent sharesoutstanding for the period. For the three-month period ended October 2, 2010,approximately 462,000 anti-dilutive weighted shares were excluded from thecalculation of weighted average number of common equivalent shares outstanding.For the nine-month period ended October 2, 2010 and for the three andnine-month periods ended October 3, 2009, all options were consideredanti-dilutive and excluded from the computation of common equivalent sharesbecause we reported a net loss. The computation of basic and dilutedincome (loss) per share for the three and nine months ended October 2,2010 and October 3, 2009, is as follows:

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **October 2,**              | ** ** | **October 3,**             | ** ** | **October 2,** | ** ** | **October 3,** | ** ** |
| **(In thousands except per share amounts)**        | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                           |       | $                                | 587        |                            | $          | (3,961 | ) | $ | (1,420 | ) | $ | (12,747 | ) |
| Weighted-average number of common shares  outstanding                       |       | 4,986                            |       | 4,985                           |       | 4,986 |   | 4,985 |   |
| Dilutive effect of equity compensation awards                               |       | 2                                |       | —                          |       | — |   | — |   |
| Weighted-average number of common and common  equivalent shares outstanding |       | 4,988                            |       | 4,985                           |       | 4,986 |   | 4,985 |   |
|                                                                        |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) per share:                                                |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                       |       | $                                | 0.12       |                            | $          | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |
| Diluted                                                                     |       | $                                | 0.12       |                            | $          | (0.80 | ) | $ | (0.28 | ) | $ | (2.56 | ) |

 

9

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**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

The following discussionshould be read in conjunction with our consolidated financial statements andrelated notes. This discussion contains forward-looking statements that involverisks and uncertainties. Our actual results could differ materially from thoseanticipated due to various factors discussed under “Forward-Looking Statements”and elsewhere in this Quarterly Report on Form 10-Q, including the “RiskFactors” described in Item 1A of our Annual Report on Form 10-K forthe fiscal year ended January 2, 2010.

 

***A.           ******Our Business***

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us” or “our”) is an informationtechnology (“IT”) services company. We employ approximately 800 professionalsand are focused on serving the information technology needs of mid-market toFortune 500 companies and government agencies across North America. AIC wasincorporated in Minnesota in 1966 and our corporate headquarters is located inMinneapolis, Minnesota.

 

***B.           ******Business Environment***

 

Our business plan includesspecific actions to be implemented during the balance of fiscal year 2010 andin fiscal year 2011. Although we believe these actions will lead toimprovements in our operating results, whether or not any improvements in ouroperating results will materialize in such a way as to improve our financialperformance depends on a number of factors. We operate in a highly competitiveindustry. Our ability to achieve our goals (including our primary goal ofattaining profitability) is dependent, among other things, on customer demandfor our services, our continuing ability to staff that customer demand withqualified IT professionals, our ability to reduce and manage our expenses, ourability to successfully implement and execute on our strategic plan andcontinued demand in general for IT services and staffing. If we do not satisfythe minimum earning requirements set forth in our revolving line of credit (“CreditFacility”) with Wells Fargo Bank, National Association (“Wells Fargo”), we risknon-compliance with the financial covenant requirement of the Credit Facility. Thefinancial covenant set forth in our Credit Facility for fiscal 2010 is amaximum year-to-date loss before taxes of $2.0 million. During fiscal 2011 theCredit Facility requires that the Company attain cumulative quarterly andannual profitability targets. If we are unable to satisfy the financialcovenant requirement, an “Event of Default” would exist under the CreditFacility which would enable Wells Fargo, in its discretion, to exercise certainrights including the right to terminate the Credit Facility and declare allamounts outstanding under the Credit Facility to be immediately due andpayable.

 

***C.           ******Fiscal 2010 Strategic Plan***

 

Our primary goal for fiscal2010 was to achieve profitability in the third quarter and the second half offiscal 2010. We continue to focus our strategy on initiatives aimed at growingour IT staffing business, improving the productivity of our sales andrecruiting personnel and controlling costs.

 

Our main objectives forfiscal 2010 continue to be:

 

·                  ***Become a profitable company***

Duringthe third quarter of fiscal 2010, we generated net income of $0.6 million,which is an improvement of $1.4 million and $4.5 million over the secondquarter of fiscal 2010 and the third quarter of fiscal 2009, respectively.

 

Forthe nine month period ended October 2, 2010, we incurred a net loss of$1.4 million compared to a net loss of $12.7 million for the nine month periodended October 3, 2009.

 

·                  ***Increase revenue***

Ourthird quarter of fiscal 2010 revenues decreased $0.8 million, or 3.0%, from thesecond quarter of fiscal 2010 and our average revenue per day decreased 1.4%from approximately $419,000 in the second quarter of fiscal 2010 toapproximately $413,000 in the third quarter of fiscal 2010. There were 64billing days in the second quarter of fiscal 2010 and 63 billing days in thethird quarter of fiscal 2010.

 

·                  ***End fiscal 2010 with 1,000 billable consultants***

Weended the third quarter of fiscal 2010 with 818 billable consultants and do notexpect to have 1,000 billable consultants by the end of fiscal 2010.

 

10

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·                  ***Achieve industry standard gross margin rates***

Ourthird quarter of fiscal 2010 gross margin percentage was 22.5%, which was 150basis points greater than our 2010 second quarter gross margin percentage and340 basis points greater than our 2009 third quarter gross margin percentage.

 

·                  ***Build cash to invest in our strategy***

Weended the third quarter of fiscal 2010 with approximately $4.7 million in cashand cash equivalents, an increase of $0.9 million since the beginning of fiscal2010.

 

**D.           ****Business Developments**

 

*ReverseStock Split and Amendment to Rights Plan*

 

On February 26, 2010,the Company amended its Articles of Incorporation to effect a one-for-fivereverse stock split (the “Reverse Stock Split”) of its common stock, par value$0.10 per share (the “Common Stock”). As a result of the Reverse Stock Split,every five shares of the Company’s Common Stock were automatically convertedinto one share of the Company’s Common Stock immediately prior to the openingof trading on March 1, 2010. All fractional shares were rounded down andany shareholder that would be entitled to receive a fractional share would bepaid the fair market value of the fractional share in cash.

 

To reflect the effect of theReverse Stock Split, the Company has retroactively adjusted all share and per sharedata to reflect the Common stock and Additional capital line in itsConsolidated Balance Sheets as of January 2, 2010 and the weighted-averageshares outstanding in its Consolidated Statements of Operations and relateddisclosures for the periods presented.

 

The Reverse Stock Split alsoresulted in proportionate adjustments under the Company’s then-existing Amendedand Restated Rights Agreement having an effective date of February 27,2008 (the “Amended Rights Plan”) in (a) the number of shares issuableunder the Amended Rights Plan and (b) the Purchase Price.

 

On May 25, 2010, theCompany amended the Amended Rights Plan by entering into Amendment No. 1to the Amended Rights Plan with Wells Fargo Bank, N.A. as rights agent (“AmendmentNo. 1”). The principal purposes of Amendment No. 1 were to reflectthe Reverse Stock Split (by decreasing the Purchase Price for Common SharePurchase Rights to $30.00 per share), and to make certain other technical andconforming changes.

 

*Sale ofCustomer Contracts*

 

On March 3, 2010, AICsold certain customer contracts, property and equipment and sublet a facility.In consideration for the assets sold and the liabilities transferred, theCompany received $0.2 million in cash. The Company recorded a loss on the saleof approximately $50,000 which is included within Selling, administrative andother operating costs (“SG&A”) in our Consolidated Statement of Operations.For the preceding 12 months before the sale date, the customer contractsgenerated revenues of approximately $3.2 million and had an unfavorablecontribution margin of approximately $0.7 million.

 

*Change in Leadership*

 

On September 28, 2010,Andrew K. Borgstrom resigned as President, Chief Executive Officer and aDirector of our Company. Under a transitional services agreement, Mr. Borgstromwill be available to assist AIC with ongoing business initiatives through January 31,2011. On September 29, 2010, our Board of Directors appointed Brittany B.McKinney as our Interim President and Chief Executive Officer.

 

***E.           ******Overview of Third Quarter Fiscal2010 Operations***

 

Our revenues decreased$4.9 million, or 15.7%, from the third quarter of fiscal 2009 primarilydue to our planned exit from non-core and low-margin lines of business (13.2%)and from less demand for our IT professional services (2.5%).

 

Gross margins as a percentof revenue increased 340 basis points from 19.1% in the third quarter of fiscal2009 to 22.5% in the third quarter of fiscal 2010 due to our focus on highermargin business and the impact of exiting lower margin lines of business.

 

Selling, administrative andother operating cost (“SG&A”) expenses declined $3.1 million in thirdquarter of fiscal 2010 over the prior year quarter due largely to the exit fromthe value added reseller (“VAR”) operations, the impact of personnel andfacility reductions and the overall reduction in business volume.

 

11

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We generated cash fromoperating activities of $1.3 million during the third quarter of fiscal2010. As of October 2, 2010, we had a cash balance of $4.7 millionand no borrowing under our revolving line of credit.

 

**RESULTS OFOPERATIONS, THREE MONTHS ENDED OCTOBER 2, 2010 VS. OCTOBER 3, 2009**

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants for the three months ended October 2,2010 and October 3, 2009.

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **October 2, 2010**    | ** ** | **October 3, 2009**    | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | **% of**                    | ** ** | ** **                   | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                   | ** ** | **Amount**                       | ** ** | **Revenue**                      | ** ** | **Amount**                   | ** ** | **Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Professional services provided directly                |       | $                                | 26,032     |                             | 99.9       | %                            | $          | 29,335 |   | 94.9 | % | $ | (3,303 | ) | (11.3 | )% |
| Professional services provided through subsuppliers    |       | 17                               |       | 0.1                              |       | 460                          |       | 1.5 |   | (443 | ) | (96.3 | ) |
| Product sales                                          |       | —                           |       | —                           |       | 1,106                        |       | 3.6 |   | (1,106 | ) | (100.0 | ) |
| Total revenue                                          |       | 26,049                           |       | 100.0                            |       | 30,901                       |       | 100.0 |   | (4,852 | ) | (15.7 | ) |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Expenses:                                              |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 20,170                           |       | 77.4                             |       | 23,595                       |       | 76.4 |   | (3,425 | ) | (14.5 | ) |
| Cost of services provided through subsuppliers         |       | 17                               |       | 0.1                              |       | 441                          |       | 1.4 |   | (424 | ) | (96.1 | ) |
| Cost of product sales                                  |       | —                           |       | —                           |       | 965                          |       | 3.1 |   | (965 | ) | (100.0 | ) |
| Selling, administrative and other operating costs      |       | 5,772                            |       | 22.2                             |       | 8,886                        |       | 28.8 |   | (3,114 | ) | (35.0 | ) |
| Restructuring costs and other severance related  costs |       | (482                             | )          | (1.9                             | )          | 917                          |       | 3.0 |   | (1,399 | ) | (152.6 | ) |
| Amortization of intangible assets                      |       | —                           |       | —                           |       | 44                           |       | 0.1 |   | (44 | ) | (100.0 | ) |
| Total expenses                                         |       | 25,477                           |       | 97.8                             |       | 34,848                       |       | 112.8 |   | (9,371 | ) | (26.9 | ) |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Operating income (loss)                                |       | 572                              |       | 2.2                              |       | (3,947                       | )          | (12.8 | ) | 4,519 |   | 114.5 |   |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Non-operating income                                   |       | 4                                |       | —                           |       | 8                            |       | — |   | (4 | ) | (50.0 | ) |
| Interest expense                                       |       | (3                               | )          | —                           |       | (9                           | )          | — |   | (6 | ) | (66.7 | ) |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Income (loss) before income taxes                      |       | 573                              |       | 2.2                              |       | (3,948                       | )          | (12.8 | ) | 4,521 |   | 114.5 |   |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Income tax (benefit) expense                           |       | (14                              | )          | (0.1                             | )          | 13                           |       | — |   | (27 | ) | (207.7 | ) |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Net income (loss)                                      |       | $                                | 587        |                             | 2.3        | %                            | $          | (3,961 | ) | (12.8 | )% | $ | 4,548 |   | 114.8 | % |
|                                                   |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Personnel:                                             |       |                             |       |                             |       |                         |       |   |   |   |   |   |   |
| Management and Administrative                          |       | 111                              |       |                             |       | 153                          |       |   |   | (42 | ) | (27.5 | )% |
| Technical Consultants                                  |       | 818                              |       |                             |       | 877                          |       |   |   | (59 | ) | (6.7 | )% |

 

*Revenue*

 

Revenue from servicesprovided directly for the three months ended October 2, 2010 declined11.3% from the comparable period a year ago. The decline in revenue wasprimarily due to our planned exit from non-core and low-margin lines ofbusiness (10.2%) and from less demand for our project-based solutions (1.1%).The overall decline in revenue from services provided directly resulted in areduction in the number of billable hours and technical consultants which waspartially offset by a 6.3% increase in overall billing rates over the prioryear period.

 

Our subsupplier revenue,which is mainly pass-through revenue with associated fees, declined by 96.3%over the prior year period as a result of focusing on higher margin business.We had no product sales in the third quarter of fiscal 2010 as a result of thesale of our VAR operations in the third quarter of fiscal 2009.

 

12

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*Cost ofServices Provided Directly*

 

Cost of services provideddirectly represents our payroll and benefit costs associated with our billableconsultants. This category of expense as a percentage of direct servicesrevenue decreased to 77.5% in the third quarter of fiscal 2010 compared to80.4% in the prior comparable period. The decrease in expense as a percentageof direct services revenue is primarily due to the reduction in volume at lowermargin staffing accounts.

 

*Cost ofServices Provided Through Subsuppliers*

 

Costof services provided through subsuppliers represents our cost when we utilizethird parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services providedthrough subsuppliers was 100% for third quarter in fiscal 2010 compared to 95.9% for the prior year comparable period.

 

*Cost ofProduct Sales*

 

Cost of product salesrepresents our cost when we resold hardware and software products.  Thiscategory of expense, as a percentage of product sales, was 87.3% in the thirdquarter of fiscal 2009. With the sale of our VAR operations in the thirdquarter of fiscal 2009, hardware and software product sales are no longer amaterial part of our operations.

 

*Selling,Administrative and Other Operating Costs*

 

SG&A costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs and other administrativecosts.  This category of costs decreased approximately $3.1 million fromthe comparable period in 2009 and represented 22.2% of total revenue for thethird quarter of fiscal 2010 compared to 28.8% in the third quarter of fiscal2009. SG&A expenses decreased primarily due to the impact of personnelreductions that occurred in the prior year as a result of the asset sales andimplementation of non-personnel cost reductions.

 

*RestructuringCosts and Other Severance Related Costs*

 

In the third quarter offiscal 2010, we recorded a net expense reversal of $0.5 million. The netreversal is comprised of a $0.2 million charge relating to severance andseverance-related expenses and a reversal of $0.7 million for modification oflease agreements.

 

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

 

*Amortizationof Intangible Assets*

 

This category of expensedecreased during the third quarter of fiscal 2010 from the prior year due tothe sale of all our remaining customer lists in third quarter of fiscal 2009.In the third quarter of fiscal 2009, we disposed of a customer list and a tradename that were fully amortized.

 

*Non-operatingIncome*

 

Non-operating incomedecreased slightly in the third quarter of fiscal 2010 compared to the thirdquarter of fiscal 2009, as a result of less interest income earned on our cashbalances and lower interest income related to customer financed equipment.

 

*InterestExpense*

 

We had no borrowingoutstanding in the third quarter of fiscal 2010 and 2009.

 

*IncomeTaxes*

 

For both the third quartersof fiscal 2010 and fiscal 2009, we recorded accruals for amounts due forcertain state income taxes and changes in our reserves for tax obligations. Werecorded no additional income tax expense associated with our net operatinglosses because any tax expense that would otherwise have been recorded has beennegated by adjusting the valuation allowance against our deferred taxasset.  If, however, we successfully return to profitability to a point wherefuture realization of deferred tax

 

13

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assets, which are currentlyreserved, becomes “more likely than not,” we may be required to reverse theexisting valuation allowance to realize the benefit of these assets.

 

*Personnel*

 

Our technical consultingstaff levels finished the third quarter of fiscal 2010 at 818, a 6.7% declineagainst the comparable period last year.  The decline in technicalconsulting staff levels is primarily due to an overall decline in businessvolume and sale of assets. The decline in management and administrativepersonnel is due to our focus on reducing the number of management andadministrative personnel that are necessary to support the existing businessoperations.

 

*CertainInformation Concerning Off-Balance Sheet Arrangements*

 

As of October 2, 2010,we did not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities that would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. We are, therefore, not exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in theserelationships.

 

***F.           ******Overview of Year to Date Fiscal 2010Operations***

 

Our revenues decreased$35.2 million, or 30.2%, from the first nine months of fiscal 2009primarily due to our planned exit from non-core and low-margin lines ofbusiness (21.5%) and from less demand for our IT professional services (8.7%).

 

Gross margins as a percentof revenue increased 180 basis points from 19.7% in the first nine months offiscal 2009 to 21.5% in the first nine months of fiscal 2010 due to our focuson higher margin business and the impact of exiting lower margin lines ofbusiness and accounts.

 

SG&A expenses declined$11.0 million, or 36.5%, in the first nine months of fiscal 2010 over the firstnine months of fiscal 2009 due largely to the exit from the VAR operations, theimpact of the personnel and facility reductions and the overall reduction inbusiness volume.

 

We generated cash fromoperating activities of $1.0 million during the first nine months offiscal 2010. As of October 2, 2010, we had a cash balance of$4.7 million and no borrowing under our revolving line of credit.

 

14

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**RESULTS OFOPERATIONS, NINE MONTHS ENDED OCTOBER 2, 2010 VS. OCTOBER 3, 2009**

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants for the nine months ended October 2,2010 and October 3, 2009.

 
|                                                   |   | **Nine Months Ended** | ** ** | **Nine Months Ended** |       |                         |       |
|--------------------------------------------------------|--------|---------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                                                   |   | **October 2, 2010**   | ** ** | **October 3, 2009**   |       | **Increase (Decrease)** |       |
|                                                   |   | ** **                      | ** ** | **% of**                   | ** ** | ** **                   |       | **% of** |   |   |   |   |   |
| **(Dollars in thousands)**                   |   | **Amount**                      | ** ** | **Revenue**                     | ** ** | **Amount**                   | ** ** | **Revenue** | ** ** | **Amount** | ** ** | **%** |   |
| Revenue:                                               |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Professional services provided directly                |   | $                               | 80,731     |                            | 99.2       | %                            | $          | 105,211 |   | 90.3 | % | $ | (24,480 | ) | (23.3 | )% |
| Professional services provided through  subsuppliers   |   | 616                             |       | 0.8                             |       | 2,011                        |       | 1.7 |   | (1,395 | ) | (69.4 | ) |
| Product sales                                          |   | —                          |       | —                          |       | 9,339                        |       | 8.0 |   | (9,339 | ) | (100.0 | ) |
| Total revenue                                          |   | 81,347                          |       | 100.0                           |       | 116,561                      |       | 100.0 |   | (35,214 | ) | (30.2 | ) |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Expenses:                                              |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Cost of services provided directly                     |   | 63,274                          |       | 77.8                            |       | 83,704                       |       | 71.8 |   | (20,430 | ) | (24.4 | ) |
| Cost of services provided through subsuppliers         |   | 582                             |       | 0.7                             |       | 1,915                        |       | 1.6 |   | (1,333 | ) | (69.6 | ) |
| Cost of product sales                                  |   | —                          |       | —                          |       | 7,973                        |       | 6.8 |   | (7,973 | ) | (100.0 | ) |
| Selling, administrative and other operating costs      |   | 19,209                          |       | 23.6                            |       | 30,233                       |       | 25.9 |   | (11,024 | ) | (36.5 | ) |
| Restructuring costs and other severance related  costs |   | (300                            | )          | (0.4                            | )          | 2,708                        |       | 2.3 |   | (3,008 | ) | (111.1 | ) |
| Impairment of intangible assets                        |   | —                          |       | —                          |       | 2,268                        |       | 1.9 |   | (2,268 | ) | (100.0 | ) |
| Amortization of intangible assets                      |   | —                          |       | —                          |       | 491                          |       | 0.4 |   | (491 | ) | (100.0 | ) |
| Total expenses                                         |   | 82,765                          |       | 101.7                           |       | 129,292                      |       | 110.9 |   | (46,527 | ) | (36.0 | ) |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Operating loss                                         |   | (1,418                          | )          | (1.7                            | )          | (12,731                      | )          | (10.9 | ) | (11,313 | ) | (88.9 | ) |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Non-operating income                                   |   | 14                              |       | —                          |       | 35                           |       | — |   | (21 | ) | (60.0 | ) |
| Interest expense                                       |   | (11                             | )          | —                          |       | (20                          | )          | — |   | (9 | ) | (45.0 | ) |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Loss before income taxes                               |   | (1,415                          | )          | (1.7                            | )          | (12,716                      | )          | (10.9 | ) | (11,301 | ) | (88.9 | ) |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Income tax expense                                     |   | 5                               |       | —                          |       | 31                           |       | — |   | (26 | ) | (83.9 | ) |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Net loss                                               |   | $                               | (1,420     | )                               | (1.7       | )%                           | $          | (12,747 | ) | (10.9 | )% | $ | (11,327 | ) | (88.9 | )% |
|                                                   |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Personnel:                                             |   |                            |       |                            |       |                         |       |   |   |   |   |   |   |
| Management and Administrative                          |   | 111                             |       |                            |       | 153                          |       |   |   | (42 | ) | (27.5 | )% |
| Technical Consultants                                  |   | 818                             |       |                            |       | 877                          |       |   |   | (59 | ) | (6.7 | )% |

 

*Revenue*

 

Revenue from servicesprovided directly for the nine months ended October 2, 2010 declined 23.3%from the comparable period a year ago. The decline in revenue was primarily dueto our planned exit from non-core and low-margin lines of business (14.9%) and fromless demand for our IT staffing (5.8%) and project-based solutions (2.5%). Thedecline in revenue from services provided directly resulted in a reduction inthe number of billable hours and technical consultants as a result of lowerbusiness volumes which was partially offset by a 4.7% increase in overallbilling rates over the prior year period.

 

Our subsupplier revenue,which is mainly pass-through revenue with associated fees, declined by 69.4%over the prior year period as a result of focusing on higher margin business.We had no product sales in the first nine months of fiscal 2010 as a result ofthe sale of our VAR operations in the third quarter of fiscal 2009.

 

15

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*Cost ofServices Provided Directly*

 

Cost of services provideddirectly represents our payroll and benefit costs associated with our billableconsultants. This category of expense as a percentage of direct servicesrevenue decreased to 78.4% for the nine months ended October 2, 2010compared to 79.6% in the prior comparable period. The decrease in expense as apercentage of direct services revenue is primarily due to the reduction involume at lower margin staffing accounts.

 

*Cost ofServices Provided Through Subsuppliers*

 

Costof services provided through subsuppliers represents our cost when we utilizethird parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services providedthrough subsuppliers was 94.5% for the nine months ended October 2, 2010compared to 95.2% for the prior year comparable period.

 

*Cost of ProductSales*

 

Cost of product salesrepresents our cost when we resold hardware and software products.  Thiscategory of expense, as a percentage of product sales, was 85.4% for the ninemonths ended October 3, 2009. With the sale of our VAR operations in thethird quarter of fiscal 2009, hardware and software product sales are no longera material part of our operations.

 

*Selling,Administrative and Other Operating Costs*

 

SG&A costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreased approximately $11.0 million from$30.2 million for the nine months ended October 3, 2009 to $19.2 millionfor the nine months ended October 2, 2010. These amounts represented 25.9%and 23.6% of total revenue for 2009 and 2010, respectively. SG&A expensesdecreased primarily due to the impact of personnel reductions that occurred inthe prior year as a result of the asset sales and implementation ofnon-personnel cost reductions.

 

*RestructuringCosts and Other Severance Related Costs*

 

For the nine month periodended October 2, 2010, we recorded a net expense reversal of $0.3 million.The net reversal is comprised of a $0.4 million charge relating to severanceand severance-related expenses and a reversal of $0.7 million for modificationof lease agreements.

 

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

 

*Amortizationof Intangible Assets*

 

During the nine months endedOctober 2, 2010, this category of expense decreased from the prior yeardue to the sale of all our remaining customer lists in third quarter of fiscal2009.

 

*Non-operatingIncome*

 

Non-operating incomedecreased for the nine months ended October 2, 2010, compared to the ninemonths ended July 3, 2009, as a result of less interest income earned fromour cash balances due to lower interest rates and higher interest incomerelated to a customer equipment lease in the prior year.

 

*InterestExpense*

 

We had no borrowingoutstanding for the nine months ended October 2, 2010. For the nine monthsended October 3, 2009, the average interest rate was 3.78% and we incurredinterest expense of $20,000.

 

*IncomeTaxes*

 

For the nine months ended October 2,2010 and October 3, 2009, we recorded accruals for amounts due for certainstate income taxes and changes in our reserves for tax obligations. We recordedno additional income tax expense associated with our net operating lossesbecause any tax expense that would otherwise have been recorded has beennegated by adjusting the valuation allowance against our deferred taxasset.  If, however, we successfully return to profitability to a pointwhere future realization of deferred tax assets, which are currently reserved,becomes “more likely than not,” we may be required to reverse the existingvaluation allowance to realize the benefit of these assets.

 

16

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**Liquidityand Capital Resources**

 

The following table providesinformation relative to the liquidity of our business.

 
| ** **                      | ** ** | ** **          | ** ** | ** **          | ** ** | ** **     | ** ** | **Percentage** | ** ** |
|---------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|----------------|------------|
| ** **                      | ** ** | **October 2,** | ** ** | **January 2,** | ** ** | **Increase**   | ** ** | **Increase**   | ** ** |
| **(In thousands)**              | ** ** | **2010**            | ** ** | **2010**            | ** ** | **(Decrease)** | ** ** | **(Decrease)** | ** ** |
|                            |       |                |       |                |       |           |       |           |       |
| Cash and cash equivalents       |       | $                   | 4,730      |                | $          | 3,818          |       | $              | 912        |   | 23.9 | % |
| Accounts receivable             |       | 18,457              |       | 23,028              |       | (4,571         | )          | (19.8          | )          |
| Other current assets            |       | 693                 |       | 1,442               |       | (749           | )          | (51.9          | )          |
| Total current assets            |       | $                   | 23,880     |                | $          | 28,288         |       | $              | (4,408     | ) | (15.6 | )% |
|                            |       |                |       |                |       |           |       |           |       |
| Accounts payable                |       | $                   | 4,419      |                | $          | 6,958          |       | $              | (2,539     | ) | (36.5 | )% |
| Line of credit                  |       | —              |       | —              |       | —         |       | —         |       |
| Salaries and benefits           |       | 3,890               |       | 2,498               |       | 1,392          |       | 55.7           |       |
| Deferred revenue                |       | 299                 |       | 310                 |       | (11            | )          | (3.5           | )          |
| Deferred compensation           |       | 205                 |       | 522                 |       | (317           | )          | (60.7          | )          |
| Restructuring accrual           |       | 776                 |       | 2,038               |       | (1,262         | )          | (61.9          | )          |
| Other current liabilities       |       | 785                 |       | 960                 |       | (175           | )          | (18.2          | )          |
| Total current liabilities       |       | $                   | 10,374     |                | $          | 13,286         |       | $              | (2,912     | ) | (21.9 | )% |
|                            |       |                |       |                |       |           |       |           |       |
| Working capital                 |       | $                   | 13,506     |                | $          | 15,002         |       | $              | (1,496     | ) | (10.0 | )% |
| Current ratio                   |       | 2.30                |       | 2.13                |       | 0.17           |       | 8.1            | %          |
|                            |       |                |       |                |       |           |       |           |       |
| Total shareholders’ equity |       | $                   | 13,503     |                | $          | 14,948         |       | $              | (1,445     | ) | (9.7 | )% |

 

*Change inWorking Capital*

 

Working capital was $13.5million at October 2, 2010, down approximately $1.5 million fromJanuary 2, 2010. The ratio of current assets to current liabilitiesincreased by 8.1% to 2.30 at October 2, 2010 compared to 2.13 atJanuary 2, 2010.

 

Our total current assetsdecreased approximately $4.4 million at October 2, 2010, compared tothe end of fiscal 2009, primarily from lower accounts receivable. Our accountsreceivable decreased 19.8% primarily due to improved collection experiencewhich lowered our days sales outstanding from 78 at the end of fiscal 2009 to63 at October 2, 2010.

 

Our total currentliabilities decreased by approximately $2.9 million at October 2,2010, compared to the end of fiscal 2009 as a result of lower accounts payablebalances due to reduced business volumes and restructuring accrual payments.

 

We believe our existingworking capital and availability under our Credit Facility with Wells Fargowill be sufficient to support the cash flow needs of our business in fiscal2010. Additional operating losses, unfavorable bad debt experience, alengthening of payment terms from our clients, or significant costs associatedwith additional restructuring activities could create a need for additionalworking capital. An inability to obtain additional working capital, should itbe required, could have a material adverse effect on our business. We expect tobe able to comply with the requirements of our credit agreement; however,failure to do so could affect our ability to obtain necessary working capitaland could have a material adverse effect on our business.

 

*Sourcesand Uses of Cash/Credit Facility*

 

Cash and cash equivalentsincreased by $0.9 million from January 2, 2010 to October 2, 2010.Our primary need for working capital is to support accounts receivable and tofund the time lag between payroll and vendor disbursements and receipt of feesbilled to clients. Historically, we have been able to support internal growthin our business with internally generated funds and through the use of ourcredit facility.

 

17

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The Credit Facility willadvance up to $15.0 million to us for working capital purposes and tofacilitate the issuance of letters of credit. The total amount available forborrowing under the Credit Facility will fluctuate based on our level ofeligible accounts receivable.

 

The Credit Facility carriesan interest rate equal to the three month LIBOR rate plus 3.5%. The CreditFacility has an unused line fee of 0.50% annually on the daily average unusedamount. The maturity date of the Credit Facility is September 30, 2012 andmay be terminated or reduced by us on 90 days notice in exchange for atermination fee of 2% of the maximum line amount or reduction of the maximumline amount in the second year or 1% of such amounts in the second year and nofee in the third year. Borrowings under the Credit Facility are secured by allof our assets.

 

The Credit Facility containsa set of covenants with which we are required to comply. These covenantsinclude reporting requirements and financial requirements. The financialrequirements allow us, among other things, to generate a loss of $2.0 millionor less to satisfy the minimum level of earnings before taxes for fiscal 2010.If we are not able to generate sufficient earnings before taxes to satisfy thecovenant, an “Event of Default” would exist under the Credit Facility whichwould enable Wells Fargo, in its discretion, to exercise certain rightsincluding the right to terminate the Credit Facility and declare all amountsoutstanding under the Credit Facility to be immediately due and payable.

 

Additionally, the CreditFacility limits our annual capital expenditures to $2.0 million andrequires us to maintain an excess borrowing base of at least $5.0 million.The Credit Facility contains customary affirmative and negative covenants andupon an event of default Wells Fargo may terminate the facility or declare theentire amount outstanding under the Credit Facility to be immediately due andpayable and exercise other rights under the agreement.

 

As of October 2, 2010,we were in compliance with all the requirements and had no borrowing under theCredit Facility. Total availability under the Credit Facility, which fluctuatesbased on our level of eligible accounts receivable, was $8.3 million as ofOctober 2, 2010.

 

On March 3, 2010, weclosed on an asset sale agreement for certain customer contracts. Inconsideration for the assets sold and the liabilities transferred, we received$0.2 million in cash.

 

During each of the thirdquarters of fiscal 2010 and 2009, we made capital expenditures of approximately$13,000 and $0.3 million, respectively. For the nine month periods ended October 2,2010 and October 3, 2009, we made capital expenditures of approximately$0.1 million and $1.1 million, respectively.

 

**Forward-LookingStatements**

 

This Form 10-Q containsforward-looking statements (within the meaning of the Private SecuritiesLitigation Reform Act of 1995) about: (i) our expectations and beliefswith respect to the current condition of the United States economy (includingthe economic recession and the volatility of the capital markets),(ii) assumptions with respect to the effect these economic conditions willhave on our business, (iii) our strategic plans, the objectives of thosestrategic plans and our ability to successfully implement our strategic plans,including our plan to attain profitability at some point during the second halfof fiscal year 2010, (iv) our expectations with respect to the demand forour services and continuing pressure from customers to request lower costofferings for IT staffing services, (v) our expectations with respect tocompetition in our industry and our ability to compete, (vi) our beliefsregarding the adequacy of our working capital, (vii) our ability tosatisfy the requirements of our Credit Facility, and (viii) ourexpectations with respect to our financial results and operating performance.These statements could affect our plans, anticipated operating results and/orfinancial condition. You can identify these statements by the use of words suchas “anticipate,” “estimate,” “expect,” “should,” “project,” “forecast,” “intend,”“plan,” “believe,” “will,” and other words and terms of similar meaning orimport, or variations thereof, in connection with any discussion of futureoperating or financial performance.

 

Among the factors that couldcause our estimates and assumptions as to future performance, and our actualresults to differ materially, are: (i) our inability, in whole or in part,to implement or execute our strategic plans, (ii) our inability tosuccessfully recruit and hire qualified technical personnel, (iii) ourinability to successfully compete on a national basis with other companies inour industry or with new competitors who face limited barriers to entry in themarkets we serve, (iv) our inability to maintain key customerrelationships or to attract new customers, (v) our inability to attract,retain or motivate key personnel, (vi) our inability to continue to reduceoperating costs, (vii) the possibility that we may incur liability for theerrors or omissions of our consultants providing IT services for customers orthe risk that we may be subject to claims for indemnification under contractswith our customers, (viii) our inability to comply with the covenants inour credit facilities or to obtain a replacement credit facility oncommercially reasonable terms, (ix) a continued or worsened downturn inthe national or global economy, and (x) our inability to effectivelymanage accounts receivable; as well as other economic, business, competitiveand/or regulatory factors affecting our business generally, including those setforth in this Quarterly Report on Form 10-Q for fiscal year 2010,especially in the 

 

18

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Management’s Discussion and Analysis section,our most recent Annual Report on Form 10-K (including the Risk Factorssection thereof) and our Current Reports on Form 8-K. All forward-lookingstatements included in this Form 10-Q are based on information availableto us as of the date hereof and largely reflect estimates and assumptions madeby our management, which may be difficult to predict and beyond our control. Weundertake no obligation (and expressly disclaim any such obligation) to updateforward-looking statements made in this Form 10-Q to reflect events or circumstancesafter the date of this Form 10-Q or to update reasons why actual resultswould differ from those anticipated in any such forward-looking statements,other than as required by law.

 

**Item3.  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 periodcovered by this report, we conducted an evaluation under the supervision andwith the participation of our management, including the Interim President andChief Executive Officer, Brittany B. McKinney, and Chief Financial Officer,Randy W. Strobel, regarding the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Rules 13a-15(e) ofthe Securities Exchange Act of 1934 (the “Exchange Act”). Based upon thatevaluation, the Interim Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures are effective to ensurethat information that is required to be disclosed by us in reports that arefiled under the Exchange Act is recorded, processed, summarized and reportedwithin the time period specified in the rules of the Securities ExchangeCommission.

 

(b)           Changes in Internal Controls

 

There were no changes in ourinternal control over financial reporting that occurred during the periodcovered by this report that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1.****                                                ****Legal Proceedings**

 

There are no pending legalproceedings 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**

 

Therewere no material changes in the Company’s risk factors from those previouslydisclosed in the Company’s Form 10-K for the period ended January 2,2010.

 

**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.****                                                        ****OtherInformation.**

 

None.

 

19

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**Item 6.****                                                        ****Exhibits.**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| ^ 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).                                                                                             |
| ^3.6                 |       | Amendment to Articles of  Incorporation to reduce authorized shares to 24 million (Exhibit 3.6 to  Quarterly Report on Form 10-Q dated May 5, 2010, Commission File  No. 0-4090, incorporated by reference).                                                                                            |
| ^ 3.7                |       | Amendment No. 1 to  Restated Bylaws of Analysts International Corporation (Exhibit 3.1 to  the Registrant’s Form 8-K filed May 25, 2010, Commission File No. 0-4090,  incorporated by reference).                                                                                             |
| ^ 4.1                |       | Specimen Common Stock  Certificate (Exhibit 4(a) to Annual Report on Form 10-K for  fiscal year 1989, Commission File No. 0-4090, incorporated by  reference).                                                                                                                                          |
| ^ 4.2                |       | 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).        |
| ^ 4.3                |       | Amendment No. 1 to  Amended and Restated Rights Agreement dated as of May 25, 2010 by and  between Analysts International Corporation and Wells Fargo Bank, N.A.  (Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2010,  Commission File No. 0-4090, incorporated by reference). |
| ^ 10.60              |       | Agreement for Legal  Services between the Company and Robert E. Woods Professional Association  dated March 5, 2010.                                                                                                                                                                                                   |
| + 10.61              |       | Separation Agreement and  Release of Claims dated July 28, 2010, between the Company and James D.  Anderson.                                                                                                                                                                                                           |
| ^ 10.62              |       | Separation Agreement and  Release of Claims dated September 29, 2010, between the Company and  Andrew K. Borgstrom (Exhibit 10.1 to the Registrant’s Form 8-K  filed September 30, 2010, Commission File No. 0-4090, incorporated  by reference).                                             |
| ^ 10.63              |       | Transitional Services  Agreement dated September 29, 2010, between the Company and Andrew K.  Borgstrom (Exhibit 10.2 to the Registrant’s Form 8-K filed  September 30, 2010, Commission File No. 0-4090, incorporated by  reference).                                                        |
| ^ 10.64              |       | Letter Agreement dated  September 29, 2010, between the Company and Brittany B. McKinney  (Exhibit 10.3 to the Registrant’s Form 8-K filed September 30,  2010, 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.                                                                                                                                                                                                                                                                                                         |

 

20

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned there unto dulyauthorized.

 
|                         | ANALYSTS  INTERNATIONAL CORPORATION |                                           |
|------------------------------|-------------------------------------|------------------------------------------------|
|                         | (Registrant)                        |                                           |
|                         |                                |                                           |   |
|                         |                                |                                           |   |
| Date: November 4,  2010 | By:                                 | /s/ Brittany B. McKinney                       |   |
|                         |                                | Brittany B. McKinney                           |   |
|                         |                                | Interim President and  Chief Executive Officer |   |
|                         |                                | (Principal Executive  Officer)                 |   |
|                         |                                |                                           |   |
|                         |                                |                                           |   |
| Date: November 4,  2010 | By:                                 | /s/ Randy W. Strobel                           |   |
|                         |                                | Randy W. Strobel                               |   |
|                         |                                | Chief Financial Officer                        |   |
|                         |                                | (Principal Financial and  Accounting Officer)  |   |

 

21

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                        |
| ^ 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).                                                                                             |
| ^3.6                 |       | Amendment to Articles of  Incorporation to reduce authorized shares to 24 million (Exhibit 3.6 to  Quarterly Report on Form 10-Q dated May 5, 2010, Commission File  No. 0-4090, incorporated by reference).                                                                                            |
| ^ 3.7                |       | Amendment No. 1 to  Restated Bylaws of Analysts International Corporation (Exhibit 3.1 to  the Registrant’s Form 8-K filed May 25, 2010, Commission File  No. 0-4090, incorporated by reference).                                                                                             |
| ^ 4.1                |       | Specimen Common Stock  Certificate (Exhibit 4(a) to Annual Report on Form 10-K for  fiscal year 1989, Commission File No. 0-4090, incorporated by  reference).                                                                                                                                          |
| ^ 4.2                |       | 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).        |
| ^ 4.3                |       | Amendment No. 1 to  Amended and Restated Rights Agreement dated as of May 25, 2010 by and  between Analysts International Corporation and Wells Fargo Bank, N.A.  (Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2010,  Commission File No. 0-4090, incorporated by reference). |
| ^ 10.60              |       | Agreement for Legal  Services between the Company and Robert E. Woods Professional Association  dated March 5, 2010.                                                                                                                                                                                                   |
| + 10.61              |       | Separation Agreement and  Release of Claims dated July 28, 2010, between the Company and James D.  Anderson.                                                                                                                                                                                                           |
| ^ 10.62              |       | Separation Agreement and  Release of Claims dated September 29, 2010, between the Company and  Andrew K. Borgstrom (Exhibit 10.1 to the Registrant’s Form 8-K  filed September 30, 2010, Commission File No. 0-4090, incorporated  by reference).                                             |
| ^ 10.63              |       | Transitional Services  Agreement dated September 29, 2010, between the Company and Andrew K.  Borgstrom (Exhibit 10.2 to the Registrant’s Form 8-K filed  September 30, 2010, Commission File No. 0-4090, incorporated by  reference).                                                        |
| ^ 10.64              |       | Letter Agreement dated  September 29, 2010, between the Company and Brittany B. McKinney  (Exhibit 10.3 to the Registrant’s Form 8-K filed September 30,  2010, 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.                                                                                                                                                                                                                                                                                                         |

 

22

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