Company Overview

Headquartered in Minneapolis, Minnesota, Analysts International Corporation (AIC) is a diversified IT services company. In business since 1966, we have sales and customer support offices in the United States and Canada. For a more complete description of our business, please refer to our Annual Report on Form 10-K for the fiscal year ending December 29, 2007.

Overview of Results of 2008 Operations

During the first nine months of 2008, we have focused on reducing our selling, administrative and other expenses, making the investments required to increase our mix of higher-margin services and exiting our lowest-margin and non-core lines of business. The sale of Symmetry, the discontinuation of our staffing relationship with one of our largest staffing accounts and the reductions in our selling, administrative and other expenses are consistent with the plans we outlined in January 2008 to restore the Company to profitability and increase shareholder value, and they mark important steps in the continued transformation of our business.

† Total revenue for the three- and nine-month periods ended September 27, 2008 was $62.6 million and $227.4 million, respectively, a 33.1% and 16.4% decline when compared to $93.5 million and $271.9 million during the periods ended September 29, 2007. The decrease in overall revenue is largely the result of our exit from non-core and low margin lines of business. Early in the third quarter of 2008, we sold Symmetry Workforce Solutions (Symmetry), our managed services business, and discontinued our staffing relationship with one of our large staffing accounts. Together, business through Symmetry and the large staffing account represented approximately $15.0 million of our quarterly revenues and $60.0 million of our annualized revenues. The remaining decrease in revenue is due to a reduction in product sale activity and lower headcount in our staffing business which was partially offset by an overall increase in billing rates.

† Gross margin (revenues less the cost of services and products divided by revenues) has improved from 15.1% and 15.8% for the three- and nine-month periods ended September 29, 2007 to 18.8% and 17.3 % for the three- and nine-month periods ended September 27, 2008 due to our focus on providing higher-margin solutions orientated services and exiting low-margin lines of business.

† Selling, administrative and other expenses declined by $2.3 million and $5.1 million for the three- and nine-month periods ended September 27, 2008, respectively, when compared to the comparable periods of 2007, primarily due to our efforts to reduce costs as part of our business transformation plan and reduced commission expense due to the decrease in business volume.

The following tables illustrate the relationship between revenue and expense categories for the three- and nine-month periods ended September 27, 2008 and September 29, 2007 and a count of administrative employees and technical consultants as of September 27, 2008 and September 29, 2007.

RESULTS OF OPERATIONS, THREE-MONTH PERIODS ENDED SEPTEMBER 27, 2008 VS.
SEPTEMBER 29, 2007



                                         Three                     Three
                                     Months Ended              Months Ended
                                  September 27, 2008        September 29, 2007         Increase (Decrease)
                                                % of                      % of
(Dollars in thousands)             Amount      Revenue       Amount      Revenue        Amount          %
Revenue:
Professional services
provided directly                $    50,116      80.0 %   $    59,938      64.1 %   $     (9,822 )     (16.4 )%
Professional services
provided through subsuppliers          2,891       4.6          13,709      14.6          (10,818 )     (78.9 )
Product sales                          9,610      15.4          19,898      21.3          (10,288 )     (51.7 )
Total revenue                         62,617     100.0          93,545     100.0          (30,928 )     (33.1 )

Expenses:
Cost of services provided
directly                              39,167      62.5          47,936      51.2           (8,769 )     (18.3 )
Cost of services provided
through subsuppliers                   2,796       4.5          13,181      14.1          (10,385 )     (78.8 )
Cost of product sales                  8,899      14.2          18,289      19.5           (9,390 )     (51.3 )
Selling, administrative and
other operating costs                 11,780      18.8          14,105      15.1           (2,325 )     (16.5 )
Restructuring, severance, and
other related expenses                   291       0.5             337       0.4              (46 )     (13.6 )
Amortization of intangible
assets                                   235       0.4             266       0.3              (31 )     (11.7 )
Total expenses                        63,168     100.9          94,114     100.6          (30,946 )     (32.9 )

Operating loss                          (551 )    (0.9 )          (569 )    (0.6 )            (18 )      (3.2 )

Non-operating income                      27       0.0             227       0.2             (200 )     (88.1 )
Interest expense                          (8 )     0.0            (100 )    (0.1 )            (92 )     (92.0 )

Loss before income taxes                (532 )    (0.9 )          (442 )    (0.5 )             90        20.4

Income tax expense                         6       0.0               6       0.0                0         0.0

Net loss                         $      (538 )    (0.9 )%  $      (448 )    (0.5 )%  $         90        20.1 %

RESULTS OF OPERATIONS, NINE-MONTH PERIODS ENDED SEPTEMBER 27, 2008 VS. SEPTEMBER
29, 2007



                                    Nine                       Nine
                                Months Ended               Months Ended
                             September 27, 2008         September 29, 2007         Increase (Decrease)
                                           % of                       % of
(Dollars in thousands)       Amount       Revenue       Amount       Revenue        Amount          %
Revenue:
Professional services
provided directly          $   169,018       74.3 %   $   183,275       67.4 %   $     (14,257 )    (7.8 )%
Professional services
provided
through subsuppliers            31,217       13.7          44,651       16.4           (13,434 )   (30.1 )
Product sales                   27,175       12.0          43,975       16.2           (16,800 )   (38.2 )
Total revenue                  227,410      100.0         271,901      100.0           (44,491 )   (16.4 )

Expenses:
Cost of services
provided directly              133,275       58.6         146,372       53.8           (13,097 )    (8.9 )
Cost of services
provided through
subsuppliers                    30,100       13.2          42,881       15.8           (12,781 )   (29.8 )
Cost of product sales           24,682       10.9          39,784       14.6           (15,102 )   (38.0 )
Selling, administrative
and other operating
costs                           38,409       16.9          43,478       16.0            (5,069 )   (11.7 )
Restructuring,
severance, and other
related expenses                 2,659        1.2           1,759        0.7               900      51.2
Amortization of
intangible assets                  793        0.3             799        0.3                (6 )    (0.8 )
Total expenses                 229,918      101.1         275,073      101.2           (45,155 )   (16.4 )

Operating loss                  (2,508 )     (1.1 )        (3,172 )     (1.2 )            (664 )   (20.9 )

Non-operating income                97        0.0             251        0.1              (154 )   (61.4 )
Interest expense                  (143 )      0.0            (243 )     (0.1 )            (100 )   (41.2 )

Loss before income taxes        (2,554 )     (1.1 )        (3,164 )     (1.2 )            (610 )   (19.3 )

Income tax expense                  15        0.0              34        0.0               (19 )   (55.9 )

Net loss                   $    (2,569 )     (1.1 )%  $    (3,198 )     (1.2 )%  $        (629 )   (19.7 )%

Personnel:
Management and
Administrative                     274                        379                         (105 )   (27.7 )%
Technical Consultants            1,472                      2,138                         (666 )   (31.2 )%

Revenue

Revenue from services provided directly by our employees declined during the three- and nine-month periods ended September 27, 2008 by 16.4% and 7.8%, respectively, over the comparable period last year. The decline in revenue was primarily due to our decision to discontinue our relationship with one of our large staffing accounts and a reduction in the number of billable technical consultants which was partially offset by an increase in overall billing rates of 13.1% and 7.4% for the three- and nine-month periods ended September 27, 2008, compared to the three- and nine month periods ended September 29, 2007, respectively. Our subsupplier revenue, which is mainly pass-through revenue with associated fees, declined by 78.9% and 30.1%, respectively, over the comparable periods last year primarily due to the sale of Symmetry early in the third quarter of 2008. Product sales during the three- and nine-month periods ended September 27, 2008, declined by 51.7% and 38.2%, respectively, over the comparable periods last year due to an overall reduction in business volume.

Cost of Services Provided Directly

Cost of services provided directly represents our payroll and benefit costs associated with our billable consultants. This category of expense as a percentage of direct services revenue was 78.2% and 78.9%, respectively, for the three- and nine-month periods ended September 27, 2008, compared to 80.0% and 79.9%, respectively, for the comparable periods a year ago. The decrease in the expense as a percentage of direct services revenue for the three- and nine-month periods is a result of increasing the bill rates that we charge our customers in excess of the payroll and benefit rates we incur for our billable consultants.

Cost of Services Provided Through Subsuppliers

Cost of services provided through subsuppliers represents our cost when we utilize third parties to fulfill our obligations to our large staffing clients. This category of expense as a percentage of revenue for services provided through subsuppliers was 96.7% and 96.4% for the three- and nine-month periods, respectively, ended September 27, 2008, compared to 96.1% and 96.0% for the comparable periods a year ago. The increase in the expense as a percentage of subsupplier revenue is a result of increased costs from our subsuppliers.

Cost of Product Sales

Cost of product sales represents our cost when we resell hardware and software products. This category of expense, as a percentage of product sales, was 92.6% and 90.8% for the three- and nine-month periods, respectively, ended September 27, 2008, compared to 91.9% and 90.5% for the three- and nine-month periods a year ago. The increase in expense as a percentage of revenue is a result of the mix of product sales between the comparable periods.

Selling, Administrative and Other Operating Costs

Selling, administrative and other operating (SG&A) costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs decreased $2.3 million and $5.1 million from the comparable three- and nine-month periods, respectively, in 2007 and represented 18.8% and 16.9% of total revenue for the three- and nine-month periods, respectively, ended September 27, 2008, compared to 15.1% and 16.0% for the comparable periods in 2007. SG&A expenses decreased primarily due to the reduction in expenses as a result of execution of the business transformation plan and a reduction of sales and recruiting expense due to the decrease in business volume for the three- and nine-month periods ended September 27, 2008, respectively, compared to the three- and nine-month periods ended September 29, 2007. The remainder of the decrease for the nine months ended September 27, 2008, is due to the reduction in business volume.

Restructuring, Severance, and Other Related Expense

During the three- and nine-month periods ended September 27, 2008, we recorded restructuring, severance, and other related expenses totaling $0.3 million and $2.7 million, respectively. The expenses recorded were a continuation of the restructuring commenced in December of 2007 as part of the implementation of our business transformation plan.

Non-Operating Income

Non-operating income decreased by $0.2 million and $0.2 million during the three- and nine-month periods, respectively, ended September 27, 2008, as compared to the comparable periods of 2007. The comparable three- and nine-month periods in 2007 included a $0.2 million non-cash item resulting from the return of 124,654 shares of our common stock from an escrow account following the departure of two of the principles of a company we acquired in 2005.

Interest Expense

Interest expense decreased by $0.1 million and $0.1 million for the three-and nine-month periods ended September 27, 2008, respectively, due to a decrease in average borrowings to $0.6 million and $3.2 million during the three- and nine-month periods ended September 27, 2008, respectively, from $4.9 million and $3.9 million during the three- and nine-month periods ended September 29, 2007, respectively. Additionally, a reduction in the interest rates from 7.75% at the end of the third quarter 2007 to 5.00% at the end of the third quarter 2008 reduced the amount of interest expense.

Income Taxes

During the three- and nine-month periods ended September 27, 2008, we recorded a charge for income taxes related to subsidiaries where profitability was achieved and state taxes were expected. We recorded no additional income tax expense or benefit because any tax expense or benefit which would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we successfully return to profitability to a point where future realization of deferred tax assets which are currently reserved, becomes "more likely than not," we may be required to reverse the existing valuation allowance to realize the benefit of these assets.

Personnel

Our technical consulting staff levels finished the quarter at 1,472, a 31.2% reduction from the comparable quarter last year. The decline in technical consulting staff levels is due to a reduction of approximately 320 billable consultants as a result of the transfer of our existing contract with one of our largest staffing accounts to other suppliers and an overall decline in business volume. The decline in management and administrative personnel is due to our focus on reducing the number of management and administrative personnel that are necessary to support the business operations. The reported technical consulting staff levels exclude approximately 100 billable headcount in Medical Concepts Staffing, our medical staffing business, due to the separate industry focus of that business.

Liquidity and Capital Resources



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



                                                                                           Percentage
                                       September 27,      December 29,       Increase       Increase
(Dollars in thousands)                     2008               2007          (Decrease)     (Decrease)

Cash and cash equivalents             $            86    $           91    $         (5 )        (5.5 )%
Accounts receivable                            51,110            66,074         (14,964 )       (22.6 )
Other current assets                            1,551             2,101            (550 )       (26.2 )
Total current assets                  $        52,747    $       68,266    $    (15,519 )       (22.7 )%

Accounts payable                      $        20,667    $       27,780    $     (7,113 )       (25.6 )%
Salaries and vacations                          3,971             6,885          (2,914 )       (42.3 )
Line of credit                                  1,466             1,587            (121 )        (7.6 )
Restructuring accrual current                     369             1,900          (1,531 )       (80.6 )
Other current liabilities                       2,769             5,327          (2,558 )       (48.0 )
Total current liabilities             $        29,242    $       43,479    $    (14,237 )       (32.7 )%

Working capital                       $        23,505    $       24,787    $     (1,282 )        (5.2 )%
Current ratio                                    1.80              1.57            0.23          14.6

Total shareholders' equity            $        37,855    $       40,035    $     (2,180 )        (5.4 )%

Cash Requirements

During the three-and nine-month periods ended September 27, 2008, we made total payments of approximately $43.2 million and $140.9 million, respectively, to pay our employee's wages, benefits and associated taxes and to purchase product from our vendors. We also made payments during the three- and nine-month periods ended September 27, 2008 of approximately $20.3 million and $78.7 million, respectively, to pay vendors who provided billable technical resources to our clients through us. We made payments during the three- and nine-month periods ended September 27, 2008 of approximately $7.0 million and $21.7 million, respectively, to fund other operating expenses such as our employee expense reimbursement, office space rental and utilities. We made payments of approximately $0.8 million and $4.6 million to fund severance, restructuring, and other related charges during the three- and nine-month periods ended September 27, 2008, respectively.

The cash to fund these payments comes almost exclusively from our collection of amounts due to us for services rendered to our clients ($70.2 million and $241.4 million in the three- and nine-month periods ended September 27, 2008, respectively). During the third quarter, we also increased our line of credit balance by $0.1 million. Generally, payments made to fund the day-to-day operation of our business are due and payable regardless of the rate of cash collections from our clients. While we do not anticipate such an occurrence, a significant decline in the rate of collections from our clients, or an inability to timely invoice and therefore collect from our clients, could rapidly increase our need to borrow cash in order to fund the operations of our business.

Sources and Uses of Cash and Our Credit Facility

Cash and cash equivalents at September 27, 2008 remained stable from December 29, 2007. Our primary need for working capital is to support accounts receivable resulting from our business and to fund the lag time between payroll disbursement and receipt of fees billed to clients. Historically, we have been able to support internal growth in our business with internally generated funds and use of our credit facility.

Our asset-based revolving credit agreement provides us with up to $45.0 million of availability. At September 27, 2008, our borrowing availability under this credit facility, which fluctuates based on our level of eligible accounts

receivable, was $21.3 million. Borrowings under the credit agreement are secured by all of our assets. This line of credit is available to us to fund working capital needs and other investments such as acquisitions as these needs arise. We believe we will be able to continue to meet the requirements of this agreement for the foreseeable future.

The revolving credit agreement requires us to take advances or pay down the outstanding balance on the line of credit daily. However, we can request fixed-term advances of one, two, or three months for a portion of the outstanding balance on the line of credit. Effective August 5, 2004, we amended our credit agreement and modified certain terms of the agreement. The amendment reduced the annual commitment fee to .25% of the unused portion of the line, reduced the annual administration fee to $25,000, and reduced the interest rates on daily advances to the Wall Street Journal's "Prime Rate", or 5.00% as of September 27, 2008, and fixed-term advances to the applicable LIBOR rate plus 2.0%. The agreement continues, among other things, to prohibit the payment of dividends and to restrict capital expenditures. Effective January 20, 2006, we again amended the credit agreement extending the expiration date from October 31, 2006 to January 20, 2010. The amendment eliminated certain reserves in calculating the amount we can borrow under the facility and changed the definition of eligible accounts receivable in calculating our borrowing capacity. The effect of the modifications was to increase the borrowing capacity under the line by $4.0 to $5.0 million.

During the three- and nine-month periods ended September 27, 2008, we made capital expenditures totaling $0.2 million and $1.1 million, respectively, compared to $0.3 million and $1.0 million in the comparable periods ended September 29, 2007.

Working capital was $23.5 million at September 27, 2008, down $1.3 million from December 29, 2007. The ratio of current assets to current liabilities increased by 14.6% at September 27, 2008, compared to December 29, 2007.

We believe our working capital will be sufficient for the foreseeable needs of our business. Significant rapid growth in our business, a major acquisition, a significant lengthening of payment terms with major clients, or significant costs associated with non-operating activities could create a need for additional working capital. An inability to obtain additional working capital, should it be required, could have a material adverse effect on our business. We expect to be able to comply with the requirements of our credit agreement; however, failure to do so could affect our ability to obtain necessary working capital and could have a material adverse effect on our business.

Commitments and Contingencies

We have entered into arrangements that represent certain commitments and have arrangements with certain contingencies. We lease office facilities under non-cancelable operating leases, are engaged in license agreements with future commitments, and have deferred compensation that is payable to participants in accordance with the terms of our Restated Special Executive Retirement Plan. Our line of credit, with an outstanding balance of $1.5 million at September 27, 2008, expires on January 20, 2010. Our line of credit balance is treated as a current liability on our balance sheet as our agreement requires us to take advances or pay down the outstanding balance daily.

We will incur interest expense on all amounts outstanding on our line of credit at a variable interest rate. We will incur interest expense on certain portions of our deferred compensation obligation. Minimum future obligations on operating leases, license agreements, deferred compensation and the line of credit outstanding at September 27, 2008, are as follows:

                                                                  Over 5
(Dollars in thousands)      1 Year     2-3 Years     4-5 Years     Years     Total

Line of credit              $ 1,466   $         -   $         -   $     -   $  1,466

Operating leases              3,462         6,502         3,584       737     14,285

Maintenance agreements          267           400             -         -        667

Capital lease obligations       192           288             -         -        480

Deferred compensation           438           281           130       522      1,371

Total                       $ 5,825   $     7,471   $     3,714   $ 1,259   $ 18,269

New Accounting Pronouncements and Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement establishes a consistent framework for measuring fair value and expands disclosures on fair value measurements. The provisions of SFAS No. 157 became effective for us beginning December 30, 2007. The adoption of SFAS No. 157 did not have a material effect on our consolidated results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 became effective for us beginning December 30, 2007. We have assessed the provisions of the statement and elected not to apply fair value accounting to our eligible financial instruments. As a result, adoption of this statement had no impact on our consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R), which replaced FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years. We will apply the provisions of SFAS 141R to any applicable business combinations after the effective date.

Critical Accounting Policies

In our 2007 Annual Report on Form 10-K, we identified critical accounting policies which effect our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed those policies previously disclosed in our Annual Report.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies . . .