ANALYSTS INTERNATIONAL CORP - 10-Q Quarterly Report

During the third 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 30.6% over the comparable period last year. Additionally, during the third quarter of 2004, average weekly candidate submittals against requirements increased 25.8% over the comparable period last year. Despite the improvements in these key indicators, average weekly placements decreased by three during the third quarter of 2004 over the comparable period last year. As the IT market continues to improve, competition for the resources we recruit is intensifying. As a result, turning a submittal resume into a placement has become more difficult, as that candidate is more frequently accepting competitive offers.


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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, they have remained flat during the third quarter of 2004. 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 t he 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.

Critical Accounting Estimates

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.

Estimates of Future Operating Results

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 ($10.7 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.

Allowance for Doubtful Accounts

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.


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Accrual of Unreported Medical Claims

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

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.

Revenue Recognition

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.

Subsupplier Revenue

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.

Goodwill and Intangible Impairment

We evaluate goodwill and other intangible assets on a periodic basis. This evaluation relies on assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or related assumptions change, we may be required to recognize impairment charges.


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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.

During the third quarter of 2004, the Company changed its designated date of the annual evaluation of goodwill from the first day of the fiscal year to the last day of its monthly accounting period for August. This change allows the Company to perform testing at a point in the reporting cycle other than during the year-end closing and reporting process so that additional resources are available. The Company performed the test at September 4, 2004, and determined that no impairment charge for goodwill was required, although the valuation determined the fair value of the Staffing, Infrastructure and Solutions reporting units to approximate their carrying value.

Deferred Taxes

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.

Restructuring Charge

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.


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RESULTS OF OPERATIONS, THREE- AND NINE-MONTH PERIODS ENDED OCTOBER 2, 2004 VS. SEPTEMBER 27, 2003

The following tables illustrate the relationship between revenue and expense categories along with a count of employees and technical consultants for the three- and nine-month periods ended October 2, 2004 and September 27, 2003. The tables provide guidance in our explanation of our operations and results.

	Three Months Ended						Three Months Ended
	October 2, 2004						September 27, 2003						Increase (Decrease)
				% of						% of						%			As % of
*(In thousands except percentages)*	Amount			Revenue			Amount			Revenue			Amount			Inc (Dec)			Revenue
Professional services revenue:
Provided directly	$	72,040			83.4	%	$	69,432			86.8	%	$	2,608			3.8	%		(3.4	)%
Provided through subsuppliers		14,340			16.6			10,604			13.2			3,736			35.2			3.4
Total revenue		86,380			100.0			80,036			100.0			6,344			7.9			.0
Salaries, contracted services and direct charges		69,995			81.0			65,406			81.7			4,589			7.0			(.7	)
Selling, administrative and other operating costs		14,910			17.3			15,035			18.8			(125	)		(0.8	)		(1.5	)
Amortization of intangible assets		193			.2			193			.2			--			.0			.0
Non-operating income		(9	)		(.0	)		(39	)		(.0	)		30			(76.9	)		.0
Interest expense		7			.0			--			.0			7			--			.0

Income (loss) before income taxes		1,284			1.5			(559	)		(.7	)		1,843			329.7			2.2
Income tax expense		--			.0			--			(.0	)		--			.0			.0

Net income (loss)	$	1,284			1.5	%	$	(559	)		(.7	)%	$	1,843			329.7	%		2.2	%

	Nine Months Ended						Nine Months Ended
	October 2, 2004						September 27, 2003						Increase (Decrease)
				% of						% of						%			As % of
*(In thousands except percentages)*	Amount			Revenue			Amount			Revenue			Amount			Inc (Dec)			Revenue
Professional services revenue:
Provided directly	$	215,193			83.2	%	$	210,510			84.6	%	$	4,683			2.2	%		(1.4	)%
Provided through subsuppliers		43,446			16.8			38,177			15.4			5,269			13.8			1.4
Total revenue		258,639			100.0			248,687			100.0			9,952			4.0			.0
Salaries, contracted services and direct charges		210,453			81.4			203,601			81.9			6,852			3.4			(.5	)
Selling, administrative and other operating costs		45,150			17.5			45,662			18.3			(512	)		(1.1	)		(.8	)
Amortization of intangible assets		580			.2			580			.2			--			.0			.0
Non-operating income		(17	)		(.0	)		(64	)		(.0	)		47			(73.4	)		.0
Interest expense		29			.0			8			.0			21			262.5			.0

Income (loss) before income taxes		2,444			.9			(1,100	)		(.4	)		3,544			322.2			1.3
Income tax expense (benefit )		--			.0			(57	)		(.0	)		57			100.0			.0

Net income (loss)	$	2,444			.9	%	$	(1,043	)		(.4	)%	$	3,487			334.3	%		1.3	%

Personnel:
Management and administrative		415						460						(45	)		(9.8	)%
Technical consultants		2,630						2,590						40			1.5	%

Revenue

Services provided directly during the three- and nine-month periods ended October 2, 2004 resulted in 3.8% and 2.2% increases, 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. 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, for whom services were provided mostly by 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.


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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 40 consultants from September 27, 2003. In addition to the increase in technical consultants, hourly rates increased slightly during the period ended October 2, 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 and trend slightly upward.

Salaries, Contracted Services and Direct Charges

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 78.1% and 78.5% for the three- and nine-month periods ended October 2, 2004, respectively, compared to 79.5% and 79.2% for the comparable periods a year ago. Althoug h we continuously attempt 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 as we have begun to experience pressure on labor rates as the market improves.

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 represented 17.3% and 17.5% of total revenue for the three- and nine-month periods ended October 2, 2004, respectively, down from 18.8% and 18.3% for 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 the Company; however, there can be no assura nce this category of cost will not increase as a percentage of revenue, especially if our revenue was to decline.

Non-Operating Income

Non-operating income, consisting primarily of interest income, declined during the three and nine months ended October 2, 2004 compared to the equivalent periods a year ago due to a decrease in invested cash balances.

Interest Expense

Interest expense during the three- and nine-month periods ended October 2, 2004 increased slightly over the equivalent periods last year. As our revenue, and consequently our payroll, has grown in the first nine months of 2004, our need to borrow from our line of credit to support that growth has also slightly increased.

Income Taxes

We recorded no income taxes during the three- and nine-month periods ended October 2, 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 which may otherwise have been recorded.

Personnel

The increase in technical consultants is an indication of what appears to be the beginning of a modest recovery in the IT market sector. Administrative and management personnel decreased as a result of our continuing efforts to contain our operating costs.


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Liquidity and Capital Resources

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

								Percentage
	October 2,		January 3,		Increase			Increase
*(In thousands except percentages)*	2004		2004		(Decrease)			(Decrease)

Cash and Cash Equivalents	$	3,541	$	4,499	$	(958	)		(21.3	)%
Accounts Receivable		61,914		55,623		6,291			11.3
Other Current Assets		4,281		4,737		(456	)		(9.6	)
Total Current Assets	$	69,736	$	64,859	$	4,877			7.5

Accounts Payable	$	17,814	$	15,825	$	1,989			12.6
Salaries and Vacations		6,997		7,774		(777	)		(10.0	)
Other Current Liabilities		5,910		5,595		315			5.6
Total Current Liabilities	$	30,721	$	29,194	$	1,527			5.2

Working Capital	$	39,015	$	35,665	$	3,350			9.4
Current Ratio		2.27		2.22		.05			2.3

Total Shareholders’ Equity	$	71,148	$	68,663	$	2,485			3.6	%

Cash Requirements

The day-to-day operation of our business requires a significant amount of cash to flow through the Company. During the three- and nine-month periods ended October 2, 2004, we made total payments of approximately $54.7 million and $157.6 million, respectively, to pay our employee’s wages, benefits and associated taxes. We also made payments of approximately $24.4 million and $67.2 million, respectively, to pay vendors who provided billable technical resources to our clients through us. Finally, we made payments of approximately $6.4 million and $28.5 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 the Company for services rendered to our clients (approximately $85.0 million and $252.4 million, respectively, in the three- and nine-month periods ended October 2, 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.

Sources and Uses of Cash/Credit Facility

Cash and cash equivalents at October 2, 2004 decreased slightly from January 3, 2004. As our revenue, and consequently our receivable balance, has 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 October 2, 2004 was up from January 3, 2004. During the first nine months of 2004, we have been able to keep our line of credit at or near zero and maintain modest cash balances. The ratio of current assets to current liabilities increased at October 2, 2004, compared to January 3, 2004.


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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 October 2, 2004. At October 2, 2004 our borrowing availability, which fluctuates based on our level of eligible accounts receivable, was at $32.0 million under this 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. Effective August 5, 2004, the Company amended its credit agreement to extend the expiration date to October 31, 2006 and modified certain terms of the agreement. The amendment reduced the 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 4.75% currently, and fixed-term advances to the LIBOR rate plus 2.0%. The agreement continues to restrict, among other things, the payment of dividends, establishes limits on capital expenditures and requires the Company to maintain a minimum accounts payable turnover ratio.

During the three- and nine-month periods ended October 2, 2004, we made capital expenditures totaling $312,000 and $1.8 million, respectively, compared to $850,000 and $1.6 million, respectively, in the three- and nine-month periods ended September 27, 2003. We funded these capital expenditures with internally generated funds. We continue to tightly control capital expenditures to preserve working capital.

Commitments and Contingencies

The Company leases office facilities under non-cancelable operating leases. Deferred compensation is payable to participants in accordance with the terms of individual contracts. Minimum future obligations on operating leases and deferred compensation at October 2, 2004, are as follows:

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

Operating Leases	$	5,211	$	8,041	$	2,077	$	--	$	15,329

Deferred Compensation		709		389		502		2,517		4,117

Total	$	5,920	$	8,430	$	2,579	$	2,517	$	19,446

Market Conditions, Business Outlook and Risks to Our Business

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. Although we have seen a slight reversal of these trends in 2004, increasing billing rates continue to be a challenge. 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 direct effect on our performance. Management expects competitive conditions in the area of technical staff augmentation to continue for the foreseeable future, although it expects that demand for these services will increase as the economic recovery continues.

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. 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.


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In addition, outside factors such as technological changes needed due to the requirements of the Sarbarnes-Oxley Act may create additional opportunities. While we believe these areas of our business present opportunities to grow our business, growth in these areas will depend on improvement in the economy and spending in the overall IT services market, our ability to compete with other vendors and our success in obtaining new clients.

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 nine months 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 clients in a timely, cost-effective manner and to retain existing technical staff, 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 have periodically implemented changes to our benefits plans. While these changes have been effective in controlling our benefit costs, our ability to continue to control these costs by impleme nting changes in the benefits programs diminishes as medical and other benefit costs continue to rise.

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.

Compliance with the Sarbanes-Oxley Act under Section 404 of the Act has created substantial cost to us and strained our internal resources. As we continue to work towards certification, we expect to incur significant costs throughout the remainder of 2004 and in future years for maintaining compliance. An inability to control these costs or a failure to comply with Sarbanes-Oxley could have a material adverse effect on our business.

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 will not be a prime vendor with Bank of America by the end of this fiscal year. These subsupplier revenues were $6.6 million and $17.7 million during the three- and nine-month periods ended October 2, 2004, respectively. However, we do not know the full impact of this development as we expect to maintain a relationship with Bank of America and to act as a subsupplier with one of the Bank’s new preferred vendors after the transition.

We believe our working capital will be sufficient for the foreseeable needs of our business. Significant rapid growth in our business, a major acquisition or a significant lengthening 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.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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. For example, while our outstanding balance on our line of credit has averaged less than $1.0 million during 2004, if our average outstanding debt balance were $5.0 million, a one percent increase in interest rates would result in an annual interest expense increase of approximately $50,000.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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.

(b) Changes in Internal Controls

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


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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 10-r		Fifth Amendment to Credit Agreement dated as of August 5, 2004.

Exhibit 18		Letter of Preferability from Deloitte & Touche LLP regarding change in date for annual goodwill assessment.

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.

(b) Reports on Form 8-K

Form 8-K filed July 19, 2004 containing a press release announcing the Company’s revised earnings guidance and the date of its conference call for its second quarter ended July 3, 2004.

Form 8-K filed July 27, 2004 containing the earnings release of the Company’s financial results for its second quarter ended July 3, 2004.

Form 8-K filed July 27, 2004 containing the full text of prepared remarks made by management in a conference call held July 27, 2004 concerning the Company’s financial results for the quarter ended July 3, 2004 and future strategy.

Form 8-K filed July 28, 2004 containing the full text of the question and answer session from the conference call held July 27, 2004 concerning the Company’s financial results for the quarter ended July 3, 2004 and future strategy.


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SIGNATURES

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

	ANALYSTS INTERNATIONAL CORPORATION
	(Registrant)



Date: November 9, 2004	By:	/s/ Michael J. LaVelle
		Michael J. LaVelle
		Chief Executive Officer


Date: November 9, 2004	By:	David J. Steichen
		David J. Steichen
		Chief Financial Officer
		(Principal Financial and Accounting Officer)


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EXHIBIT INDEX

Exhibit No.		Description

Exhibit 10-r		Fifth Amendment to Credit Agreement dated as of August 5, 2004.

Exhibit 18		Letter of Preferability from Deloitte & Touche LLP regarding change in date for annual goodwill assessment.

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.


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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


Part I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheets
	October 2, 2004 (Unaudited) and January 3, 2004

	Condensed Consolidated Statements of Operations
	Three and nine months ended October 2, 2004 and September 27, 2003 (Unaudited)

	Condensed Consolidated Statements of Cash Flows
	Nine months ended October 2, 2004 and September 27, 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 6.	Exhibits and Reports on Form 8-K

Signatures

Exhibit Index


	October 2,		January 3,
*(In thousands)*	2004		2004
	*(Unaudited)*

ASSETS
Current assets:
Cash and cash equivalents	$	3,541	$	4,499
Accounts receivable, less allowance for doubtful accounts		61,914		55,623
Prepaid expenses and other current assets		4,281		4,737
Total current assets		69,736		64,859

Property and equipment, net		5,892		6,297
Intangible assets other than goodwill, net		10,669		11,249
Goodwill		16,460		16,460
Other assets		3,370		3,030
	$	106,127	$	101,895

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	17,814	$	15,825
Salaries and vacations		6,997		7,774
Deferred revenue		2,838		2,766
Self-insured health care reserves and other amounts		3,072		2,829
Total current liabilities		30,721		29,194

Non-current liabilities, primarily deferred compensation		4,258		4,038
Shareholders' equity		71,148		68,663
	$	106,127	$	101,895

	Nine Months Ended
	October 2,			September 27,
*(In thousands)*	2004			2003

Net cash provided by operating activities	$	826		$	9,948

Cash flows from investing activities:
Property and equipment additions		(1,800	)		(1,586	)
Proceeds from property and equipment sales		15			22
Net cash used in investing activities		(1,785	)		(1,564	)

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		(958	)		8,060

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

Cash and cash equivalents at end of period	$	3,541		$	8,114

	October 2, 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	$	(3,188	)	$	9,082	$	12,270	$	(2,608	)	$	9,662
Tradename		1,720		(133	)		1,587		1,720		(133	)		1,587
	$	13,990	$	(3,321	)	$	10,669	$	13,990	$	(2,741	)	$	11,249

ANALYSTS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

	Three Months Ended					Nine Months Ended
*(In thousands, except per share amounts)*	October 2, 2004		September 27, 2003			October 2, 2004		September 27, 2003

Net income (loss)	$	1,284	$	(559	)	$	2,444	$	(1,043	)

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		256		--			105		--
Weighted-average number of common and common equivalent shares outstanding		24,468		24,199			24,317		24,199

Earnings (loss) per share:
Basic	$	.05	$	(.02	)	$	.10	$	(.04	)
Diluted	$	.05	$	(.02	)	$	.10	$	(.04	)

	Office Closure/
*(In thousands)*	Consolidation

Balance at January 3, 2004	$	611

Cash expenditures		214

Balance at October 2, 2004	$	397