ANALYSTS INTERNATIONAL CORP - 10-Q Quarterly Report

ANALYSTS INTERNATIONAL CORPORATION
(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


	July 3,		January 3,
(In thousands)	2004		2004
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	4,061	$	4,499
Accounts receivable, less allowance for doubtful accounts		60,488		55,623
Prepaid expenses and other current assets		4,572		4,737
Total current assets		69,121		64,859

Property and equipment, net		6,304		6,297
Intangible assets other than goodwill, net		10,862		11,249
Goodwill		16,460		16,460
Other assets		3,550		3,030
	$	106,297	$	101,895

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	16,844	$	15,825
Salaries and vacations		9,995		7,774
Deferred revenue		1,797		2,766
Self-insured health care reserves and other amounts		3,454		2,829
Total current liabilities		32,090		29,194

Non-current liabilities, primarily deferred compensation		4,377		4,038
Shareholders' equity		69,830		68,663
	$	106,297	$	101,895

	Three Months Ended						Six Months Ended
	July 3,			June 28,			July 3,			June 28,
(In thousands except per share amounts)	2004			2003			2004			2003

Professional services revenue:
Provided directly	$	72,084		$	71,443		$	143,153		$	141,078
Provided through subsuppliers		14,781			11,167			29,106			27,573
Total revenue		86,865			82,610			172,259			168,651

Expenses:
Salaries, contracted services and direct charges		70,794			67,539			140,458			138,195
Selling, administrative and other operating costs		15,159			15,062			30,240			30,627
Amortization of intangible assets		194			194			387			387

Operating income (loss)		718			(185	)		1,174			(558	)
Non-operating income		2			17			8			25
Interest expense		(14	)		--			(22	)		(8	)

Income (loss) before income taxes		706			(168	)		1,160			(541	)
Income tax expense (benefit)		--			--			--			(57	)
Net income (loss)	$	706		$	(168	)	$	1,160		$	(484	)

Per common share:
Basic income (loss)	$	.03		$	(.01	)	$	.05		$	(.02	)
Diluted income (loss)	$	.03		$	(.01	)	$	.05		$	(.02	)


Average common shares outstanding		24,212			24,199			24,212			24,199
Average common and common equivalent shares outstanding		24,223			24,199			24,228			24,199

	Six Months Ended
	July 3,			June 28,
*(In thousands)*	2004			2003

Net cash provided by operating activities	$	1,038		$	5,935

Cash flows from investing activities:
Property and equipment additions		(1,488	)		(736	)
Proceeds from property and equipment sales		11			17
Net cash used in investing activities		(1,477	)		(719	)

Cash flows from financing activities:
Net change in working capital line of credit		--			(324	)
Proceeds from exercise of stock options		1			--
Net cash provided by (used in) financing activities		1			(324	)

Net (decrease) increase in cash and cash equivalents		(438	)		4,892

Cash and cash equivalents at beginning of period		4,499			54

Cash and cash equivalents at end of period	$	4,061		$	4,946

Condensed Consolidated Financial Statements - The condensed consolidated balance sheet as of July 3, 2004, the condensed consolidated statements of operations for the three- and six-month periods ended July 3, 2004 and June 28, 2003, and the condensed consolidated statements of cash flows for the six-month periods ended July 3, 2004 and June 28, 2003 have been prepared by the Company, without audit. In the opinion of management, all adjustments necessary to present fairly the financial position at
July 3, 2004 and the results of operations and the cash flows for the periods ended July 3, 2004 and June 28, 2003 have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company suggests reading these condensed consolidated financial statements in conjunction with the financial statements and notes thereto included in the Company's January 3, 2004 annual report to shareholders.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," the Company evaluates its goodwill and indefinite-lived intangible assets for impairment as of the first day of the fiscal year and whenever events or changes in circumstances indicate that the assets might be impaired. In the current year, the Company evaluated these assets on January 3, 2004 and found no indication of impairment of its recorded goodwill, although the valuation determined the fair value of the Infrastructure and Solutions reporting units to approximate their carrying value.

	July 3, 2004							January 3, 2004
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Other Intangibles, Net		Gross Carrying Amount		Accumulated Amortization			Other Intangibles, Net

Customer list	$	12,270	$	(2,995	)	$	9,275	$	12,270	$	(2,608	)	$	9,662
Tradename		1,720		(133	)		1,587		1,720		(133	)		1,587
	$	13,990	$	(3,128	)	$	10,862	$	13,990	$	(2,741	)	$	11,249

Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant dates in accordance with SFAS 148, our pro forma net income (loss) and net income (loss) per share for the three and six months ended July 3, 2004 and June 28, 2003 would have been the amounts indicated below:

	Three Months Ended					Six Months Ended
	July 3,		June 28,			July 3,		June 28,
	2004		2003			2004		2003
Net income (loss) (in thousands):
As reported	$	706	$	(168	)	$	1,160	$	(484	)
Pro forma		530		(439	)		763		(1,009	)
Net income (loss) per share (basic):
As reported	$	.03	$	(.01	)	$	.05	$	(.02	)
Pro forma		.02		(.02	)		.03		(.04	)
Net income (loss) per share (diluted):
As reported	$	.03	$	(.01	)	$	.05	$	(.02	)
Pro forma		.02		(.02	)		.03		(.04	)

The Company has an asset-based revolving credit facility with up to $45,000,000 of availability. Borrowings under this credit agreement are secured by all of the Company’s assets. Under the revolving credit agreement, which matures on April 10, 2005, the Company must take advances or pay down the outstanding balance daily. The Company can, however, choose to request fixed-term advances of one, two, or three months for a portion of the outstanding balance on the line of credit. Daily advances on the line of credit bear interest at the Wall Street Journal’s "Prime Rate" plus .75% (5.00% on July 3, 2004) while the fixed-term advances bear interest at the LIBOR rate plus 3.0%. The credit agreement requires the payment of a commitment fee of .50% of the unused portion of the line plus an annual administration fee of $50,000. The agreement restricts, among other things, the payment of dividends, establishes limits on capital expenditures and requires the Company to maintain a minimum accounts payable turnover ratio. The Company believes it will be able to continue to meet these requirements for the foreseeable future and as of July 3, 2004 did not have any borrowings under this agreement.

Subsequent to July 3, 2004, the Company amended its credit agreement to extend the expiration date to October 31, 2006 and modify certain terms of the agreement. The amendment reduces the commitment fee from .50% to .25% of the unused portion of the line, reduces the annual administration fee from $50,000 to $25,000, and reduces the interest rates on daily advances to the Wall Street Journal’s "Prime Rate" and fixed-term advances to the LIBOR rate plus 2.0%.

Basic and diluted earnings (loss) per share (EPS) are presented in accordance with SFAS No. 128, "Earnings per Share." Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. The difference between weighted-average common shares and average common and common equivalent shares used in computing diluted EPS is the result of outstanding stock options and other contracts to issue common stock. Options to purchase 2,394,000 and 2,018,000 shares of common stock were outstanding at the end of the periods ended July 3, 2004 and June 28, 2003, respectively. Options to purchase 2,129,000 and 1,543,000 shares were considered anti-dilutive and excluded from the computation of common equivalent shares for the three and six months ended July 3, 2004, respectively, because the exercise price was greater than the average share price. All outstanding options were considered anti-dilutive and excluded from the computation of common equivalent shares for the three and six months ended June 28, 2003 because the Company reported a net loss. The computation of basic and diluted earnings (loss) per share for the three and six months ended July 3, 2004 and June 28, 2003 is as follows:

	Three Months Ended					Six Months Ended
(In thousands, except per share amounts)	July 3, 2004		June 28, 2003			July 3, 2004		June 28, 2003

Net income (loss)	$	706	$	(168	)	$	1,160	$	(484	)

Weighted-average number of common shares outstanding		24,212		24,199			24,212		24,199
Dilutive effect of employee stock options and restricted stock award		11		--			16		--
Weighted-average number of common and common equivalent shares outstanding		24,223		24,199			24,228		24,199

Earnings (loss) per share:
Basic	$	.03	$	(.01	)	$	.05	$	(.02	)
Diluted	$	.03	$	(.01	)	$	.05	$	(.02	)

In December 2000, the Company recorded a restructuring charge of $7,000,000. Of this charge, $2,600,000 related to workforce reductions (primarily non-billable staff), and $4,400,000 related to lease termination and abandonment costs (net of sub-lease income), including an amount for assets to be disposed of in conjunction with this consolidation. The restructuring accrual for workforce reductions was fully used prior to January 3, 2004. A summary of activity with respect to the restructuring charge for the six-month period ended July 3, 2004 is as follows:

Effective June 18, 2004, Jeffrey P. Baker joined the Company as its President and was granted a restricted stock award of 200,000 shares. At the time of the award, the aggregate market value of the restricted stock was $558,000 and was recorded as deferred compensation, a separate component of shareholders’ equity. The restricted stock award vests at the rate of 25% per year for the next four years.

The statements contained in "Management’s Discussion and Analysis of Financial Condition and Results of Operations," that are not historical fact, including without limitation, statements relating to the need of current and prospective clients for our services and our ability to retain and/or win that business, the effects of competition and our ability to respond to competitive and market conditions, our success in retaining and placing qualified professional staff, our ability to balance changes in billing and labor rates and to control other employee-related and operating costs (our ability to maintain gross margin levels), our ability to comply with the terms of our credit agreement, our ability to meet our working capital requirements and our ability to achieve and maintain profitability are forward looking stat ements made under the safe harbor provision of the Private Securities Litigation Reform Act. Words such as "believes," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Such statements are based on management’s current expectations as of the date of this document but involve risks, uncertainties and other factors which could cause actual results to differ materially from those contemplated by such forward looking statements. Investors are cautioned to consider these forward looking statements in light of important factors including, but not limited to, the risk factors discussed below, which may result in variations from results contemplated by such forward looking statements.

The following discussion of the results of our operations and our financial condition should be read in conjunction with our condensed consolidated financial statements and the related notes to condensed consolidated financial statements in this 10-Q, our other filings with the Securities and Exchange Commission and our other investor communications.

Total revenue for the three and six months ended July 3, 2004 was $86.9 million and $172.3 million, respectively, up from $82.6 million and $168.7 million during the comparable periods ended June 28, 2003. The increase included a 0.9% and 1.5% increase in revenue from services we supply directly to clients for the three and six months ended July 3, 2004, respectively. For the three- and six-month periods ended July 3, 2004, 83.0% and 83.1% of our revenues, respectively, were derived from services provided directly, compared to 86.5% and 83.7% in the comparable periods a year ago. The change in revenue mix was due mainly to an increase in revenue from a certain client, most of which had previously been provided through subsuppliers.

Our net income for the three and six months ended July 3, 2004 was $706,000 and $1.2 million, respectively, compared with a net loss of ($168,000) and ($484,000) for the comparable periods ended June 28, 2003. On a diluted per share basis, the net income for the three and six months ended July 3, 2004 was $.03 and $.05 per share, respectively, compared with a net loss of ($.01) and ($.02) per share, respectively, for the comparable periods ended June 28, 2003.

During the second quarter we continued our focus on managing the key elements to our future success: (i) increasing the number of requirements our sales organization brings to the Company from new and existing clients; (ii) increasing the number of qualified candidates our recruiting organization submits against those requirements; and most importantly,
(iii) increasing the rate at which quality submittals turn into placements.

During the second quarter of 2004, the productivity of both our sales and recruiting staff remained strong. During this period, average weekly requirements coming from new and existing clients increased 21.8% over the comparable period last year. Additionally, during the second quarter of 2004, average weekly candidate submittals against requirements increased 33.3% over the comparable period last year. As a result of the improvements in these key indicators, average weekly placements increased by sixteen during the second quarter of 2004 over the comparable period last year. This improvement is an indication of the industry and general economic recovery we have been experiencing.

As important as the above key elements are to growth of revenue, the bill rates we are able to charge to clients and the margins we are able to obtain on those bill rates are the key indicators of our profitability. Although we continue to experience intense competition on average bill rates, we did experience a slight increase in these rates during the second quarter. This increase, while encouraging, was more than offset by increases in medical and other fringe benefit costs, resulting in a slight decrease in our overall gross margin. As evidence of the continuing pressure on bill rates, one of our most significant clients implemented a 5% bill rate reduction during the second quarter of 2004. This rate reduction, and other rate competitive situations we have encountered and expect to arise during the remainder of 2004, will make further improvements in our average bill rates very difficult to achieve. As a result, we are anticipating average bill rates to remain flat for the remainder of 2004. To enhance the profitability in an environment of intense margin pressures, we are focused on three key objectives: i) developing the lowest-cost staffing delivery model in the industry and becoming the service provider, and employer of choice to the IT consulting community; ii) fully integrating offshore capabilities into each line of business; and iii) developing channel sales partners to drive new business opportunities.

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

The realization of certain assets recorded in our balance sheet is dependent upon our ability to maintain profitability. In evaluating the recorded value of our intangible assets ($10.9 million), goodwill ($16.5 million), and deferred tax assets ($2.6 million, net of the valuation allowance) for indication of impairment, we are required to make critical accounting estimates regarding the future operating results of the Company. These estimates are based on management’s current expectations but involve risks, uncertainties and other factors that could cause actual results to differ materially from these estimates.

To evaluate our intangible assets and goodwill for impairment, we rely heavily on the discounted cash flow model to assess the value of the associated reporting units. The discounted cash flow valuation technique requires us to project operating results and the related cash flows over a ten-year period. These projections involve risks, uncertainties and other factors and are by their nature extremely subjective. If actual results were substantially below projected results, an impairment of the recorded value of our goodwill and intangible assets could result.

To assess the recorded value of our deferred tax assets for possible impairment, we must predict the likelihood of future taxable income generation. Realization of the net deferred tax assets of $2.6 million requires the generation of at least $6.8 million of future taxable income. If the Company does not generate sufficient future taxable income, an impairment of the recorded assets could result.

In each accounting period we determine an amount to be set aside to cover potentially uncollectible accounts. We base our determination on an evaluation of accounts receivable for risk associated with a client’s ability to make contractually required payments. These determinations require considerable judgment in assessing the ultimate potential for collection of these receivables and include reviewing the financial stability of the client, the clients’ willingness to pay and current market conditions. If our evaluation of a client’s ability to pay is incorrect, we may incur future charges.

In each accounting period we estimate an amount to accrue for medical costs incurred but not yet reported (IBNR) under our self-funded employee medical insurance plans. We base our determination on an evaluation of past rates of claim payouts and trends in the amount of payouts. This determination requires significant judgment and assumes past patterns are representative of future payment patterns and that we have identified any trends in our claim experience. A significant shift in usage and payment patterns within our medical plans could necessitate significant adjustments to these accruals in future accounting periods.

Critical accounting policies are defined as those that involve significant judgments and uncertainties or affect significant line items within our financial statements and potentially result in materially different outcomes under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. We believe the accounting policies described below meet these characteristics.

We recognize revenue for our staffing business and the majority of our business solutions and infrastructure business as services are performed or products are delivered. Certain of our outsourcing and help desk engagements provide for a specific level of service each month for which we bill a standard monthly fee. Revenue for these engagements is recognized in monthly installments over the period of the contract. In some such contracts we invoice in advance for two or more months of service. When we do this, the revenue is deferred and recognized over the term of the invoicing agreement.

We generally do not enter into fixed price engagements. If we enter into such an engagement, revenue is recognized over the life of the contract based on time and materials input to date and estimated time and materials to complete the project. This method of revenue recognition relies on accurate estimates of the cost, scope and duration of the engagement. If the Company does not accurately estimate the resources required or the scope of the work to be performed, then future revenues may be negatively affected or losses on contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.

In all of our services, risk associated with client satisfaction exists. Although management feels these risks are adequately addressed by our adherence to proven project management methodologies and other procedures and policies, the potential exists for future revenue charges relating to unresolved issues with a small number of clients.

In certain client situations, where the nature of the engagement requires it, we utilize the services of other companies in our industry. If these services are provided under an arrangement whereby we agree to retain only a fixed portion of the amount billed to the client to cover our management and administrative costs, we classify the amount billed to the client as subsupplier revenue. These revenues, however, are recorded on a gross versus net basis because we retain credit risk and are the primary obligor to our client. All revenue derived from services provided by our employees or other independent contractors who work directly for us are recorded as direct revenue.

In accordance with the provisions of SFAS 142, "Goodwill and Other Intangible Assets," effective January 1, 2002 we ceased amortization of certain intangible assets including goodwill. Intangible assets with definite useful lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company completed its impairment analysis for 2004 during the first quarter and found no indication of impairment of its recorded goodwill although the valuation determined the fair value of the Infrastructure and Solutions reporting units to approximate their carrying value. Additional write-downs of intangible assets may be required if future valuations do not support current carrying value.

We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between reported income and income considered taxable by the taxing authorities. SFAS 109 also requires the resulting deferred tax assets to be reduced by a valuation allowance if some portion or all of the deferred tax assets are not expected to be realized. Based upon prior taxable income and estimates of future taxable income, we expect our deferred tax assets, net of the established valuation allowance, will be fully realized in the future. If actual future taxable income is less than we anticipate from our estimates, we may be required to record a valuation allowance against our deferred tax assets resulting in additio nal income tax expense which will be recorded in our consolidated statement of operations.

We recorded a restructuring charge and reserves associated with restructuring plans approved by management in December 2000. The remaining reserve consists of an estimate pertaining to real estate lease obligations. Factors such as the Company’s ability to enter into subleases, the creditworthiness of sublessees, and the ability to negotiate early termination agreements with lessors could materially affect this real estate reserve. While we believe our current estimates regarding lease obligations are adequate, our inability to sublet the remaining space or obtain payments from sublessees could necessitate significant adjustments to these estimates in the future.

	Three Months Ended						Three Months Ended
	July 3, 2004						June 28, 2003						Increase (Decrease)
				% of						% of			%					As % of
(In thousands)	Amount			Revenue			Amount			Revenue			Amount		Inc (Dec)			Revenue
Professional services revenue:
Provided directly	$	72,084			83.0	%	$	71,443			86.5	%	$	641		.9	%		(3.5	)%
Provided through subsuppliers		14,781			17.0			11,167			13.5			3,614		32.4			3.5
Total revenue		86,865			100.0			82,610			100.0			4,255		5.2			.0
Salaries, contracted services and direct charges		70,794			81.5			67,539			81.8			3,255		4.8			(.3	)
Selling, administrative and other operating costs		15,159			17.5			15,062			18.2			97		.6			(.7	)
Amortization of intangible assets		194			.2			194			.2			--		.0			.0
Non-operating income		(2	)		(.0	)		(17	)		(.0	)		15		(88.2	)		.0
Interest expense		14			.0			--			.0			14		--			.0

Income (loss) before income taxes		706			.8			(168	)		(.2	)		874		520.2			1.0
Income tax expense (benefit )		--			.0			--			(.0	)		--		.0			.0

Net income (loss)	$	706			.8	%	$	(168	)		(.2	)%	$	874		520.2	%		1.0	%

	Six Months Ended						Six Months Ended
	July 3, 2004						June 28, 2003						Increase (Decrease)
				% of						% of			%						As % of
(In thousands)	Amount			Revenue			Amount			Revenue			Amount			Inc (Dec)			Revenue
Professional services revenue:
Provided directly	$	143,153			83.1	%	$	141,078			83.7	%	$	2,075			1.5	%		(.6	)%
Provided through subsuppliers		29,106			16.9			27,573			16.3			1,533			5.6			.6
Total revenue		172,259			100.0			168,651			100.0			3,608			2.1			.0
Salaries, contracted services and direct charges		140,458			81.5			138,195			81.9			2,263			1.6			(.4	)
Selling, administrative and other operating costs		30,240			17.6			30,627			18.2			(387	)		(1.3	)		(.6	)
Amortization of intangible assets		387			.2			387			.2			--			.0			.0
Non-operating income		(8	)		(.0	)		(25	)		(.0	)		17			(68.0	)		.0
Interest expense		22			.0			8			.0			14			175.0			.0

Income (loss) before income taxes		1,160			.7			(541	)		(.3	)		1,701			314.4			1.0
Income tax expense (benefit )		--			.0			(57	)		(.0	)		57			100.0			.0

Net income (loss)	$	1,160			.7	%	$	(484	)		(.3	)%	$	1,644			339.7	%		1.0	%

Personnel:
Management and administrative		410						440						(30	)		(6.8	)%
Technical consultants		2,600						2,575						25			1.0	%

Services provided directly during the three- and six-month periods ended July 3, 2004 resulted in a 0.9% and 1.5% increase, respectively, in direct revenue over the comparable periods a year ago. We derived a lower percentage of our total revenue from direct billings during the periods in 2004 as compared to the comparable periods last year, however. The decrease in direct revenue as a percentage of total revenue during the periods in 2004 was due to the increase in revenue from one particular client, provided mostly through subsuppliers. The increase in subsupplier revenue from this client was partially offset by significant decreases in subsupplier revenue with certain other clients. Our subsupplier revenue is mainly pass-through revenue with associated fees providing minimal profit.

The increase in direct revenue resulted primarily from the increase in the number of consultants we had billable during these periods, which appears to be reflective of a modest recovery in the Information Technology (IT) market sector. Our technical consultant staff has increased by 25 consultants from June 28, 2003. In addition to the increase in technical consultants, hourly rates increased by 3% during the period ending July 3, 2004 as compared to last year. As demand for the services our industry provides has improved with the modest recovery, hourly rates have begun to stabilize.

Salaries, contracted services and direct charges primarily represent our payroll and benefit costs associated with billable consultants. Comparing the 2004 periods to the 2003 periods, these expenses decreased slightly as a percentage of revenue. We have been successful at managing our direct labor rates as our bill rates have increased slightly. The shifting of our revenue mix in 2004 to include more subsupplier revenue, with lower margins, played a role in offsetting the decrease of this category of expense as a percentage of revenue. Excluding the revenue and cost associated with subsupplier activity, this category of expense as a percentage of revenue was 78.6% for both the three- and six-month periods ended
July 3, 2004, compared to 79.4% and 79.1% for the comparable periods a year ago. Although we continuously a ttempt to control the factors which affect this category of expense, there can be no assurance we will be able to maintain or improve this level.

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 represented 17.5% and 17.6% of total revenue for the three- and six-month periods ended July 3, 2004, respectively, down from 18.2% for both of the comparable periods in 2003. We have managed these costs downward primarily by reducing discretionary spending for non-billable travel, imposing wage controls on administrative and management personnel, eliminating office space where possible, and by reducing the number of non-technical personnel we employ. We are committed to continuing to manage this category of expense to the right level for our company; however, there can be no assurance th is category of cost will not increase as a percentage of revenue, especially if our revenue declines.

We recorded no income taxes during the three- and six-month periods ended July 3, 2004. Income tax expense, which would have been recorded, was negated by a reversal of previously established reserves against deferred tax assets. As we continue to generate profit, we anticipate reversing portions of the reserves we have established on our deferred tax assets to negate any tax expense in which may otherwise have been recorded.

								Percentage
		July 3,		January 3,		Increase		Increase
(In thousands)		2004		2004		(Decrease)		(Decrease)

Cash and Cash Equivalents	$	4,061	$	4,499	$	(438	)	(9.7	)%
Accounts Receivable		60,488		55,623		4,865		8.7
Other Current Assets		4,572		4,737		(165	)	(3.5	)
Total Current Assets	$	69,121	$	64,859	$	4,262		6.6

Accounts Payable	$	16,844	$	15,825	$	1,019		6.4
Salaries and Vacations		9,995		7,774		2,221		28.6
Other Current Liabilities		5,251		5,595		(344	)	(6.1	)
Total Current Liabilities	$	32,090	$	29,194	$	2,896		9.9

Working Capital	$	37,031	$	35,665	$	1,366		3.8
Current Ratio		2.15		2.22		(.07	)	(3.2	)

Total Shareholders’ Equity	$	69,830	$	68,663	$	1,167		1.7	%

The day-to-day operation of our business requires a significant amount of cash to flow through our Company. During the three- and six-month periods ended July 3, 2004, we made total payments of approximately $49.0 million and $102.9 million, respectively, to pay our employee’s wages, benefits and associated taxes. We also made payments of approximately $21.2 million and $42.8 million, respectively, to pay vendors who provided billable technical resources to our clients through us. Finally, we made payments of approximately $11.8 million and $22.1 million, respectively, to fund general operating expenses such as employee expense reimbursement, office space rental and utilities.

The cash to fund these significant payments comes almost exclusively from our collection of amounts due us for services rendered to our clients (approximately $85.4 million and $167.4 million, respectively, in the three- and six-month periods ended July 3, 2004). 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 of the Company to timely invoice and therefore collect from our clients, could rapidly increase our need to borrow to fund the operations of our business.

Cash and cash equivalents at July 3, 2004 decreased slightly from January 3, 2004. As our revenue and consequently our receivable balance have grown during that time, our cash reserves have been utilized to fund that growth. Our primary need for working capital is to support accounts receivable resulting from our business and to fund the time lag 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. If our revenue and payroll continue to grow, we would expect our need to borrow to increase.

Working capital at July 3, 2004 was up from January 3, 2004. During the first half of 2004, we have been able to keep our line of credit at or near zero and maintain our average cash and cash equivalents position in the $2.0 million range. The ratio of current assets to current liabilities decreased at July 3, 2004, compared to January 3, 2004.

Our asset-based revolving credit agreement, consummated in April 2002, provides us with up to $45.0 million of availability. We have been successful at maintaining the balance on this line of credit at or near zero throughout the quarter ended July 3, 2004. At July 3, 2004 our borrowing availability, which fluctuates based on our level of eligible accounts receivable, was at $30.8 million under our credit facility. The level of availability has increased compared to January 3, 2004 as our receivable collateral base has increased. Borrowings under the credit agreement are secured by all of our assets.

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. The daily advances on the line of credit bear interest at the Wall Street Journal’s "Prime Rate" plus .75%, or 5.00% currently, while the fixed-term advances bear interest at the LIBOR rate plus 3.0%. The credit agreement requires the payment of a commitment fee of .50% of the unused portion of the line plus an annual administration fee of $50,000. The agreement restricts, among other things, the payment of dividends, establishes limits on capital expenditures and requires us to maintain a minimum accounts payable turnover ratio. We believe we will be able to continue to meet the requirements of the agreement. The credit agreement matures on April 10, 2005.

Subsequent to July 3, 2004, we amended our credit agreement to extend the expiration date to October 31, 2006 and modify certain terms of the agreement. The amendment reduces the commitment fee from .50% to .25% of the unused portion of the line, reduces the annual administration fee from $50,000 to $25,000, and reduces the interest rates on daily advances to the Wall Street Journal’s "Prime Rate" and fixed-term advances to the LIBOR rate plus 2.0%. The Company expects these new terms to reduce borrowing costs by approximately $330,000 on an annual basis.

During the three- and six-month periods ended July 3, 2004, we made capital expenditures totaling $860,000 and $1,488,000, respectively, compared to $498,000 and $736,000, respectively, in the three- and six-month periods ended June 28, 2003. We funded these capital expenditures with internally generated funds. We continue to tightly control capital expenditures to preserve working capital.

Several market conditions are affecting our industry. Intense price competition in the area of technical staff augmentation has created pressure on billable hourly rates, and clients have been requesting increasingly lower cost models for staff augmentation services. As a result, although we have seen some reversal of these trends in 2004, we have encountered lowering billing rates for quite some time. Low cost offerings for staff augmentation services through e-procurement systems, extremely competitive bidding processes, the granting of various types of discounts and the use of offshore resources will continue, thus making improvement in our average billing rates very difficult. Our ability to respond to customer requests for lower pricing or to provide other low cost solutions in this area of our business will have a d irect effect on our performance. Management expects competitive conditions in the area of

Management continues to concentrate on staff augmentation in Fortune 500 and small and medium-sized businesses, business solutions for small and medium-sized businesses, and business opportunities with its technology and product partners. In addition, we are developing a low-cost staffing model, expanding our offshore service capabilities and developing relationships with sales channel partners with which we will share sales leads.

Staff augmentation continues to represent more than half of total revenues (revenue from services provided directly to client (direct revenue) plus revenue from services provided to our clients by subsuppliers (subsupplier revenue)) and over half of our direct revenue. While we saw a slight increase in demand for our services during the first half of 2004, there can be no assurance as to when, or if, we will begin to see significant increases in revenue. Our ability to respond to the conditions outlined above will bear directly on our performance.

Our ability to quickly identify, attract and retain qualified technical personnel, especially during an economic recovery, will affect our results of operations and ability to grow in the future. Competition for qualified personnel is intense. If we are unable to hire the talent required by our client in a timely, cost-effective manner, it will affect our ability to grow our business. In addition to our ability to control labor costs, our ability to control employee benefit costs and other employee-related costs will affect our future performance. In an effort to contain our benefits costs, we implemented substantial changes to our benefits plans in fiscal year 2003 and have implemented additional changes in 2004. While we believe the changes we implemented will be effective, the effectiveness of these changes may vary du e to factors we cannot control such as rising medical costs, the amount of medical services used by our employees and similar factors.

Controlling operating costs while attempting not to impact our ability to respond to our clients also is a factor in our future success. We have streamlined our operations by consolidating offices, reducing administrative and management personnel and continuing to review our company structure for more efficient methods of operating our business and delivering our services. We may not be able to continue to reduce costs without affecting our ability to deliver service to our clients and therefore may choose to forego particular cost reductions if we believe it would be prudent to do so for the future business of the Company.

Terms and conditions standard to computer consulting services contracts also present a risk to our business. In general, our clients can cancel or reduce their contracts on short notice. Loss of a significant client relationship or a significant portion thereof, a significant number of relationships or a major contract could have a material adverse effect on our business.

We believe our working capital will be sufficient for the foreseeable needs of our business. Significant rapid growth in our business or a significant stretching of payment terms with major clients, 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 have a material adverse effect on our business.

We are exposed to certain market risks on our line of credit agreement because of the variable interest rate charged. Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates. Market risk is estimated as the potential increase in fair value resulting from a hypothetical one percent increase in interest rates which assuming an average outstanding debt balance of $5.0 million would result in an annual interest expense increase of approximately $50,000.

As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Michael J. LaVelle, and Chief Financial Officer, David J. Steichen, regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information that is required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission.

Nominee	Votes For	Authority Withheld

John D. Bamberger	20,735,285	1,380,304
Krzysztof K. Burhardt	20,945,156	1,170,433
Willis K. Drake	20,682,126	1,433,463
Michael B. Esstman	20,895,629	1,219,960
Frederick W. Lang	20,602,703	1,512,886
Michael J. LaVelle	20,735,741	1,379,848
Margaret A. Loftus	20,705,169	1,410,420
Edward M. Mahoney	20,562,397	1,553,192
Robb L. Prince	20,867,479	1,248,110

Exhibit 10-p	2004 Equity Incentive Plan.
Exhibit 10-q	Employment contract with Jeffrey P. Baker, recently appointed President of the Company.
Exhibit 31.1	Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Exhibit 31.2	Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Exhibit 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.

Exhibit No.		Description

10-p		2004 Equity Incentive Plan.
10-q		Employment contract with Jeffrey P. Baker, recently appointed President of the Company.
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.


Part I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheets
	July 3, 2004 (Unaudited) and January 3, 2004

	Condensed Consolidated Statements of Operations
	Three and six months ended July 3, 2004 and June 28, 2003 (Unaudited)

	Condensed Consolidated Statements of Cash Flows
	Six months ended July 3, 2004 and June 28, 2003 (Unaudited)

	Notes to Condensed Consolidated Financial Statements (Unaudited)

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

Part II.	OTHER INFORMATION

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

Item 6.	Exhibits and Reports on Form 8-K

Signatures

Exhibit Index

	Office Closure/
(In thousands)	Consolidation

Balance at January 3, 2004	$	611

Cash expenditures		141

Balance at July 3, 2004	$	470

	1 Year		2-3 Years		4-5 Years		Over 5 Years		Total

Operating Leases	$	5,823	$	10,119	$	2,551	$	--	$	18,493

Deferred Compensation		270		389		502		2,976		4,137

Total	$	6,093	$	10,508	$	3,053	$	2,976	$	22,630

In favor	21,411,126
Against	497,321
Abstain	207,142

In favor	11,929,500
Against	2,037,617
Abstain	1,449,979
No-vote	6,698,493

	ANALYSTS INTERNATIONAL CORPORATION
	(Registrant)



Date: August 11, 2004	By:	/s/ Michael J. LaVelle
		Michael J. LaVelle
		Chief Executive Officer


Date: August 11, 2004	By:	/s/ David J. Steichen
		David J. Steichen
		Chief Financial Officer
		(Principal Financial and Accounting Officer)