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 1, 2006

or

( ) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨Accelerated Filer þNon-accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

As of August 4, 2006, 25,078,730 shares of the registrant's common stock were outstanding.

ANALYSTS INTERNATIONAL CORPORATION

INDEX

Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets
	July 1, 2006 (Unaudited) and December 31, 2005
	Condensed Consolidated Statements of Operations
	Three and six months ended July 1, 2006 and July 2, 2005 (Unaudited)
	Condensed Consolidated Statements of Cash Flows
	Six months ended July 1, 2006 and July 2, 2005 (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 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Signatures
Exhibit Index

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Analysts International Corporation

Condensed Consolidated Balance Sheets

	July 1,		December 31,
(In thousands)	2006		2005
	(Unaudited)
ASSETS
Current assets:
Cash and Cash Equivalents	$	362	$	64
Accounts receivable, less allowance for doubtful accounts		70,227		66,968
Prepaid expenses and other current assets		2,846		2,383
Total current assets		73,435		69,415
Property and equipment, net		3,637		4,056
Intangible assets		11,778		12,298
Goodwill		11,799		11,799
Other assets		3,661		4,436
	$	104,310	$	102,004
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	27,007	$	24,581
Salaries and vacations		8,775		8,260
Line of credit		5,526		5,000
Deferred revenue		1,223		1,645
Restructuring accrual		747		971
Health care reserves and other		1,840		2,242
Deferred compensation		172		534
Total current liabilities		45,290		43,233
Non-current liabilities:
Deferred compensation		2,168		1,878
Restructuring accrual		274		581
Shareholders' equity		56,578		56,312
	$	104,310	$	102,004

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 1,			July 2,			July 1,			July 2,
(In thousands except per share amounts)	2006			2005			2006			2005
Revenue:
Professional services provided directly	$	65,375		$	66,267		$	130,834		$	132,317
Professional services provided through subsuppliers		14,127			7,520			28,204			15,117
Product sales		8,404			5,317			15,709			10,769
Total revenue		87,906			79,104			174,747			158,203
Expenses:
Salaries, contracted services and direct charges		65,915			58,892			131,110			117,959
Cost of product sales		7,308			4,804			13,752			9,911
Selling, administrative and other operating costs		14,821			15,910			29,309			31,364
Merger and severance related costs		(248	)		1,631			(244	)		1,631
Amortization of intangible assets		266			194			520			387
Operating (loss) income		(156	)		(2,327	)		300			(3,049	)
Non-operating income		105			1			109			22
Interest expense		(199	)		(49	)		(392	)		(54	)
(Loss) income before income taxes		(250	)		(2,375	)		17			(3,081	)
Income tax expense		8			--			21			--
Net loss	$	(258	)	$	(2,375	)	$	(4	)	$	(3,081	)
Per common share:
Basic loss	$	(.01	)	$	(.10	)	$	(.00	)	$	(.13	)
Diluted loss	$	(.01	)	$	(.10	)	$	(.00	)	$	(.13	)
Average common shares outstanding		24,620			24,504			24,616			24,410
Average common and common equivalent shares outstanding		24,620			24,504			24,616			24,410

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 1,			July 2,
(In thousands)	2006			2005
Net cash provided by (used in) operating activities	$	535		$	(4,538	)
Cash flows from investing activities:
Property and equipment additions		(774	)		(1,813	)
Proceed from property and equipment sales		11			4
Payments for acquisitions, net of cash acquired		--			(5,033	)
Net cash used in investing activities		(763	)		(6,842	)
Cash flows from financing activities:
Net change in line of credit		526			3,580
Proceeds from exercise of stock options		--			67
Net cash provided by financing activities		526			3,647
Net increase (decrease) in cash and cash equivalents		298			(7,733	)
Cash and cash equivalents at beginning of period		64			7,889
Cash and cash equivalents at end of period	$	362		$	156
Non-cash activities:
Value of common stock issued for acquisitions	$	--		$	1,000
Value of common stock issued for stock awards	$	20		$	28

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 1, 2006, the condensed consolidated statements of operations for the three- and six-month periods ended July 1, 2006 and July 2, 2005, and the condensed consolidated statements of cash flows for the six-month periods ended July 1, 2006 and July 2, 2005 have been prepared by the Company, without audit. In the opinion of management, all adjustments necessary to present fairly the financial position at July 1, 2006 and the results of operations and the cash flows for the periods ended July 1, 2006 and July 2, 2005 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 in these condensed consolidated financial statements. The Company suggests reading these statements in conjunction with the financial statements and notes thereto included in the Company's December 31, 2005 annual report to shareholders.

Goodwill and Intangible Assets

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company is required to evaluate its goodwill and indefinite-lived intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the assets might be impaired. The Company currently performs the annual test as of the last day of its monthly accounting period for August. In the current year, the Company will evaluate these assets on September 2, 2006. In the prior year, the Company evaluated these assets on September 3, 2005 and found the goodwill associated with its non-infrastructure solutions reporting unit to be impaired. Accordingly, in the third quarter of 2005, the Company recognized a $7.1 million impairment charge.

During the second quarter of 2006, no intangible assets were acquired, impaired, or disposed. Intangible assets other than goodwill consist of the following:

	July 1, 2006							December 31, 2005
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Other Intangibles, Net		Gross Carrying Amount		Accumulated Amortization			Other Intangibles, Net
Customer list	$	15,075	$	(4,884	)	$	10,191	$	15,075	$	(4,364	)	$	10,711
Tradename		1,720		(133	)		1,587		1,720		(133	)		1,587
	$	16,795	$	(5,017	)	$	11,778	$	16,795	$	(4,497	)	$	12,298

The customer lists are amortized on a straight-line basis over 4 to 20 years and are scheduled to be fully amortized in 2024. Amortization is estimated to be approximately $1.0 million per year through 2008, $900,000 from 2009 to 2015, and under $150,000 from 2016 to 2024. The tradename is considered to have an indefinite life and therefore does not result in any amortization.

6

Equity CompensationPlans

Analysts International has options outstanding under five option plans. New options may be granted under three of these plans. Under the 1999 Stock Option Plan, the Company may grant options to its employees for up to 1,000,000 shares of common stock. Under the 2000 Stock Option Plan, the Company may grant non-qualified options to its employees for up to 225,000 shares of common stock. On May 25, 2006, at the annual shareholders meeting, shareholders approved an amendment to increase from 1,000,000 to 2,000,000 the number of shares available under the 2004 Equity Incentive Plan. Therefore, under the 2004 Equity Incentive Plan, the Company may grant incentive options, non-qualified options or restricted stock awards to its employees and non-qualified options or restricted stock awards to its directors for up to 2,000,000 shares of common stock. The Company also has outstanding options under the 1994 Incentive Stock Option Plan and the 1996 Stock Option Plan for Non-Employee Directors. Generally, an option's maximum term is 10 years; the exercise price of each option is equal to the market price of the Company's stock on the date of grant; and the options and awards become exercisable or vest in annual increments of 25% beginning one year after the date of grant. Exceptions to this general rule are 300,000 options granted in 2004 and 100,000 options granted in each of 2005 and 2006 to Jeffrey P. Baker, the Company’s President and CEO, with seven-year cliff vesting and subject to certain previously disclosed accelerators, 100,000 restricted shares granted to Michael J. LaVelle, the Company’s then-CEO and current Chairman, in October 2004 and vesting in annual increments of 33% over three years, and 250,000 restricted shares granted to Mr. Baker in January 2006 and vesting over five years; 25,000 in each of the first two years; 50,000 in the third year, and 75,000 in each of years four and five.

Effective December 30, 2005, the Compensation Committee of the Board of Directors of the Company authorized the vesting of all of the Company's outstanding, unvested stock options granted to directors, officers and employees of the Company, except for the unvested options held by Mr. Baker.

Prior to January 1, 2006, Analysts International applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for options. Accordingly, prior to January 1, 2006, no stock-based compensation expense relating to stock options was recognized in the consolidated statements of income, as the exercise price of all option grants was equal to or greater than the market price on the date of grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123R), requiring the Company to recognize expense related to the fair value of our stock-based compensation awards. The Company elected the modified prospective transition method as permitted by SFAS No. 123R. Accordingly, results from prior periods have not been restated. Under this transition method, stock-based compensation expense for the six months ended July 1, 2006 includes:

a)   Compensation expense for all stock-based compensation awards granted prior to December 31, 2005, which were not fully vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation; and

b)   Compensation expense for all stock-based compensation awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

Historically for SFAS No. 123 pro forma disclosure on stock-based compensation, the Company reported compensation expense for stock option awards issued to employees over the requisite service period of the award. This policy differs from the policy to be applied to awards granted after the adoption of SFAS No. 123R, which requires that compensation expense be recognized in the Company’s statement of operations. For all awards granted after December 31, 2005, and any unvested awards as of December 31, 2005, compensation expense will be recognized in the Company’s statement of operations over the requisite service period of the award. Total stock option expense included in the Company’s condensed consolidated statements of operations for the three- and six-month periods ended July 1, 2006, was $48,206 and $76,081, respectively; and July 2, 2005, was $0 and $0, respectively. The tax benefit recorded for the three- and six-month periods ended July 1, 2006 was $16,938 and $27,809, respectively and for July 2, 2005, was $0 and $0, respectively. A valuation allowance was provided against the tax benefit.

Prior to the adoption of SFAS No. 123R, the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in its condensed consolidated statements of cash flows. In accordance with SFAS No. 123R, for the six months ended July 1, 2006, the presentation of the Company’s condensed consolidated statement of cash flows will change from prior periods to report the excess tax benefits from the exercise of stock options as financing cash flows. There were no excess tax benefits recognized for the the six months ended July 1, 2006.

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The table below illustrates the effect on net earnings and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during the three- and six-month periods ended July 2, 2005 (in thousands):

	Three Months Ended			Six Months Ended
	July 2, 2005			July 2, 2005
Net loss, as reported	$	(2,375	)	$	(3,081	)
Deduct: Stock-based compensation expense determined under fair Value method for all awards(1)		(95	)		(237	)
Net earnings, pro forma	$	(2,470	)	$	(3,318	)
Earnings per share:
Basic - as reported	$	(.10	)	$	(.13	)
Basic - pro forma	$	(.10	)	$	(.14	)
Diluted - as reported	$	(.10	)	$	(.13	)
Diluted - pro forma	$	(.10	)	$	(.14	)

⁽¹⁾ For purposes of this pro forma disclosure, the value of the stock-based compensation is amortized to expense on a

straight-line basis over the period it is vested.

The following table summarizes the stock option activity for the six-month period ended July 1, 2006:

	Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding on December 31, 2005		2,348,781	$	6.36		6.38	$	25,250
Granted		164,000		2.44
Exercised		00		00
Forfeited/Canceled		250,949		7.84
Outstanding on July 1, 2006		2,261,832	$	5.92		6.26	$	0
Exercisable on July 1, 2006		1,713,832	$	6.85		5.53	$	0

The aggregate intrinsic value of options (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) exercised during the six-month periods ended July 1, 2006 and July 2, 2005 was $0 and $8,569, respectively.

As of July 1, 2006, there was $455,667 of unrecognized compensation expense related to unvested option awards that are expected to vest over a weighted average period of 5.2 years.

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The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing model. No options were granted in the quarter ended July 1, 2006. The weighted-average grant date fair value of stock options granted during the three- and six-month periods ended July 2, 2005, was $2.76 and $2.56, respectively; and for the six-month period ended July 1, 2006 was $1.62.

	The Period Ended
Black-Scholes Option Valuation Assumptions(1)	July 1, 2006			July 2, 2005
Risk-free interest rate(2)		5.1 - 5.2	%		3.4 - 4.1	%
Expected dividend yield		0.0	%		0.0	%
Expected stock price volatility(3)		41% - 71	%		48% - 80	%
Expected life of stock options (in years)(4)		6.3			6.8

⁽¹⁾Forfeitures are estimated and based on historical experience.

⁽²⁾Based on the U.S. Treasury zero-coupon bond with a term consistent with the expected life of the options.

⁽³⁾Expected stock price volatility is based on historical experience.

⁽⁴⁾Expected life of stock options based upon historical experience.

No options were exercised in the three- and six-month periods ended July 1, 2006. Net cash proceeds from the exercise of stock options were $55,593 and $66,188, respectively, for the period ended July 2, 2005. The actual income tax benefit realized from stock option exercises totaled $392 and $480, respectively, for the three- and six-month periods ended July 2, 2005.  A valuation allowance was provided against the tax benefit.

Stock Awards

On June 18, 2004, Jeffrey P. Baker, the Company’s then President and now President and CEO was awarded 200,000 shares of restricted stock vesting in annual increments of 25% over four years. On January 3, 2006, Mr. Baker was awarded 250,000 restricted shares vesting over five years; 25,000 shares vest in each of the first two years, 50,000 in the third year and 75,000 in each of years four and five.

On October 21, 2004, Michael J. LaVelle, the Company’s then Chairman and CEO and current Chairman was awarded 100,000 shares of restricted stock vesting in annual increments of 33% over three years. On June 30, 2006, the Compensation Committee of the board of directors of Analysts International Corporation amended the October 21, 2004 restricted stock agreement. Mr. LaVelle has remained employed as a consultant to the Company since his retirement from the CEO position in December 2005 with a termination date of June 30, 2006. The amendment to the Agreement will provide for the shares to continue to vest as set forth in the Agreement after termination of Mr. LaVelle’s employment but will be contingent upon continued service on the Company’s board of directors. This was treated as a modification under FAS 123R. In January 2006, each of the outside members of the Board of Directors was awarded 1,000 shares of fully vested common stock.

The following table summarizes the restricted stock activity for the six-month period ended July 1, 2006:

	Shares		Weighted Average Grant Date Fair Value
Non-vested December 31, 2005		217,000		3.12
Granted		258,000		2.43
Vested		58,000		2.74
Forfeited		0
Non-vested at July 1, 2006		417,000		2.45

As of July 1, 2006, there was $885,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2004 plan. The cost is expected to be recognized over a weighted average period of 3.5 years. The total fair value of shares vested during the three- and six-month periods ended July 1, 2006 was $139,500 and $159,150, respectively; compared to $139,500 and $167,780, respectively, in the comparable periods of 2005.

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2.Line of Credit

Effective April 11, 2002, the Company consummated an asset-based revolving credit facility with GE Capital Corporation. Total availability under this credit facility is up to $45.0 million. Borrowings under this credit agreement are secured by all of the Company’s assets. 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. The credit facility, as amended, requires a commitment fee of .25% of the unused portion of the facility, and an annual administration fee of $25,000. The facility carries an interest rate on daily advances equal to the Wall Street Journal’s “Prime Rate” (8.25% on July 1, 2006) and on fixed-term advances equal to the applicable LIBOR rate plus 2.0%. The agreement restricts, among other things, the payment of dividends and capital expenditures. The Company is in compliance with all restrictive covenants.

Effective January 20, 2006, the Company amended the revolving credit agreement extending the expiration date from October 31, 2006 to January 20, 2010. The modifications included the elimination of certain reserves in calculating the amount the Company can borrow under the facility and changes to the definition of eligible receivables.

3.Shareholders' Equity

	Six Months Ended
(In thousands)	July 1, 2006
Balance at beginning of period	$	56,312
Issuance of common stock		20
Amortization of deferred compensation		174
FAS 123 R stock option expense		76
Net Loss		(4	)
Balance at end of period	$	56,578

4.Earnings Per Share

Basic and diluted 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 2,262,000 and 2,490,000 shares of common stock were outstanding July 1, 2006 and July 2, 2005, respectively. All options were considered anti-dilutive and excluded from the computation of common equivalent shares at July 1, 2006 and July 2, 2005 because the Company reported a net loss. The computation of basic and diluted income (loss) per share for the three months ended July 1, 2006 and July 2, 2005 is as follows:

	Three Months Ended						Six Months Ended
(In thousands, except per share amounts)	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Net income (loss)	$	(258	)	$	(2,375	)	$	(4	)	$	(3,081	)
Weighted-average number of common shares outstanding		24,620			24,504			24,616			24,410
Dilutive effect of equity compensation plan awards		--			--			--			--
Weighted-average number of common and common equivalent shares outstanding		24,620			24,504			24,616			24,410
Net income (loss) per share:
Basic	$	(.01	)	$	(.10	)	$	(.00	)	$	(.13	)
Diluted	$	(.01	)	$	(.10	)	$	(.00	)	$	(.13	)

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5.Restructuring

During the second and third quarters of 2005, the Company recorded restructuring and severance-related charges of $3.9 million. Of these charges, $1.6 million related to workforce reductions and $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) in locations where the Company has chosen to downsize or exit completely.

In December 2000, the Company recorded a restructuring charge of $7,000,000 including $4,400,000 to cover lease termination and abandonment costs (net of sub-lease income). Of this amount, the Company has a small reserve remaining that consists of an estimate pertaining to real estate lease obligations, and the last of these lease obligations is expected to terminate in September 2006.

	Workforce			Office Closure/
(In thousands)	Reduction			Consolidation			Total
Balance at December 31, 2005	$	44		$	1,508		$	1,552
Cash expenditures		(44	)		(467	)		(511	)
Non-cash charges		--			(20	)		(20	)
Balance at July 1, 2006	$	0		$	1,021		$	1,021

The Company believes the reserve is currently adequate. Negative sublease activity in the future, including any defaults of existing subleases, could create the need for future adjustments to this reserve.

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

Three- and Six-Month Periods Ended July 1, 2006 and July 2, 2005

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Statements contained herein, which are not historical fact, may be deemed forward-looking statements. In some cases, forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “plan,” “potential,” “continue,” “intend” or similar expressions.  Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.  Such forward-looking statements are based upon current expectations and beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Any forward-looking statements made herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements are based on the Company’s current expectations for future demand for our products and services, our revenues, earnings, results of operations and sales and relate to, among other things, the success of our growth and other strategies, cost-control and business investment methods, our estimate of our lease obligations as they relate to our restructuring charges, our working capital and cash requirements, our ability to meet the requirements of our credit agreement, and the realization of our deferred tax assets.  The Company’s actual results may vary materially from those projected due to certain risks and uncertainties such as the general state of the economy, volume of business activity, continued need for our services by current and prospective clients, client cancellations or re-bidding of work, the Company’s ability to control and improve profit margins, including our ability to control operating and labor costs and billing rates for our services, the availability and utilization of qualified technical personnel and the uncertainties and risks set forth in Item 1.A of Part II of this Form 10-Q, or Item 1.A of Part II of our most recent Annual Report filed on form 10-K, as the case may be, and other similar factors.  For more information concerning risks and uncertainties related to the Company’s business, refer to the Company’s prior Annual Reports, 10-Ks, 10-Qs, other Securities and Exchange Commission filings and investor relations materials.  You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made.  The Company undertakes no obligation (and expressly disclaims any such obligation) to update forward-looking statements made in this quarterly report to reflect events or circumstances after the date of this Quarterly Report or to update reasons why actual results would differ from those anticipated in 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 (SEC) and our other investor communications.

Introduction and Overview of Second Quarter 2006 Events

Headquartered in Minneapolis, Minnesota, Analysts International is a diversified IT services company. In business since 1966, we have sales and customer support offices in the United States and Canada.

We offer our clients a full range of information technology consulting, software development and other services, including offerings sometimes referred to in the industry as “solutions” or “projects”. Service offerings are divided into two categories: Staffing Services, providing IT supplemental staffing and managed team services; and Solutions Services, specializing in IP communications, storage solutions, Lawson services and managed IT services. We also provide methodologies and processes for implementing technology and managing human capital and provide services in the state and local government sector.

In September of 2005, we instituted a restructuring plan to significantly reduce our operating costs and improve our business performance. Our restructuring plan was comprised of three components: i) restructuring and performance improvement for our staffing business; ii) restructuring and performance improvement for our solutions business; and iii) a company-wide cost reduction program.

As we anticipated, some of the cost reductions deployed during the fourth quarter of 2005 were relaxed during the first half of 2006. Also, during 2006 we are making investments in areas of our business we believe are necessary to sustain our revenue growth. In addition, we believe that by continuing to focus on the performance improvement initiatives implemented in our staffing and solutions businesses during the fourth quarter of 2005 we can continue to grow profitably.

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Market Conditions and Economics of Our Business

Market conditions in the IT services industry continue to present challenges for us. We were successful in growing our business during the second quarter of 2006; however, we continue to experience intense competition in hiring billable technical personnel and intense pricing pressures from our largest clients. Although we were able to slightly increase our average bill rates during the second quarter of 2006, these pricing pressures had a negative impact on our average gross margins during the second quarter. We have seen an increase in the percentage of our services provided to large national clients where margin pressures are typically more noticeable. We expect that many of these larger companies will continue to request low cost offerings for IT Staffing Services through a variety of means, including e-procurement systems, competitive bidding processes, the granting of various types of discounts, use of offshore resources and other lower cost offerings. Although, we expect this market condition to continue for the foreseeable future, we expect that demand for these services will increase modestly.

Our ability to identify, attract and retain qualified technical personnel at competitive pay rates will affect our results of operations and our ability to grow in the future. Competition for the technical personnel needed to deliver the services has intensified as the IT sector is experiencing higher employment rates. If we are unable to hire the talent required by our clients in a timely, cost-effective manner, it will affect our ability to grow our business.

Employee benefit and other employee-related costs are an additional factor bearing on our ability to hire qualified personnel and control overall labor costs. In an effort to manage our benefits costs, we have regularly implemented changes to our benefit plans. While we believe the changes we implemented will be effective in reducing or maintaining the costs of those plans, the effectiveness of these changes may vary due to factors such as rising medical costs, the amount of medical services used by our employees and similar factors. Also, as we make changes to benefit plans to control costs, the risk that it will be more difficult to retain current consultants or to attract and retain new resources increases.

Our ability to respond to our client needs in a cost-controlled environment is a key factor to our future success. We have continued to streamline 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 timely services 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 success of the Company.

Our ability to respond to the conditions outlined above will directly impact our performance because IT Staffing Services continues to represent the majority of our total revenue. Although we believe we can continue to grow this business, there can be no assurance as to when, or if, we will experience sustained revenue and profit growth.

Strategy

We continue to pursue IT Staffing Services in Fortune 500 and small and medium-sized businesses. However, because of the market conditions in IT Staffing Services we also are focused on the following key objectives: i) implementing a next generation staffing model, which will transform workforce deployment and human capital management; ii) improving key business processes to better align our business with market needs and allow us to build a more adaptive delivery model to drive growth; iii) building a focused set of services and solutions around high-demand, emerging technologies; and iv) being an active participant in the consolidation taking place throughout the industry. We believe these objectives present opportunities to grow our business and to provide the scale necessary for sustained success in the staffing business.

In our Solutions Services group we continue to pursue clients of all sizes, but primarily focus on small and medium size businesses. We also remain committed to business opportunities with technology and product partners such as Cisco, Microsoft, Lawson and EMC. We believe that partnering with vendors such as these is an important factor in achieving growth in revenue and profit. We provide solutions services in four major practice areas which are aligned with leading edge technologies:

§   IP Communications which includes Wireless, IP Telecommunications, Call Center and Security Services

§   Storage Solutions which includes storage product support and VMware services

§   Lawson Services which includes integration, customization, and administration of Lawson Software applications

§   Managed IT Services which includes Application Outsourcing, Help Desk, Hosting, and Field Engineering services

In addition, Government Solutions is a key vertical market for the Company. In this vertical market, we are providing a broad array of services including application development for criminal justice information systems and mobile and wireless solutions.

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Acquisitions we completed in fiscal year 2005 represent part of our strategy related to our IP Communications and Storage Solutions offerings. We may continue to look for opportunities to expand our service offerings through the acquisition of well-managed companies with strong client and/or vendor relationships and with geographic or vertical market presence complementary to our business. Pursuit of an acquisition strategy presents risks to the Company such as increased costs, strain on internal resources and similar factors which can be detrimental to operating results. Additionally, if we were unable to transition and maintain employee, client and vendor relationships of acquired companies, or were unable to integrate the back office operations of these companies to provide seamless and cost effective service to our combined clients, the anticipated benefits of these transactions may be less than expected. Use of our financial resources to acquire companies means these resources would not be available for our ordinary operations. While we expect to enter into transactions that are accretive to earnings and enhance our cash flow, failure to successfully integrate acquired companies and achieve such results could have a negative impact on our business.

Our objective to participate in the overall consolidation of the IT services industry reflects our belief that scale has become and will continue to be important in the future. More clients require vendors to have achieved a certain size in order to win business, and size provides the operating leverage necessary to create competitive margins. We will therefore continue to consider participation in merger and acquisition activity. Our ability to participate in industry consolidation may bear on our future financial performance.

Other Factors

Terms and conditions standard to computer consulting services contracts present risks 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, or loss of a significant number of smaller contracts could have a material adverse effect on our business.

Compliance with the Sarbanes-Oxley Act under Section 404 of the Act has created substantial cost to us and strained our internal resources. We incurred significant costs throughout 2005, and we continue to incur significant ongoing costs to maintain compliance. An inability to control these costs, a failure to comply with Sarbanes-Oxley, or a failure to adequately remediate any control deficiencies that are identified, 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, a major acquisition or a significant lengthening of payment terms with major clients, could create a need for additional working capital. An inability to obtain additional working capital, should it be required, could have a material adverse effect on our business. We expect to be able to comply with the requirements of our credit agreement; however, failure to do so could affect our ability to obtain necessary working capital and have a material adverse effect on our business.

Overview of Results of Second Quarter 2006 Operations

Total revenue for the three- and six-month periods ended July 1, 2006 was $87.9 million and $174.7 million, compared to $79.1 million and $158.2 million during the comparable periods ended July 2, 2005. The increase included an 87.9% and 86.6% increase in revenue from services provided through subsuppliers for the three- and six-month periods ended July 1, 2006 compared to the comparable period of 2005. For the three- and six-month periods ended July 1, 2006, 74.4% and 74.9% of our revenue was derived from services provided directly, compared to 83.8% and 83.6% in the comparable periods a year ago. The change in revenue mix was due mainly to an increase in revenue from IBM, where a significant portion of our revenue growth has come from services provided by subsuppliers.

Our net loss for the three- and six-month periods ended July 1, 2006, was $(258,000) and $(4,000) compared with a net loss of $(2.4) million and $(3.1) million for the comparable periods of 2005. On a diluted per share basis, the net income for the three- and six-month periods ended July 1, 2006 was $(.01) and $(.00) per share, respectively, compared with a net loss of $(.10) and $(.13) per share, respectively, in the comparable period of 2005.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is 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. We believe the estimates described below are the most sensitive estimates made by management in the preparation of the financial statements.

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Estimates of Future Operating Results

The realization of certain assets recorded in our balance sheet is dependent upon our ability to achieve and maintain profitability. In evaluating the recorded value of our intangible assets, goodwill, and deferred tax assets 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 indefinite-lived intangible assets and goodwill for impairment, we rely heavily on the discounted cash flow method 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 subjective. If actual results were substantially below projected results, an impairment of the recorded value of our goodwill and indefinite-lived intangible assets could result.

To assess the recorded value of our deferred tax assets for possible impairment, we must estimate the likelihood and amount of future taxable income generation. Realization of the net deferred tax assets of $2.6 million (deferred tax assets of $15.2 million net of a valuation allowance of $12.6 million) requires the generation of at least $6.8 million of future taxable income prior to the expiration of federal net operating loss carry forward benefits. The federal net operating loss (NOL) carry forward benefits of $857,000, $62,000 and $3,695,000 expire in 2023, 2024, and 2025, respectively. 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 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.

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 solutions 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 occasionally enter into fixed price engagements. When we enter into such engagements, 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, 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.

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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 for rendering services 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 Other Intangible Impairment

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” the Company is required to evaluate its goodwill and indefinite-lived intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the assets might be impaired. The Company currently performs the annual test as of the last day of its monthly accounting period for August. 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.

Effective January 1, 2002, we ceased amortization of indefinite-lived 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.”

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 No. 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.

During the second quarter we recorded only $8,000 of income tax expense related to subsidiaries where profitability was achieved and state taxes were paid. If actual future taxable income is less than we anticipate from our estimates, we may be required to record an additional valuation allowance against our deferred tax assets resulting in additional income tax expense, which will be recorded in our consolidated statement of operations. If, however, we successfully return to profitability to a point where future realization of deferred tax assets which are currently reserved becomes “more likely than not,” we may be required to reverse the existing valuation allowances resulting in an income tax benefit.

Restructuring and other severance related costs

During the second and third quarters of 2005, we recorded restructuring and other severance charges of $3.9 million. Of these charges, $1.6 million related to workforce reductions and $2.3 million related to lease obligations and abandonment costs (net of sub-lease income) in locations where we have chosen to downsize or exit completely.

In December 2000, we recorded a restructuring charge of $7,000,000 including $4,400,000 to cover lease termination and abandonment costs (net of sub-lease income). Of this amount, we have a small reserve remaining that consists of an estimate pertaining to real estate lease obligations. The last of these lease obligations is expected to terminate in September 2006.

Factors such as our ability to enter into subleases, the creditworthiness of sublessees, and the ability to negotiate early termination agreements with lessors could materially affect the real estate reserve for each restructure. 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.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123R) requiring us to recognize expense related to the fair value of our stock-based compensation award. (See Note 1 to the condensed consolidated financial statements.)

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RESULTS OF OPERATIONS, THREE- AND SIX-MONTH PERIODS ENDED JULY 1, 2006 VS. JULY 2, 2005

The following table illustrates 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 1, 2006 and July 2, 2005. The table provides guidance in the explanation of our operations and results.

	Three Months Ended					Three Months Ended
	July 1, 2006					July 2, 2005					Increase (Decrease)
				% of					% of					%		As % of
(dollars in thousands)		Amount		Revenue			Amount		Revenue			Amount		Inc (Dec	)	Revenue
Revenue:
Professional services provided directly	$	65,375		74.4	%	$	66,267		83.8	%	$	(892	)	(1.3	)%	(9.4	)%
Professional services provided through subsuppliers		14,127		16.1			7,520		9.5			6,607		87.9		6.6
Product sales		8,404		9.5			5,317		6.7			3,087		58.1		2.8
Total revenue		87,906		100.0			79,104		100.0			8,802		11.1		0.0
Salaries, contracted services and direct charges		65,915		75.0			58,892		74.4			7,023		11.9		.6
Cost of product sales		7,308		8.3			4,804		6.1			2,504		52.1		2.2
Selling, administrative and other operating costs		14,821		16.9			15,910		20.1			(1,089	)	(6.8	)	(3.2	)
Merger and severance related costs		(248	)	(.3	)		1,631		2.1			(1,879	)	(115.2	)	(2.4	)
Amortization of intangible assets		266		.3			194		.2			72		37.1		.1
Non-operating income		(105	)	(.1	)		(1	)	(.0	)		(104	)	10,400.0		(.1	)
Interest expense		199		.2			49		.1			150		306.1		.1
(Loss) Income before income taxes		(250	)	(.3	)		(2,375	)	(3.0	)		2,125		89.5		2.7
Income tax expense		8		0.0			--		.0			8		--		0
Net (loss) income	$	(258	)	(.3	)%	$	(2,375	)	(3.0	)%	$	2,117		89.1	%	2.7	%

	Six Months Ended					Six Months Ended
	July 1, 2006					July 2, 2005					Increase (Decrease)
				% of					% of					%		As % of
(dollars in thousands)		Amount		Revenue			Amount		Revenue			Amount		Inc (Dec	)	Revenue
Revenue:
Professional services provided directly	$	130,834		74.9	%	$	132,317		83.6	%	$	(1,483	)	(1.1	)%	(8.7	)%
Professional services provided through subsuppliers		28,204		16.1			15,117		9.6			13,087		86.6		6.5
Product sales		15,709		9.0			10,769		6.8			4,940		45.9		2.2
Total revenue		174,747		100.0			158,203		100.0			16,544		10.5		0.0
Salaries, contracted services and direct charges		131,110		75.0			117,959		74.6			13,151		11.1		.4
Cost of product sales		13,752		7.9			9,911		6.3			3,841		38.8		1.6
Selling, administrative and other operating costs		29,309		16.8			31,364		19.8			(2,055	)	(6.6	)	(3.0	)
Merger and severance related costs		(244	)	(.1	)		1,631		1.0			(1,875	)	(115.0	)	(1.1	)
Amortization of intangible assets		520		.3			387		.2			133		34.4		.1
Non-operating income		(109	)	(.1	)		(22	)	(.0	)		(87	)	395.5		(.1	)
Interest expense		392		.2			54		.0			338		625.9		.2
Income (loss) before income taxes		17		.0			(3,081	)	(1.9	)		3,098		100.6		1.9
Income tax expense		21		.0			--		.0			21		--		--
Net (loss) income	$	(4	)	.0	%	$	(3,081	)	(1.9	)%	$	(3,077	)	99.9	%	1.9	%
Personnel:
Management and administrative		435					450					(15	)	(3.3	)
Technical consultants		2,385					2,415					(30	)	(1.2	)

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Revenue

Revenue from services provided directly by our employees during the three- and six-month periods ended July 1, 2006 decreased 1.3% and 1.1%, respectively, from the comparable periods of 2005. This slight decrease in revenue is a direct result of a corresponding decrease in the number of technical consultants we had billable during these periods. While we did manage a slight increase in our average bill rates during the 2006 periods, these increases were offset by a decline in the utilization rates in our solutions business. We derived a smaller percentage of our total revenue from direct billings during the period in 2006 than in the comparable period last year. This decrease was due primarily to an increase in revenue from IBM where a significant portion of the growth in our revenue has come from services provided by subsuppliers, and an increase in product revenue. Our subsupplier revenue is mainly pass-through revenue with associated fees providing minimal profit.

Product sales during the three- and six-month periods ended July 1, 2006 grew by 58.1% and 45.9%, respectively, over the comparable periods of 2005. Product sales increase as we continue to successfully implement our strategy of investing in high growth infrastructure businesses such as IP Communications and Storage Solutions.

Salaries, Contracted Services and Direct Charges

Salaries, contracted services and direct charges primarily represent our payroll and benefit costs associated with billable consultants. Excluding the revenue associated with product sales, this category of expense as a percentage of revenue was 82.9% and 82.4% for the three- and six-month periods ended July 1, 2006, compared to 79.8% and 80.0%, respectively, for the comparable periods of 2005. This increase was due mainly to the shift of our revenue mix in 2006 to include more subsupplier revenue with lower margins. Excluding the effect of subsupplier revenue and cost, this category of costs increased as a percent of revenue to 80.0% and 79.5% for the three- and six-months ended July 1, 2006 from 78.3% and 78.4% for the comparable period of 2005. The increase in costs related to our direct service revenue is a result of a shift in the mix of our direct services to include more revenue from larger volume accounts where margins are generally lower, and lower than desired utilization in our solutions business. Although we continuously attempt to control the factors which affect this category of expense, given the continuous pressures to control bill rates and increasing pay rates and benefits to the consultant, there can be no assurance we will be able to maintain or improve upon the current level.

Cost of Product Sales

Cost of product sales represents our cost when we resell hardware and software products. These costs, as a percentage of product sales, decreased to 87.0% and 87.5%, respectively, for the three- and six-month periods ended July 1, 2006, from 90.4% and 92.0%, respectively, for the three- and six-month periods ended July 2, 2005. This decrease is due mainly to the volume of sales of IP Communications products where we can charge a greater margin, and where we receive volume rebates from the vendors.

Selling, Administrative and Other Operating Costs

Selling, administrative and other operating (SG&A) costs include management and administrative salaries, commissions paid to sales representatives and recruiters, location costs, and other administrative costs. This category of costs decreased $1.1 million and $2.1 million from the comparable periods in 2005 and represented 16.9% and 16.8%, respectively, of total revenue for the three- and six-month periods ended July 1, 2006, down from 20.1% and 19.8%, respectively, for the comparable periods in 2005. The decrease in this category of expense is attributable to the cost reduction measures implemented as part of our restructuring program during the third quarter of 2005. We are committed to continuing to manage this category of expense to the right level for the Company; however, there can be no assurance this category of cost will not increase as a percentage of revenue, especially if our revenue were to decline.

Merger and Severance Related Costs

During the three months ended July 1, 2006 we recorded a credit of $248,000 as a change in estimate to previously recorded merger-related accruals. During the three months ended July 2, 2005, we incurred significant costs relating to our pending merger with Computer Horizons Corporation. These costs consisted of approximately $700,000 of severance payments to employees whose employment was terminated in anticipation of the merger and approximately $900,000 of amounts paid or accrued for legal, accounting, investment banking, and other consulting costs.

Non-Operating Income

Non-operating income, consisting primarily of interest income collected as a result of the resolution of a significant receivable balance, increased during the three- and six-month periods ended July 1, 2006 compared to the equivalent periods of 2005.

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Interest Expense

Interest expense increased due to an increase in average borrowings to $9.7 million and $10.2 million during the three- and six-month periods ended July 1, 2006, respectively, from $3.4 million and $1.8 million in the three- and six-month periods ending July 2, 2005, respectively, under our line of credit and an increase in the market interest rate.

Income Taxes

During the three- and six-month periods ended July 1, 2006, we recorded a small charge for income taxes related to subsidiaries where profitability was achieved and state taxes were due. We recorded no additional income tax expense or benefit because any tax expense or benefit which has been recorded has been negated by adjusting the valuation allowance against our deferred assets. If actual future taxable income is less than we anticipate, we may be required to record an additional valuation allowance against our deferred tax assets resulting in additional income tax expense, which will be recorded in our consolidated statement of operations. If, however, we successfully return to profitability to a point where future realization of deferred tax assets which are currently reserved, becomes “more likely than not,” we may be required to reverse the existing valuation allowances resulting in an income tax benefit.

Personnel

Our technical consulting staff levels finished the quarter at a slight decrease in comparison to the comparable quarter last year. This number excludes headcount in Medical Concepts Staffing, our medical staffing business, which accounts for an immaterial amount of our revenue.

Liquidity and Capital Resources

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

								Percentage
	July 1,		December 31,		Increase			Increase
(In thousands except percentages)	2006		2005		(Decrease)			(Decrease)
Cash and Cash Equivalents	$	362	$	64	$	298			465.6	%
Accounts Receivable		70,227		66,968		3,259			4.9
Other Current Assets		2,846		2,383		463			19.4
Total Current Assets	$	73,435	$	69,415	$	4,020			5.8	%
Accounts Payable		27,007	$	24,581	$	2,426			9.9	%
Salaries and Vacations		8,775		8,260		515			6.2
Line of Credit		5,526		5,000		526			10.5
Restructuring Accruals Current		747		971		(224	)		(23.1	)
Other Current Liabilities		3,235		4,421		(1,186	)		(26.8	)
Total Current Liabilities	$	45,290	$	43,233	$	2,057			4.8	%
Working Capital		28,145	$	26,182		1,963			7.5	%
Current Ratio		1.62		1.61		.01			.6
Total Shareholders’ Equity	$	56,578	$	56,312	$	266			.5	%

Cash Requirements

The day-to-day operation of our business requires a significant amount of cash to flow through the Company. During the three- and six-month periods ended July 1, 2006, we made total payments of approximately $52.3 million and $103.9 million respectively, to pay our employee’s wages, benefits and associated taxes. We also made payments during the three- and six-month periods ended July 1, 2006 of approximately $25.2 million and $48.5 million, respectively, to pay vendors who provided billable technical resources to our clients through us. We made payments during the three- and six-month periods ended July 1, 2006 of approximately $10.2 million and $18.8 million, respectively, to fund other operating expenses such as our cost of product sales, employee expense reimbursement, office space rental and utilities.

The cash to fund these significant payments comes almost exclusively from our collection of amounts due the Company for services rendered to our clients (approximately $88.0 million and $171.5 million, respectively, in the three- and six-month periods ended July 1, 2006). During the second quarter we also paid down our line of credit by $5.0 million. Generally, payments made to fund the day-to-day operation of our business are due and payable regardless of the rate of cash collections from our clients. While we do not anticipate such an occurrence, a significant decline in the rate of collections from our clients, or an inability 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.

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 Sources and Uses of Cash/Credit Facility

Cash and cash equivalents at July 1, 2006 remained relatively stable from December 31, 2005. 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. As our revenue and payroll continues to grow, or if we use our cash to make small acquisitions, our need to borrow may increase.

Working capital at July 1, 2006 was up from December 31, 2005. The ratio of current assets to current liabilities increased slightly at July 1, 2006, compared to December 31, 2005.

Our asset-based revolving credit agreement, consummated in April 2002, provides us with up to $45.0 million of availability. At July 1, 2006, our borrowing availability under this credit facility, which fluctuates based on our level of eligible accounts receivable, was at $40.4 million. Borrowings under the credit agreement are secured by all of our assets. This line of credit is available to us to fund working capital needs and other investments such as acquisitions as these needs arise. We believe we will be able to continue to meet the requirements of this agreement for the foreseeable future.

The revolving credit agreement requires us to take advances or pay down the outstanding balance on the line of credit daily. However, we can request fixed-term advances of one, two, or three months for a portion of the outstanding balance on the line of credit. Effective August 5, 2004, the Company amended its credit agreement and modified certain terms of the agreement. The amendment reduced the commitment fee to .25% of the unused portion of the line, reduced the annual administration fee to $25,000, and reduced the interest rates on daily advances to the Wall Street Journal’s “Prime Rate”, or 8.25% as of July 1, 2006, and fixed-term advances to the applicable LIBOR rate plus 2.0%. The agreement continues to restrict, among other things, the payment of dividends and capital expenditures. Effective January 20, 2006, the Company again amended the credit agreement extending the expiration date from October 31, 2006 to January 20, 2010. The amendment eliminated certain reserves in calculating the amount the Company can borrow under the facility and changed the definition of eligible accounts receivable in calculating our borrowing capacity. The effect of the modifications was to increase by $4.0 to 5.0 million the borrowing capacity under the line. The Company has the opportunity to increase capacity by approximately $3.0 million if certain operating results are achieved in 2006.

During the three- and six-month periods ended July 1, 2006, we made capital expenditures totaling $448,000 and $774,000, respectively, compared to $642,000 and $1.8 million, respectively, in the comparable periods ended July 2, 2005. 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 the plan. The Company’s line of credit, with an outstanding balance of $5.5 million at July 1, 2006, expires on January 20, 2010. The Company will incur interest expense on all amounts outstanding on this line of credit at a variable interest rate. The Company will incur interest expense on certain portions of its deferred compensation obligation. Minimum future obligations on operating leases and deferred compensation and the line of credit outstanding at July 1, 2006, are as follows:

(in thousands)	1 Year		2-3 Years		4-5 Years		Over 5 Years		Total
Line of Credit	$	--	$	--	$	5,526	$	--	$	5,526
Operating Leases		4,427		5,762		3,479		1,508		15,176
Deferred Compensation		178		969		270		923		2,340
Total	$	4,605	$	6,731	$	9,275	$	2,431	$	23,042

20

New Accounting Pronouncements and Standards

In December 2004, the Financial Accounting Standards Board issued a revision to SFAS 123,“Share-Based Payment.” The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statement eliminates the alternative method of accounting for employee share-based payments previously available under APB Opinion No. 25. The Statement was effective for the Company beginning in the first quarter of fiscal 2006. See Note 1 to the condensed consolidated financial statements for the Company’s disclosure regarding the effect of the adoption of SFAS 123(R) on the Company’s consolidated financial statements.

On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition but does not expect FIN 48 to have a material impact.

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our financing agreement with GE Capital Corporation carries a variable interest rate which exposes us to certain market risks. Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates. Market risk is estimated as the potential increase in fair value resulting from a hypothetical one percent increase in interest rates. For example, our line of credit averaged less than $10.2 million during the first half of 2006. A one percent increase in interest rates, assuming this average outstanding balance, would result in an annual interest expense increase of approximately $102,000.

Item 4. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Jeffrey P. Baker, 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(e) 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.

22

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which the Company is a party or to which any of its property is subject, other than routine litigation incidental to the business.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors that could materially affect our business, financial condition or future results discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

At the annual meeting of shareholders held May 25, 2006, 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
Brigid A. Bonner	20,331,689	827,487
Willard W. Brittain	20,231,260	927,916
Krzysztof K. Burhardt	20,238,413	920,763
Michael B. Esstman	19,855,930	1,303,246
Michael J. LaVelle	19,877,759	1,281,417
Margaret A. Loftus	19,761,595	1,397,581
Robb L Prince	19,880,647	1,278,529

(b)Ratification of Auditors

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

In favor	20,490,759
Against	616,470
Abstain	51,947

(c)Approval of amendment to the 2004 Equity Incentive Plan

The shareholders voted their shares to approve an amendment to increase the number of shares available under the 2004 Equity Incentive Plan from 1,000,000 to 2,000,000 by the following vote:

In Favor	11,426,904
Against	2,716,443
Abstain	198,150
Broker Non-vote	6,817,679

23

Item 5. Other Information

None.

Item 6. Exhibits

*+Exhibit 10.1	Analysts International Corporation 2004 Equity Incentive Plan (as amended through May 25, 2006).
*+ Exhibit 10.2	Form of 2006 Management Incentive Compensation Plan and target incentive levels for named executive officers.
+ 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.

*	Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Quarterly Report pursuant to Item 6 of Form 10-Q.
^	Denotes an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference.
+	Filed herewith
++	Furnished herewith

24

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 9, 2006	By:	/s/ Jeffrey P. Baker
		Jeffrey P. Baker
		Chief Executive Officer
		(Principal Executive Officer)
Date: August 9, 2006	By:	/s/ David J. Steichen
		David J. Steichen
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

25

EXHIBIT INDEX

Exhibit 10.1	Analysts International Corporation 2004 Equity Incentive Plan (as amended through May 25, 2006).
Exhibit 10.2	Form of 2006 Management Incentive Compensation Plan and target incentive levels for named executive officers.
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.

EX-10.1

EXHIBIT 10.1

ANALYSTS INTERNATIONAL CORP.

2004 EQUITY INCENTIVE PLAN

(as amended through May 25, 2006)

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 established 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.

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 conditions 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.

SECTION 6.

STOCK

The Stock to be optioned or awarded under this Plan shall consist of authorized but unissued shares of Stock. Two Million (2,000,000) 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 prior 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 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 Common 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 granted. 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.

(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 delivering 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 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 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 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 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 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.

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 option 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 adjustment 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 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, 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.

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) 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:

(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 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.

EX-10.2

EXHIBIT 10.2

ANALYSTS INTERNATIONAL

INCENTIVE COMPENSATION PLAN

This material is Analysts International confidential and is not to be disclosed to any person other than Analysts International Corporate Officers, the immediate supervisor of the employee to whom it pertains and Analysts International Corporate personnel with a need to know.

ANALYSTS INTERNATIONAL

INCENTIVE COMPENSATION PLAN

Analysts International Corporation (the “Company”) has adopted an Incentive Compensation Plan in which (“Employee”) has become a participant and is hereinafter described:

1.Purpose. The Plan is intended as a means by which the Company can attract and retain the services of key management and other employees through incentive payments based on the performance of the Company. This Plan replaces all prior Incentive Plans and is effective as of January 1, 2006 or for new participants joining the Plan in successive fiscal years, as the case may be, when fully executed by the parties.

The Plan is not intended as a guarantee of continuing employment, the employment relationship between the Company and participants in the Plan being terminable at any time by either the Company or the participant, with or without cause, unless agreed to otherwise in writing between Employee and Company.

2.Terms of participation.

2.1Eligibility. Before an employee may participate in this Plan, the employee must be designated by Analysts International corporate management or, in the case of an executive officer, the Company’s Compensation Committee as eligible to participate and must execute, if requested by the Company, a non-compete agreement, in such form as the Company may require, protecting the Company’s confidential information and its relationships with customers, prospects and personnel during and after employment. The Company’s failure to request Employee to sign a non-compete agreement in order to participate in this Plan shall in no way modify, amend, terminate or void any non-compete, confidentiality or similar agreement previously signed by the Employee and such agreement shall remain in full force and effect.

2.2Changes in position or Gross Base Salary. If, during the course of the fiscal year, Employee accepts a new position with the Company or receives a new Gross Base Salary as defined herein, Employee’s incentive distribution, if any, shall be calculated at the rate for the position Employee held at the beginning of the fiscal year, unless otherwise agreed to by the Company in writing.

3.Incentive Compensation.

3.1Incentive Compensation. Incentive compensation under this Plan shall be as called for in Schedules I issued for successive fiscal years.

3.2Calculation of Incentive Compensation. Incentive compensation called for in this Section 3 shall be determined on an incremental basis as set forth herein and as further delineated in the Schedule I for the fiscal year specified in that Schedule I.

3.2.1Gross Base Salary. Incentive compensation under this Plan shall be calculated and determined on the basis of Employee’s Gross Base Salary in effect on the first day of the fiscal year in which the incentive compensation shall be earned, subject to the provisions of Section 2.2.

3.2.2Process for calculation. On an annual basis, the Chief Financial Officer and/or the Director of Treasury Operations shall determine whether all prerequisites for payment of incentive compensation have been met and shall calculate Employee’s incentive amount based on the Company’s final financial results as determined by the Company’s Chief Financial Officer, subject to: i) any changes that occur during audit of the Company’s books by its independent auditors; and ii) to any limits imposed by the terms and condition of this Plan.

3.2.3Incentive Amount. The amount of incentive compensation shall be calculated as defined in Schedule I attached hereto and other terms and conditions of the Plan, including but not limited to Sections 3.2.2, 3.2.4.2, 3.2.5.1, 3.2.5.2 and 5.2 hereof.

3.2.4Distributions.

3.2.4.1Annual Distributions. Incentive compensation that has been earned and is payable under all terms of this Plan will be distributed on an annual basis only. The Company anticipates that annual distributions will occur during March of the year following completion of the fiscal year in which the Employee earns the incentive compensation

3.2.4.2Limits on Distributions

(a)Limit on Aggregate Amount. The aggregate amount of distribution paid by the Company under this Plan to all participants shall be subject to the Annual Maximum as defined herein. In the event that the aggregate amount of incentive compensation as calculated exceeds or would exceed the Annual Maximum, the incentive amount for each participant, including Employee, will be recalculated and reduced on a pro rata basis. “Annual Maximum” means the limit on the aggregate amount of incentive distribution paid by the Company under this Plan and shall be no more than thirty percent (30%) of the Company’s pre-tax, pre-incentive profit for any given fiscal year.

(b)Profit Requirements. Unless otherwise specified in the Schedule I for the fiscal year for which payment is to be made, no participant shall receive an incentive distribution under this Plan unless:

(i)the Company is profitable as reported in its financial results filed with the Securities and Exchange Commission; and

(ii)Employee’s “Area of Responsibility,” as defined in Schedule I attached hereto, has achieved at least eighty percent (80%) of its Profit Goal set forth in Exhibit A to Schedule I.

3.2.5Adjustments to Incentive Compensation.

3.2.5.1Recalculations. The Company reserves the right to re-compute incentive calculations and/or distributions to determine whether prior calculations of an incentive distribution or award were consistent with the terms of the Plan, including but not limited to Sections 3.2.2, 3.2.4 and 5.2 and the Schedule I for the applicable fiscal year. The calculation of incentive compensation also will be reduced by any cash compensation paid or payable to Employee for the current fiscal year under other incentive compensation arrangements, if any.

3.2.5.2Recoup of Overpayments. Employee agrees that in the event that a previously received incentive distribution becomes subject to reduction pursuant to Section 3.2.4.2 or any other provision of the Plan, Employee shall re-pay to the Company any excess amount received by Employee immediately upon the Company’s request. If Employee fails to re-pay such amount upon request, Employee agrees and consents to deduction of such excess from his or her next paycheck or paychecks as the case may be.

4.Incentive Protection. Upon the occurrence of an event constituting a Change in Control:

4.1Neither the Company nor any successor or assign shall have the right to modify, amend or terminate the Plan; and

4.2In the event of a Change in Control, determination of incentive compensation for the fiscal year will be calculated under Section 3 based on: (i) actual results through the month ended prior to the Change in Control; and (ii) results as projected in the Management Forecast for the remainder of the fiscal year or the six-month period beginning with the month in which the Change of Control occurs, whichever is shorter.

5.General Provisions.

5.1Eligibility for Distribution. Unless otherwise provided for in writing, in order to be eligible for any distribution or award, Employee must be a full-time employee of the Company as of the date on which the distribution is made.

Without limiting the Company’s right to damages or injunctive relief, a participant must refund all incentive compensation payments received, during his or her last twelve (12) months of employment with the Company if he or she violates any of the provisions of the separate non-compete agreement referenced in Paragraph 2.1 of this Plan.

5.2Revenue and Profit. Revenue and profit shall be determined by the Company in accordance with the Company’s practices and procedures, and in compliance with applicable rules of accounting and federal and state law and regulations. Specifically, but not by way of limitation, all items of income and expense, and all adjustments to income by way of reserves, write-downs or write-offs and all expenses (including but not limited to bad debt expense, interest and depreciation), shall be recorded when determined by the Company to have been receivable or incurred.

5.3Definitions. The following terms as used in the Plan shall have the following meanings:

5.3.1“Board” means the Board of Directors of the Company.

5.3.2“Change in Control” shall, for purposes of this Plan, mean the acquisition by any person or group or related persons of more than a majority in interest on the outstanding voting stock of Analysts International, or a change in a majority of the Company’s Board of Directors as a result of a proxy solicitation not approved by a majority of the current Board. The change of control shall be deemed to occur as of the date of such change of control.

5.3.3“Compensation Committee” means the Compensation Committee of the Board.

5.3.4“Gross Base Salary” means the participant’s regular annual cash compensation, before pre-tax deduction for benefits, if any, paid for the period in the fiscal year during with respect to which Employee’s incentive compensation is being calculated hereunder. Specifically excluded from Gross Base Salary are: (i) amounts grossed up in any of Employee’s compensation for tax reporting purposes; (ii) gain realized on the grant or exercise of stock options and the grant of restricted stock or the lapse of conditions related thereto; (iii) dividends credited to a restricted stock or stock subject to options; (iv) incentive payments; (v) amounts paid for automobile allowance and/or expenses; and (vi) any other amounts determined by the Company to be other than regular monthly cash compensation.

5.3.5“Management Forecast” means the Company’s pre-tax profit plan for the fiscal year as presented to and approved by the Board.

5.3.6“Plan Year” means the Company’s fiscal year for which incentive compensation is to be paid.

5.4 Termination and Modification. The Company reserves the right to terminate this Plan or to modify the provisions hereof at any time and from time to time. Such termination or modification shall be effective when issued by the Company.

I certify that the foregoing constitutes the Incentive Compensation Plan as duly adopted.

Colleen M. Davenport
Signature:_________________________________________	Signature:_________________________________________
Employee	Analysts International Corporation
Name:____________________________________________	Name:____________________________________________
Please Print	Please Print
Date:_____________________________________________	Date:_____________________________________________

Targeted Incentive Levels

Executive Officers	Targeted Incentive as percentage of Base Salary
Jeffrey P. Baker	80%
David J. Steichen	50%
Colleen M. Davenport	50%

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey P. Baker, Chief Executive Officer, certify that:

1. I have reviewed this quarterly 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

d) disclosed in this quarterly 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 reasonable 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 the 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 9, 2006	By:	/s/ Jeffrey P. Baker
		Jeffrey P. Baker
		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 quarterly 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

d) disclosed in this quarterly 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 reasonable 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 the 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 9, 2006	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 1, 2006 as filed with the Securities and Exchange Commission (the “Report”), the undersigned, Jeffrey P. Baker, 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 9, 2006	By:	/s/ Jeffrey P. Baker
		Jeffrey P. Baker
		Chief Executive Officer
Dated: August 9, 2006	By:	/s/ David J. Steichen
		David J. Steichen
		Chief Financial Officer