**** ****

****UNITED STATES****

****SECURITIES AND EXCHANGECOMMISSION****

**Washington, D.C. 20549**

 

****FORM 10-Q****

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

 

**For thequarterly period ended July 4, 2009**

 

**or**

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

 

**For thetransition period from             to              **

 

**CommissionFile Number: 0-4090**

 

****ANALYSTS INTERNATIONALCORPORATION****

(Exact name of registrant as specified in its charter)

 

| ****Minnesota****                                  | **** **** | ****41-0905408****                 |
|----------------------------------------------------|----------------|------------------------------------|
| (State of  Incorporation)                          |           | (IRS Employer  Identification No.) |
|                                               |           |                               |
| ****3601 West 76********th******** Street**** | ** **     | ** **                         |
| ****Minneapolis, MN****                            | **** **** | ****55435****                      |
| (Address of  Principal Executive Offices)          |           | (Zip Code)                         |

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 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 checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Date File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

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

 

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

 

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

 

As of August 10,2009, 24,925,076 shares of the registrant’s common stock were outstanding.

 

 

 

----

 

****ANALYSTS INTERNATIONAL CORPORATION****

 

****INDEX****

 
| ****Part I.**** | ****FINANCIAL INFORMATION.****                                                                                      | 3      |
|----------------------|---------------------------------------------------------------------------------------------------------------------|--------|
|                 |                                                                                                                |   |
| Item 1.              | Financial Statements (Unaudited)                                                                                    | 3      |
|                 |                                                                                                                |   |
|                 | Consolidated Balance  Sheets as of July 4, 2009 and January 3, 2009                                       | 3      |
|                 |                                                                                                                |   |
|                 | Consolidated Statements of  Operations for the Three and Six Months Ended July 4, 2009 and  June 28, 2008 | 4      |
|                 |                                                                                                                |   |
|                 | Consolidated Statements of  Cash Flows for the Six Months Ended July 4, 2009 and June 28, 2008            | 5      |
|                 |                                                                                                                |   |
|                 | Notes to Consolidated Financial Statements                                                                          | 6      |
|                 |                                                                                                                |   |
| Item 2.              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 12     |
|                 |                                                                                                                |   |
| Item 3.              | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 23     |
|                 |                                                                                                                |   |
| Item 4T.             | Controls and  Procedures                                                                                            | 23     |
|                 |                                                                                                                |   |
| **Part II.**    | **OTHER INFORMATION**                                                                                               | 25     |
|                 |                                                                                                                |   |
| Item 1.              | Legal Proceedings                                                                                                   | 25     |
|                 |                                                                                                                |   |
| Item 1A.             | Risk Factors                                                                                                        | 25     |
|                 |                                                                                                                |   |
| Item 2.              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        | 26     |
|                 |                                                                                                                |   |
| Item 3.              | Defaults Upon  Senior Securities                                                                                    | 26     |
|                 |                                                                                                                |   |
| Item 4.              | Submission of  Matters to a Vote of Security Holders                                                                | 26     |
|                 |                                                                                                                |   |
| Item 5.              | Other Information                                                                                                   | 27     |
|                 |                                                                                                                |   |
| Item 6.              | Exhibits                                                                                                            | 27     |
|                 |                                                                                                                |   |
| Signatures           |                                                                                                                | 28     |
|                 |                                                                                                                |   |
| Exhibit Index   |                                                                                                                | 29     |

 

2

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****PART I. FINANCIAL INFORMATION****

 

****Item 1. Financial Statements****

 

****AnalystsInternational Corporation****

****Consolidated Balance Sheets****

**(Unaudited)**

** **
| ** **                                                                                                                            | ** ** | **July 4,** | ** ** | **January 3,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| **(In thousands)**                                                                                                                    | ** ** | **2009**         | ** ** | **2009**            | ** ** |
|                                                                                                                                  |       |             |       |                |       |
| **ASSETS**                                                                                                                            |       |             |       |                |       |
|                                                                                                                                  |       |             |       |                |       |
| Current assets:                                                                                                                       |       |             |       |                |       |
| Cash and cash equivalents                                                                                                             |       | $                | 4,559      |                | $          | 2,288 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,029 and $1,092, respectively                                         |       | 29,348           |       | 40,814              |       |
| Prepaid expenses and other current assets                                                                                             |       | 1,127            |       | 1,521               |       |
| Total current assets                                                                                                                  |       | 35,034           |       | 44,623              |       |
|                                                                                                                                  |       |             |       |                |       |
| Property and equipment, net                                                                                                           |       | 2,777            |       | 3,081               |       |
| Intangible assets, net of accumulated amortization  of $7,184 and $7,155, respectively                                                |       | 3,389            |       | 6,104               |       |
| Other assets                                                                                                                          |       | 390              |       | 446                 |       |
| Total assets                                                                                                                          |       | $                | 41,590     |                | $          | 54,254 |   |
|                                                                                                                                  |       |             |       |                |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                        |       |             |       |                |       |
|                                                                                                                                  |       |             |       |                |       |
| Current liabilities:                                                                                                                  |       |             |       |                |       |
| Accounts payable                                                                                                                      |       | $                | 10,229     |                | $          | 15,581 |   |
| Line of credit                                                                                                                        |       | —           |       | —              |       |
| Salaries and benefits                                                                                                                 |       | 3,885            |       | 3,249               |       |
| Deferred revenue                                                                                                                      |       | 1,103            |       | 1,473               |       |
| Deferred compensation                                                                                                                 |       | 253              |       | 275                 |       |
| Restructuring accrual                                                                                                                 |       | 718              |       | 184                 |       |
| Other current liabilities                                                                                                             |       | 962              |       | 1,025               |       |
| Total current liabilities                                                                                                             |       | 17,150           |       | 21,787              |       |
|                                                                                                                                  |       |             |       |                |       |
| Non-current liabilities:                                                                                                              |       |             |       |                |       |
| Deferred compensation                                                                                                                 |       | 1,264            |       | 1,391               |       |
| Restructuring accrual                                                                                                                 |       | 1,098            |       | 65                  |       |
| Other long-term liabilities                                                                                                           |       | 256              |       | 616                 |       |
| Total non-current liabilities                                                                                                         |       | 2,618            |       | 2,072               |       |
|                                                                                                                                  |       |             |       |                |       |
| Shareholders’ equity:                                                                                                            |       |             |       |                |       |
| Common stock, par value $.10 a share; authorized  120,000,000 shares; issued and outstanding 24,925,076 and 24,913,076,  respectively |       | 2,492            |       | 2,491               |       |
| Additional capital                                                                                                                    |       | 23,357           |       | 23,145              |       |
| Accumulated (deficit) earnings                                                                                                        |       | (4,027           | )          | 4,759               |       |
| Total shareholders’ equity                                                                                                       |       | 21,822           |       | 30,395              |       |
| Total liabilities and shareholders’ equity                                                                                       |       | $                | 41,590     |                | $          | 54,254 |   |

 

See notes to consolidated financial statements.

 

3

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****AnalystsInternational Corporation****

****Consolidated Statements of Operations****

****(Unaudited)****

**** ****
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **July 4,**       | ** ** | **June 28,**    | ** ** | **July 4,** | ** ** | **June 28,** | ** ** |
| **(In thousands except per share  amounts)**           | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Revenue:                                               |       |                   |       |                 |       |   |   |   |   |
| Professional  services provided directly               |       | $                      | 35,053     |                 | $          | 58,162 |   | $ | 75,876 |   | $ | 118,902 |   |
| Professional  services provided through subsuppliers   |       | 678                    |       | 14,230               |       | 1,551 |   | 28,326 |   |
| Product  sales                                         |       | 4,797                  |       | 9,598                |       | 8,233 |   | 17,565 |   |
| Total  revenue                                         |       | 40,528                 |       | 81,990               |       | 85,660 |   | 164,793 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Expenses:                                              |       |                   |       |                 |       |   |   |   |   |
| Cost  of services provided directly                    |       | 27,821                 |       | 46,491               |       | 60,109 |   | 94,108 |   |
| Cost  of services provided through subsuppliers        |       | 643                    |       | 13,730               |       | 1,474 |   | 27,304 |   |
| Cost  of product sales                                 |       | 4,079                  |       | 8,793                |       | 7,008 |   | 15,783 |   |
| Selling,  administrative and other operating costs     |       | 10,318                 |       | 12,940               |       | 21,347 |   | 26,629 |   |
| Restructuring  costs and other severance related costs |       | 1,725                  |       | 729                  |       | 1,791 |   | 2,368 |   |
| Impairment  of intangible assets                       |       | 2,268                  |       | —               |       | 2,268 |   | — |   |
| Amortization  of intangible assets                     |       | 224                    |       | 279                  |       | 447 |   | 558 |   |
| Total  expenses                                        |       | 47,078                 |       | 82,962               |       | 94,444 |   | 166,750 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Operating  loss                                        |       | (6,550                 | )          | (972                 | )          | (8,784 | ) | (1,957 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Non-operating  income                                  |       | 13                     |       | 36                   |       | 27 |   | 70 |   |
| Interest  expense                                      |       | (3                     | )          | (43                  | )          | (11 | ) | (135 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Loss  before income taxes                              |       | (6,540                 | )          | (979                 | )          | (8,768 | ) | (2,022 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Income  tax expense                                    |       | 12                     |       | 5                    |       | 18 |   | 9 |   |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Net  loss                                              |       | $                      | (6,552     | )                    | $          | (984 | ) | $ | (8,786 | ) | $ | (2,031 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Per  common share (basic):                             |       |                   |       |                 |       |   |   |   |   |
| Net  loss                                              |       | $                      | (0.26      | )                    | $          | (0.04 | ) | $ | (0.35 | ) | $ | (0.08 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Per  common share (diluted):                           |       |                   |       |                 |       |   |   |   |   |
| Net  loss                                              |       | $                      | (0.26      | )                    | $          | (0.04 | ) | $ | (0.35 | ) | $ | (0.08 | ) |
|                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted-average  shares outstanding:                  |       |                   |       |                 |       |   |   |   |   |
| Basic                                                  |       | 24,925                 |       | 24,913               |       | 24,925 |   | 24,913 |   |
| Diluted                                                |       | 24,925                 |       | 24,913               |       | 24,925 |   | 24,913 |   |

 

See notes to consolidated financial statements.

 

4

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****AnalystsInternational Corporation****

****Consolidated Statements of Cash Flows****

****(Unaudited)****

**** ****
| ** **                                       | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **July 4,**     | ** ** | **June 28,** | ** ** |
| **(In thousands)**                               | ** ** | **2009**             | ** ** | **2008** | ** ** |
| *** ***                                     | ** ** | ** **           | ** ** | ** ** | ** ** |
| Cash flows from operating activities:            |       |                 |       |   |   |
| Net loss                                         |       | $                    | (8,786     | ) | $ | (2,031 | ) |
|                                             |       |                 |       |   |   |
| Adjustments to net loss:                         |       |                 |       |   |   |
| Depreciation                                     |       | 767                  |       | 803 |   |
| Amortization of intangible assets                |       | 447                  |       | 558 |   |
| Impairment of intangible assets                  |       | 2,268                |       | — |   |
| Stock based compensation                         |       | 213                  |       | 260 |   |
| Loss on asset disposal                           |       | 8                    |       | 39 |   |
|                                             |       |                 |       |   |   |
| Changes in:                                      |       |                 |       |   |   |
| Accounts receivable                              |       | 11,576               |       | 7,270 |   |
| Accounts payable                                 |       | (5,365               | )          | (2,829 | ) |
| Salaries and benefits                            |       | 636                  |       | (437 | ) |
| Restructuring accrual                            |       | 1,567                |       | (1,118 | ) |
| Deferred compensation                            |       | (149                 | )          | (1,393 | ) |
| Prepaid expenses and other assets                |       | 340                  |       | 811 |   |
| Deferred revenue                                 |       | (374                 | )          | (750 | ) |
| Other accrued liabilities                        |       | (56                  | )          | (75 | ) |
| Net cash provided by operating activities        |       | 3,092                |       | 1,108 |   |
|                                             |       |                 |       |   |   |
| Cash flows from investing activities:            |       |                 |       |   |   |
| Expended for property and equipment additions    |       | (762                 | )          | (829 | ) |
| Net cash used in investing activities            |       | (762                 | )          | (829 | ) |
|                                             |       |                 |       |   |   |
| Cash flows from financing activities:            |       |                 |       |   |   |
| Net change in line of credit                     |       | —               |       | (263 | ) |
| Payment of capital lease obligation              |       | (59                  | )          | — |   |
| Net cash used in financing activities            |       | (59                  | )          | (263 | ) |
|                                             |       |                 |       |   |   |
| Net increase in cash and cash equivalents        |       | 2,271                |       | 16 |   |
|                                             |       |                 |       |   |   |
| Cash and cash equivalents at beginning of period |       | 2,288                |       | 91 |   |
|                                             |       |                 |       |   |   |
| Cash and cash equivalents at end of period       |       | $                    | 4,559      |   | $ | 107 |   |

 

See notes to consolidated financial statements.

 

5

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****AnalystsInternational Corporation****

****Notes to Consolidated Financial Statements****

**(Unaudited)**

 

**1. ******Organization and Natureof Business****

 

AnalystsInternational Corporation (“AIC,” “Company,” “we,” “us” or “our”) is aninformation technology (“IT”) services company that is focused on providingconfigured solutions for its clients. AIC serves a broad portfolio of clientsthroughout the United States with technology staffing, collaboration solutions,infrastructure solutions, project and application solutions and managedservices offerings. We were incorporated under Minnesota law in 1966 and ourcorporate headquarters are located in Minneapolis, Minnesota. For a morecomplete description of our Company, please refer to our Annual Report on Form 10-Kfor the fiscal year ended January 3, 2009.

 

We operate on afiscal year ending on the Saturday closest to December 31. Accordingly,fiscal 2009 will end on Saturday, January 2, 2010. The second quarter offiscal 2009 ended on July 4, 2009 and the second quarter of fiscal 2008ended on June 28, 2008. Fiscal 2009 will include 52 weeks while fiscal2008 included 53 weeks.

 

****2.  Summary of Significant Accounting Policies****

 

*Basis ofConsolidation*

 

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

 

*Reclassifications*

 

To maintain consistencyand comparability, we reclassified certain prior-year amounts previouslyreported in our Annual Report on Form 10-K for the fiscal year ended January 3,2009 to conform to the current-year presentation.  The reclassifications affect only thegrouping of line item balances within current liabilities and non-currentliabilities. The reclassifications were deemed immaterial to the financialstatements as they did not change the character of any liability and had noeffect on total current and non-current liabilities, net income or cash flows.

 

*AccountingPronouncements*

 

In April 2009, theFinancial Accounting Standards Board (“FASB”) issued Financial Staff Position (“FSP”)FAS 141(R)-1, *Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies*(“FSP FAS 141R-1”) which amends and clarifies Statements of FinancialAccounting Standards (“SFAS”) 141(R), *Business Combinations*,on initial recognition and measurement, subsequent measurement and accounting,and disclosure of assets and liabilities arising from contingencies in abusiness combination. FSP FAS 141R-1 is effective for business combinationsoccurring in fiscal years beginning on or after December 15, 2008. Theimpact 

 

6

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

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments* (“FSP FAS 107-1 and APB 28-1”)to require an entity to provide disclosures about the fair value of financialinstruments in interim financial information. FSP FAS 107-1 and APB 28-1 wouldapply to all financial instruments within the scope of SFAS 107, *Disclosures about Fair Value of Financial Instruments*, andwill require entities to disclose the method(s) and significantassumptions used to estimate the fair value of financial instruments, in bothinterim financial statements as well as annual financial statements. FSP FAS107-1 and APB 28-1 will be effective for interim and annual periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did nothave a material impact on our financial statement disclosures.

 

In May 2009, theFASB issued SFAS No. 165, *SubsequentEvents *(“SFAS 165”).SFAS 165 establishes general standards for accounting for and disclosureof events that occur after the balance sheet date but before financialstatements are available to be issued (“subsequent events”). SFAS 165 setsforth the period after the balance sheet date during which management of areporting entity should evaluate events or transactions that may occur forpotential recognition in the financial statements, identifies the circumstancesunder which an entity should recognize events or transactions occurring afterthe balance sheet date in its financial statements and the disclosures thatshould be made about events or transactions that occur after the balance sheetdate. SFAS 165 provides largely the same guidance on subsequent eventswhich previously existed only in auditing literature.  SFAS 165 is effective for interim and annualperiods ending after June 15, 2009. The adoption of SFAS 165 did not havea material impact on our financial statement disclosures.

 

In June 2009, theFASB issued SFAS No. 168, *The FASBAccounting Standards Codification and Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162 (*“SFAS 168”).SFAS 168 establishes the FASB Standards Accounting Codification(“Codification”) as the source of authoritative U.S. GAAP recognized bythe FASB to be applied to nongovernmental entities and rules andinterpretive releases of the SEC as authoritative GAAP for SEC registrants. TheCodification will supersede all the existing non-SEC accounting and reportingstandards upon its effective date and subsequently, the FASB will not issue newstandards in the form of Statements, FASB Staff Positions or Emerging IssuesTask Force Abstracts. SFAS 168 also replaces FASB Statement No. 162, *“The Hierarchy of Generally Accepted AccountingPrinciples”*given that once in effect, the Codification will carrythe same level of authority. SFAS 168 will be effective for interim and annualperiods ending after September 15, 2009. The adoption of this SFAS 168will not have a material impact on our consolidated financial statementfootnote disclosures.

 

****3.****  ****Fair Value Measurement****

 

Effective January 1,2008, we adopted SFAS 157, *Fair Value Measurements*(“SFAS 157”). The adoption of SFAS 157 had no impact on our consolidatedfinancial statements or the valuation methods consistently followed by theCompany.

 

The fair value hierarchygives 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 pricesin active 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 — Observableinputs other 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.

 

7

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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.

 

Short-term cashinvestments in money market accounts are considered to be cash equivalents. Theestimated fair values for cash equivalents approximate their carrying valuesdue to the short-term maturities of these instruments. Cash equivalents areclassified as Level 1 and are recorded in our cash and cash equivalents line onour Consolidated Balance Sheets.

 

**4.   IntangibleAssets**

 

Inthe first quarter of fiscal 2009, we incurred amortization expense of $0.2 millionand wrote-off $0.4 million related to a customer list and a trade name thatwere fully amortized.

 

Duringthe second quarter of fiscal 2009, we incurred amortization expense of $0.2million and recorded an impairment of approximately $2.3 million. As of July 4,2009, our intangible assets consist of the following:

 
| ** **         | ** ** | **July 4, 2009** | ** ** | **January 3, 2009**      | ** ** |
|--------------------|------------|-----------------------|------------|-------------------------------|------------|
| **(In thousands)** | ** ** | **Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** |
|               | ** ** | ** **            | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer  lists    |       | $                     | 10,573     |                          | $          | (7,184 | ) | $ | 3,389 |   | $ | 13,259 |   | $ | (7,155 | ) | $ | 6,104 |   |
|                    |            |                       |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the second quarterof fiscal 2009, we reviewed our customer lists in accordance with FASB SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,based on the expectation that the business with which the customer lists areassociated would be sold significantly before the end of their previouslyestimated useful life. Based on this measurement, we recorded a $2.3 millionimpairment loss, which is the amount by which the carrying value of thecustomer lists exceeds the fair value. In determining fair value, we consideredthe expected consideration to be received from the sale of net assets asdescribed in the *Subsequent Events* footnote in theNotes to Consolidated Financial Statements. The impairment loss is recorded onthe Impairment of Intangible Assets line in the Consolidated Statement of Operations.

 

****5. **** ****Financing Agreement****

 

Effective April 11,2002, we consummated an asset-based revolving credit facility with GE CapitalCorporation (“GE Capital”). As of July 4, 2009, we were in compliance withall the requirements of the credit facility and had no borrowing under thecredit facility. Total availability of the credit facility, which fluctuatesbased on our level of eligible accounts receivable, was $10.4 million.Borrowing under this credit agreement is secured by all of our assets. Theagreement restricts, among other things, the payment of dividends and capitalexpenditures. The facility carries an interest rate on daily advances equal to the Wall StreetJournal’s “Prime Rate” (3.25% on July 4, 2009) and on fixed-term advancesequal to the applicable LIBOR rate plus 2.0%.

 

Effective August 4,2009, we amended the revolving credit agreement with GE Capital.  The amendment reduced the availability underthe credit facility from $45.0 million to $15.0 million, adjusted the unusedcommitment fee from 0.25% to 0.75%, adjusted the revolver interest rate from PrimeRate to Prime Rate plus 2.75%, adjusted the interest rate on fixed-termadvances from the applicable LIBOR plus 2% to LIBOR plus 3.75% and adjusted theMinimum Fixed Charge Coverage Ratio covenant.

 

8

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**6.  Shareholders’ Equity**

 
| ** **                                 | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated** | ** ** | **Total**              | ** ** |
|--------------------------------------------|------------|------------|------------|----------------|------------|-----------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Common** | ** ** | **Additional** | ** ** | **Earnings**    | ** ** | **Shareholders’** | ** ** |
| **(In thousands)**                         | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **(Deficit)**   | ** ** | **Equity**             | ** ** |
|                                       |       |       |       |           |       |            |       |                   |       |
| Balances as of January 3, 2009        |       | $          | 2,491      |           | $          | 23,145          |       | $                      | 4,759      |   | $ | 30,395 |   |
| Common stock issued - 12,000 shares        |       | 1          |       | 4              |       | —          |       | 5                      |       |
| SFAS 123R share based compensation expense |       | —     |       | 208            |       | —          |       | 208                    |       |
| Net loss                                   |       | —     |       | —         |       | (8,786          | )          | (8,786                 | )          |
| Balance as of July 4, 2009            |       | $          | 2,492      |           | $          | 23,357          |       | $                      | (4,027     | ) | $ | 21,822 |   |

 

**7.   Restructuring Costs and Other SeveranceRelated Costs**

 

Duringthe first quarter of fiscal 2009, we recorded workforce reduction chargestotaling $0.1 million, all of which related to severance and benefits.

 

Duringthe second quarter of fiscal 2009, we recorded office closure and consolidationcharges totaling $1.7 million related to future rent obligations (net ofanticipated sub-lease income). The office closure charges are for locations weclosed prior to July 4, 2009 and the consolidation charge relates to theconsolidation of our corporate office.

 

Duringthe first quarter of fiscal 2008, we recorded workforce reduction and officeclosure and consolidation charges totaling $1.6 million.  Of these charges, $1.4 million related toseverance and severance-related charges and $0.2 million related to future rentobligations (net of anticipated sub-lease income) for locations we closed ordownsized prior to March 29, 2008.

 

Duringthe second quarter of fiscal 2008, we recorded workforce reduction and officeclosure/consolidation charges totaling approximately $0.7 million. Of thesecharges, approximately $0.7 million related to severance and severance-relatedcharges and approximately $24,000 related to future rent obligations for alocation we closed prior to June 28, 2008.

 

A summary of the activityin the restructuring accrual for the six months ended July 4, 2009 is asfollows:

 
| ** **                         | ** ** | **Workforce** | ** ** | **Office Closure/** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------|------------|---------------------|------------|------------|------------|
| **(In thousands)**                 | ** ** | **Reduction** | ** ** | **Consolidation**   | ** ** | **Total**  | ** ** |
| ** **                         | ** ** | ** **    | ** ** | ** **          | ** ** | ** ** | ** ** |
| Balance as of January 3, 2009 |       | $             | 28         |                | $          | 221        |       | $ | 249 |   |
| Additional restructuring charges   |       | 88            |       | 1,703               |       | 1,791      |       |
| Cash expenditures                  |       | (96           | )          | (128                | )          | (224       | )          |
| Balance as of July 4, 2009    |       | $             | 20         |                | $          | 1,796      |       | $ | 1,816 |   |

 

****8.******  ******EquityCompensation Plans****

 

Total equity-basedcompensation expense for the three- and six-month periods ended July 4,2009 was approximately $0.1 million and $0.2 million, respectively. Thisincludes compensation expense related to both stock options and stock awards.The tax benefit recorded for these same periods was approximately $15,000 and$22,000 respectively. The tax benefit is offset against our valuation allowancefor our deferred tax asset.

 

Total equity-basedcompensation expense for the three- and six-month periods ended June 28,2008, was approximately $0.2 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 $17,000 and$30,000 respectively. The tax benefit is offset against our valuation allowancefor our deferred tax asset.

 

9

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No stock options wereexercised during the three- and six-month periods ended July 4, 2009, and June 28,2008. As of July 4, 2009, there was approximately $0.3 million ofunrecognized compensation expense related to unvested option awards that areexpected to vest over a weighted-average period of 1.3 years.

 

During the three-andsix-month periods ended July 4, 2009, and June 28, 2008, we grantedequity compensation awards as follows:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**                         | ** ** |
|---------------|------------|------------------------|------------|----------------------------------------------|------------|
| ** **    | ** ** | **July 4,**       | ** ** | **June 28,**                            | ** ** | **July 4,** | ** ** | **June 28,** | ** ** |
| ** **    | ** ** | **2009**               | ** ** | **2008**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **    | ** ** | **Grants**             | ** ** | **Weighted-Average  Grant Date  Fair Value** | ** ** | **Grants** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Grants** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** | **Grants** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
| ** **    | ** ** | ** **             | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock Options |       | 200,000                |       | $                                            | 0.35       |   | 745,000 |   | $ | 0.58 |   | 304,000 |   | $ | 0.31 |   | 1,063,000 |   | $ | 0.58 |   |
| Stock Awards  |       | —                 |       | $                                            | —     |   | — |   | $ | 0.00 |   | 12,000 |   | $ | 0.44 |   | 9,000 |   | $ | 1.38 |   |

 

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

 

**9.  Loss Per Share**

 

Basic and diluted lossper share is presented in accordance with SFAS No. 128, *Earnings per Share*. Basic loss per share excludes dilution and is computed by dividing lossavailable to common stockholders by the weighted-average number of commonshares outstanding for the period. Options to purchase approximately 2,535,000 and 2,439,000 shares ofcommon stock were outstanding at July 4, 2009 and June 28, 2008,respectively.  All options wereconsidered anti-dilutive and excluded from the computation of common equivalentshares at July 4, 2009 and June 28, 2008, because we reported a netloss.  The computation of basic anddiluted loss per share for the three- and six-months ended July 4, 2009and June 28, 2008, is as follows:

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | **July 4,**       | ** ** | **June 28,**    | ** ** | **July 4,** | ** ** | **June 28,** | ** ** |
| **(In thousands except per share  amounts)**                                | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Net loss                                                                    |       | $                      | (6,552     | )                    | $          | (984 | ) | $ | (8,786 | ) | $ | (2,031 | ) |
| Weighted-average number of common shares  outstanding                       |       | 24,925                 |       | 24,913               |       | 24,925 |   | 24,913 |   |
| Dilutive effect of equity compensation awards                               |       | —                 |       | —               |       | — |   | — |   |
| Weighted-average number of common and common  equivalent shares outstanding |       | 24,925                 |       | 24,913               |       | 24,925 |   | 24,913 |   |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Net loss per share:                                                         |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                       |       | $                      | (0.26      | )                    | $          | (0.04 | ) | $ | (0.35 | ) | $ | (0.08 | ) |
| Diluted                                                                     |       | $                      | (0.26      | )                    | $          | (0.04 | ) | $ | (0.35 | ) | $ | (0.08 | ) |

 

10

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**10.  Subsequent Events**

 

*Saleof value-added reseller (“VAR”) assets*

 

On August 4, 2009,AIC entered into and simultaneously closed an asset sale agreement with Netarx,LLC (“Netarx”) for the sale of assets relating to the Company’s VAR business.

 

In consideration for theassets sold, which are primarily customer contracts, and the liabilitiestransferred, Netarx paid the Company $3.0 million in cash at closing and willpay the Company up to an additional $0.75 million in cash contingent on thenumber of customer contract assignments received prior to December 31,2009.

 

The preliminary carryingvalue of the assets sold and liabilities transferred on the closing date of thetransaction are estimated as follows:

 
| ** **                    | ** ** | **Balance as of**        | ** ** |
|-------------------------------|------------|--------------------------|------------|
| **(In thousands)**            | ** ** | **August 5,  2009** | ** ** |
| Assets:                       | ** ** | ** **               | ** ** |
| Inventory                     |       | $                        | 246        |   |
| Property and equipment, net   |       | 506                      |       |
| Intangible assets             |       | 3,389                    |       |
| Total assets sold             |       | $                        | 4,141      |   |
|                          |       |                     |       |
| Liabilities:                  |       |                     |       |
| Deferred revenue              |       | $                        | 841        |   |
| Total liabilities transferred |       | $                        | 841        |   |

 

The Company expects thegain or loss, net of fees and expenses, from this asset sale to be not materialand will record the resulting gain or loss in the third or fourth quarters of 2009.

 

*Amendmentto our c**reditfacility*

 

On August 4, 2009,AIC and GE Capital amended our revolving credit agreement. For more informationon the amendment, see the *Financing*footnotein the Notes to Consolidated Financial Statements.

 

AIC has evaluated anddisclosed all material subsequent events through August 13, 2009, which isthe date the Company’s financial statements were issued.

 

11

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

 

****Three and six-month periods ended July 4, 2009and June 28, 2008****

 

*Company Overview*

 

Analysts InternationalCorporation (“AIC,” “Company,” “we,” “us” or “our”) is an informationtechnology (“IT”) services company that is focused on providing configuredsolutions for our clients. We serve a broad portfolio of clients throughout theUnited States with technology staffing, collaboration solutions, infrastructuresolutions, project and application solutions and managed services offerings. Wewere incorporated under Minnesota law in 1966 and our corporate headquartersare located in Minneapolis, Minnesota. For a more complete description of ourCompany, please refer to our Annual Report on Form 10-K for the fiscalyear ended January 3, 2009.

 

*Consequencesand Challenges of the Economic Environment on Our Business and Our StrategicPlan*

 

The sharp contraction inthe U.S. economy that began in the second half of fiscal 2008 and continuestoday has had a significant and continuing impact on our business. The effectsof this economic deterioration have presented significantly greater challengesthan we previously anticipated, resulting in accelerating downward pressures onour revenues, margins, results of operations and cash flows. We expect thechallenges we are facing to continue throughout the remainder of fiscal2009.  We expect operating losses tocontinue throughout fiscal 2009 and that total operating loss incurred for thefiscal year will be significant. We believe that we are making some progress onexecuting our strategic plan that should help us to weather the economicdownturn and emerge as a stronger, more institutionally mature business thatcan serve as a platform for future growth. However, the economic downturn has made it more difficult to fulfillsome of the stated objectives of our strategic plan, which difficulties weexpect to continue. Further, if the economic downturn worsens or extendssignificantly into the future or we are unsuccessful in executing on ourstrategic plan, we would expect to incur additional losses from operations andreductions in our cash flows and liquidity.

 

*OurStrategic Plan*

 

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

 

1. Returning the Company to sustainedprofitability;

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

3. Attracting and retaining top talent; and

4. Aligning with our technology partners.

 

In our 2008 AnnualReport, we communicated our annual objectives in support of our businessstrategy, placing the highest priority on protecting our business through theseeconomic challenges. Our objectives for fiscal 2009 and our progress towardsthese objectives are as follows:

 

·      **Manage Cash Flow and Maintain a Strong Balance Sheet**

 

We believemanaging our cash flow activity and maintaining a strong balance sheet isnecessary to mitigate the financial risks during the current economicrecession.

 

·                  During the first half of fiscal 2009, cash provided by operations wasapproximately $3.1 million. See “Liquidity and Capital Resources” in this Form 10-Qfor further discussion regarding our changes in working capital.

·                  As of July 4, 2009, our current ratio was substantially unchangedfrom the end of fiscal 2008.

·                  As of July 4, 2009, we had no borrowing outstanding under ourcredit facility.

 

·      **Exit Non-Strategic or Non-Core Business**

 

We believe exitingadditional lines of business that are non-strategic or non-core to our futurewill allow us to focus on growing our business, provide the cash to fund ourgrowth and aid in simplifying our business model.

 

·                  On August 4, 2009, we sold ourvalue-added reseller (“VAR”) assets to Netarx, LLC (“Netarx”).  The sale provided us with $3.0 million in cash at closing andmay provide up to an additional $0.75 million in contingent cash consideration.  In addition, we retained certain 

 

12

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current assets andliabilities related to the VAR business which are expected to provideadditional net cash to the Company upon settlement of approximately $2.5million.

 

·      **Strengthen our IT Staffing Business**

 

Strengthening ourIT staffing business is essential to the financial stability of the Company;however, we have experienced a further decline in the number of technicalconsultants and associated billable hours in both the first and second quartersof fiscal 2009.

 

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

·                  New systems and tools will be implemented in the third quarter offiscal 2009 to enhance our sales efforts and delivery processes.

 

·      **Expand our Public Sector Practice**

 

The United Statesgovernment has enacted substantial economic stimulus programs, includingprograms in practice areas where we provide services. We have experience inJustice & Public Safety engagements as well as existing governmentalrelationships, and are actively pursuing several opportunities in the publicsector.

 

·      **Improve Gross Margins**

 

We continue tofocus on improving our gross margins. The positive effects of improvement inour gross margin percentage have been attenuated, however, by the lower volumesof business. Our gross margin increased to 19.7% in the second quarter offiscal 2009 and 19.9% during the first half of fiscal 2009. Our gross marginsfor the second quarter and first half of fiscal 2008 were 15.8% and 16.7%,respectively. The primary driver of the increase was the elimination or exitfrom low margin and subsupplier business during fiscal 2008.

 

·      **Retain Clients and Develop Business**

 

Retaining grossmargins from existing clients as well as attracting new clients and developingbusiness in key markets is vital to delivering long-term operating profits.

 

·                  We have increased our salesteam by six people during the second quarter of fiscal 2009 and plan tocontinue to add sales headcount in the third quarter of fiscal 2009 as well.

 

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

 

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

 

·                  We reduced our SG&A expenses in the second quarter and first halfof fiscal 2009 by $2.6 million and $5.3 million when compared against thesecond quarter and first half of fiscal 2008, respectively; however, we expectthe rate and amount of future SG&A reductions to decline. As a percentageof revenue, our SG&A expense increased to 25.5% and 24.9% during the secondquarter and first half of fiscal 2009 compared to 15.8% and 16.2% in the secondquarter and first half of fiscal 2008, respectively, primarily due to asignificantly lower revenue base.

·                  During the first half of fiscal 2009, we reduced our SG&A staff byapproximately 19%.

 

*Sale ofthe Company’s VAR Business*

 

In line with ourobjective of exiting non-strategic or non-core businesses, we entered into andsimultaneously closed an asset sale agreement with Netarx on August 4,2009 for the sale of assets relating to the Company’s VAR business.

 

In consideration for theassets sold, which were primarily customer contracts, and the liabilitiestransferred, Netarx paid us $3.0 million in cash at closing and will pay us upto an additional $0.75 million in cash contingent on the number of customercontract assignments received prior to December 31, 2009.

 

We believe the sale ofthe VAR business will significantly impact our future operations. Through thefirst six months of fiscal 2009, the VAR business generated revenues ofapproximately $18.6 million and had an unfavorable 

 

13

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contribution margin of$0.4 million. Over the past 12 months, the VAR business has generated revenuesof approximately $48.5 million and had an unfavorable contribution margin ofapproximately $0.1 million.

 

We believe the sale ofthe VAR business will help us achieve several of the objectives in support ofour business strategy as outlined above. Exiting the lower margin productreseller business, which is working capital intensive, should allow us tobetter manage our balance sheet and cash flows as well as improve our margins.The cash provided by the sale allows us to further invest in our core businessofferings. In addition, we expect to further reduce our general andadministrative costs to align our back office operations with the remainingbusiness operations.  We also expect lowercapital expenditures and related depreciation expense as a result of the sale.

 

**Overview ofResults of Second Quarter Fiscal 2009 Operations**

 

Our revenuesdecreased $41.5 million, or 50.6%, in the second quarter of fiscal 2009 ascompared to the second quarter of fiscal 2008 primarily due to our planned exitfrom non-core and low-margin lines of business (20.2%), the negative impact theeconomic environment has had on the demand for our IT professional services(17.7%), a reduction in volume at our largest customer (6.8%) and a reductionin product demand (5.9%). Specifically, our planned exit from non-core andlow-margin lines of business caused our revenues to decline $16.6 million, or20.2%, compared to the second quarter of fiscal 2008. Early in the thirdquarter of fiscal 2008, we sold Symmetry Workforce Solutions (“Symmetry”), ourmanaged staffing business, to COMSYS Information Technology Services, Inc.and discontinued our staffing relationship with one of our large staffingaccounts. Together, business through Symmetry and the large staffing accountrepresented approximately $15 million in quarterly revenue and$60 million in annualized revenue.

 

Gross margins as apercentage of revenue increased due to the impact of implementing our strategyof exiting low margin lines of business and accounts and the reduction in lowermargin product sales.

 

SG&A expensesdeclined in the second quarter of fiscal 2009 due largely to the execution ofour Plan and the reduction in business volume. During the quarter, we incurrednon-cash charges of $4.0 million, including $2.3 million for the impairment ofintangible customer lists and $1.7 million for restructuring and otherseverance related costs.

 

We generated cashfrom operations of $0.3 million during the second quarter of fiscal 2009. As ofJuly 4, 2009, we had a cash balance of approximately $4.6 million andno borrowing under our revolving credit facility.

 

14

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**** ****

****RESULTS OF OPERATIONS,THREE MONTHS ENDED JULY 4, 2009 VS. JUNE 28, 2008****

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants for the three months ended July 4,2009 and June 28, 2008.

 
| ** **                                             | ** ** | **Three Months Ended  July 4, 2009** |       | **Three Months Ended  June 28, 2008** |       | **Increase (Decrease)** |   |
|--------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|-------------------------|--------|
| ** **                                             | ** ** | ** **                                | ** ** | **%  of**                                  | ** ** |                    |   | **%  of** |   | ** ** |   | ** ** |   |
| **(Dollars in thousands)**                             | ** ** | **Amount**                                |       | **Revenue**                                |       | **Amount**              |   | **Revenue** |   | **Amount** |   | **%** |   |
| Revenue:                                               |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Professional services provided directly                |       | $                                         | 35,053     |                                       | 86.5       | %                       | $      | 58,162 |   | 70.9 | % | $ | (23,109 | ) | (39.7 | )% |
| Professional services provided through subsuppliers    |       | 678                                       |       | 1.7                                        |       | 14,230                  |   | 17.4 |   | (13,552 | ) | (95.2 | ) |
| Product sales                                          |       | 4,797                                     |       | 11.8                                       |       | 9,598                   |   | 11.7 |   | (4,801 | ) | (50.0 | ) |
| Total revenue                                          |       | 40,528                                    |       | 100.0                                      |       | 81,990                  |   | 100.0 |   | (41,462 | ) | (50.6 | ) |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Expenses:                                              |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Cost of services provided directly                     |       | 27,821                                    |       | 68.6                                       |       | 46,491                  |   | 56.7 |   | (18,670 | ) | (40.2 | ) |
| Cost of services provided through subsuppliers         |       | 643                                       |       | 1.6                                        |       | 13,730                  |   | 16.8 |   | (13,087 | ) | (95.3 | ) |
| Cost of product sales                                  |       | 4,079                                     |       | 10.1                                       |       | 8,793                   |   | 10.7 |   | (4,714 | ) | (53.6 | ) |
| Selling, administrative and other operating costs      |       | 10,318                                    |       | 25.5                                       |       | 12,940                  |   | 15.8 |   | (2,622 | ) | (20.3 | ) |
| Restructuring costs and other severance related  costs |       | 1,725                                     |       | 4.2                                        |       | 729                     |   | 0.9 |   | 996 |   | 136.6 |   |
| Impairment of intangible assets                        |       | 2,268                                     |       | 5.6                                        |       | —                  |   | 0.0 |   | 2,268 |   | 100.0 |   |
| Amortization of intangible assets                      |       | 224                                       |       | 0.6                                        |       | 279                     |   | 0.3 |   | (55 | ) | (19.7 | ) |
| Total expenses                                         |       | 47,078                                    |       | 116.2                                      |       | 82,962                  |   | 101.2 |   | (35,884 | ) | (43.3 | ) |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Operating loss                                         |       | (6,550                                    | )          | (16.2                                      | )          | (972                    | )      | (1.2 | ) | 5,578 |   | 573.9 |   |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Non-operating income                                   |       | 13                                        |       | 0.0                                        |       | 36                      |   | 0.0 |   | (23 | ) | (63.9 | ) |
| Interest expense                                       |       | (3                                        | )          | 0.0                                        |       | (43                     | )      | (0.0 | ) | (40 | ) | (93.0 | ) |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Loss before income taxes                               |       | (6,540                                    | )          | (16.2                                      | )          | (979                    | )      | (1.2 | ) | 5,561 |   | 568.0 |   |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Income tax expense                                     |       | 12                                        |       | 0.0                                        |       | 5                       |   | 0.0 |   | 7 |   | 140.0 |   |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Net loss                                               |       | $                                         | (6,552     | )                                          | (16.2      | )%                      | $      | (984 | ) | (1.2 | )% | $ | 5,568 |   | 565.9 | % |
|                                                   |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Personnel:                                             |       |                                      |       |                                       |       |                    |   |   |   |   |   |   |   |
| Management and Administrative                          |       | 210                                       |       |                                       |       | 297                     |   |   |   | (87 | ) | (29.3 | )% |
| Technical Consultants                                  |       | 1,079                                     |       |                                       |       | 1,883                   |   |   |   | (804 | ) | (42.7 | )% |

 

**Revenue**

 

Revenue from servicesprovided directly for the three months ended July 4, 2009 declined 39.7%from the prior comparable period. The decline in revenue was primarily due to areduction in the number of billable hours and technical consultants as a resultof lower business volumes and our decision to discontinue our relationship withone of our large staffing accounts, partially offset by a 7.1% increase inoverall billing rates over the prior year period. Our subsupplier revenue forthe three months ended July 4, 2009, which is mainly pass-through revenuewith associated fees, declined by 95.2% over the prior year period primarilydue to the sale of Symmetry early in the third quarter of fiscal 2008.  Product sales in the second quarter of fiscal2009 declined by 50.0% over the prior year period due to an overall reductionin business volume.

 

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**Cost of Services Provided Directly**

 

Cost of servicesprovided directly represents our payroll and benefit costs associated with ourbillable consultants. This category of expense as a percentage of directservices revenue decreased to 79.4% in the second quarter of fiscal 2009compared to 79.9% in the prior comparable period.

 

**Cost of Services Provided Through Subsuppliers**

 

**Cost of services provided through subsuppliersrepresents our cost when we utilize third parties to fulfill our obligations toour large staffing clients.  Thiscategory of expense as a percentage of revenue for services provided throughsubsuppliers was 94.8% for the second quarter of fiscal 2009 compared to 96.5%for the comparable period in fiscal 2008. The decrease in expense as apercentage of subsupplier revenue was primarily due to**exiting lower margin subsupplier businessduring the second half of fiscal 2008.

 

**Cost of Product Sales**

 

Costof product sales represents our cost when we resell hardware and softwareproducts.  This category of expense, as apercentage of product sales, was 85.0% in the second quarter of fiscal 2009compared to 91.6% in the second quarter of fiscal 2008. The decrease in expenseas a percentage of revenue was primarily due to the mix of product salesbetween the comparable periods.

 

**Selling, Administrative and Other Operating Costs**

 

SG&Acosts include management and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreasedapproximately $2.6 million in the second quarter of fiscal 2009 from thecomparable period in 2008 and represented 25.5% of total revenue for the secondquarter of fiscal 2009 compared to 15.8% for the second quarter in fiscal 2008.SG&A expenses decreased primarily due to the impact of personnel reductionsand implementation of non-personnel cost reductions and a reduction of salesand recruiting incentive compensation expense due to the decrease in businessvolume. As a percentage of revenue, SG&A costs increased due to asignificantly lower revenue base in the second quarter of fiscal 2009.

 

*Restructuring Costs and Other Severance RelatedCosts*

 

Duringthe second quarter of fiscal 2009, we recorded office closure and consolidationcharges totaling $1.7 million related to future rent obligations (net ofanticipated sub-lease income). The office closure charges are for locations weclosed prior to July 4, 2009 and the consolidation charge relates toconsolidating our corporate back office.

 

Duringthe second quarter of fiscal 2008, we recorded workforce reduction and officeclosure and consolidation charges totaling approximately $0.7 million. Of thesecharges, approximately $0.7 million related to severance and severance-relatedcharges and approximately $24,000 related to future rent obligations for alocation we closed prior to June 28, 2008.

 

*Impairmentof Intangible Assets*

 

During the second quarterof fiscal 2009, we reviewed our customer lists in accordance with Statement ofFinancial Accounting Standards (“SFAS”) 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, based on theexpectation that the business with which the customer lists are associatedwould be sold significantly before the end of their previously estimated usefullife. Based on this measurement, we recorded a $2.3 million impairment loss,which is the amount by which the carrying value of the customer lists exceedsthe fair value. In determining fair value, we considered the expectedconsideration to be received from the sale of net assets.

 

*Amortizationof Intangible Assets*

 

Amortization ofintangible assets primarily relates to our customer lists. This category ofexpense decreased during the second quarter of fiscal 2009 compared to thesecond quarter of fiscal 2008 due to the SequoiaNet.com trade name and acertain customer list becoming fully amortized during fiscal 2008.

 

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*Non-operatingIncome*

 

Non-operatingincome decreased slightly in the second quarter of fiscal 2009 compared to thesecond quarter of fiscal 2008 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.

 

**Interest Expense**

 

We had noborrowings outstanding in the second quarter of fiscal 2009 compared to averageborrowing outstanding under our credit facility of approximately $3.4 millionfor the second quarter of fiscal 2008 at an average interest rate of 5.00%.

 

**Income Taxes**

 

For both thesecond quarter of fiscal 2009 and second quarter of fiscal 2008, we recorded aprovision for income taxes for amounts due for certain state income taxes andchanges in our reserves for tax obligations. We recorded no additional incometax benefit or expense associated with our net operating losses because any taxbenefit or expense that would otherwise have been recorded has been negated byadjusting the valuation allowance against our deferred tax asset.  If, however, we successfully return toprofitability to a point where future realization of deferred tax assets, whichare currently reserved, becomes “more likely than not,” we may be required toreverse the existing valuation allowance to realize the benefit of theseassets.

 

**Personnel**

 

Our technicalconsulting staff levels finished the second quarter of fiscal 2009 at 1,079, a42.7% decline against the comparable prior period. The decline in technicalconsulting staff levels was due to a reduction of approximately 320 billableconsultants as a result of the transfer of our existing contract with one ofour largest staffing accounts to other suppliers in the third quarter of fiscal2008 and an overall decline in business volume. The decline in management andadministrative personnel was due to our focus on reducing the number ofmanagement and administrative personnel that are necessary to support thebusiness operations. The reported technical consulting staff levels excludeMedical Concepts Staffing, our medical staffing business, due to the separateindustry focus of that business.

 

**CertainInformation Concerning Off-Balance Sheet Arrangements**

 

For the threemonths ended July 4, 2009, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities that would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. We are, therefore, notexposed to any financing, liquidity, market or credit risk that could arise ifwe had engaged in these relationships.

 

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****RESULTS OFOPERATIONS, SIX MONTHS ENDED JULY 4, 2009 VS. JUNE 28, 2008****

 

The following tableillustrates the relationship between revenue and expense categories along witha count of employees and technical consultants for the six months ended July 4,2009 and June 28, 2008.

 
| ** **                                             | ** ** | **Six Months Ended**  | ** ** | **Six Months Ended**   | ** ** | ** **              | ** ** | ** **  | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                             | ** ** | **July 4, 2009** | ** ** | **June 28, 2008** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                                             | ** ** | ** **            | ** ** | **%  of**              | ** ** | ** **              | ** ** | **% of**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                             | ** ** | **Amount**            | ** ** | **Revenue**            | ** ** | **Amount**              | ** ** | **Revenue** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenue:                                               |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Professional services provided directly                |       | $                     | 75,876     |                   | 88.6       | %                       | $          | 118,902     |       | 72.1 | % | $ | (43,026 | ) | (36.2 | )% |
| Professional services provided through subsuppliers    |       | 1,551                 |       | 1.8                    |       | 28,326                  |       | 17.2        |       | (26,775 | ) | (94.5 | ) |
| Product sales                                          |       | 8,233                 |       | 9.6                    |       | 17,565                  |       | 10.7        |       | (9,332 | ) | (53.1 | ) |
| Total revenue                                          |       | 85,660                |       | 100.0                  |       | 164,793                 |       | 100.0       |       | (79,133 | ) | (48.0 | ) |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Expenses:                                              |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Cost of services provided directly                     |       | 60,109                |       | 70.2                   |       | 94,108                  |       | 57.1        |       | (33,999 | ) | (36.1 | ) |
| Cost of services provided through subsuppliers         |       | 1,474                 |       | 1.7                    |       | 27,304                  |       | 16.6        |       | (25,830 | ) | (94.6 | ) |
| Cost of product sales                                  |       | 7,008                 |       | 8.2                    |       | 15,783                  |       | 9.6         |       | (8,775 | ) | (55.6 | ) |
| Selling, administrative and other operating costs      |       | 21,347                |       | 24.9                   |       | 26,629                  |       | 16.2        |       | (5,282 | ) | (19.8 | ) |
| Restructuring costs and other severance related  costs |       | 1,791                 |       | 2.1                    |       | 2,368                   |       | 1.4         |       | (577 | ) | (24.4 | ) |
| Impairment of intangible assets                        |       | 2,268                 |       | 2.7                    |       | —                  |       | 0.0         |       | 2,268 |   | 100.0 |   |
| Amortization of intangible assets                      |       | 447                   |       | 0.5                    |       | 558                     |       | 0.3         |       | (111 | ) | (19.9 | ) |
| Total expenses                                         |       | 94,444                |       | 110.3                  |       | 166,750                 |       | 101.2       |       | (72,306 | ) | (43.4 | ) |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Operating loss                                         |       | (8,784                | )          | (10.3                  | )          | (1,957                  | )          | (1.2        | )          | 6,827 |   | 348.9 |   |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Non-operating income                                   |       | 27                    |       | 0.0                    |       | 70                      |       | 0.0         |       | (43 | ) | (61.4 | ) |
| Interest expense                                       |       | (11                   | )          | 0.0                    |       | (135                    | )          | 0.0         |       | (124 | ) | (91.9 | ) |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Loss before income taxes                               |       | (8,768                | )          | (10.3                  | )          | (2,022                  | )          | (1.2        | )          | 6,746 |   | 333.6 |   |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Income tax expense                                     |       | 18                    |       | 0.0                    |       | 9                       |       | 0.0         |       | 9 |   | 100.0 |   |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Net loss                                               |       | $                     | (8,786     | )                      | (10.3      | )%                      | $          | (2,031      | )          | (1.2 | )% | $ | 6,755 |   | 332.6 | % |
|                                                   |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Personnel:                                             |       |                  |       |                   |       |                    |       |        |       |   |   |   |   |
| Management and Administrative                          |       | 210                   |       |                   |       | 297                     |       |        |       | (87 | ) | (29.3 | )% |
| Technical Consultants                                  |       | 1,079                 |       |                   |       | 1,883                   |       |        |       | (804 | ) | (42.7 | )% |

 

**Revenue**

 

Total revenue fromservices provided directly declined 36.2% to $75.9 million for the six monthsended July 4, 2009 from $118.9 million for the six months ended June 28,2008.  The decline in revenue wasprimarily due to a reduction in the number of billable hours and technicalconsultants as a result of lower business volumes and our decision todiscontinue our relationship with one of our large staffing accounts, partiallyoffset by an 8.2% increase in overall billing rates over the prior year period.Our subsupplier revenue, which is mainly pass-through revenue with associatedfees, declined by 94.5% in 2009 compared to 2008 due to the sale of Symmetryearly in the third quarter of fiscal 2008. Product sales declined 53.1 % to$8.2 million for the six months ended July 4, 2009 from $17.6 million forthe six months ended June 28, 2008 due to an overall reduction in businessvolume.

 

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**Cost of Services Provided Directly**

 

Cost of servicesprovided directly represents our payroll and benefit costs associated with ourbillable consultants. This category of expense as a percentage of directservices revenue increased slightly to 79.2% for the six months ended July 4,2009 from 79.1% for the six months ended June 28, 2008.

 

**Cost of Services Provided Through Subsuppliers**

 

**Cost of services provided through subsuppliersrepresents our cost when we utilize third parties to fulfill our obligations toour large staffing clients.  Thiscategory of expense as a percentage of revenue for services provided throughsubsuppliers was 95.0% for the six months ended July 4, 2009 compared to96.4% for the six months ended June 28, 2008. The decrease in expense as apercentage of subsupplier revenue was primarily due to**exiting lower margin subsupplier businessduring fiscal 2008.

 

**Cost of Product Sales**

 

Costof product sales represents our cost when we resell hardware and softwareproducts.  This category of expense, as apercentage of product sales, was 85.1% for the six months ended July 4,2009 compared to 89.9% for the six months ended June 28, 2008. Thedecrease in expense as a percentage of revenue was primarily due to the mix ofproduct sales between the comparable periods.

 

**Selling, Administrative and Other Operating Costs**

 

SG&Acosts include management and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costs decreased 19.8% from $26.6 million forthe six months ended June 28, 2008 to $21.3 million for the six monthsended July 4, 2009. These amounts represented 16.2% and 24.9% of totalrevenue for 2008 and 2009, respectively. SG&A expenses decreased primarilydue to the impact of personnel reductions and implementation of non-personnelcost reductions and a reduction of sales and recruiting incentive compensationexpense due to the decrease in business volume. As a percentage of revenue,SG&A costs increased due to a significantly lower revenue base for the sixmonths ended July 4, 2009.

 

*Restructuring Costs and Other Severance RelatedCosts*

 

Duringthe six months ended July 4, 2009, we recorded restructuring and severancerelated expenses totaling $1.8 million. Of these charges, $0.1 million relatedto severance and severance-related charges and $1.7 million related to futurerent obligations (net of anticipated sub-lease income) related to consolidatingour corporate back office and for locations we closed prior to July 4,2009.

 

Duringthe six months ended June 28, 2008, we recorded restructuring andseverance related expenses totaling $2.4 million.  Of these charges, $2.1 million related toworkforce reductions and $0.3 million related to lease obligations andabandonment costs (net of anticipated sub-lease income) for locations where wechose to downsize or exit completely.

 

*Impairmentof Intangible Assets*

 

During the second quarterof fiscal 2009, we reviewed our customer lists in accordance with SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,based on the expectation that the business with which the customer lists areassociated would be sold significantly before the end of their previouslyestimated useful life. Based on this measurement, we recorded a $2.3 millionimpairment loss, which is the amount by which the carrying value of thecustomer lists exceeds the fair value. In determining fair value, we consideredthe expected consideration to be received from the sale of net assets.

 

*Amortizationof Intangible Assets*

 

Amortization ofintangible assets primarily relates to our customer lists. This category ofexpense decreased during fiscal 2009 compared to fiscal 2008 due to theSequoiaNet.com trade name and a certain customer list becoming fully amortizedduring fiscal 2008.

 

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*Non-operatingIncome*

 

Non-operatingincome decreased slightly for the six months ended July 4, 2009 comparedto the six months ended June 28, 2009 as a result of less interest incomeearned from our cash balances due to lower interest rates and higher interestincome related to a customer equipment lease in the prior year.

 

**Interest Expense**

 

Interest expensedecreased to $11,000 for the six months ended July 4, 2009 from $135,000for the six months ended June 28, 2008 primarily due to a decrease inaverage borrowing base from $4.5 million for 2008 to $27,000 for 2009. Areduction in interest rates from 5.00% at the end of the second quarter offiscal 2008 to 3.25% at the end of the second quarter of fiscal 2009 alsocontributed to the decrease in interest expense.

 

**Income Taxes**

 

For the six months ended July 4,2009 and June 28, 2008, we recorded a provision for income taxes foramounts due for certain state income taxes and changes in our reserves for taxobligations. We recorded no additional income tax expense or benefit becauseany tax expense or benefit which would otherwise have been recorded has beennegated by adjusting the valuation allowance against our deferred taxasset.  If, however, we successfully return to profitability to apoint where future realization of deferred tax 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**

 

For the six monthsended July 4, 2009 and June 28, 2008 our technical consulting stafflevels finished at 1,079 and 1,883 respectively, a 42.7% decline.  The decline in technical consulting stafflevels was due to a reduction of approximately 320 billable consultants as aresult of the transfer of our existing contract with one of our largeststaffing accounts to other suppliers in the third quarter of fiscal 2008 and anoverall decline in business volume. The decline in management andadministrative personnel was due to our focus on reducing the number ofmanagement and administrative personnel that are necessary to support thebusiness operations. The reported technical consulting staff levels excludeMedical Concepts Staffing, our medical staffing business, due to the separateindustry focus of that business.

 

**CertainInformation Concerning Off-Balance Sheet Arrangements**

 

For the six monthsended July 4, 2009, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities that would have been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. We are, therefore, not exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin these relationships.

 

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**Liquidityand Capital Resources**

 

The followingtable provides information relative to the liquidity of our business.

 
| ** **                                | ** ** | ** **       | ** ** | ** **          | ** ** | ** **     | ** ** | **Percentage** | ** ** |
|-------------------------------------------|------------|------------------|------------|---------------------|------------|----------------|------------|----------------|------------|
| ** **                                | ** ** | **July 4,** | ** ** | **January 3,** | ** ** | **Increase**   | ** ** | **Increase**   | ** ** |
| **(In thousands)**                        | ** ** | **2009**         | ** ** | **2009**            | ** ** | **(Decrease)** | ** ** | **(Decrease)** | ** ** |
|                                      |       |             |       |                |       |           |       |           |       |
| Cash and cash equivalents                 |       | $                | 4,559      |                | $          | 2,288          |       | $              | 2,271      |   | 99.3 | % |
| Accounts receivable                       |       | 29,348           |       | 40,814              |       | (11,466        | )          | (28.1          | )          |
| Prepaid expenses and other current assets |       | 1,127            |       | 1,521               |       | (394           | )          | (25.9          | )          |
| Total current assets                      |       | $                | 35,034     |                | $          | 44,623         |       | $              | (9,589     | ) | (21.5 | )% |
|                                      |       |             |       |                |       |           |       |           |       |
| Accounts payable                          |       | $                | 10,229     |                | $          | 15,581         |       | $              | (5,352     | ) | (34.3 | )% |
| Line of credit                            |       | —           |       | —              |       | —         |       | —         |       |
| Salaries and benefits                     |       | 3,885            |       | 3,249               |       | 636            |       | 19.6           |       |
| Deferred revenue                          |       | 1,103            |       | 1,473               |       | (370           | )          | (25.1          | )          |
| Deferred compensation                     |       | 253              |       | 275                 |       | (22            | )          | (8.0           | )          |
| Restructuring accrual                     |       | 718              |       | 184                 |       | 534            |       | 290.2          |       |
| Other current liabilities                 |       | 962              |       | 1,025               |       | (63            | )          | (6.1           | )          |
| Total current liabilities                 |       | $                | 17,150     |                | $          | 21,787         |       | $              | (4,637     | ) | (21.3 | )% |
|                                      |       |             |       |                |       |           |       |           |       |
| Working capital                           |       | $                | 17,884     |                | $          | 22,836         |       | $              | (4,952     | ) | (21.7 | )% |
| Current ratio                             |       | 2.04             |       | 2.05                |       | (0.01          | )          | (0.5           | )%         |
|                                      |       |             |       |                |       |           |       |           |       |
| Total shareholders’ equity           |       | $                | 21,822     |                | $          | 30,395         |       | $              | (8,573     | ) | (28.2 | )% |

 

**Change in WorkingCapital**

 

Working capitalwas $17.9 million at July 4, 2009, down approximately $5.0 million from January 3,2009. The ratio of current assets to current liabilities decreased slightly to2.04 at July 4, 2009 compared to 2.05 at January 3, 2009.

 

Our total currentassets decreased approximately $9.6 million at July 4, 2009 comparedto the beginning of the year as a result of lower accounts receivable offsetslightly by an increase in our cash and cash equivalents. The primary reasonfor the 28.1% decrease in our accounts receivable from the beginning of theyear is the approximately 27.4% decline in revenues from the fourth quarter offiscal 2008 to the second quarter of fiscal 2009.

 

Our total currentliabilities decreased approximately $4.6 million at July 4, 2009compared to the beginning of the year primarily due to fewer product purchasesand less business volume.

 

We believe ourworking capital and availability under our GE Capital credit agreement will besufficient to support the cash flow needs of our business in fiscal 2009.Continuing operating losses, a significant increase in bad debt experience, asignificant lengthening of payment terms, or significant costs associated withrestructuring activities could create a need for additional working capital. Aninability to obtain additional working capital, should it be required, couldhave a material adverse effect on our business. We expect to be able to complywith the requirements of our credit agreement; however, failure to do so couldaffect our ability to obtain necessary working capital and could have amaterial adverse effect on our business. In addition, the current GE Capital creditagreement expires on January 20, 2010. We expect to either renew or obtaina new credit facility during fiscal 2009; however, failure to do so could havea material adverse effect on our business. See Part II. Other Information,Item 1A. Risk Factors.

 

*Sourcesand Uses of Cash/Credit Facility*

 

Cash and cashequivalents increased by $2.3 million from January 3, 2009 to July 4,2009. Our primary need for working capital is to support accounts receivableand to fund the time lag between payroll and vendor disbursements and receiptof fees billed to clients. Historically, we have been able to support internalgrowth in our business with internally generated funds and the use of ourcredit facility.

 

Effective August 4,2009, we amended the revolving credit agreement with GE Capital.  The amendment reduced the availability underthe credit facility from $45.0 million to $15.0 million, adjusted the unusedcommitment fee from

 

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0.25% to 0.75%, adjustedthe revolver interest rate from the Wall Street Journal’s “Prime Rate” to PrimeRate plus 2.75%, adjusted the interest rate on fixed-term advances from theapplicable LIBOR plus 2% to LIBOR plus 3.75% and adjusted the Minimum FixedCharge Coverage Ratio covenant.

 

Prior to theamendment, our asset-based revolving credit agreement provided up to$45.0 million of availability. As of July 4, 2009, our borrowingavailability under this credit facility, which fluctuates based on our level ofeligible accounts receivable, was $10.4 million and we had no amountsoutstanding. Borrowing under the credit agreement is secured by all of ourassets. This line of credit is available to us to fund working capital needsand other investments such as acquisitions as these needs arise. As of July 4,2009, we were in compliance with all the requirements of the credit facility.

 

The revolvingcredit agreement requires us to take advances or pay down the outstandingbalance on the line of credit daily. However, we can request fixed-termadvances of one, two or three months for a portion of the outstanding balanceon the line of credit.

 

On August 4, 2009,we entered into and simultaneously closed an asset sale agreement with Netarxfor the sale of assets relating to our VAR business.  In consideration for the assets sold, whichwere primarily customer contracts, and the liabilities transferred, Netarx paidus $3.0 million in cash at closing and will pay us up to an additional $0.75million in cash contingent on the number of customer contract assignmentsreceived prior to December 31, 2009. In addition, we retained certain current assets and liabilities relatedto the VAR business which are expected to provide additional net cash to theCompany upon settlement of approximately $2.5 million.

 

We made capitalexpenditures of $0.3 million and $0.8 million during the second quarter andfirst half of fiscal 2009, respectively.

 

On July 25,2007, we announced that our Board of Directors authorized the repurchase of upto one million shares of our common stock. On July 26, 2007, we amendedour credit agreement with GE Capital to allow us to repurchase up to$5,000,000 of our common stock. Timing of repurchases will be based on severalfactors, including the price of the common stock, general market conditions,corporate and regulatory requirements and alternate investment opportunities.Repurchases may be made in the open market or through private transactions, inaccordance with SEC requirements. Repurchases may be suspended at any time andare subject to the terms and conditions of our credit agreement withGE Capital which includes restrictions based on our borrowing availabilityunder the credit agreement and maximum dollar expenditure for repurchases.During the second quarter and the first six months of fiscal 2009, we did notengage in any repurchases of our common stock.

 

**NewAccounting Pronouncements**

 

In April 2009, the Financial Accounting StandardsBoard (“FASB”) issued Financial Staff Position (“FSP”) FAS 141(R)-1, *Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies* (“FSP FAS 141R-1”) whichamends and clarifies SFAS 141(R), *Business Combinations*,on initial recognition and measurement, subsequent measurement and accounting,and disclosure of assets and liabilities arising from contingencies in abusiness combination. FSP FAS 141R-1 is effective for business combinationsoccurring in fiscal years beginning on or after December 15, 2008. Theimpact on our consolidated financial statements of adopting FSP FAS 141R-1will depend on the nature, terms and size of business combinations completedafter the effective date.

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments* (“FSP FAS 107-1 and APB 28-1”)to require an entity to provide disclosures about the fair value of financialinstruments in interim financial information. FSP FAS 107-1 and APB 28-1 wouldapply to all financial instruments within the scope of SFAS 107, *Disclosures about Fair Value of Financial Instruments*, andwill require entities to disclose the method(s) and significantassumptions used to estimate the fair value of financial instruments, in bothinterim financial statements as well as annual financial statements. FSP FAS107-1 and APB 28-1 will be effective for interim and annual periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 did nothave a material impact on our financial statement disclosures.

 

In May 2009, theFASB issued SFAS No. 165, *SubsequentEvents *(“SFAS 165”).SFAS 165 establishes general standards for accounting for and disclosureof events that occur after the balance sheet date but before financialstatements are available to be issued (“subsequent events”). SFAS 165 setsforth the period after the balance sheet date

 

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during which managementof a reporting entity should evaluate events or transactions that may occur forpotential recognition in the financial statements, identifies the circumstancesunder which an entity should recognize events or transactions occurring afterthe balance sheet date in its financial statements and the disclosures thatshould be made about events or transactions that occur after the balance sheetdate. SFAS 165 provides largely the same guidance on subsequent eventswhich previously existed only in auditing literature. The Company does notanticipate that the adoption of this statement will have a material impact onits consolidated financial statements. SFAS 165 will be effective for interimand annual periods ending after June 15, 2009. The Company does notbelieve the adoption of SFAS 165 will have a material impact on our financialstatement disclosures.

 

In June 2009, theFASB issued SFAS No. 168, *The FASBAccounting Standards Codification and Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162 *(“SFAS 168”). SFAS 168establishes the FASB Standards Accounting Codification (“Codification”) as thesource of authoritative U.S. GAAP recognized by the FASB to be applied tonongovernmental entities and rules and interpretive releases of the SEC asauthoritative GAAP for SEC registrants. The Codification will supersede all theexisting non-SEC accounting and reporting standards upon its effective date andsubsequently, the FASB will not issue new standards in the form of Statements,FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS 168also replaces FASB Statement No. 162, *“TheHierarchy of Generally Accepted Accounting Principles”*given thatonce in effect, the Codification will carry the same level of authority. SFAS168 will be effective for interim and annual periods ending after September 15,2009. The Company does not anticipate that the adoption of SFAS 168 will have amaterial impact on its consolidated financial statement footnote disclosures.

 

**Forward-LookingStatements**

 

This Form 10-Qcontains forward-looking statements (within the meaning of the PrivateSecurities Litigation Reform Act of 1995) about: (i) our expectations andbeliefs with respect to the recession, the volatility of the capital markets,the tightening of lending standards in the credit markets, and the generaldownturn in the global economy, as well as our assumptions with respect to theimpact these economic conditions will have on our business, including anexpectation of a reduction in business volume and continued operating lossesthrough fiscal 2009, (ii) our Plan and the objectives of the Plan,including certain expense reduction initiatives, additions to sales headcountand the planned expansion into new geographic markets, (iii) the plannedexpansion of our public sector practice, (iv) our beliefs and expectationswith respect to the impact of the VAR business sale, (v) our expectationswith respect to growing our business, reducing expenses and achievingprofitability, (vi) our beliefs regarding the adequacy of our working capitaland our ability to meet the requirements of our credit facility or to obtain areplacement credit facility on commercially reasonable terms, and (vii) ourexpectations with respect to our financial results and operating performance.You can identify these statements by the use of words such as “anticipate,” “estimate,”“expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words andterms of similar meaning or import in connection with any discussion of futureoperating or financial performance. Among the factors that could cause actualresults to differ materially are: (i) our inability, in whole or in part,to implement or execute the Plan, (ii) our inability to successfullyrecruit and hire qualified technical and sales personnel, (iii) ourinability to successfully compete on a national basis with other companies inour industry by responding to our customers’ varied staffing needs, (iv) ourinability to maintain key client relationships, (v) incorrect assumptionsby management with respect to the impact of the VAR business sale, (vi) ourinability to reduce operating costs, (vii) our inability to comply withthe covenants in our credit facilities or inability to obtain a new creditfacility on commercially reasonable terms, (viii) a prolonged or worseneddownturn in the national or global economy, and (ix) our inability toeffectively manage accounts receivable, as well as other economic, business,competitive and/or regulatory factors affecting our business generally,including those set forth in our most recent Annual Report on Form 10-Kand our Current Reports on Form 8-K. All forward-looking statementsincluded in this Form 10-Q are based on information available to us as ofthe date hereof. We undertake no obligation (and expressly disclaim any suchobligation) to update forward-looking statements made in this Form 10-Q toreflect events or circumstances after the date of this Form 10-Q or toupdate reasons why actual results would differ from those anticipated in anysuch forward-looking statements, other than as required by law.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

Notapplicable.

 

****Item 4T. Controls and Procedures.****

 

(a)                      Evaluation of Disclosure Controls andProcedures

 

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

 

(b)                     Changes in Internal Controls

 

Therewere no changes in our internal control over financial reporting that occurredduring the period covered by this report that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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****PART II. OTHER INFORMATION****

 

****Item 1.            LegalProceedings****

 

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

 

**Item 1A.         RiskFactors.**

 

***If we are unable to satisfy theNasdaq Global Market’s continued listing requirements, including a minimumprice per share of $1.00, our common stock may be delisted, which would likelyimpair the liquidity and the value of our common stock.***

 

As of August 10, 2009, the closing bid price of our common stock onthe Nasdaq Global Market was $0.67, which is below the minimum $1.00 bid pricerequirement for continued listing on the Nasdaq Global Market pursuant toNasdaq Marketplace Rule 4450(a)(5), or the Rule. Given the extraordinarymarket conditions in late 2008 and early 2009, Nasdaq announced a temporarymoratorium on enforcement of the Rule. This moratorium was in effect until July 20,2009. On July 14, 2009 Nasdaq extended the moratorium for approximatelytwo additional weeks, until July 31, 2009. The enforcement of the Rule resumedon August 3, 2009.

 

Because we were not able to regain compliance by the time the Rule wasreinstated, we expect that Nasdaq will provide us with an initial notice thatour common stock will be delisted unless the bid price of our common stockcloses at $1.00 per share or more for a minimum of 10 consecutive business dayswithin 180 calendar days from such notification. If we were to fail to regaincompliance within 180 calendar days, we would receive written notice ofdelisting from Nasdaq, which we could then appeal to a Nasdaq ListingsQualifications Panel pursuant to applicable Nasdaq rules. Alternatively, wemight be permitted under Nasdaq rules to transfer the listing of ourcommon stock to the Nasdaq Capital Market if our common stock satisfies allcriteria, other than compliance with the minimum bid price requirement, forinitial inclusion on such market. In the event of such a transfer, the NasdaqMarketplace Rules provide that we would be afforded an additional 180calendar days to comply with the minimum bid price requirement while listed onthe Nasdaq Capital Market.

 

If our common stock is delisted from the Nasdaq Global Market and theNasdaq Capital Market, trading in our common stock would likely be conducted onthe OTC Bulletin Board, a regulated quotation service. If our common stock isdelisted from Nasdaq, the liquidity of our common stock may be reduced, notonly in terms of the number of shares that can be bought and sold at a givenprice, but also through delays in the timing of transactions and reduction insecurity analysts’ and the media’s coverage of us. This may result in lowerprices for our common stock than might otherwise be obtained and could alsoresult in a larger spread between the bid and asked prices for our commonstock. Delisting could also result in a loss of confidence by our suppliers,customers and employees.

 

***We may be unsuccessful in executingthe Plan and restoring the company to profitability and increasing shareholdervalue.***

 

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

 

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

 

·                  expanding our value-addedservices in key metro markets;

 

·                  strengthening relationshipswith technology partners;

 

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

 

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

 

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

 

·                  attracting and retaining toptalent;

 

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·                  managing our cash flow andmaintaining a strong balance sheet;

 

·                  delivering operating profits;

 

·                  continue to improve our grossmargins; and

 

·                  building our public sectorpractice.

 

We have been unsuccessful in achieving our goal of increasing revenueover the first half of fiscal 2009. The positive effects of improvement in ourgross margins have been attenuated by the lower volumes of business. Inaddition, we believe our ability to provide higher-margin services will belimited as long as our clients continue to be impacted by the economicdownturn. Finally, we may be unsuccessful in our ability to expand into keymetro markets and strengthen relationships with technology partners. If we areunable to increase our revenues or achieve one or more of the other objectiveslisted above, we may fail to restore profitability and increase shareholdervalue.

 

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

 

****Item 2.            UnregisteredSales of Equity Securities and Use of Proceeds.****

 

None.

 

****Item 3.****            ****Defaults UponSenior Securities.****

 

None.

 

****Item 4.            Submissionof Matters to a Vote of Security Holders.****

 

Atthe annual meeting of shareholders held June 2, 2009, the followingactions were taken:

 

(a) Electionof Directors

 

Thefollowing nominees, all of whom were listed in our proxy statement prepared inaccordance with Regulation 14(a), were elected:

 
| **Nominee**            | ** ** | **Votes For** | ** ** | **Authority Withheld** | ** ** |
|------------------------|------------|---------------|------------|------------------------|------------|
| Elmer  N. Baldwin      |       | 17,723,328    |       | 4,293,316              |       |
| Bridid  A. Bonner      |       | 17,801,055    |       | 4,215,589              |       |
| Andrew  K. Borgstrom   |       | 17,582,330    |       | 4,434,314              |       |
| Krzysztof  K. Burhardt |       | 17,094,712    |       | 4,921,932              |       |
| Joseph  T. Dunsmore    |       | 17,553,913    |       | 4,462,731              |       |
| Galen  G. Johnson      |       | 17,773,188    |       | 4,243,456              |       |
| Douglas  C. Neve       |       | 17,798,581    |       | 4,218,063              |       |

 

(b) Approvalof the Analysts International Corporation 2009 Equity Incentive Plan

 

Theshareholders voted their shares to approve the Analysts InternationalCorporation 2009 Equity Incentive Plan by the following vote:

 
| In  favor |   | 9,444,559 |   |   |   |
|-----------|--------|-----------|--------|--------|--------|
| Against   |   | 5,028,529 |   |   |   |
| Abstain   |   | 184,156   |   |   |   |
| Non-Votes |   | 7,359,400 |   |   |   |

 

(c) Ratificationof Auditors

 

Theshareholders voted their shares to ratify the appointment of Deloitte &Touche LLP by the following vote:

 

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| In  favor |   | 20,687,621 |   |   |   |
|-----------|--------|------------|--------|--------|--------|
| Against   |   | 1,227,892  |   |   |   |
| Abstain   |   | 101,131    |   |   |   |

 

****Item 5.            OtherInformation.****

 

None.

 

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                      |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                 |
| ^2.1                 |       | Asset Purchase Agreement,  dated August 4, 2009, by and between Netarx LLC and Analysts  International Corporation (with Ex. K, Form of Promissory Note)  (Exhibit 2.1 to Current Report on Form 8-K, filed August 5,  2009, Commission File No. 0-4090, incorporated by reference).   |
| ^ 3.1                |       | Articles of  Incorporation, as amended (Exhibit 3-a to Annual Report on  Form 10-K for fiscal year 1988, Commission File No. 0-4090,  incorporated by reference).                                                                                                                                     |
| ^ 3.2           |       | Restated Bylaws  (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000,  Commission File No. 0-4090, incorporated by reference).                                                                                                                                                            |
| ^ 3.3                |       | Amendment to Articles  of Incorporation to increase authorized shares to 40 million (Exhibit A  to Definitive Proxy Statement dated September 5, 1996, Commission File  No. 0-4090, incorporated by reference).                                                                                       |
| ^ 3.4                |       | Amendment to Articles  of Incorporation to increase authorized shares to 60 million  (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998,  Commission File No. 0-4090, incorporated by reference).                                                                                        |
| ^ 3.5                |       | Amendment to Articles of  Incorporation to increase authorized shares to 120 million (Exhibit A to  Definitive Proxy Statement dated September 8, 1998, Commission File  No. 0-4090, incorporated by reference).                                                                                      |
| ^ 4.1                |       | 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). |
| ^10.1                |       | Consent and Twelfth  Amendment to Credit Agreement, date August 4, 2009 (Exhibit 10.1 to  Current Report on Form 8-K, filed August 5, 2009, Commission File  No. 0-4090, incorporated by reference).                                                                                        |
| + 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.                                                                                                                                                                   |

 

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| ^  |   | Denotes an exhibit  previously filed with the Securities and Exchange Commission and incorporated  herein by reference. |
|----|--------|-------------------------------------------------------------------------------------------------------------------------|
| +  |   | Filed herewith.                                                                                                         |
| ++ |   | Furnished herewith.                                                                                                     |

 

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****SIGNATURES****

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned there untoduly authorized.

 

 
|                        | ANALYSTS  INTERNATIONAL CORPORATION |
|-----------------------------|-------------------------------------|
|                        | (Registrant)                        |
|                        |                                |   |
|                        |                                |   |
| Date: August 13,  2009 | By:                                 | /s/ Elmer N. Baldwin |
|                        |                                | Elmer N. Baldwin |
|                        |                                | President and Chief  Executive Officer |
|                        |                                | (Principal Executive  Officer) |
|                        |                                |   |
|                        |                                |   |
| Date: August 13,  2009 | By:                                 | /s/ Randy W. Strobel |
|                        |                                | Randy W. Strobel |
|                        |                                | Chief Financial Officer  and Treasurer |
|                        |                                | (Principal Financial  and Accounting Officer) |

 

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****EXHIBIT INDEX****

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                      |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                 |
| ^2.1                 |       | Asset Purchase  Agreement, dated August 4, 2009, by and between Netarx LLC and Analysts  International Corporation with Ex. K, Form of Promissory Note  (Exhibit 2.1 to Current Report on Form 8-K, filed August 5,  2009, Commission File No. 0-4090, incorporated by reference).     |
| ^ 3.1                |       | Articles of  Incorporation, as amended (Exhibit 3-a to Annual Report on  Form 10-K for fiscal year 1988, Commission File No. 0-4090,  incorporated by reference).                                                                                                                                     |
| ^ 3.2           |       | Restated Bylaws  (Exhibit 3-b to Annual Report on Form 10-K for fiscal year 2000,  Commission File No. 0-4090, incorporated by reference).                                                                                                                                                            |
| ^ 3.3                |       | Amendment to Articles  of Incorporation to increase authorized shares to 40 million (Exhibit A  to Definitive Proxy Statement dated September 5, 1996, Commission File  No. 0-4090, incorporated by reference).                                                                                       |
| ^ 3.4                |       | Amendment to Articles  of Incorporation to increase authorized shares to 60 million  (Exhibit 3-d to Annual Report on Form 10-K for fiscal year 1998,  Commission File No. 0-4090, incorporated by reference).                                                                                        |
| ^ 3.5                |       | Amendment to Articles  of Incorporation to increase authorized shares to 120 million (Exhibit A  to Definitive Proxy Statement dated September 8, 1998, Commission File  No. 0-4090, incorporated by reference).                                                                                      |
| ^ 4.1                |       | 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). |
| ^10.1                |       | Consent and Twelfth  Amendment to Credit Agreement, date August 4, 2009 (Exhibit 10.1 to  Current Report on Form 8-K, filed August 5, 2009, Commission File  No. 0-4090, incorporated by reference).                                                                                        |
| + 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.                                                                                                                                                                   |

 

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| ^  |   | Denotes an exhibit  previously filed with the Securities and Exchange Commission and incorporated  herein by reference. |
|----|--------|-------------------------------------------------------------------------------------------------------------------------|
| +  |   | Filed herewith.                                                                                                         |
| ++ |   | Furnished herewith.                                                                                                     |

 

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