10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the quarterly period ended July 3, 2004

or

o Transition Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the transition period from                            to                          

Commission file number 0-4090

ANALYSTS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota	41-0905408
(State of Incorporation)	(IRS Employer Identification No.)
3601 West 76th Street
Minneapolis, MN	55435
(Address of Principal Executive Offices)	(Zip Code)
Registrant’s telephone number, including area code: (952) 835-5900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes x No o

As of August 5, 2004, 24,211,957 shares of the registrant's common stock were outstanding.

ANALYSTS INTERNATIONAL CORPORATION

INDEX

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

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PART I. FINANCIAL INFORMATION

Item 1.

Analysts International Corporation

Condensed Consolidated Balance Sheets

	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

Note: The balance sheet at January 3, 2004 has been taken from the audited financial statements at that date, and condensed.

See notes to condensed consolidated financial statements.

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Analysts International Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

	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

See notes to condensed consolidated financial statements.

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Analysts International Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	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

See notes to condensed consolidated financial statements.

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Analysts International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

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.

The Company operates on a fiscal year ending on the Saturday closest to December 31. Accordingly, the Company’s fiscal quarters end on the Saturday closest to the end of the calendar quarter.

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.

Comprehensive income (loss) for the three and six months ended July 3, 2004 and June 28, 2003 was equivalent to reported net income (loss).

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.

For the six months ended July 3, 2004, no goodwill or other intangibles were acquired, impaired or disposed. Other intangibles consisted of the following:

	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

The customer list is scheduled to be fully amortized by 2015 with corresponding amortization estimated to be approximately $800,000 per year.  The tradename is considered to have an indefinite life and therefore is no longer amortized.

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The Company applies the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," and continues to account for its five stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25 and related interpretations.

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	)

2. Line of Credit

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%.

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3. Shareholders' Equity

	Six Months Ended
(In thousands)	July 3, 2004
Balance at beginning of period	$	68,663
Proceeds upon exercise of stock options		1
Amortization of Deferred Compensation		6
Comprehensive income		1,160
Balance at end of period	$	69,830

4. Earnings Per Share

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	)

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5. Restructuring

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:

	Office Closure/
(In thousands)	Consolidation
Balance at January 3, 2004	$	611
Cash expenditures		141
Balance at July 3, 2004	$	470

The remaining balance in this accrual is to cover the ongoing lease payments for properties abandoned as a part of the restructuring. The last of these lease obligations is expected to terminate in September 2006.

6. Restricted Stock

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.

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

Six Months Ended July 3, 2004 and June 28, 2003

Forward Looking Statements

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.

Overview

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.

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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, 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.

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 ($10.9 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.

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.

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.

RESULTS OF OPERATIONS, THREE- AND SIX-MONTH PERIODS ENDED JULY 3, 2004 VS. JUNE 28, 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 six-month periods ended July 3, 2004 and June 28, 2003. The tables provide guidance in our explanation of our operations and results.

	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	%

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	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	%

Revenue

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

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.

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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 17.5% 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.

Non-Operating Income

Non-operating income, consisting primarily of interest income, declined during the three and six months ended July 3, 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 six-month periods ended July 3, 2004 increased over the equivalent periods last year. As our revenue and consequently our payroll have grown in the first half of 2004, our need to borrow from our line of credit to support that growth has also increased.

Income Taxes

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.

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
		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	%

Cash Requirements

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.

Sources and Uses of Cash/Credit Facility

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.

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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 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.

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 July 3, 2004, are as follows (in thousands):

	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

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. 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

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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. 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.

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 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.

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 which assuming an average outstanding debt balance of $5.0 million would result in an annual interest expense increase of approximately $50,000.

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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.

PART II. OTHER INFORMATION

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

At the annual meeting of shareholders held May 26, 2004, the following actions were taken:

(a) Election of Directors

The following nominees, all of whom were listed in the Company’s proxy statement prepared in accordance with Regulation 14(a), were elected:

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

(b) Ratification of Auditors

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

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

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(c) Approval of the 2004 Equity Incentive Plan

The shareholders voted their shares to approve the 2004 Equity Incentive Plan by the following vote:

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

Item 6. Exhibits and Reports on Form 8-K

(a)Exhibits

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.

(b)Reports on Form 8-K

A. Form 8-K filed April 14, 2004 containing a press release announcing the Company’s updated earnings guidance and the date of its conference call for its first quarter ended
April 3, 2004.

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

C. Form 8-K filed June 21, 2004 containing a press release announcing changes to the Board of Directors and appointments of President and Chief Financial Officer.

D. Form 8-K filed June 23, 2004 containing a press release announcing the Company granted 200,000 restricted shares to Jeffrey P. Baker, recently appointed President of the Company, as incentive for his employment agreement effective June 18, 2004.

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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: 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)

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EXHIBIT INDEX

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.

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EX-10.P

EXHIBIT 10-p

ANALYSTS INTERNATIONAL CORP.

2004 EQUITY INCENTIVE PLAN

SECTION 1.

DEFINITIONS

As used herein, the following terms shall have the meanings indicated below:

(a) "Affiliates" shall mean a Parent or Subsidiary of the Company.

(b) "Committee" shall mean a Committee of two or more directors who shall be appointed by and serve at the pleasure of the Board. If the Company’s securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, then, to the extent necessary for compliance with Rule 16b-3, or any successor provision, each of the members of the Committee shall be a "non-employee director." Solely for purposes of this Section 1(b), "non-employee director" shall have the same meaning as set forth in Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regula-tions under the Securities Exchange Act of 1934, as amended.

(c) The "Company" shall mean Analysts International Corp., a Minnesota corporation.

(d) "Fair Market Value" as of any date shall mean (i) if such stock is listed on the Nasdaq National Market, Nasdaq SmallCap Market, or an established stock exchange, the price of such stock at the close of the regular trading session of such market or exchange on such date, as reported by The Wall Street Journal or a comparable reporting service, or, if no sale of such stock shall have occurred on such date, on the next preceding day on which there was a sale of stock; (ii) if such stock is not so listed on the Nasdaq National Market, Nasdaq SmallCap Market, or an est ablished stock exchange, the average of the closing "bid" and "asked" prices quoted by the OTC Bulletin Board, the National Quotation Bureau, or any comparable reporting service on such date or, if there are no quoted "bid" and "asked" prices on such date, on the next preceding date for which there are such quotes; or (iii) if such stock is not publicly traded as of such date, the per share value as determined by the Board, or the Committee, in its sole discretion by applying principles of valuation with respect to the Company’s Common Stock.

(e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as amended from time to time.

(f) The "Participant" means (i) an employee of the Company or any Subsidiary to whom an incentive stock option has been granted pursuant to Section 9, (ii) a director, an employee or an officer of the Company or any Subsidiary to whom a

nonqualified stock option has been granted pursuant to Section 10, or (iii) a director, an employee or an officer of the Company or any Subsidiary to whom a stock award has been granted pursuant to Section 17.

(g) "Parent" shall mean any corporation which owns, directly or indirectly in an unbroken chain, fifty percent (50%) or more of the total voting power of the Company’s outstanding stock.

(h) The "Plan" means the Analysts International Corp. 2004 Equity Incentive Plan, as amended from time to time, including the form of Option and Award Agreements as they may be modified by the Board from time to time.

(i) "Stock" shall mean Common Stock of the Company (subject to adjustment as described in Section 12) reserved for incentive and nonqualified stock options and stock awards pursuant to this Plan.

(j) A "Subsidiary" shall mean any corporation of which fifty percent (50%) or more of the total voting power of outstanding stock is owned, directly or in-directly in an unbroken chain, by the Company.

 

SECTION 2.

PURPOSE

The purpose of the Plan is to promote the success of the Company and its Subsidiaries by facilitating the employment and retention of competent personnel and by furnishing incentive to officers, directors and employees upon whose efforts the success of the Company and its Subsidiaries will depend to a large degree.

It is the intention of the Company to carry out the Plan through the granting of stock options which will qualify as "incentive stock options" under the provisions of Section 422 of the Internal Revenue Code, or any successor provision, pursuant to Section 9 of this Plan, through the granting of "nonqualified" stock options pursuant to Section 10 of this Plan, and through the granting of stock awards pursuant to Section 17 of this Plan. Adoption of this Plan shall be and is expressly subject to the condition of approval by the shareholders of the Company within twelve (12) months before or after the adoption of the Plan by the Board of Directors.

SECTION 3.

EFFECTIVE DATE OF PLAN

The effective date of the Plan is the date it is adopted by the Board of Directors, subject to approval by the shareholders of the Company as required in Section 2.

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SECTION 4.

ADMINISTRATION

The Plan shall be administered by the Board of Directors of the Company (hereinafter referred to as the "Board") or by a Committee which may be appointed by the Board from time to time to administer the Plan (collectively referred to as the "Administrator"). The Administrator shall have all of the powers vested in it under the provisions of the Plan, including but not limited to exclusive authority (where applicable and within the limitations described herein) to determine, in its sole discretion, whether an incentive stock option, nonqualified stock option or stock award shall be granted, the individuals to whom, and the time or times at which, options and awards shall be granted, the number of shares subject to each option or award, the option price, and terms and condit ions of each option or award. The Administrator shall have full power and authority to administer and interpret the Plan, to make and amend rules, regulations and guidelines for administering the Plan, to prescribe the form and condi-tions of the respective stock option and stock award agreements (which may vary from Participant to Participant) evidencing each option or award and to make all other determinations necessary or advisable for the administration of the Plan. The Administrator’s interpretation of the Plan, and all actions taken and determinations made by the Administrator pursuant to the power vested in it hereunder, shall be conclusive and binding on all parties concerned.

No member of the Board or the Committee shall be liable for any action taken or determination made in good faith in connection with the administration of the Plan. In the event the Board appoints a Committee as provided hereunder, any action of the Committee with respect to the administration of the Plan shall be taken pursuant to a majority vote of the Committee members or pursuant to the written resolution of all Committee members.

SECTION 5.

PARTICIPANTS

The Administrator shall from time to time, at its discretion and without approval of the shareholders, designate those employees to whom incentive stock options shall be granted pursuant to Section 9 of the Plan; those employees, officers and directors of the Company or of any Subsidiary to whom nonqualified stock options shall be granted pursuant to Section 10 of the Plan; and those employees, officers and directors of the Company or any Subsidiary to whom stock awards shall be granted pursuant to Section 17 of the Plan. The Administrator may grant additional incentive stock options, nonqualified stock options and stock awards under this Plan to some or all Participants then holding options or awards or may grant options and awards solely or partially to new Participants. In designating Participants, the Administrator shall also determine the number of shares to be optioned or awarded to each such Participant. The Administrator may from time to time designate individuals as being ineligible to participate in the Plan.

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SECTION 6.

STOCK

The Stock to be optioned or awarded under this Plan shall consist of authorized but unissued shares of Stock. One Million (1,000,000) shares of Stock shall be reserved and available for stock options and stock awards under the Plan; provided, however, that the total number of shares of Stock reserved for options and stock awards under this Plan shall be subject to adjustment as provided in Section 12 of the Plan. In the event (i) any portion of an outstanding stock option or stock award under the Plan for any reason expires, (ii) any portion of an outstanding stock option is terminated prior to the exercise of such option, or (iii) any portion of a stock award is terminated prior to the lapsing of any risks of forfeiture on such stock, the shares of Stock allocable to such portion of the option or award shall continue to be reserved for stock options and stock awards under the Plan and may be optioned or awarded hereunder.

SECTION 7.

DURATION OF PLAN

Incentive stock options may be granted pursuant to the Plan from time to time during a period of ten (10) years from the effective date as defined in Section 3. Nonqualified stock options and stock awards may be granted pursuant to the Plan from time to time after the effective date of the Plan and until the Plan is discontinued or terminated by the Board. Any incentive stock option granted during such ten-year period and any nonqualified stock option or stock award granted prior to the termination of the Plan by the Board shall remain in full force and effect until the expiration of the option or award as specified in the written stock option or stock award agreement and shall remain subject to the terms and conditions of this Plan.

SECTION 8.

PAYMENT

Participants may pay for shares upon exercise of stock options granted pursuant to this Plan with cash, personal check, certified check or, if approved by the Administrator in its sole discretion, previously-owned shares of the Company’s Common Stock valued at such Stock’s then Fair Market Value, or such other form of payment as may be authorized by the Administrator. The Administrator may, in its sole discretion, limit the forms of payment available to the Participant and may exercise such discretion any time prior to the termination of the option granted to the Participant or upon any exercise of the option by the Participant. "Previously-owned shares" means shares of the Company’s Common Stock which the Participant has owned for at least six (6) months pr ior to the exercise of the stock option, or for such other period of time as may be required by generally accepted accounting principles.

With respect to payment in the form of Common Stock of the Company, the Administrator may require advance approval or adopt such rules as it deems necessary to assure compliance with

4

Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

SECTION 9.

TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS

Each incentive stock option granted pursuant to this Section 9 shall be evidenced by a written stock option agreement (the "Option Agreement"). The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Participant to Participant; provided, however, that each Participant and each Option Agreement shall comply with and be subject to the following terms and con-ditions:

(a) Number of Shares and Option Price. The Option Agreement shall state the total number of shares covered by the incentive stock option. To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, the option price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock per share on the date the Administrator grants the option; provided, however, that if a Participant owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent or any Subsidiary, the option price per share of an incentive stock option granted to such Participant shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Comm on Stock per share on the date of the grant of the option. The Administrator shall have full authority and discretion in establishing the option price and shall be fully protected in so doing.

(b) Term and Exercisability of Incentive Stock Option. The term during which any incentive stock option granted under the Plan may be exercised shall be established in each case by the Administrator. To the extent required to qualify the Option as an incentive stock option under Section 422 of the Internal Revenue Code, or any successor provision, in no event shall any incentive stock option be exercisable during a term of more than ten (10) years from the date on which it is granted; provided, however, that if a Participant owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its Parent or any Subsidiary, the incentive stock option granted to such Participant shall be exercisable during a term of not more than five (5) years from the date on which it is gr anted. The Option Agreement shall state when the incentive stock option becomes exercisable and shall also state the maximum term during which the option may be exercised. In the event an incentive stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the Option Agreement. The Administrator may acceler-ate the exercise date of any incentive stock option granted hereunder which is not immediately exercisable as of the date of grant.

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(c) Withholding. The Company or its Subsidiary shall be entitled to withhold and deduct from future wages of the Participant all legally required amounts necessary to satisfy any and all withholding and employment-related taxes attributable to the Participant’s exercise of an incentive stock option or a "disqualifying disposition" of shares acquired through the exercise of an incentive stock option as defined in Code Section 421(b). In the event the Participant is required under the Option Agreement to pay the Company or Subsidiary, or make arrangements satisfactory to the Company or Subsidiary respecting payment of, such withholding and employment-related taxes, the Administrator may, in its discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such obligation, in whole or in part, by deliver ing shares of the Company’s Common Stock or by electing to have the Company withhold shares of Common Stock otherwise issuable to the Participant having a Fair Market Value equal to the minimum required tax withholding, based on the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to the supplemental income resulting from the exercise of the incentive stock option or disqualifying disposition. In no event may the Company or any Subsidiary withhold shares having a Fair Market Value in excess of such statutory minimum required tax withholding. The Participant’s election to have shares withheld for this purpose shall be made on or before the date the option is exercised or, if later, the date that the amount of tax to be withheld is determined under applicable tax law. Such election shall be approved by the Administrator and otherwise comply with such rules as the Administrator may adopt to assure compliance with Rule 16b-3, or any su ccessor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

(d) Other Provisions. The Option Agreement authorized under this Section 9 shall contain such other provisions as the Administrator shall deem advisable. Any such Option Agreement shall contain such limitations and restrictions upon the exercise of the option as shall be necessary to ensure that such option will be considered an "incentive stock option" as defined in Section 422 of the Internal Revenue Code or to conform to any change therein.

SECTION 10.

TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS

Each nonqualified stock option granted pursuant to this Section 10 shall be evidenced by a written Option Agreement. The Option Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Participant to Participant; provided, however, that each Participant and each Option Agreement shall comply with and be subject to the following terms and conditions:

(a) Number of Shares and Option Price. The Option Agreement shall state the total number of shares covered by the nonqualified stock option. Unless otherwise

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determined by the Administrator, the option price per share shall be one hundred percent (100%) of the Fair Market Value of the Common Stock per share on the date the Administrator grants the option.

(b) Term and Exercisability of Nonqualified Stock Option. The term during which any nonqualified stock option granted under the Plan may be exercised shall be established in each case by the Administrator. The Option Agreement shall state when the nonqualified stock option becomes exercisable and shall also state the maximum term during which the option may be exercised. In the event a nonqualified stock option is exercisable immediately, the manner of exercise of the option in the event it is not exercised in full immediately shall be specified in the Option Agreement. The Administrator may acceler-ate the exercise date of any nonqualified stock option granted hereunder which is not immediately exercisable as of the date of grant.

(c) Withholding. The Company or its Subsidiary shall be entitled to withhold and deduct from future wages of the Participant all legally required amounts necessary to satisfy any and all withholding and employment-related taxes attributable to the Participant’s exercise of a nonqualified stock option. In the event the Participant is required under the Option Agreement to pay the Company or Subsidiary, or make arrangements satisfactory to the Company or Subsidiary respecting payment of, such withholding and employment-related taxes, the Administrator may, in its discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such obligation, in whole or in part, by delivering shares of the Company’s Common Stock or by electing to have the Company or Subsidiary withhold shares of Common Stock otherwi se issuable to the Participant having a Fair Market Value equal to the minimum required tax withholding, based on the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to the supplemental income resulting from the exercise of the nonqualified stock option. In no event may the Company or any Subsidiary withhold shares having a Fair Market Value in excess of such statutory minimum required tax withholding. The Participant’s election to have shares withheld for this purpose shall be made on or before the date the option is exercised or, if later, the date that the amount of tax to be withheld is determined under applicable tax law. Such election shall be approved by the Administrator and otherwise comply with such rules as the Administrator may adopt to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

(d) Other Provisions. The Option Agreement authorized under this Section 10 shall contain such other provisions as the Administrator shall deem advisable.

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SECTION 11.

TRANSFER OF OPTIONS

No incentive stock option shall be transferable, in whole or in part, by the Participant other than by will or by the laws of descent and distribution. During the Participant’s lifetime, the incentive stock option may be exercised only by the Participant. If the Participant shall attempt any transfer of any incentive stock option granted under the Plan during the Participant’s lifetime, such transfer shall be void and the incentive stock option, to the extent not fully exercised, shall terminate.

No nonqualified stock option shall be transferred, except that the Administrator may, in its sole discretion, permit the Participant to transfer any or all nonqualified stock options to any member of the Participant’s "immediate family" as such term is defined in Rule 16a-1(e) promulgated under the Securities Exchange Act of 1934, or any successor provision, or to one or more trusts whose beneficiaries are members of such Participant’s "immediate family" or partnerships in which such family members are the only partners; provided, however, that the Participant cannot receive any consideration for the transfer and such transferred nonqualified stock option shall continue to be subject to the same terms and conditions as were applicable to such nonqualified stock o ption immediately prior to its transfer.

SECTION 12.

RECAPITALIZATION, SALE, MERGER, EXCHANGE OR LIQUIDATION

If, following adoption of this Plan, the Company effects an increase or decrease in the number of shares of Common Stock in the form of a subdivision or consolidation of shares, or the payment of a stock dividend, or effects any other increase or decrease in the number of shares of Common Stock without receipt of consideration by the Company, the number of shares of Option Stock reserved under Section 6 hereof and the number of shares of Option Stock covered by each outstanding option and stock award, and the price per share thereof, shall be appropriately adjusted by the Board to reflect such change. Additional shares which may be credited pursuant to such adjustment shall be subject to the same restrictions as are applicable to the shares with respect to which the adjust ment relates.

Unless otherwise provided in the Option or Award Agreement, in the event of an acquisition of the Company through the sale of substantially all of the Company’s assets and the consequent discontinuance of its business or through a merger, consolidation, exchange, reorganization, reclassification, extraordinary dividend, divestiture or liquidation of the Company (collectively referred to as a "transaction"), the Board may provide for one or more of the following:

(a) the equitable acceleration of the exercisability of any outstanding options and the lapsing of the risks of forfeiture on any stock awards;

(b) the complete termination of this Plan, the cancellation of outstanding options not exercised prior to a date specified by the Board (which date shall give Participants a

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reasonable period of time in which to exercise the options prior to the effectiveness of such transaction), and the cancellation of any stock awards for which the risks of forfeiture have not lapsed;

(c) that Participants holding outstanding stock options shall receive, with respect to each share of Stock subject to such options, as of the effective date of any such transaction, cash in an amount equal to the excess of the Fair Market Value of such Stock on the date immediately preceding the effective date of such transaction over the option price per share of such options; provided that the Board may, in lieu of such cash payment, distribute to such Participants shares of stock of the Company or shares of stock of any corporation succeeding the Company by reason of such transaction, such shares having a value equal to the cash payment herein;

(d) that Participants holding outstanding stock awards shall receive, with respect to each share of Stock subject to such awards, as of the effective date of any such transaction, cash in an amount equal to the Fair Market Value of such Stock on the date immediately preceding the effective date of such transaction; provided that the Board may, in lieu of such cash payment, distribute to such Participants shares of stock of the Company or shares of stock of any corporation succeeding the Company by reason of such transaction, such shares having a value equal to the cash payment herein;

(e) the continuance of the Plan with respect to the exercise of options which were outstanding as of the date of adoption by the Board of such plan for such transaction and provide to Participants holding such options the right to exercise their respective options as to an equivalent number of shares of stock of the corporation succeeding the Company by reason of such transaction; and

(f) the continuance of the Plan with respect to stock awards for which the risks of forfeiture have not lapsed as of the date of adoption by the Board of such plan for such transaction and provide to Participants holding such awards the right to receive an equivalent number of shares of stock of the corporation succeeding the Company by reason of such transaction.

The Board may restrict the rights of or the applicability of this Section 12 to the extent necessary to comply with Section 16(b) of the Securities Exchange Act of 1934, the Internal Revenue Code or any other applicable law or regulation. The grant of an option or stock award pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 13.

INVESTMENT PURPOSE

No shares of Common Stock shall be issued pursuant to the Plan unless and until there has been compliance, in the opinion of Company’s counsel, with all applicable legal requirements,

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including without limitation, those relating to securities laws and stock exchange listing requirements. As a condition to the issuance of Stock to Participant, the Administrator may require Participant to (i) represent that the shares of Stock are being acquired for investment and not resale and to make such other representations as the Administrator shall deem necessary or appropriate to qualify the issuance of the shares as exempt from the Securities Act of 1933 and any other applicable securities laws, and (ii) represent that Participant shall not dispose of the shares of Stock in violation of the Securities Act of 1933 or any other applicable securities laws or any company policies then in effect.

As a further condition to the grant of any stock option or the issuance of Stock to Participant, Participant agrees to the following:

(a) In the event the Company advises Participant that it plans an underwritten public offering of its Common Stock in compliance with the Securities Act of 1933, as amended, and the underwriter(s) seek to impose restrictions under which certain shareholders may not sell or contract to sell or grant any option to buy or otherwise dispose of part or all of their stock purchase rights of the underlying Common Stock, Participant will not, for a period not to exceed 180 days from the prospectus, sell or contract to sell or grant an option to buy or otherwise dispose of any stock option granted to Participant pursuant to the Plan or any of the underlying shares of Common Stock without the prior written consent of the underwriter(s) or its representative(s).

(b) In the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any state’s securities or Blue Sky law limitations with respect thereto, the Board of Directors of the Company shall have the right (i) to accelerate the exercisability of any stock option and the date on which such option must be exercised, provided that the Company gives Participant prior written notice of such acceleration, and (ii) to cancel any options or portions thereof which Participant does not exercise prior to or contemporaneously with such public offering.

(c) In the event of a transaction (as defined in Section 12 of the Plan), Participant will comply with Rule 145 of the Securities Act of 1933 and any other restrictions imposed under other applicable legal or accounting principles if Participant is an "affiliate" (as defined in such applicable legal and accounting principles) at the time of the transaction, and Participant will execute any documents necessary to ensure compliance with such rules.

The Company reserves the right to place a legend on any stock certificate issued upon the exercise of an option or upon the grant of a stock award pursuant to the Plan to assure compliance with this Section 13.

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SECTION 14.

RIGHTS AS A SHAREHOLDER

A Participant (or the Participant’s successor or successors) shall have no rights as a shareholder with respect to any shares covered by an incentive stock option or nonqualified stock option until the date of the issuance of a stock certificate evidencing such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is actually issued (except as otherwise provided in Section 12 of the Plan).

SECTION 15.

AMENDMENT OF THE PLAN

The Board may from time to time, insofar as permitted by law, suspend or discontinue the Plan or revise or amend it in any respect; provided, however, that no such revision or amendment, except as is authorized in Section 12, shall impair the terms and conditions of any stock option or stock award which is outstanding on the date of such revision or amendment to the material detriment of the Participant without the consent of the Participant. Notwithstanding the foregoing, no such revision or amendment shall (i) increase the number of shares subject to the Plan except as provided in Section 12 hereof, (ii) change the desig-nation of the class of employees eligible to receive stock options or stock awards, (iii) decrease the price at which options may be granted, or (iv)&nb sp;increase the benefits accruing to Participants under the Plan, without the approval of the shareholders of the Company if such approval is required for compliance with the requirements of any applicable law or regulation. Furthermore, the Plan may not, without the approval of the shareholders, be amended in any manner that will cause incentive stock options to fail to meet the requirements of Section 422 of the Internal Revenue Code.

SECTION 16.

NO OBLIGATION TO EXERCISE OPTION

The granting of a stock option shall impose no obligation upon the Participant to exercise such option. Further, the granting of a stock option or stock award hereunder shall not impose upon the Company or any Subsidiary any obligation to retain the Participant in its employ for any period.

SECTION 17.

STOCK AWARDS

Each stock award granted pursuant to the Plan shall be evidenced by a written stock award agreement (the "Stock Award Agreement"). The Stock Award Agreement shall be in such form as may be approved from time to time by the Administrator and may vary from Participant to Participant; provided, however, that each Participant and each Stock Award Agreement shall comply with and be subject to the following terms and conditions:

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(a) Number of Shares. The Stock Award Agreement shall state the total number of shares of Stock covered by the stock award.

(b) Risks of Forfeiture. The Stock Award Agreement shall set forth the risks of forfeiture, if any, which shall apply to the shares of Stock covered by the stock award, and shall specify the manner in which such risks of forfeiture shall lapse. The Administrator may, in its sole discretion, modify the manner in which such risks of forfeiture shall lapse but only with respect to those shares of Stock which are restricted as of the effective date of the modification.

(c) Issuance of Shares. The Company shall cause to be issued a stock certificate representing such shares of Stock in the Participant’s name, and shall deliver such certificate to the Participant; provided, however, that the Company shall place a legend on such certificate describing the risks of forfeiture and other transfer restrictions set forth in the Participant’s Stock Award Agreement and providing for the cancellation and return of such certificate if the shares of Stock subject to the stock award are forfeited.

(d) Rights as Shareholder. If the Participant’s stock award is subject to any risk of forfeiture, this Section 17(d) shall apply. Until such risks of forfeiture have lapsed or the shares subject to such stock award have been forfeited, the Participant shall be entitled to vote the shares of Stock represented by such stock certificates and shall receive all dividends attributable to such shares, but the Participant shall not have any other rights as a shareholder with respect to such shares.

(e) Withholding Taxes. The Company or its Subsidiary shall be entitled to withhold and deduct from future wages of the Participant all legally required amounts necessary to satisfy any and all withholding and employment-related taxes attributable to the Participant’s stock award. In the event the Participant is required under the Stock Award Agreement to pay the Company or Subsidiary, or make arrangements satisfactory to the Company or Subsidiary respecting payment of, such withholding and employment-related taxes, the Administrator may, in its discretion and pursuant to such rules as it may adopt, permit the Participant to satisfy such obligations, in whole or in part, by delivering shares of Common Stock, including shares of Stock received pursuant to a stock award on which the risks of forfeiture have lapsed. Such shares shall have a Fair Market Value equal to the minimum required tax withholding, based on the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to the supplemental income resulting from such stock award. In no event may the Participant deliver shares having a Fair Market Value in excess of such statutory minimum required tax withholding. The Participant’s election to deliver shares of Common Stock for this purpose shall be made on or before the date that the amount of tax to be withheld is determined under applicable tax law. Such election shall be approved by the Administrator and otherwise comply with such rules as the

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Administrator may adopt to assure compliance with Rule 16b-3, or any successor provision, as then in effect, of the General Rules and Regulations under the Securities Exchange Act of 1934, if applicable.

(f) Nontransferability. If the Participant’s stock award is subject to any risks of forfeiture, this Section 17(f) shall apply. No such stock award shall be transferable, in whole or in part, by the Participant, other than by will or by the laws of descent and distribution, prior to the date the risks of forfeiture described in the Stock Award Agreement have lapsed. If the Participant shall attempt any transfer of such stock award granted under the Plan prior to such date, such transfer shall be void and the stock award shall terminate.

(g) Other Provisions. The Stock Award Agreement authorized under this Section 17 shall contain such other provisions as the Administrator shall deem advisable.

#2927049\2

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EX-10.Q

EXHIBIT 10-q

EMPLOYMENT AGREEMENT

This is an Employment Agreement (Agreement) between ANALYSTS INTERNATIONAL CORPORATION, a Minnesota corporation, (hereinafter "Analysts") with headquarters offices located at 3601 W. 76^th Street, Minneapolis, Minnesota 55435 and JEFFREY P. BAKER, (hereinafter "Executive") of 1 Spyglass Court, Frisco, Texas 75034.

SECTION 1

DEFINITIONS

1. Definitions.

The following capitalized terms used in this Agreement shall be defined as follows:

Agreement shall mean this Agreement between Analysts and Executive.

Base Salary shall mean the annual base salary payable to Executive pursuant to Section 3.1 hereof, and "bi-weekly Base Salary" shall mean the Base Salary divided by twenty-six (26).

Board shall mean the Board of Directors of Analysts.

Cause shall mean termination of the Executive’s employment with Analysts by the Board because of (1) failure to perform his duties in good faith and as required in Section 2.2 hereof after receiving three notices of specific and material failures in this regard; (2) gross misconduct, dishonesty or disloyalty which results in material harm to Analysts; (3) willful and material breach of this Agreement by Executive (other than Executive’s failure to perform his duties hereunder resulting from incapacity due to physical or mental illness); or (4) conviction or entry of a plea of guilty or < EM>nolo contendere to any felony or to any misdemeanor involving fraud, misrepresentation, theft or moral turpitude. No act, or failure to act, by Executive shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in Analysts’s best interest.

Change in Control shall have the definition of a "Change in Control" as defined in Analysts’ Change in Control Agreement (attached hereto as Exhibit A and hereinafter referred to as "Change in Control Agreement") with its senior executives.

Change in Control Payments shall mean any payment (including any benefit or transfer of property) in the nature of compensation to or for the benefit of Executive under any arrangement which is partially or entirely contingent on a Change of Control, or is deemed to be contingent on a Change in Control for purposes of Section 280G of the Code. As used in this definition, the term "arrangement" includes any agreement between Executive and Analysts and

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any and all of Analysts’ salary, bonus, incentive, compensation or benefit plans, programs or arrangements, and shall include this Agreement.

Code shall mean the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes a reference to such provision as it may be amended from time to time and to any successor provision..

Company shall mean Analysts International Corporation, a Minnesota corporation, any subsidiaries thereof, and any successors or assigns, including any Successor as defined herein.

Company Product means any product, product line or service (including any component thereof or research to develop information useful in connection with a product or service) that is being designed, developed, manufactured, marketed or sold by Analysts at the time of the termination of Executive’s employment with Analysts or with respect to which Analysts has acquired, conceived of or developed, prior to termination of Executive’s employment, Confidential Information which it intends to use in the design, development, manufacture, marketing or sale of a product or service.

Competitive Product means any product, product line or service (including any component thereof or research to develop information useful in connection with a product or service) that is being designed, developed, manufactured, marketed or sold by anyone other than Analysts and is of the same general type, performs similar functions, or is used for the same purposes as a Company Product.

Confidential Information means any information or compilation of information that Executive learns or develops during the course of his employment with Analysts that derives independent economic value from not being generally known, or readily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use. "Confidential Information" includes, but is not limited to, trade secrets, inventions, discoveries, and may relate to such matters as financial information; information concerning capitalization of the Company; pricing procedures, techniques and other pricing information; technical and business plans; identity of potential clients and their IT consulting requirements; the IT consulting needs of current clients; research and development, manufacturing, bidding or other business processes; management systems and techniques; vendor relationships and processes; and sales and marketing plans and information.

Good Reason except for purposes of a Change in Control, in which case Good Reason shall have the meaning set forth in the Change in Control Agreement, shall mean, (1) a substantial reduction in the nature or status of Executive’s responsibilities hereunder, including if Executive should no longer serves as the President of Analysts (unless Executive is appointed CEO of Analysts); (2) a reduction by the Company in the Executive’s Base Salary, except in the case where the Company reduces the base salaries of its senior executives generally provided that such reduction shall not exceed the average percentage reduction of all senior executives of this Agreement; (3) the failure to comply with Section 3.3 of this Agreement; and (4) intentional failure by Analysts to allow Executive to participate to the full extent in all plans, programs or benefits in accordance with this Agreement. Notwithstanding the foregoing, "Good Reason"

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shall be deemed to occur only if such event enumerated in (1), (2), (3) or (4) above has not been corrected by Analysts within two weeks of receipt of notice from Executive of the occurrence of such event, which notice shall specifically describe such event.

Inventions means any inventions, discoveries, improvements, ideas or works of authorship (whether patentable or not and including those which may be subject to copyright protection) generated, conceived, authored or reduced to practice by Executive alone or in conjunction with others, during or after working hours, while an employee of Analysts, and that:

(i) are derived in whole or in part from, or use, incorporate or represent any improvement to any Invention or trade secret of Analysts; or

(ii) result from any work Executive performs for Analysts; or

(iii) use any of Analysts’ equipment, supplies, facilities or trade secret information; or

(iv) otherwise relate to Analysts’ products or Analysts’ present or reasonably foreseeable future research or development.

For purposes of this Agreement, the term "Inventions" shall not preclude Executive’s involvement in Financial Market Solutions, LLC, e-Learning and Education Solutions, LLC, bpmx., LLC or Mullets, LLC (hereinafter "the LLCs"), and Executive may make de minimus use of Analysts equipment, supplies or facilities for his involvement with the LLCs. In all other respects, Executive shall refrain from the activities set forth in subsections (i)-(iv) of the definition of "Inventions." With respect to his involvement with the LLCs, Executive shall remain bound by the terms of Section 2.2.

Term shall mean the term of Executive’s employment under Section 2.3 below.

Person shall mean an individual, partnership, corporation, estate or trust or other entity.

Successor shall be any entity acquiring substantially all of the assets of Analysts or a corporation into which Analysts is merged or with which it is consolidated.

SECTION 2

EMPLOYMENT AND TERMS OF AGREEMENT

2.1 Employment. Analysts hereby agrees to continue to employ Executive, and Executive hereby agrees to continue his employment as President of Analysts, subject to the terms and conditions of this Agreement. Executive shall report directly to the Company’s Chief Executive Officer ("CEO").

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2.2 Duties.

a. During the term of his employment pursuant to this Agreement, Executive shall serve Analysts faithfully and to the best of his ability and shall devote substantially all his business and professional time, energy, and diligence to the performance of the duties of such office and he shall perform such service and duties in connection with the business and affairs of Analysts: (i) as are customarily incident to such office; and (ii) as may reasonably be assigned or delegated to him by the CEO.

b. Executive may engage in appropriate civic, charitable or religious activities and devote a reasonable amount of time to private investments or with the consent of Analysts’ Board of Directors, which shall not be withheld unreasonably, serve on up to two (2) boards of directors of other entities, in each case, as long as such activities and service do not interfere or conflict with Executive’s duties and responsibilities to Analysts and its affiliates.

c. Executive agrees to be subject to Analysts’ control, rules, regulations, policies, codes of conduct and programs and to comply with the federal and state laws and regulations applicable to Analysts, including but not limited to federal securities laws and regulations, and NASDAQ market rules.

2.3 Term of Employment.

a. The term of this Agreement shall be effective as of June 18, 2004 and shall extend until terminated as expressly provided herein.

b. Unless extended by mutual consent or as provided in Section 2.3(c) below, this Agreement shall terminate on June 17, 2007 (the "Initial Term").

c. On and after the Initial Term, this Agreement shall be deemed extended from year to year ("Extension Year") unless, no later than ninety (90) days prior to the end of the Initial Term or applicable Extension Year (as the case may be), Analysts or the Executive shall have notified the other party in writing that it or he does not elect to extend the Initial Term or applicable Extension Year (as the case may be) past its then expiration date.

SECTION 3

COMPENSATION, BENEFITS AND OTHER ENTITLEMENTS

3.1 Base Salary. As compensation for his services to Analysts and as compensation for his confidentiality and non-competition agreements provided in Sections 6 and 8 of this Agreement, Executive shall be paid a bi-weekly salary of $14,615.38. The Base Salary may be increased or reduced; provided, however, that any reduction shall be permitted only if the Company reduces the base salary of its senior executives generally and such reduction shall not exceed the average percentage reduction for all s enior executives. The Base Salary shall be inclusive of all applicable income, Social Security, and other taxes and charges that are required by law to be withheld by Analysts or that Executive requests Analysts to withhold.

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3.2 Bonus. In addition to the Base Salary payable to Executive pursuant to Section 3.1 above, Executive will be eligible to participate in Analysts annual executive incentive plan. The criteria for payout of Executive’s bonus for a particular year shall, subject to the preceding sentence, be determined solely within the discretion of the Board or the Compensation Committee of Analysts and shall be communicated to Executive each year in the form of a separate incentive plan covering all execut ives. The bonus earned by Executive, if any, will be paid to Executive in accordance with the terms and conditions of the incentive plan.

3.3 Long-Term Incentives. In addition to the Base Salary and incentive bonus, if any, payable to Executive pursuant to Sections 3.1 and 3.2, Executive will be eligible to receive equity-based awards. Except for those restricted stock awards and stock option grants made in accordance with Sections 3.3.a, 3.3.b and 3.3.c, the Compensation Committee in its sole discretion will determine whether to grant to Executive any equity based awards in a particular year and the size of such awards.

a. Restricted stock award. With the effective date of this Agreement, Executive shall be granted 200,000 shares of restricted common stock of Analysts on the effective date of this Agreement. The shares will vest in four annual increments of twenty-five percent (25%) beginning one year from the date hereof so long as Executive continues to be employed by Analysts on the vesting dates.

b. Non-incentive stock options.

(i) Option grant and vesting. Analysts will, effective the date of this Agreement, grant to Executive non-incentive stock options covering 300,000 shares of common stock of Analysts with a ten-year term. Such award will vest seven years from the date of grant, if at the vesting date Executive remains employed by Analysts, and shall have an exercise price of $3.00 per share. If, prior to the effective date of this Agreement, the price of Analysts’ stock closes above $3.00 at the end of the regular NASDAQ trading, the price of such options shall be the average price in the preceding thirty (30) days at the close of regular NASDAQ trading sessions, as reported by The Wall Street Journal or a comparable reporting service.

(ii) Acceleration of vesting. The vesting of the non-incentive options granted in conjunction with this Agreement will be accelerated if the average closing price of Analysts’ stock, as reflected by NASDAQ, equals or exceeds the prices set forth in the table below (hereinafter "Acceleration Price") and any additional terms set forth below in Sections 3.3.b.(ii)(a) and 3.3.b.(ii)(b) are met.

Share Price (Acceleration Price)	Number of Options to Vest
$5.00	60,000
$8.00	60,000
$10.00	60,000
$12.00	60,000
$15.00	60,000

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(a) Acceleration Price. The accelerated vesting provisions of this Section 3.3.b shall not apply until the Acceleration Price has been met and is maintained as an average price for ninety (90) days. Notwithstanding the foregoing, no acceleration of vesting shall occur due to any increase in stock price within: i) thirty (30) days prior to internal or public knowledge of a possible merger or acquisition involving Analysts; or ii) ninety (90) days after public disclosure of completion or termination of such merger or acquisition unless the ratio of the price of Analysts stock to Net Earnings (hereinafter "P/E ratio") is less than 30. For purposes o f this Agreement, "Net Earnings" shall mean net earnings for the trailing twelve months as measured by generally accepted accounting principles, (hereinafter "GAAP") and as publicly reported in Analysts’ filings with the SEC for the most recently completed quarter, except in the case where Analysts has any highly unusual one-time charges and the parties agree in writing that Net Earnings shall exclude specific one-time charges.

(b) Accelerated vesting at or above $10.00 per share. In no event shall acceleration of vesting occur at or above $10.00 per share unless the P/E ratio of Analysts stock is fifty (50) or less.

(iii) Other terms and conditions of non-incentive stock options. Executive shall sign an option agreement containing the terms for options outlined herein and such other terms and conditions required by Analysts as determined in the sole discretion of the Board or Compensation Committee of the Board of Analysts.

c. Incentive stock options.

(i) Option grant and vesting. Analysts intends to grant Executive incentive stock options for 100,000 shares after each of the first two years of the Initial Term of this Agreement. Options granted shall be issued from the Company’s incentive stock option plan or plans, which currently call for options with a ten-year term. Each option grant shall vest seven years from the date of grant, if at the vesting date Executive remains employed by Analysts and shall have an exercise price equal to the price of such stock at the close of the regular NASDAQ trading session on the date of the grant, as reported by The Wall Street Journal or a comparable reporting service, or, if no sale of such stock shall have occurred on such date, on the next preceding day on which a sale of stock occurred.

(ii) Acceleration of vesting. Vesting of any incentive options granted pursuant to Section 3.3.c(i) of this Agreement will be accelerated in increments of 20,000 if the average closing price of Analysts’ stock, as reflected by NASDAQ, equals or exceeds associated acceleration trigger prices to be determined at the time of each grant (hereinafter ("Incentive Option Acceleration Price") and any additional terms set forth below in Sections 3.3.c(ii)(a) and 3.3.c(ii)(b) are met.

(a) Incentive Option Acceleration Price. The accelerated vesting provisions of this Section 3.3c shall not apply until an Incentive Option Acceleration Price has been met and is maintained as an average price for ninety (90) days.

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(b) Limits on Acceleration of Vesting. Notwithstanding the foregoing, no acceleration of vesting shall occur due to any increase in stock price within: i) thirty (30) days prior to internal or public knowledge of a possible merger or acquisition involving Analysts; or ii) ninety (90) days after public disclosure of completion or termination of such merger or acquisition unless the P/E ratio of Analysts stock (as defined in Section 3.3.b(ii)(a)) is less than 30.

(iii) Other terms and conditions of incentive stock options. Executive shall sign an option agreement containing the terms for options outlined herein and such other terms and conditions required by Analysts’ incentive stock option plans, as interpreted and determined in the sole discretion of the Board or Compensation Committee of the Board of Analysts.

3.4 Benefits. Executive shall be eligible to participate in or receive benefits under all senior executive and employee benefit plans, health plans, or arrangements, if any, made available from time to time by Analysts to its senior executive employees as set forth in an employee manual or otherwise, including but not limited to deferred compensation, 401(k) plan, disability, life and other insurance plans and programs, all hospitalization and health and welfare plans and programs, and stock optio n, restricted share, incentive or other bonus plans. Analysts retains the right to amend, modify or terminate any of its benefits or benefit plans during the term of Executive’s employment.

3.5 Miscellaneous Benefits. Analysts shall provide Executive the following additional benefits:

a. Reimbursement of all ordinary and necessary expenses incurred by Executive for Analysts’ business.

b. Paid vacation at the discretion of Executive and with the concurrence of the CEO.

c. Moving expenses, including realtor commissions paid by him, up to $100,000. Moving expenses will not include any loss on the sale of Executive’s Texas home or temporary living expenses in Minnesota. Analysts shall pay airfare related to periodic trips by Executive to Texas until completion of his relocation to Minnesota.

d. Participation in Analysts’ Special Executive Retirement Plan (hereinafter "SERP"), a copy of which is attached hereto and incorporated herein by reference. In order to participate in the SERP, Executive shall sign a Deferred Compensation Agreement.

e. Monthly automobile allowance substantially similar to the current CEO.

SECTION 4

TERMINATION OF EMPLOYMENT

4.1 Termination. Notwithstanding any other provision of this Agreement to the contrary or appearing to be to the contrary, Executive’s employment shall terminate as follows:

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a. By mutual written agreement of the parties.

b. Upon Executive’s death.

c. Analysts shall have the right to terminate Executive’s employment upon Executive’s inability to perform the essential functions of his position due to physical or mental disability as determined in the good faith judgment of the Board of Directors, provided such inability continues for a period of ninety (90) consecutive days, one hundred twenty (120) non-consecutive days in any twelve (12) month period, or longer period if required by applicable law.

d. Subject to Sections 4.1.c and 4.1.f, upon ninety (90) days written notice to Executive by Analysts.

e. Analysts shall have the right to terminate Executive’s employment immediately for "Cause" as defined in Section 1 above.

f. Executive shall have the right to terminate his employment immediately for "Good Reason" as defined in Section 1 above.

g. Executive shall have the right to terminate his employment immediately if not appointed CEO of Analysts after the current CEO retires or resigns.

h. Executive’s right to resign after a Change in Control, if any, shall be governed by the Change in Control Agreement.

4.2 Effect of Termination of or Resignation from Employment. With the exception of the provisions of Section 4.3, the following terms and conditions will apply in the event that Analysts terminates the employment of Executive or Executive resigns from his employment with Analysts.

a. Termination for Cause not Due to Performance or Due to Resignation by Executive Without Good Reason. If Analysts terminates Executive’s employment for Cause other than Cause related to Executive’s performance, or if Executive resigns from his employment without Good Reason, then Executive shall be entitled only to receive "Accrued Benefits." For purposes of this Agreement, "Accrued Benefits" shall mean any accrued and unpaid Base Salary through the termination date and any other benefits under any plan or program in accordance with the terms of such plan o r program (including any vesting requirements).

b. Termination for Cause Due to Performance or Without Cause or Resignation by Executive With Good Reason. In the event that Analysts terminates Executive’s employment for Cause related to Executive’s performance or without Cause or Executive resigns from his employment with Good Reason, except in the case where Executive resigns under the circumstances set forth in Section 4.3: i) Executive shall be entitled to Accrued Benefits as defined in 4.2a above; ii) the right to exercise stock options vested as of the date of termination for a period of ninety (90) d ays; and iii) with respect to outstanding restricted stock awards

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granted in conjunction with this Agreement, all restrictions shall lapse immediately and such awards shall be fully vested.

c. Termination Within 90 Days of Change in Control Transaction. If Analysts terminates Executive’s employment without Cause within the ninety (90) day period prior to a closing on a transaction resulting in a Change in Control, Executive shall, on the closing of such transaction, be entitled to receive a lump sum distribution in an amount equal to one-third (1/3) the amount he would have received under the Change in Control Agreement. The terms of this Section 4.2.c shall apply only if since commencement of Executive’s employment a trend of continuous improve ment in a combination of two of three factors: i) revenue; ii) net profit; or iii) stock price has occurred.

d. Effective Date of Termination. The date of termination of Executive’s employment by Analysts under the circumstances described in this Section 4.2 shall be effective immediately upon receipt by Executive of written notice of termination, unless otherwise indicated in such notice. The date of resignation by Executive under the circumstances described in this Section 4.2 shall be ninety (90) days after receipt by Analysts of written notice of resignation.

4.3 Effect of Resignation of Executive If Executive is not Appointed CEO Upon Resignation or Retirement of Current CEO.

a. Restricted Stock Awards. Notwithstanding other termination provisions of this Section 4, in the event that Executive resigns if he is not appointed CEO upon the resignation or retirement of the current CEO, with respect to outstanding restricted stock awards, all restrictions shall lapse immediately and such awards shall fully vest one year after the effective date of Executive’s employment termination if Executive has, in the sole determination of Analysts, complied with the non-competition provisions set forth in Section 8 of this Agreement and his Deferred C ompensation Agreement.

b. Vested Stock Options. All fully vested stock options shall be exercisable for ninety (90) days after the effective date of Executive’s resignation.

Section 5

INVENTIONS

5. Assignment of Inventions. Executive agrees to promptly disclose to Analysts in writing all Inventions; and all such Inventions shall be the exclusive property of Analysts and are hereby assigned by Executive to Analysts. Further, Employee will, at Analysts’ expense, give Analysts all assistance it reasonably requires to perfect, protect, and use its rights to Inventions. In particular, but without limitation, Executive will sign all documents, do all things, and supply all information that Analysts may deem necessary or desirable to:

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(i) transfer or record the transfer of his entire right, title and interest in Inventions; and

(ii) enable Analysts to obtain patent, copyright or trademark protection for Inventions anywhere in the world.

The obligations of this Section 5 shall continue beyond the termination of employment with respect to Inventions conceived or made by Executive during the period of his employment and shall be binding upon assigns, executors, administrators and other legal representatives. For purposes of this Agreement, any Invention relating to the business of Analysts on which Executive files a patent application within six (6) months after termination of employment with Analysts shall be presumed to cover Inventions conceived by Executive during the term of his employment, subject to proof to the contrary by good faith, written and duly corroborated records establishing that such Invention was conceived and made following termination of emplo yment.

NOTICE: Pursuant to Minnesota Statutes § 181.78, Executive is hereby notified that this Section 6 does not apply to any invention for which no equipment, supplies, facility, or trade secret information of Analysts was used and which was developed entirely on Executive’s own time, and (1) which does not relate (a) directly to the business of Analysts or (b) to Analysts’ actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for Analysts.

SECTION 6

CONFIDENTIAL INFORMATION

6. Confidential Information. Executive agrees not to directly or indirectly use or disclose Confidential Information for the benefit of anyone other than Analysts, either during or after employment, for as long as the information retains the characteristics of Confidential Information described in Section 1 above.

SECTION 7

DOCUMENTS AND PROPERTY

7. Return of Documents and Property. All documents and tangible items provided to Executive by Analysts, or possessed by or created by Executive for use in connection with his employment, are the property of Analysts and shall be promptly returned to Analysts on termination of employment together with all copies, recordings, abstracts, notes or reproductions of any kind made from or about the documents and tangible items or the information they contain.

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SECTION 8

NON-COMPETITION

8. Non-competition. In consideration of Executive’s rights under this Agreement, Executive agrees that, from and after the Effective Date and continuing until the two-year anniversary of termination or cessation of Executive’s employment with Analysts, Executive will not, alone or in any capacity with another legal entity:

(i) directly or indirectly, own any interest in, control, be employed by or associated in a material manner with, or render services to (including but not limited to services in research), any person or entity (or subsidiary, subdivision, division, or joint venture of such entity) in connection with the design, development, manufacture, marketing, or sale of a Competitive Product that is sold or intended for distribution or sale in any geographic area in which Analysts actively markets, or in which, to the Executive’s knowledge acquired through his employment with Analysts, Analysts intends to actively market, a Company Product of the same general type or function;

(ii) directly or indirectly, solicit any of Analysts’ then current employees for the purpose of hiring them or inducing them to leave their employment with Analysts;

(iii) directly or indirectly, solicit, attempt to solicit, interfere, or attempt to interfere with Analysts’ relationship with its then current customers or potential customers (of which Executive has knowledge acquired through his employment with Analysts), on behalf of himself or any other person or entity engaged in the design, development, manufacture, marketing, or sale of a Competitive Product; or

(iv) directly or indirectly design, develop, manufacture, market, or sell any Competitive Product that is sold or intended for distribution or sale in any geographic area in which Analysts actively markets, or in which, to the Executive’s knowledge acquired through his employment with Analysts, Analysts intends to actively market, a Company Product of the same general type or function.

Notwithstanding the foregoing in no event shall ownership of less than four percent (4%) of the outstanding publicly-traded equity or debt securities of any issuer or less than four percent (4%) of the outstanding interests in a private equity fund, mutual fund or other pooled investment account, in each case, in which the Executive does not actively participate in the management thereof, be prohibited by this Section 8.

Notwithstanding the foregoing, Executive’s involvement with the LLCs, either during his employment or thereafter, shall not be a violation of this Section 8. Executive agrees,

11

however, that, during his employment and the two-year period thereafter, he shall comply with Sections 8.(ii) and 8.(iii) at all times, including his involvement with the LLCs.

Executive acknowledges and agrees that the re-strictions set forth in this Section 8 are reasonable and appropriate in duration, scope and geographical area and accepts them as a condition of employment with Analysts.

SECTION 9

BREACH OF NON-COMPETITION PROVISIONS

9. Breach of Non-competition Provisions of this Agreement. In addition to any other relief or remedies afforded by law or in equity, if Executive breaches Section 8 of this Agreement, Executive agrees that Analysts shall be entitled, as a matter of right, to injunctive relief in any court of competent jurisdiction. Executive recognizes and hereby admits that irreparable damage will result to Analysts if he violates or threatens to violate the terms of Section 8 of this Agreement. This Section 9 sh all not preclude the granting of any other appropriate relief including, without limitation, money damages against Executive for breach of Section 8 of this Agreement.

SECTION 10

OTHER OBLIGATIONS

10. Effect of Other Obligations. It is intended that the obligation of the parties to perform the terms of this Agreement is unconditional and does not depend on the performance or non-performance of any terms, duties or obligations not specifically recited in this Agreement.

SECTION 11

BINDING AGREEMENT AND SURVIVAL

11. Binding Agreement; Survival.

a. Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of Analysts, its successors and assigns, but without the prior written consent of Executive, this Agreement may not be assigned other than in connection with a merger or sale of substantially all the assets of Analysts or similar transaction. The rights of the Executive hereunder to payments and benefits shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and l egatees.

b. Survival. The rights and obligations set forth in Sections 4, 5, 6, 7, 8 and 12 shall survive the termination or expiration of this Agreement.

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SECTION 12

SEVERABILITY

12. Severability. If the final determination of a court of competent jurisdiction declares, after the expiration of the time within which judicial review (if permitted) of such determination may be perfected, that any term of provision hereof is invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, and (b) the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expr essing the intention of the invalid or unenforceable term or provision.

SECTION 13

AMENDMENT AND WAIVER

13. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.

SECTION 14

GOVERNING LAW

14. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, interpreted and construed in accordance with the laws of the State of Minnesota without regard to the conflict of laws principles thereof.

SECTION 15

NOTICES

15. Notices. Any notice hereunder by either party to the other shall be given in writing by personal delivery or certified mail, return receipt requested. If addressed to Executive, the notice shall be delivered or mailed to Executive at the address most recently communicated in writing by Executive to Analysts, or if addressed to Analysts, the notice shall be delivered or mailed to Analysts at its executive offices to the attention of the Board of Directors of Analysts. A notice shall be deemed g iven, if by personal delivery, on the date of such delivery or, if by certified mail, on the date shown on the applicable return receipt.

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SECTION 16

PREVIOUS AGREEMENTS

16. Supersedes Previous Agreements. This Agreement supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings will have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing will have no further rights or obligations thereunder.

SECTION 17

HEADINGS AND CONSTRUCTION

17. Headings; Construction. The headings of Sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted.

SECTION 18

BENEFIT

18. Benefit. Subject to Section 11, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement.

IN WITNESS WHEREOF, Analysts has caused this Agreement to be signed by its Chief Executive Officer pursuant to the authority of its Board, and Executive has executed this Agreement.

ANALYSTS INTERNATIONAL CORPORATION

By:
	Michael J. LaVelle
	Chief Executive Officer
By:
	Jeffrey P. Baker
	Executive

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EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. LaVelle, Chief Executive Officer, certify that:

1. I have reviewed this report on Form 10-Q of Analysts International Corporation (the Registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

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

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Steichen, Chief Financial Officer, certify that:

1. I have reviewed this report on Form 10-Q of Analysts International Corporation (the Registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 11, 2004	By:	/s/ David J. Steichen
		David J. Steichen
		Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Analysts International Corporation (the "Company") on Form 10-Q for the period ended July 3, 2004 as filed with the Securities and Exchange Commission (the "Report"), the undersigned, Michael J. LaVelle, Chief Executive Officer of the Company, and David J. Steichen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 11, 2004	By:	/s/ Michael J. LaVelle
		Michael J. LaVelle
		Chief Executive Officer
Dated: August 11, 2004	By:	/s/ David J. Steichen
		David J. Steichen
		Chief Financial Officer