**Exhibit 13**

 

**ANALYSTS INTERNATIONAL**

 

ANNUAL REPORT 2003

 

 

 

 

 

 
| changing the rules_  maintaining the values |   |   |
|---------------------------------------------|--------|--------|

 

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*Forward Looking Statements*

 

The statements contained in the letter from the CEO and the Presidentand in “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” that are not strictly historical fact, including withoutlimitation, statements relating to the need of current and prospectivecustomers for our services and our ability to retain and/or win that business, theeffects of competition and our ability to respond to competitive and marketconditions, our success in retaining and placing qualified professional staff,our ability to balance changes in billing and labor rates and to control otheremployee-related and operating costs (our ability to maintain gross marginlevels), our ability to comply with the terms of our credit agreement and ourworking capital requirements and our ability to achieve and maintainprofitability are forward looking statements made under the safe harborprovision of the Private Securities Litigation Reform Act. Words such as“believes,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or“plans” and similar expressions are intended to identify forward-lookingstatements. Such statements are based on management’s current expectations asof the date of this document but involve risks, uncertainties and other factorswhich could cause actual results to differ materially from those contemplatedby such forward looking statements. Investors are cautioned to consider theseforward looking statements in light of important factors including, but notlimited to, the risk factors discussed below, which may result in variationsfrom results contemplated by such forward looking statements.

 

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**AnalystsInternational CorporationFinancial Highlights**

 
| **(Dollars in thousands except per  share amounts)**                              |   | **Year Ended  January 3, 2004** |    | **Year Ended  December 28, 2002** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------|---------|-----------------------------------|--------|
| Professional services revenue:                                                    |   |                            |    |                              |   |
| Provided directly                                                                 |   | $                               | 281,356 |                              | $      | 327,582 |   |
| Provided through subsuppliers                                                     |   | 50,543                          |    | 98,578                            |   |
| Total revenue                                                                     |   | 331,899                         |    | 426,160                           |   |
|                                                                              |   |                            |    |                              |   |
| Loss before income taxes and cumulative  effect of change in accounting principle |   | (1,524                          | )       | (5,748                            | )      |
| Net loss                                                                          |   | (1,524                          | )       | (21,031                           | )      |
|                                                                              |   |                            |    |                              |   |
| Per share of common stock:                                                        |   |                            |    |                              |   |
| Net loss (diluted)                                                                |   | (.06                            | )       | (.87                              | )      |
| Shareholders’ equity                                                         |   | 2.84                            |    | 2.90                              |   |
| Dividends declared                                                                |   | .00                             |    | .00                               |   |
|                                                                              |   |                            |    |                              |   |
| Average common and common equivalent shares  outstanding                          |   | 24,201                          |    | 24,198                            |   |
|                                                                              |   |                            |    |                              |   |
| Number of personnel                                                               |   | 3,000                           |    | 3,075*                            |   |
|                                                                              |   |                            |    |                              |   |
| Current ratio                                                                     |   | 2.22                            |    | 2.08                              |   |
| Working capital                                                                   |   | $                               | 35,665  |                              | $      | 35,705 |   |

 

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*Personnel staff restated for 2002 due to a change in the way theCompany counts technical consultants who are between projects or have left theCompany but not yet been terminated in its accounting systems.

 

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To Our Shareholders

 

In 2003, Analysts International achieved significant strategic progress in positioningour operations to reflect the fundamental changes that have taken place withinthe global IT services industry. Despite a continuing tough market in whichtotal revenue continued to decline, the initiatives we implemented in reducingexpenses, building key strategic alliances and streamlining our organizationenabled us to improve performance over 2002 and position our business tocapitalize on future opportunities.

 

Total revenue in fiscal year 2003 was $332 million, down from $426million in 2002. The decline included a 14 percent reduction in revenue fromservices we supply directly to customers and a 49 percent revenue decline fromservices provided by subsuppliers. Eighty-five percent of our revenue now flowsfrom directly-provided services compared to 77 percent in 2002.

 

Our net loss for the year was $1.5 million, compared with last year’snet loss, excluding the implementation of SFAS No. 142, of $4.6 million. On adiluted per share basis, the net loss for the year ended January 3, 2004 was$0.06 per share, compared with a loss of $0.19 per share last year, exclusiveof the aforementioned item.

 

Throughout 2003, we initiated and made substantial progress in severalkey areas.  Operationally, we kept ourfocus on productivity and cost effectiveness, repositioning our management teamand eliminating a level of field management. We saw improvement in recruitingproductivity through the use of new information systems launched in 2002.

 

Strategically, we continued to expand our capabilities. In the secondquarter of 2003, we formalized a strategic alliance with Majesco Software,Inc., a leading offshore services provider. Our alliance with Majesco isfocused on taking advantage of the growth in offshore IT services.

 

In the third quarter, we entered into an agreement with eWork tojointly develop and launch a state-of-the-art internet-centric platform forwork force and career management within the information technology industry.This new platform is intended to facilitate the introduction of new resourcemanagement business models, forging new relationships with clients and leadingto greater productivity.

 

In the fourth quarter we further expanded our global capabilities withthe integration of Renodis into Analysts International’s organization. Renodis,a Minneapolis-based consulting firm, compiled a stellar track record inadvising businesses on the successful development

 

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[Photo]

 

Michael J. LaVelle, President and Chief Executive Officer

 

of offshore IT capabilities. The addition of Renodis’ talent adds depthto our experience and resources to develop a profitable offshore service model.

 

We also established additional relationships with selected channelpartners in each of our lines of business. These arrangements extend our marketreach and enhance our customer service.

 

In December of 2003, we saw our Medical Concepts Staffing subsidiarybecome profitable. Medical Concepts Staffing was founded in 2002 to providenursing resources to hospitals. This group is now serving 20 hospitals andclinics scheduling more than 100 nurses. We are excited about the potential ofthis business.

 

At year end, Analysts International’s financial position remainedsolid. With $4.5 million in cash, no debt on the balance sheet and an unusedrevolving credit facility, we are well positioned to support the future growthof our business.

 

As we look to 2004 and beyond, we are encouraged by the apparentstabilization in the IT services market. Demand in each of our lines ofbusiness has been increasing. We are prepared to serve customers, both existingand new, with a talented technical staff that has sustained us through toughtimes and that will drive our future growth.

 

By embracing the sweeping changes that have occurred in our industryover the past four years, and by confidently launching strategies thatcapitalize on those changes, we are today better equipped than ever to achieveprofitable growth in the years ahead. The financial markets are beginning torecognize the important operating and strategic advances we have made — evidencedby the 70 percent growth in Analyst International’s market value during 2003 —and we have the vision, people, systems and resources to continue thoseoperating and strategic advances through 2004 and into the future.

 

 

*Sincerely,*

 
| /s/ Michael J. LaVelle                  |   |
|-----------------------------------------|--------|
| Michael J. LaVelle                      |
| *President and Chief Executive Officer* |

 

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Company Overview

 

 

 

*Excellence in the Delivery of InformationTechnology*

 

Analysts International is a diversifiedinformation technology services company with a global reach in what is now aglobal IT industry.  We have sales andcustomer service support centers throughout the United States and Canada andstrategic partnerships with companies that have extended our reach tointernational shores.

 

Analysts International is a leader in IT technology and servicedelivery.  Our mission for growth andsuccess is to provide our customers with the IT and staffing services they needat the most affordable cost.  In anadvancing IT marketplace, we continually strive to provide the right mix ofservices at the right price by observing and analyzing changes in themarketplace and by listening to our customers.

 

Our service offerings are designed to help our clients meet theirgrowing business demands.  Thoseofferings include Business Solutions such as application development andintegration, infrastructure services including network support, security andconnectivity, and full-service staffing. With this mix of services, we can assist our clients in plotting acourse that can deliver long-term, tangible dividends from their investment ininformation technology.

 

Analysts International’s exceptional quality of service and reputationare well known within the IT industry. In business for 38 years, we have established a loyal following of morethan 1,000 client organizations ranging from *Fortune50®*companies to government agencies to mid-tier industry leaders.

 

We draw from a pool of more than 2,500 talented and experiencedconsultants with knowledge in every IT field. And we contract these professionals to our clients for a variety ofset-term and ongoing support needs.

 

We have strong relationships with leading software and hardwaresuppliers like Microsoft, IBM and Cisco Systems to bring our customers the bestproducts and solutions the industry has to offer.

 

Our recently expanded offshore development capability makes ourservices available to our clients at significant cost savings throughout ourlines of business.

 

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| **BUSINESS SOLUTIONS SERVICES**                                                                                                                                                                                                                                                                                                                                                                           |   | **BUSINESS  SOLUTIONS SERVICES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Analysts International’s Business Solutions  is a grouping of IT services that enable our clients to leverage the Internet  and other wireless applications to increase efficiency within their  organizations.  Our enterprise-level  software solutions cover all areas of business, including financial  reporting, human resources, marketing, manufacturing, and supply chain  management. |   | **Application  Development**•   Criminal Justice Information Systems (CJIS)•   Offshore  Services•   Application  Outsource Management•   Internet  / Web Development•   Web  Services•   Mobile  Applications **Application Integration**•   Portal Services•   Customer  Relationship Management (CRM)•   Enterprise  Resource Planning (ERP)**INFRASTRUCTURE  SERVICES****Network  Support Services**•   Call Center•   Hosting•   Hardware  Procurement & Maintenance•   Systems  Management**Network Security Services**•   Security Services•   Business  Continuity Planning & Disaster Recovery**Network Connectivity**•   Enterprise Networking•   Server  Infrastructure & Messaging•   Voice  & Data Cabling•   IP  Telephony•   Wireless**STAFFING  SERVICES****IT  Supplemental Resources  Managed Teams  Managed Services** |
|                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| Our Business Solutions services range from creating an interactive Web  portal to developing a mobile network or integrating Enterprise Resource  Planning (ERP) software tools.  We  work with each client to determine their needs and then develop and integrate  applications that allow people within the organization to manage and access  information from various sources and networks.     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| Some of Analysts International’s Business Solutions services include:                                                                                                                                                                                                                                                                                                                                |   |
|                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| *•**      Criminal  Justice Information Systems (CJIS)*— a network integration service specially designed to help government  agencies share information among law enforcement officers and the legal  system.                                                                                                                                                         |   |
|                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| *•**      Web  Development and Portals*—  collaborative tools that help clients share knowledge and information online  for building customer loyalty, increasing employee productivity and reducing  customer service and channel management costs.                                                                                                                   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| *•**      Mobile  &Wireless Solutions*—  solutions that streamline processes, increase productivity and deliver                                                                                                                                                                                                                                                    |   |

 

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mission-critical information. For example, providing a wireless solution that allows healthcareproviders to use handheld devices to access patient information and writeprescriptions through a secure, online network.

 

*•**     CustomerRelationship Management (CRM)—*solutionsthat help businesses maintain solid and profitable customer relationships withsoftware like Microsoft Business Solutions. Analysts International is one of only 10 nationally managed resellers ofMicrosoft Business Solutions, which helps organizations manage contacts, leadsand customer histories.

 

**INFRASTRUCTURE SERVICES**

 

In addition to developing applications and networks, AnalystsInternational helps procure, install and maintain the hardware and softwareneeded to drive and maintain networks and systems.  Services such as call centers, hosting, field engineering,hardware procurement and systems management are all important to maintainingcritical technology systems for our clients.

 

Equally important is securing those systems. We incorporate advancedsecurity services to help keep hackers, viruses, worms and other threats out ofour clients’ systems.  Our BusinessContinuity Plan (BCP) is designed to help recovery of major technical outages.  And to help prevent a company’s network fromfailing in the first place, we install voice and data cabling to strengthentheir systems and improve routine troubleshooting.

 

**OFFSHORE CAPABILITIES**

 

According to industry sources, the offshore IT industry is expected togrow nearly 30 percent over the next two years.  There is increasing demand from companies consideringestablishing IT or back office capabilities in India. 

 

Analysts International has been developing and expanding our offshorecapabilities to meet this need with the help of personnel we brought in fromRenodis.  The principals of Renodisbegan a consulting firm that advised businesses on the development of offshorecapabilities.  Through this firm,Renodis established and maintained 

 

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relationships with a network of offshore service providers inIndia.  Our integration of Renodispersonnel allows us to maintain these relationships and service offerings fromstrategic planning to operational implementation of an offshore project orcenter.

 

We also formed a strategic alliance with Majesco Software, Inc., aleading offshore IT services provider. With this relationship in place, we will offer innovative onshore /offshore capabilities to our strategic and midmarket clients throughout ourlines of business.

 

We will use these alliances to enhance and expand our ‘client-centric’approach to information technology solutions. We will be offering a new anddifferent offshore delivery model to our clients, one in which onsiteaccountability and management of projects is combined with the technicalexcellence and economics of offshore development.

 

**FULL-SERVICE STAFFING**

* *

*IT Supplemental Resources*

 

Analysts International is a leading supplier of IT supplementalresources and staff augmentation services. At Analysts International, our principal resource is people, and we arecommitted to attracting and developing talented professionals dedicated toexcellence, integrity and innovation. Our centralized national recruiting network is driven by an integratedapproach for managing key processes and powerful supporting technology.  As a result, we consistently find and retainthe most valuable contract professionals.

 

Our employee professionals help develop and maintain a business’sessential technical applications and related systems.  Personnel range from information architects and systems analyststo Java programmers and web developers. Services include new development, ongoing maintenance, help desksupport, application migration, training and documentation, PC/LAN, program implementationmanagement and evaluation.

 

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*Managed Teams*

 

Analysts International’s Managed Teams are designed to help ITdepartments cut spending while increasing efficiency.  We share in the management of an IT project, acquiring resourcesand directing them based on an organization’s priorities and goals.  The Managed Teams approach provides fast,efficient team assembly and disassembly, co-management based on a customer’spriorities and seasoned team leadership.

 

*Managed Services Group*

 

The emergence of technology is outpaced only by the diversification ofspecialized suppliers and subcontractors —Analysts International offers ablueprint to radically transform our clients’ strategic sourcing capability.  Our Managed Services offering is anintegrated approach to managing the key processes needed to find, retain andmanage valuable contract professionals. We provide a means for companies to quickly establish a singlepoint-of-contact for several services. Some of the services that we manage under this business include staffaugmentation, resource acquisition, selecting and implementing a VendorManagement Systems (VMS) tool, tracking costs and supplier performance,controlling “maverick” spending and substantially simplifying the associatedbilling and invoicing processes.

 

**MEDICAL CONCEPTS STAFFING**

 

As an IT consulting and staffing company, Analysts International has along history and extensive knowledge and understanding of the staffingindustry.  Our subsidiary, MedicalConcepts Staffing, transfers this expertise to the medical industry, providingmore than 100 qualified nurses to hospitals and healthcare facilities on adaily or long-term basis.

 

Whatever mix of services an organization needs to make the most oftheir investment in IT, Analysts International offers years of experience,expertise and the vision to support clients now and into the future.

 

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**Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Overview

 

Total revenue for fiscal year 2003 was $332 million, down from $426million in 2002.  The decline included a14% reduction in revenue from services we supply directly to customers and a49% revenue decline from services we provide to our clients throughsubsuppliers.  The decline insubsupplier revenue primarily resulted from the loss of two significant ManagedServices accounts, Qwest Communications and Chevron Texaco.  These changes in our revenue mix resulted in85% of our revenues flowing from directly provided services, compared to 77% in2002.  This favorable increase inpercentage of direct revenue allowed us to improve our gross margins from 17.0%in 2002 to 18.3% in 2003 in spite of continuous pricing pressures from ourclients.

 

Our net loss for the year was $1.5 million, compared with last year’snet loss of $4.6 million (excluding the implementation of Statement ofFinancial Accounting Standards (SFAS) No. 142).  On a diluted per share basis, the net loss for the year endedJanuary 3, 2004 was six cents ($.06) per share, compared with a loss ofeighty-seven cents ($.87) per share last year. At year-end, Analysts International’s financial position remained strong.  With $4.5 million in cash, no debt on thebalance sheet and an unused revolving credit facility, we believe we are wellpositioned to support future growth.

 

In keeping with our focus on productivity and cost effectiveness, weimplemented a repositioning of our management and supervisory team during 2003,reducing our field leadership to six area managers and eliminating one level offield management.  With our fieldleadership aggressively streamlined, we are focused more clearly than ever onmanaging what we believe to be the key elements to our future success.  To be successful we must: (i) increase thenumber of requirements our sales organization brings to the Company from newand existing clients; (ii) increase the number of qualified candidates ourrecruiting organization submits against those requirements; and mostimportantly, (iii) increase the rate at which quality submittals turn intoplacements.  

 

During the latter part of 2003, as a result of intense focus by ourmanagement team and what appears to be the beginning of a market recovery inthe Information Technology (IT) market sector, the productivity of both oursales and recruiting staff improved. During the second half of 2003, average weekly requirements coming fromnew and existing clients increased 7.7% over the first half of the year.  Additionally, during the same period averageweekly candidate submittals against requirements increased 3.0%.  The improvements in these key indicatorshave not yet resulted in a significant growth in technical headcount however.While average weekly placements increased by seven during the second half of2003, average weekly terminations of existing technical employees alsoincreased, resulting in a net increase in technical headcount of only twoduring the second half of 2003.  Anincrease in average weekly terminations has been common during the second halfof the year.  The fact that significantgrowth did not occur during the second half of the year, in spite of theincrease in average weekly placements, is an indication of the tentativeness ofthe recovery we are beginning to see.

 

While we are disappointed that our vigorous focus on increasing averageweekly requirements and submittals has not yet resulted in significantincreases in net placements (i.e., technical headcount growth), we believe thatby continuing to focus on improving our placement rate, significant headcountgrowth in 2004 is possible.  However,achievement of such growth is dependent upon the continuation of increasedsales and recruiting productivity and what appears to be the beginning of amodest recovery in the IT sector.

 

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As important as the above indicators are to growth of revenue, the billrates we are able to charge to clients and the margins we are able to obtain onthose bill rates are the key indicators of our profitability.  Throughout 2003 we have seen continuouspressure from our clients to reduce our bill rates and to accept lower margins.  Average hourly bill rates have declined 9%from January 2003 to December 2003, and our average hourly margins on directbillings have declined 0.3%.  We believethat as the IT services market begins recovery, we will see a stabilization ofbill rates and margins in 2004; however, we do not expect to see an improvementin these indicators until the demand for IT services and the supply of ITresources returns to balance.  Toenhance profitability in an environment of intense margin pressures, we arefocused on three key objectives: i) developing the lowest-cost staffingdelivery model in the industry and becoming the service provider, and employerof choice to the IT consulting community; ii) fully integrating offshorecapabilities into each line of business; and iii) developing channel salespartners to drive new business opportunities.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results ofoperations is based on our consolidated financial statements which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amount of assets and liabilities, revenuesand expenses and related disclosure of contingent assets and liabilities at thedate of our financial statements. Actual results may differ from these estimates under differentassumptions or conditions.  We believethe estimates described below are the most sensitive estimates made bymanagement in the preparation of the financial statements.

 

*Estimates of Future Operating Results*

 

The realization of certain assets recorded in our balance sheet isdependent upon our ability to return to profitability.  In evaluating the recorded value of ourintangible assets ($11.2 million), goodwill ($16.5 million), and deferred taxassets ($2.6 million) for indication of impairment, we are required to makecritical accounting estimates regarding the future operating results of theCompany.  These estimates are extremelysubjective. 

 

To evaluate our intangible assets and goodwill for impairment, we relyheavily on the discounted cash flow model to assess the value of the associatedreporting units.  The discounted cashflow valuation technique requires us to project operating results and therelated cash flows over a ten-year period. These projections are by their nature extremely subjective and if actualresults were substantially below projected results, an impairment of the recordedvalue of our goodwill and intangible assets could result.

 

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

 

*Allowance for Doubtful Accounts*

 

In each accounting period we determine an amount to set aside to coverpotentially uncollectible accounts.  Webase our determination on an evaluation of accounts receivable for riskassociated with a client’s ability to make contractually required payments.  These determinations require considerablejudgment in assessing the ultimate potential for collection of thesereceivables and include reviewing the financial stability of the client, theclients’ willingness to pay and current market conditions.  If our evaluation of a client’s ability topay is incorrect, we may incur future charges.

 

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*Accrual of Unreported Medical Claims*

 

In each accounting period we estimate an amount to accrue for medicalcosts incurred but not yet reported (IBNR) under our self-funded employeemedical insurance plans.  We base ourdetermination on an evaluation of past rates of claim payouts and trends in theamount of payouts.  This determinationrequires significant judgment and assumes past patterns are representative offuture payment patterns and that we have identified any trends in our claimexperience.  A significant shift inusage and payment patterns within our medical plans could necessitatesignificant adjustments to these accruals in future accounting periods.

 

Critical Accounting Policies

 

Critical accounting policies are those policies that involvesignificant judgments and uncertainties or affect significant line items withinour financial statements and potentially result in materially differentoutcomes under different assumptions and conditions.  Application of these policies is particularly important to theportrayal of our financial condition and results of operations.  We believe the accounting policies describedbelow meet these characteristics.

 

*Revenue Recognition*

 

We recognize revenue for our staffing business and the majority of oursolutions and infrastructure business as services are performed or products aredelivered.  Certain outsourcing and helpdesk engagements provide for a specific level of service each month for whichwe bill a standard monthly fee.  Revenuefor these engagements is recognized in monthly installments over the period ofthe contract.  In some such contracts weinvoice in advance for two or more months of service.  When we do this, the revenue is deferred and recognized over theterm of the invoicing agreement.  

 

In certain client situations, where the nature of the engagementrequires it, we utilize the services of other companies in our industry.  If these services are provided under anarrangement whereby we agree to retain only a fixed portion of the amountbilled to the client to cover our management and administrative costs, weclassify the amount billed to the client as subsupplier revenue.  These revenues, however, are recorded on agross versus net basis because we retain credit risk and are the primaryobligor to our client.  All revenuederived from services provided by our employees or other independentcontractors who work directly for us are recorded as direct revenue.

 

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

 

In all of our services, risk associated with client satisfactionexists.  Although management feels theserisks are adequately addressed by our adherence to proven project managementmethodologies and other procedures, the potential exists for future revenuecharges relating to unresolved project issues with a small number of clients.

 

*Goodwill and Other Intangible Impairment*

 

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

 

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In June 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and OtherIntangible Assets.”  In accordance withthe provisions of SFAS 142, effective January 1, 2002 we ceased amortization ofcertain intangible assets including goodwill. Intangible assets with definite useful lives will continue to be amortizedover their useful lives and reviewed for impairment in accordance with SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Also in conjunction with the adoption of theprovisions of SFAS 142, we recorded a goodwill impairment charge of $16.4million during 2002.  This impairmentwas recorded as a cumulative effect of a change in accounting principle as ofJanuary 1, 2002, and therefore did not impact operating income.  The Company completed its impairmentanalysis as of January 4, 2004and found no indication of impairment of itsrecorded goodwill although the valuation determined the fair value of theInfrastructure and Solutions reporting units to approximate their carryingvalue.  Additional write-downs ofintangible assets may be required if future valuations do not support currentcarrying value.

 

*Deferred Taxes*

 

We account for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes,” which requires that deferred tax assets andliabilities be recognized for the effect of temporary differences betweenreported income and income considered taxable by the taxing authorities.  SFAS 109 also requires the resultingdeferred tax assets to be reduced by a valuation allowance if some portion orall of the deferred tax assets are not expected to be realized.  Based upon prior taxable income andestimates of future taxable income, we expect our deferred tax assets, net ofthe established valuation allowance ($2.6 million), will be fully realized inthe future.  If actual future taxableincome is less than we anticipate from our estimates, we may be required torecord a valuation allowance against our deferred tax assets resulting inadditional income tax expense which will be recorded in our consolidatedstatement of operations.

 

*Restructuring*

 

We recorded a restructuring charge and reserves associated withrestructuring plans approved by management in December 2000.  The remaining reserve of $611,000 at January3, 2004, consists of an estimate pertaining to real estate leaseobligations.  Factors such as theability to enter into subleases, the creditworthiness of sublessees, and theability to negotiate early termination agreements with lessors could materiallyaffect this real estate reserve.  Whilewe believe our current estimates regarding lease obligations are adequate, ourinability to sublet the remaining space or to obtain payments from sublesseescould necessitate significant adjustments to these estimates in the future.

 

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**RESULTS OFOPERATIONS, YEAR ENDED JANUARY 3, 2004 VS. YEAR ENDED DECEMBER 28, 2002**

 

The following table illustrates the relationship between revenue andexpense categories and provides a count of employees and technical consultantsfor the fiscal years ended January 3, 2004 (fiscal year 2003) versus December28, 2002 (fiscal year 2002).  The tablesprovide guidance in our explanation of our operations and results.

 
|                                                    |   | **Year Ended  January 3, 2004** |    | **Year Ended  December 28, 2002** |   | **Increase  (Decrease)** |   |
|---------------------------------------------------------|--------|---------------------------------|---------|-----------------------------------|--------|--------------------------|--------|
| **(dollars in thousands)**                              |   | **Amount**                      |    | **% of  Revenue**                 |   | **Amount**               |   | **% of  Revenue** |   | **Amount** |   | **%  Inc (Dec)** |   | **As %  of Revenue** |   |
| Professional services revenue:                          |   |                            |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Provided directly                                       |   | $                               | 281,356 |                              | 84.8   | %                        | $      | 327,582 |   | 76.9 | % | $ | (46,226 | ) | (14.1 | )% | 7.9 | % |
| Provided through subsuppliers                           |   | 50,543                          |    | 15.2                              |   | 98,578                   |   | 23.1 |   | (48,035 | ) | (48.7 | ) | (7.9 | ) |
| Total revenue                                           |   | 331,899                         |    | 100.0                             |   | 426,160                  |   | 100.0 |   | (94,261 | ) | (22.1 | ) | .0 |   |
| Salaries, contracted services and direct charges        |   | 271,205                         |    | 81.7                              |   | 353,715                  |   | 83.0 |   | (82,510 | ) | (23.3 | ) | (1.3 | ) |
| Selling, administrative and other operating costs       |   | 61,511                          |    | 18.6                              |   | 73,694                   |   | 17.3 |   | (12,183 | ) | (16.5 | ) | 1.3 |   |
| Amortization of intangible assets                       |   | 773                             |    | .2                                |   | 785                      |   | .2 |   | (12 | ) | (1.5 | ) | .0 |   |
| Loss on sale of corporate headquarters building         |   | —                          |    | —                            |   | 1,860                    |   | .4 |   | (1,860 | ) | (100.0 | ) | (.4 | ) |
| Non-operating income                                    |   | (79                             | )       | (.0                               | )      | (122                     | )      | .0 |   | 43 |   | (35.2 | ) | .0 |   |
| Loss on investment                                      |   | —                          |    | —                            |   | 190                      |   | .0 |   | (190 | ) | (100.0 | ) | .0 |   |
| Interest expense                                        |   | 13                              |    | .0                                |   | 1,042                    |   | .2 |   | (1,029 | ) | (98.8 | ) | (.2 | ) |
| Loss on debt extinguishment                             |   | —                          |    | —                            |   | 744                      |   | .2 |   | (744 | ) | (100.0 | ) | (.2 | ) |
| Cumulative effect of change in accounting for  goodwill |   | —                          |    | —                            |   | 16,389                   |   | 3.9 |   | (16,389 | ) | (100.0 | ) | (3.9 | ) |
|                                                    |   |                            |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                                |   | (1,524                          | )       | (.5                               | )      | (22,137                  | )      | (5.2 | ) | 20,613 |   | 93.1 |   | 4.7 |   |
| Income taxes (benefit)                                  |   | —                          |    | —                            |   | (1,106                   | )      | (.3 | ) | 1,106 |   | 100.0 |   | .3 |   |
|                                                    |   |                            |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Net loss                                                |   | $                               | (1,524  | )                                 | (.5    | )%                       | $      | (21,031 | ) | (4.9 | )% | $ | 19,507 |   | 92.8 | % | 4.4 | % |
|                                                    |   |                            |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Personnel:                                              |   |                            |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Management and Administrative                           |   | 425                             |    |                              |   | 450                      |   |   |   | (25 | ) | (5.6 | )% |   |   |
| Technical Consultants                                   |   | 2,575                           |    |                              |   | 2,625                    | *      |   |   | (50 | ) | (1.9 | )% |   |   |

 

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*Technical Consultant total restated for the year ended December 28,2002 due to a change in the way the Company counts consultants who are betweenprojects or have left the Company but not yet been terminated in its accountingsystems.

 

13

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*Revenue*

 

Revenue provided directly for the year ended January 3, 2004 decreased14.1% from the comparable period a year ago. We derived a substantially greater percentage of our total revenue fromdirect billings during 2003.  Thisincrease in the percentage of direct revenue was due principally to thedecrease in Chevron Texaco and Qwest Communications Managed Services contractrevenue, most of which had been provided through subsuppliers.  Our subsupplier revenue is mainlypass-through revenue with associated fees for management and administrationproviding minimal profit.

 

The decrease in revenue from 2002 to 2003 resulted primarily from thedecrease in the number of consultants we had billable during 2003, as well assignificant pricing pressures imposed by our clients.  Our technical consultant staff has decreased by only 50consultants from December 28, 2002.  Webelieve this slight decrease in technical consultants is an indication the ITmarket has begun to stabilize. Nonetheless, we expect pricing pressures imposed by our clients tocontinue.  As demand for the servicesour industry provides has declined, more clients have continued to demandpricing concessions, and we have had to concede lower prices to retain ourrelationships with these clients.

 

*Salaries, Contracted Services and DirectCharges*

 

Salaries, contracted services and direct charges primarily representour payroll and benefit costs associated with billable consultants.  Comparing the 2003 period to the 2002period, these expenses decreased slightly as a percentage of revenue.  We have been successful at reducing ourdirect labor rates in response to decreasing bill rates.  We have been able to do this in part bypassing billing rate decreases through to our consultants in the form of laborrate decreases where possible, increasing productivity levels of our billabletechnical staff and partially passing on increases in benefit costs to theemployee.  The shift of our revenue mixto include more direct revenue with better margins and less low marginsubsupplier revenue also played a role in decreasing this category of expenseas a percentage of revenue.  We continuouslyattempt to control the factors which affect this category of expense.  Due to the pricing pressures previouslydiscussed, there can be no assurance we will be able to maintain or improvethis level.

 

*Selling, Administrative and Other OperatingCosts*

 

Selling, administrative and other operating (SG&A) costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs, and other administrativecosts.  This category of costsrepresented 18.6% of total revenue for the year ended January 3, 2004, up from17.3% for the year ended December 28, 2002. The significant decline in our total revenue, especially subsupplierrevenue, caused SG&A costs to increase as a percentage of totalrevenue.  The actual amounts of thesecosts decreased considerably from 2002 to 2003, however.  This decrease is the result of our ongoingefforts to reduce costs as demand for our services and our average billingrates has declined.  We decreased thesecosts primarily by reducing discretionary spending for non-billable travel,imposing wage controls on administrative and management personnel, eliminatingor subleasing office space where possible and reducing the number ofnon-technical personnel we employ.  Weare committed to continuing to manage this category of expense to the rightlevel for our company; however, there can be no assurance this category of costwill not increase as a percentage of income if our revenue continues todecline.

 

*Loss on Sale of Corporate HeadquartersBuilding*

 

In 2002 we sold our corporate headquarters building, incurring a lossof $1.9 million.  Net proceeds of $16.4million were used to reduce the balance on our line of credit.  The Company remains a major tenant in thebuilding following the sale.  

 

14

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*Non-Operating Income*

 

Non-operating income, consisting primarily of interest income, declinedslightly during the year ended January 3, 2004 compared to the year endedDecember 28, 2002.  The higher level ofinterest income in the 2002 period resulted from significant cash investmentsduring the early part of the year.  Thecash invested during this time was then used to reduce outstanding debt.

 

*Loss on Investment*

 

During 2002 we wrote off a $190,000 equity investment we made during2000.  The market value of this securityhad declined significantly and we deemed the decline in value to be other thantemporary.  We disposed of this securityprior to December 28, 2002.

 

*Interest Expense*

 

Interest expense during the year ended January 3, 2004 decreasedsignificantly compared to the year ended December 28, 2002.  The reduction in interest expense is theresult of lower levels of borrowing and reduced interest rates subsequent toour April 11, 2002 debt restructuring. In April 2003 we reduced our borrowing on our line of credit to zero andit remained at or near zero throughout the remainder of fiscal 2003.  Debt levels have declined to zero primarilyas a result of using cash invested during the first quarter of 2002, proceedsfrom the sale of our corporate headquarters building in May 2002 and proceedsfrom the Company’s federal income tax refund received in April 2003 to reducedebt.  We also experienced a decreasedneed to borrow to support accounts receivable as our revenue declined.  

 

*Loss on Debt Extinguishment*

 

We completed the restructuring of our credit facility with GE CapitalCorporation in the second quarter of 2002. Upon the refinancing of our debt, we recorded a loss on extinguishmentof debt of $744,000 primarily related to make-whole payments associated withour 1998 Note Purchase Agreement and the write-off of costs associated withprevious financing arrangements.

 

*Cumulative Effect of Change in Accounting forGoodwill*

 

We adopted the full provisions of SFAS 142 in the first quarter of 2002and recorded an impairment charge of approximately $16.4 million.  SFAS 142 no longer allows the amortizationof purchased goodwill and certain indefinite lived intangible assets.  Instead, companies must test such assets forimpairment at least annually.  Based onthe impairment tests during the year ended December 28, 2002, we reduced thecarrying value of goodwill for our Infrastructure reporting unit to its impliedfair value.  The impairment was requiredbecause reduced the estimated future expected performance for this reportingunit.  Following the initial adoption ofSFAS 142, at least annually, we are required to test our remaining goodwill forimpairment.  We performed these tests asof December 29, 2002 and found no indication of impairment although thecarrying value of the Infrastructure and the Solutions reporting unitsapproximated their fair values.  Anysignificant deterioration in the outlook for these reporting units could resultin future impairment of the associated goodwill.  See footnote “J” to the consolidated financial statements forfurther discussion of our adoption of SFAS 142.  

 

*Income Taxes*

 

We recorded no income tax benefit during the year ended January 3, 2004as non-deductible items (primarily travel meals and entertainment) negated thetax benefit of our operating loss.  Thiscompares to a tax benefit of $1.1 million recorded for the year ended December28, 2002, or an effective tax rate of 5.0%.

 

*Personnel*

 

We believe the fact that our technical consultants headcount decreasedonly slightly indicates the beginning of a stabilization of the IT marketsector.  Administrative and managementpersonnel decreased as a result of our continuing efforts to contain ouroperating costs.

 

15

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**RESULTS OFOPERATIONS, YEAR ENDED DECEMBER 28, 2002 VS. YEAR ENDED DECEMBER 31, 2001**

 

The following table illustrates the relationship between revenue andexpense categories and provides a count of employees and technical consultantsfor the fiscal years ended December 28, 2002 versus December 31, 2001.  The tables provide guidance in ourexplanation of our operations and results.

 
|                                                    |   | **Year Ended  December 28, 2002** |    | **Year Ended  December 31, 2001** |   | **Increase  (Decrease)** |   |
|---------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|--------------------------|--------|
| **(dollars in thousands)**                              |   | **Amount**                        |    | **% of  Revenue**                 |   | **Amount**               |   | **% of  Revenue** |   | **Amount** |   | **%  Inc (Dec)** |   | **As %  of Revenue** |   |
| Professional services revenue:                          |   |                              |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Provided directly                                       |   | $                                 | 327,582 |                              | 76.9   | %                        | $      | 411,387 |   | 74.6 | % | $ | (83,805 | ) | (20.4 | )% | 2.3 | % |
| Provided through subsuppliers                           |   | 98,578                            |    | 23.1                              |   | 140,340                  |   | 25.4 |   | (41,762 | ) | (29.8 | ) | (2.3 | ) |
| Total revenue                                           |   | 426,160                           |    | 100.0                             |   | 551,727                  |   | 100.0 |   | (125,567 | ) | (22.8 | ) | .0 |   |
| Salaries, contracted services and direct charges        |   | 353,715                           |    | 83.0                              |   | 457,706                  |   | 83.0 |   | (103,991 | ) | (22.7 | ) | .0 |   |
| Selling, administrative and other operating costs       |   | 73,694                            |    | 17.3                              |   | 87,909                   |   | 15.9 |   | (14,215 | ) | (16.2 | ) | 1.4 |   |
| Amortization of goodwill and other intangible  assets   |   | 785                               |    | .2                                |   | 3,212                    |   | .6 |   | (2,427 | ) | (75.6 | ) | (.4 | ) |
| Loss on sale of corporate headquarters building         |   | 1,860                             |    | .4                                |   | —                   |   | — |   | 1,860 |   | 100.0 |   | .4 |   |
| Non-operating income                                    |   | (122                              | )       | .0                                |   | (247                     | )      | .0 |   | 125 |   | (50.6 | ) | .0 |   |
| Loss on investment                                      |   | 190                               |    | .0                                |   | 3,012                    |   | .5 |   | (2,822 | ) | (93.7 | ) | (.5 | ) |
| Interest expense                                        |   | 1,042                             |    | .2                                |   | 2,899                    |   | .5 |   | (1,857 | ) | (64.1 | ) | (.3 | ) |
| Loss on debt extinguishment                             |   | 744                               |    | .2                                |   | —                   |   | — |   | 744 |   | 100.0 |   | .2 |   |
| Cumulative effect of change in accounting for  goodwill |   | 16,389                            |    | 3.9                               |   | —                   |   | — |   | 16,389 |   | 100.0 |   | 3.9 |   |
|                                                    |   |                              |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                                |   | (22,137                           | )       | (5.2                              | )      | (2,764                   | )      | (.5 | ) | (19,373 | ) | (700.9 | ) | (4.7 | ) |
| Income  taxes (benefit) and minority interest           |   | (1,106                            | )       | (.3                               | )      | 216                      |   | .0 |   | (1,322 | ) | (612.0 | ) | (.3 | ) |
|                                                    |   |                              |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Net loss                                                |   | $                                 | (21,031 | )                                 | (4.9   | )%                       | $      | (2,980 | ) | (.5 | )% | $ | (18,051 | ) | (605.7 | )% | (4.4 | )% |
|                                                    |   |                              |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Personnel:                                              |   |                              |    |                              |   |                     |   |   |   |   |   |   |   |   |   |
| Management and Administrative                           |   | 450                               |    |                              |   | 600                      |   |   |   | (150 | ) | (25.0 | )% |   |   |
| Technical Consultants                                   |   | 2,625                             | *       |                              |   | 3,200                    |   |   |   | (575 | ) | (18.0 | )% |   |   |

 

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*Technical Consultant total restated for the year ended December 28,2002 due to a change in the way the Company counts consultants who are betweenprojects or have left the Company but not yet been terminated in its accountingsystems.

 

16

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*Revenue*

 

During fiscal year 2002, we derived 2.3% more of our revenue fromdirect revenue than in 2001.  Thedecline in subsupplier revenue was due principally to a $59 million decrease inrevenue from our managed services agreement with Qwest Communications. Most ofthe revenue from our Qwest relationship had been provided throughsubsuppliers.  The large decrease withthis single client was partially offset by the addition of a new managedservices client.  Subsupplier revenue ismainly pass-through revenue with associated fees providing minimal profit.

 

Direct revenue decreased in 2002 compared to 2001 mostly as a result ofa 18.0% decrease in technical consultants. This decrease was reflective of the overall slowness in the economy anda significant downturn in spending for IT services in general and for thespecific IT services we provide. Additionally, we experienced a 7% decrease in our average bill rate dueto pricing pressures imposed by our clients. As demand for the services our industry provides declined during fiscalyear 2002, certain clients took the opportunity to demand pricing concessions,and we conceded lower prices to retain our relationship with these clients.

 

*Salaries, Contracted Services and DirectCharges*

 

Salaries, contracted services and direct charges primarily representour payroll and benefit costs associated with billable consultants.  Comparing fiscal year 2002 to 2001, theseexpenses did not change as a percentage of revenue.  We were successful at decreasing our direct labor rates inresponse to decreasing bill rates.  Wewere able to do this by passing billing rate decreases through to ourconsultants in the form of labor rate decreases where possible and increasingproductivity levels of our billable technical staff.  The shift of our revenue mix to include more direct revenue withbetter margins and less low margin subsupplier revenue also played a role inkeeping this category of expense, as a percentage of revenue, constant.  Excluding the revenue and cost associated withsubsupplier revenue, this category of expense as a percentage of revenueincreased from 77.1% in 2001 to 77.9% in 2002. 

 

*Selling, Administrative and Other OperatingCosts*

 

Selling, administrative and other operating (SG&A) costs includemanagement and administrative salaries, commissions paid to salesrepresentatives and recruiters, location costs and other administrativecosts.  SG&A costs represented 22.6%of direct revenue for fiscal year ended 2002, up from 21.4% for the comparableperiod in 2001.  Although SG&A costsincreased as a percentage of direct revenue, we reduced SG&A costs by $14million in 2002 over the prior fiscal year. This decrease was the result of our ongoing efforts to reduce costs asdemand for our services declined.  Wemanaged these costs downward primarily by reducing discretionary spending fornon-billable travel, imposing wage freezes on administrative and managementpersonnel, eliminating office space where possible, and reducing the number ofnon-technical personnel we employed.  

 

*Amortization of Goodwill and Other IntangibleAssets*

 

Amortization of goodwill and intangible assets decreased in the twelvemonths ended December 28, 2002 as a result of the adoption of SFAS 142 at thebeginning of 2002.  SFAS 142 requirescompanies to no longer amortize purchased goodwill and indefinite livedintangible assets but instead to test such assets for impairment at leastannually.

 

*Loss on Sale of Corporate HeadquartersBuilding*

 

In 2002 we sold our corporate headquarters building, incurring a lossof $1.9 million.  Net proceeds of $16.4million were used to reduce the balance on our line of credit.  The Company remains a major tenant in thebuilding following the sale.

 

*Non-Operating Income*

 

Non-operating income, consisting primarily of interest income, declinedduring the twelve months ended December 28, 2002 due to carrying minimal cashreserves as required by our line of credit. 

 

*Loss on Investment*

 

We recorded a $3.0 million loss during 2001 relating to a 1999 equityinvestment in a privately held Minneapolis-based software company specializingin the storage and transmission of high volume data.

 

17

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During 2002 we wrote off a $190,000 equity investment we made during2000.  The market value of this securityhad declined significantly, and we deemed the decline in value to be other thantemporary.  We disposed of this securityprior to December 28, 2002.

 

*Interest Expense*

 

The decrease in interest expense resulted primarily from lower debtlevels during 2002.  Debt levels declinedduring 2002 primarily as a result of using proceeds from the sale of ourcorporate headquarters building to reduce debt and a decreased need to borrowto support accounts receivable.  As ourrevenue, and accordingly, our receivable balance declined throughout the year,we used the cash collected from accounts receivable to reduce debt.  The lower interest rate we paid, prime plus..75% on the current line of credit versus 9%, also affected interest expensefor the year.

 

*Loss on Debt Extinguishment*

 

We completed the restructuring of our credit facility with GE CapitalCorporation in 2002.  Upon therefinancing of our debt, we recorded a loss on extinguishment of debt of$744,000 primarily related to make-whole payments associated with our 1998 NotePurchase Agreement and the write-off of costs associated with previousfinancings.

 

*Cumulative Effect of Change in Accounting forGoodwill*

 

We adopted the full provisions of SFAS 142 in 2002 and recorded animpairment charge of approximately $16.4 million.  

 

*Income Taxes*

 

We recorded an income tax benefit of $1.1 million during the twelvemonths ended December 28, 2002, resulting in an overall tax benefit rate ofonly 5.0%.  As a result of ourcontinuing losses and our estimates of future taxable income, during 2002, wedeemed it appropriate to establish reserves of $7.1 million against thedeferred tax assets created by the write-off of goodwill and our continuing netoperating losses.  The establishment ofthese reserves had the effect of reducing our recorded tax benefit.  We recorded an income tax expense of$216,000 during the twelve months ended December 31, 2001 in spite of the $2.8million pre-tax loss.  The 2001 pre-taxloss included the loss of the investment of $3.0 million which represented acapital loss for tax purposes.  We donot expect to generate capital gains to enable us to utilize this capital lossduring the carry-forward period, and accordingly, have recorded no tax benefitfor that loss.

 

*Personnel*

 

The decrease in technical consultants was reflective of the overallslowness in the economy which had resulted in an overall reduction in spendingfor the IT services we provide. Administrative and management personnel decreased as a result of ourcontinuing efforts to contain our operating costs.

 

18

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**Liquidity and CapitalResources**

 

The following table provides information relative to the liquidity ofour business.

 
| **(dollars in thousands)**      |   | **1/3/04** |   | **12/28/02** |   | **Increase  (Decrease)** |   | **Percentage  Increase  (Decrease)** |   |
|---------------------------------|--------|------------|--------|--------------|--------|--------------------------|--------|--------------------------------------|--------|
|                            |   |       |   |         |   |                     |   |                                 |   |
| Cash and Cash Equivalents       |   | $          | 4,499  |         | $      | 54                       |   | $                                    | 4,445  |   | 8,231.5 | % |
| Accounts Receivable             |   | 55,623     |   | 59,776       |   | (4,153                   | )      | (6.9                                 | )      |
| Other Current Assets            |   | 4,737      |   | 8,848        |   | (4,111                   | )      | (46.5                                | )      |
| Total Current Assets            |   | $          | 64,859 |         | $      | 68,678                   |   | $                                    | (3,819 | ) | (5.6 | ) |
|                            |   |       |   |         |   |                     |   |                                 |   |
| Accounts Payable                |   | $          | 15,825 |         | $      | 18,966                   |   | $                                    | (3,141 | ) | (16.6 | ) |
| Current Debt                    |   | —     |   | 324          |   | (324                     | )      | (100.0                               | )      |
| Other Current Liabilities       |   | 13,369     |   | 13,683       |   | (314                     | )      | (2.3                                 | )      |
| Total Current Liabilities       |   | $          | 29,194 |         | $      | 32,973                   |   | $                                    | (3,779 | ) | (11.5 | ) |
|                            |   |       |   |         |   |                     |   |                                 |   |
| Working Capital                 |   | $          | 35,665 |         | $      | 35,705                   |   | $                                    | (40    | ) | (.1 | ) |
| Current Ratio                   |   | 2.22       |   | 2.08         |   | .14                      |   | 6.7                                  |   |
|                            |   |       |   |         |   |                     |   |                                 |   |
| Total Shareholders’ Equity |   | $          | 68,663 |         | $      | 70,166                   |   | $                                    | (1,503 | ) | (2.1 | ) |
| Ratio of Debt to Equity         |   | —     |   | .00          |   | (.00                     | )      | (100.0%                              | )      |

 

*Cash Requirements*

 

The day-to-day operation of our business requires a significant amountof cash to flow through our Company. During fiscal year 2003, we made total payments of approximately $237.4million to pay our employees wages, benefits, and associated taxes.  We also made payments of approximately $53.5million to pay vendors who provided billable technical resources to our clientsthrough us.  Finally, we made payments ofapproximately $40.7 million to fund general operating expenses such as employeeexpense reimbursement, office space rental and utilities.

 

The cash to fund these significant payments comes almost exclusivelyfrom our collection of amounts due us for services rendered to our clients(approximately $336.1 million in fiscal year 2003).  Generally, payments made to fund the day-to-day operation of ourbusiness are due and payable regardless of the rate of cash collections fromour clients.  While we do not anticipatesuch an occurrence, a significant decline in rate of collections from ourclients, or an inability of the Company to timely invoice and therefore collectfrom our clients, could rapidly increase our need to borrow to fund theoperations of our business.

 

*Sources and Uses of Cash/Credit Facility*

 

Cash and cash equivalents at January 3, 2004 increased considerablyfrom December 28, 2002.  Since April2003, we have been able to keep our line of credit at or near zero and excesscash in short-term investments.  Cashand cash equivalents have increased primarily as a result of:  (i) net collections of accounts receivableof $4.2 million during the year ended January 3, 2004; and (ii) the Companyreceiving its federal income tax refund of approximately $4.6 million in thesecond quarter of 2003.  These factorsresulted in increases in cash and were partially offset by a reduction inaccounts payable, which is reflective of our lower usage of subsuppliers.

 

19

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Historically, we have been able to support internal growth in ourbusiness with internally generated funds. Our primary need for working capitalis to support accounts receivable resulting from our business and to fund thetime lag between payroll disbursement, a bi-weekly occurrence, and receipt offees billed to clients, which generally occurs 30 or more days afterinvoicing.  During fiscal year 2003 and2002 as revenues and payroll have declined, our need for working capital tosupport accounts receivable has also declined, resulting in a reduction in ourneed to borrow.  When our revenue andpayroll begin to grow again, we would expect our need for working capital toincrease once again.

 

During the twelve-month period ended January 3, 2004, we made capitalexpenditures totaling $2.3 million compared to $1.7 million in the twelve-monthperiod ended December 28, 2002.  Wefunded these capital expenditures with internally generated funds.  We continue to tightly control capitalexpenditures to preserve working capital. 

 

We believe funds generated from our business and credit available underour credit facility will be adequate to meet demands placed upon our resourcesby our operations and capital investments.

 

During 2002 and 2003, reducing our debt level and maintaining a lowdebt level was one of our top priorities. In pursuit of this priority, effective April 11, 2002, we entered intoan asset-based revolving credit agreement with up to $55.0 million ofavailability.  This borrowing facilityreduced our cost of borrowing from 9% at the beginning of the year to primeplus .75%, or 4.75% currently.  Toreduce our cost of financing even further, we reduced the level of availabilityunder this credit agreement to $45.0 million following the sale of ourcorporate headquarters building on May 15, 2002.  In April 2003 we successfully reduced our borrowings on our lineof credit to zero, and they have remained at or near zero throughout theremainder of fiscal 2003.  At January 3,2004 our borrowing capability was at $26.6 million under our creditfacility.  Borrowings under the credit agreementare secured by all of the Company’s assets. 

 

The revolving credit agreement requires us to take advances or pay downthe outstanding balance on the line of credit daily.  However, we can request fixed-term advances of one, two, or threemonths for a portion of the outstanding balance on the line of credit.  The daily advances on the line of creditbear interest at the Wall Street Journal’s “Prime Rate” plus .75% while thefixed-term advances bear interest at the LIBOR rate plus 3.0%.  The credit agreement requires the payment ofa commitment fee of .50% of the unused portion of the line plus an annualadministration fee of $50,000.  Theagreement, prohibits the payment of dividends, establishes limits on capitalexpenditures and requires us to maintain a minimum accounts payable turnoverratio among other things.  We believe wewill be able to continue to meet the requirements of the agreement.  The credit agreement matures on April 10,2005.

 

Commitments and Contingencies

 

The Company leases office facilities under non-cancelable operatingleases.  Deferred compensation ispayable to participants in accordance with the terms of individualcontracts.  Minimum future obligationson operating leases and deferred compensation agreements at January 3, 2004,are as follows (in thousands):

 
|                  |   | **1 Year** |   | **2-3 Years** |   | **4-5 Years** |   | **Over 5  Years** |   | **Total** |   |
|-----------------------|--------|------------|--------|---------------|--------|---------------|--------|-------------------|--------|-----------|--------|
|                  |   |       |   |          |   |          |   |              |   |      |   |
| Operating Leases      |   | $          | 5,959  |          | $      | 10,835        |   | $                 | 4,705  |      | $      | 6 |   | $ | 21,505 |   |
|                  |   |       |   |          |   |          |   |              |   |      |   |
| Deferred Compensation |   | $          | 347    |          | $      | 389           |   | $                 | 502    |      | $      | 2,478 |   | $ | 3,716 |   |
|                  |   |       |   |          |   |          |   |              |   |      |   |
| Total                 |   | $          | 6,306  |          | $      | 11,224        |   | $                 | 5,207  |      | $      | 2,484 |   | $ | 25,221 |   |

 

20

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New Accounting Pronouncements

 

In June 2001, the FASB issued SFAS Nos. 141, “Business Combinations”and 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 was effective for all business combinationsinitiated after June 30, 2001, and has had no impact on our financialstatements.  SFAS No. 142 addresses howintangible assets should be accounted for. We initially adopted the full provisions of SFAS No. 142 in 2002 andrecorded an impairment charge of $16.4 million.  

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  SFAS 145 rescinds SFASNo. 4, “Reporting Gains and Losses from Extinguishment of Debt,” which requiredall gains and losses from extinguishment of debt to be classified as anextraordinary item.  SFAS 145 iseffective for fiscal years beginning after May 15, 2002, with early adoptionencouraged.  We adopted SFAS 145 as ofDecember 28, 2002, at which time we reclassified the loss resulting from theextinguishment of debt as a separate component in income from continuingoperations.  The adoption of SFAS 145did not have a material impact on our consolidated balance sheet or results ofoperations.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure,” which amends SFAS No.123, “Accounting for Stock-Based Compensation.”  SFAS 148 provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure requirements of SFAS 123 to require moreprominent and more frequent disclosures in financial statements of the effectsof stock-based compensation.  Thetransition guidance and annual disclosure provisions of SFAS 148 became effectivefor fiscal years ending after December 15, 2002.  The interim disclosure provisions are effective for financialreports containing condensed financial statements for interim periods beginningafter December 15, 2002.  The adoptionof SFAS 148 did not have a material impact on our consolidated balance sheet orresults of operations.  We provided theinterim disclosures required by SFAS 148 beginning in the first quarter of2003.

 

**Market Conditions****, BusinessOutlook and Risks to Our Business**

 

During fiscal 2003, several market conditions have continued to affectour industry.  Price competition in thearea of technical staff augmentation has created pressure on billable hourlyrates, and clients continued to request increasingly lower cost models for staffaugmentation services.  As a result, wehave encountered declining billing rates for quite some time.  Management expects that clients willcontinue, for the foreseeable future, to request lower cost offerings for staffaugmentation services through e-procurement systems, extremely competitivebidding processes, the granting of various types of discounts and the use ofoffshore resources.  Our ability torespond to customer requests for lower pricing or to provide other low-costsolutions in this area of our business will have a direct effect on ourperformance.  Management expectscompetitive conditions in the area of technical staff augmentation to continuefor the foreseeable future, although it expects that demand for these serviceswill increase as the general economy begins to recover.

 

Management continues to concentrate on staff augmentation in Fortune500 and small and medium-sized businesses, business solutions for small andmedium-sized businesses, and business opportunities with its technology andproduct partners.  In addition, we planto develop a low-cost staffing delivery model, expand our offshore servicecapabilities and develop relationships with sales channel partners with whichwe will share sales leads.  While webelieve these areas of our business present opportunities to grow our business,growth in these areas will depend on improvement in the economy and spending inthe overall IT services market, our ability to compete with other vendors andour success in obtaining new clients.

 

21

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Staff augmentation continues to represent more than half of totalrevenue (revenue from services provided directly to clients(direct revenue)plus revenue from services provided to our clients by subsuppliers (subsupplierrevenue)) and over half of our direct revenue. While we saw a slight increase in demand for our services in the secondhalf of 2003, there can be no assurance as to when, or if, we will experiencesustained revenue growth.  Our abilityto respond to the conditions outlined above will bear directly on ourperformance.  

 

Our ability to quickly identify, attract and retain qualified technicalpersonnel, especially when recovery begins, will affect our results ofoperations and ability to grow in the future. Competition for qualified personnel is intense.  If we are unable to hire the talent requiredby our clients in a timely, cost-effective manner, it will affect our abilityto grow our business.  In addition toour ability to control labor costs, our ability to control employee benefitcosts and other employee-related costs will affect our future performance.  In an effort to contain our benefits costs,we implemented changes to our benefits plans for fiscal year 2003 and haveimplemented additional changes for 2004. While we believe the changes we implemented will be effective, theeffectiveness of these changes may vary due to factors we cannot control suchas rising medical costs, the amount of medical services used by our employeesand similar factors.

 

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

 

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

 

We believe our working capital will be sufficient for the foreseeableneeds of our business.  Significantrapid growth in our business or a significant stretching of payment terms withmajor clients, could create a need for additional working capital.  An inability to obtain additional workingcapital, should it be required, could have an adverse material effect on ourbusiness.  We expect to be able tocomply with the requirements of our credit agreement; however, failure to do socould have a material adverse effect on our business.

 

Our financing agreement with GE Capital Corporation carries a variableinterest rate, which exposes us to certain market risks.  Market risk is the potential loss arisingfrom the adverse changes in market rates and prices, such as interestrates.  Market risk is estimated as thepotential increase in fair value resulting from a hypothetical one percentincrease in interest rates which, assuming an average outstanding debt balanceof $5.0 million, would result in an annual interest expense increase of approximately$50,000.

 

22

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**Consolidated Balance Sheets**

 
| **(Dollars in thousands except per  share amounts)**                                                                                         |   | **January 3,  2004** |    | **December  28,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|---------|-------------------------|--------|
| **ASSETS**                                                                                                                                   |   |                 |    |                    |   |
|                                                                                                                                         |   |                 |    |                    |   |
| Current assets:                                                                                                                              |   |                 |    |                    |   |
| Cash and cash equivalents                                                                                                                    |   | $                    | 4,499   |                    | $      | 54 |   |
| Accounts receivable, less allowance for  doubtful accounts of $1,508 and $1,283, respectively                                                |   | 55,623               |    | 59,776                  |   |
| Prepaid expenses and other current assets                                                                                                    |   | 4,737                |    | 4,004                   |   |
| Income tax refund receivable                                                                                                                 |   | —               |    | 4,844                   |   |
| Total current assets                                                                                                                         |   | 64,859               |    | 68,678                  |   |
|                                                                                                                                         |   |                 |    |                    |   |
| Property and equipment                                                                                                                       |   | 6,297                |    | 7,071                   |   |
| Intangible assets, net of accumulated  amortization of $2,741 and $1,968, respectively                                                       |   | 11,249               |    | 12,022                  |   |
| Goodwill                                                                                                                                     |   | 16,460               |    | 16,460                  |   |
| Other assets                                                                                                                                 |   | 3,030                |    | 2,513                   |   |
|                                                                                                                                         |   | $                    | 101,895 |                    | $      | 106,744 |   |
|                                                                                                                                         |   |                 |    |                    |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                |   |                 |    |                    |   |
|                                                                                                                                         |   |                 |    |                    |   |
| Current liabilities:                                                                                                                         |   |                 |    |                    |   |
| Accounts payable                                                                                                                             |   | $                    | 15,825  |                    | $      | 18,966 |   |
| Salaries and vacations                                                                                                                       |   | 7,774                |    | 6,036                   |   |
| Deferred revenue                                                                                                                             |   | 2,766                |    | 4,340                   |   |
| Health care reserves                                                                                                                         |   | 1,821                |    | 1,873                   |   |
| Other current liabilities                                                                                                                    |   | 1,008                |    | 1,434                   |   |
| Line of credit                                                                                                                               |   | —               |    | 324                     |   |
| Total current liabilities                                                                                                                    |   | 29,194               |    | 32,973                  |   |
|                                                                                                                                         |   |                 |    |                    |   |
| Non-current liabilities, primarily deferred  compensation                                                                                    |   | 4,038                |    | 3,605                   |   |
| Commitments (Note H)                                                                                                                         |   |                 |    |                    |   |
|                                                                                                                                         |   |                 |    |                    |   |
| Shareholders’ equity:                                                                                                                   |   |                 |    |                    |   |
| Common stock, par value $.10 a share;  authorized 120,000,000 shares; issued and outstanding 24,211,807 and  24,199,307 shares, respectively |   | 2,421                |    | 2,420                   |   |
| Additional capital                                                                                                                           |   | 20,149               |    | 20,129                  |   |
| Retained earnings                                                                                                                            |   | 46,093               |    | 47,617                  |   |
| Total shareholders’ equity                                                                                                              |   | 68,663               |    | 70,166                  |   |
|                                                                                                                                         |   | $                    | 101,895 |                    | $      | 106,744 |   |

 

See notes to consolidated financialstatements.

 

23

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**Consolidated Statements of Operations**

 
|                                                                              |   | **Fiscal  Year** |    |
|-----------------------------------------------------------------------------------|--------|------------------|---------|
| **(Dollars in thousands except per  share amounts)**                              |   | **2003**         |    | **2002** |   | **2001** |   |
|                                                                              |   |             |    |   |   |   |   |
| Professional services revenue:                                                    |   |             |    |   |   |   |   |
| Provided directly                                                                 |   | $                | 281,356 |   | $ | 327,582 |   | $ | 411,387 |   |
| Provided through subsuppliers                                                     |   | 50,543           |    | 98,578 |   | 140,340 |   |
| Total revenue                                                                     |   | 331,899          |    | 426,160 |   | 551,727 |   |
|                                                                              |   |             |    |   |   |   |   |
| Expenses:                                                                         |   |             |    |   |   |   |   |
| Salaries, contracted services and direct  charges                                 |   | 271,205          |    | 353,715 |   | 457,706 |   |
| Selling, administrative and other operating  costs                                |   | 61,511           |    | 73,694 |   | 87,909 |   |
| Amortization of goodwill and other  intangible assets                             |   | 773              |    | 785 |   | 3,212 |   |
| Loss on sale of corporate headquarters  building                                  |   | —           |    | 1,860 |   | — |   |
| Operating (loss) income                                                           |   | (1,590           | )       | (3,894 | ) | 2,900 |   |
|                                                                              |   |             |    |   |   |   |   |
| Non-operating income                                                              |   | 79               |    | 122 |   | 247 |   |
| Loss on investments                                                               |   | —           |    | 190 |   | 3,012 |   |
| Interest expense                                                                  |   | 13               |    | 1,042 |   | 2,899 |   |
| Loss on debt extinguishment                                                       |   | —           |    | 744 |   | — |   |
|                                                                              |   |             |    |   |   |   |   |
| Loss before income taxes and cumulative  effect of change in accounting principle |   | (1,524           | )       | (5,748 | ) | (2,764 | ) |
|                                                                              |   |             |    |   |   |   |   |
| Income tax (benefit) expense                                                      |   | —           |    | (1,106 | ) | 216 |   |
|                                                                              |   |             |    |   |   |   |   |
| Net loss before cumulative effect of change  in accounting principle              |   | (1,524           | )       | (4,642 | ) | (2,980 | ) |
|                                                                              |   |             |    |   |   |   |   |
| Cumulative effect of change in accounting  for goodwill                           |   | —           |    | 16,389 |   | — |   |
|                                                                              |   |             |    |   |   |   |   |
| Net loss                                                                          |   | $                | (1,524  | ) | $ | (21,031 | ) | $ | (2,980 | ) |
|                                                                              |   |             |    |   |   |   |   |
| Per common share:                                                                 |   |             |    |   |   |   |   |
| Basic and diluted loss:                                                           |   |             |    |   |   |   |   |
| Net loss before cumulative effect of change  in accounting principle              |   | $                | (.06    | ) | $ | (.19 | ) | $ | (.12 | ) |
| Cumulative effect of change in accounting  for goodwill                           |   | —           |    | (.68 | ) | — |   |
| Net loss:                                                                         |   | $                | (.06    | ) | $ | (.87 | ) | $ | (.12 | ) |
|                                                                              |   |             |    |   |   |   |   |
| Average common shares outstanding                                                 |   | 24,201,000       |    | 24,198,000 |   | 24,196,000 |   |
|                                                                              |   |             |    |   |   |   |   |
| Average common and common equivalent shares  outstanding                          |   | 24,201,000       |    | 24,198,000 |   | 24,196,000 |   |

 

See notes to consolidated financialstatements.

 

24

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**Consolidated Statements of Cash Flows**

 
|                                                                             |   | **Fiscal  Year** |   |
|----------------------------------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                                               |   | **2003**         |   | **2002** |   | **2001** |   |
|                                                                             |   |             |   |   |   |   |   |
| Cash flows from operating activities:                                            |   |             |   |   |   |   |   |
| Net loss                                                                         |   | $                | (1,524 | ) | $ | (21,031 | ) | $ | (2,980 | ) |
| Cumulative effect of change in accounting  for goodwill                          |   | —           |   | 16,389 |   | — |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |             |   |   |   |   |   |
| Depreciation                                                                     |   | 2,883            |   | 4,704 |   | 5,124 |   |
| Amortization of goodwill and other  intangible assets                            |   | 773              |   | 785 |   | 3,212 |   |
| Loss on disposal of building                                                     |   | —           |   | 1,860 |   | — |   |
| Loss on disposal of other assets                                                 |   | 202              |   | 296 |   | 96 |   |
| Loss on investments                                                              |   | —           |   | 190 |   | 3,012 |   |
| Change in deferred income tax assets                                             |   | (330             | )      | 3,712 |   | 2,405 |   |
| Change in:                                                                       |   |             |   |   |   |   |   |
| Accounts receivable                                                              |   | 4,153            |   | 23,546 |   | 15,173 |   |
| Prepaid expenses                                                                 |   | (706             | )      | (815 | ) | (2,251 | ) |
| Other assets                                                                     |   | (214             | )      | (268 | ) | 2,775 |   |
| Accounts payable                                                                 |   | (3,141           | )      | (18,812 | ) | 3,528 |   |
| Salaries and vacations                                                           |   | 1,738            |   | (363 | ) | (2,116 | ) |
| Other accrued expenses                                                           |   | (119             | )      | 139 |   | 4,445 |   |
| Deferred revenue                                                                 |   | (1,574           | )      | 1,470 |   | 1,039 |   |
| Income tax refund receivable                                                     |   | 4,844            |   | (2,103 | ) | (248 | ) |
| Restructuring accrual                                                            |   | (587             | )      | (1,456 | ) | (3,894 | ) |
| Non-current liabilities, primarily deferred  compensation                        |   | 661              |   | (5,525 | ) | (3,027 | ) |
| Net cash provided by operating activities                                        |   | 7,059            |   | 2,718 |   | 26,293 |   |
|                                                                             |   |             |   |   |   |   |   |
| Cash flows from investing activities:                                            |   |             |   |   |   |   |   |
| Property and equipment additions                                                 |   | (2,334           | )      | (1,664 | ) | (4,910 | ) |
| Payments for acquisitions, net of cash  acquired                                 |   | —           |   | — |   | (2,993 | ) |
| Proceeds from liquidation of annuities and  other contracts                      |   | —           |   | 5,016 |   | — |   |
| Proceeds from property and equipment sales                                       |   | 23               |   | 16,448 |   | 36 |   |
| Net cash (used in) provided by investing  activities                             |   | (2,311           | )      | 19,800 |   | (7,867 | ) |
|                                                                             |   |             |   |   |   |   |   |
| Cash flows from financing activities:                                            |   |             |   |   |   |   |   |
| Cash dividends                                                                   |   | —           |   | — |   | (2,420 | ) |
| Net change in line of credit                                                     |   | (324             | )      | 324 |   | — |   |
| Proceeds from borrowings                                                         |   | —           |   | 29,525 |   | 52,895 |   |
| Repayment of borrowings                                                          |   | —           |   | (70,525 | ) | (52,895 | ) |
| Proceeds from exercise of stock options                                          |   | 21               |   | 8 |   | 6 |   |
| Net cash used in financing activities                                            |   | (303             | )      | (40,668 | ) | (2,414 | ) |
|                                                                             |   |             |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents                                 |   | 4,445            |   | (18,150 | ) | 16,012 |   |
|                                                                             |   |             |   |   |   |   |   |
| Cash and equivalents at beginning of year                                        |   | 54               |   | 18,204 |   | 2,192 |   |
|                                                                             |   |             |   |   |   |   |   |
| Cash and equivalents at end of year                                              |   | $                | 4,499  |   | $ | 54 |   | $ | 18,204 |   |
|                                                                             |   |             |   |   |   |   |   |
| Supplemental cash flow information:                                              |   |             |   |   |   |   |   |
| Cash (refunded) paid during the year for:                                        |   |             |   |   |   |   |   |
| Income taxes                                                                     |   | $                | (4,515 | ) | $ | (2,715 | ) | $ | (1,846 | ) |
| Interest                                                                         |   | 13               |   | 1,073 |   | 3,811 |   |

 

See notes to consolidated financial statements.

 

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**Consolidated Statements of Shareholders’Equity**

 
| **(Dollars in thousands except per  share amounts)**                     |   | **Common  Stock** |   | **Additional  Capital** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Retained  Earnings** |   | **Total  Shareholders’  Equity** |   |
|--------------------------------------------------------------------------|--------|-------------------|--------|-------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------|--------|
| Balances at December 31, 2000                                            |   | $                 | 2,419  |                    | $      | 20,116                                      |   | $                      | (48    | )                                     | $      | 72,596 |   | $ | 95,083 |   |
|                                                                     |   |              |   |                    |   |                                        |   |                   |   |                                  |   |
| Common stock issued – 1,545 shares upon  exercise of stock options  |   | 1                 |   | 5                       |   |                                        |   |                   |   | 6                                     |   |
| Cash dividends ($.04 per share)                                          |   |              |   |                    |   |                                        |   | (968                   | )      | (968                                  | )      |
| Unrealized loss on available for sale  securities                        |   |              |   |                    |   | (58                                         | )      |                   |   | (58                                   | )      |
| Net loss                                                                 |   |              |   |                    |   |                                        |   | (2,980                 | )      | (2,980                                | )      |
| Comprehensive loss                                                       |   |              |   |                    |   |                                        |   |                   |   | (3,038                                | )      |
| Balances at December 31, 2001                                            |   | 2,420             |   | 20,121                  |   | (106                                        | )      | 68,648                 |   | 91,083                                |   |
|                                                                     |   |              |   |                    |   |                                        |   |                   |   |                                  |   |
| Common stock issued – 2,685 shares upon  exercise of stock options  |   |              |   | 8                       |   |                                        |   |                   |   | 8                                     |   |
| Realized loss on available for sale  securities                          |   |              |   |                    |   | 106                                         |   |                   |   | 106                                   |   |
| Net loss                                                                 |   |              |   |                    |   |                                        |   | (21,031                | )      | (21,031                               | )      |
| Comprehensive loss                                                       |   |              |   |                    |   |                                        |   |                   |   | (20,925                               | )      |
| Balances at December 28, 2002                                            |   | 2,420             |   | 20,129                  |   | $                                           | 0      |                   | 47,617 |                                  | 70,166 |   |
|                                                                     |   |              |   |                    |   |                                        |   |                   |   |                                  |   |
| Common stock issued – 12,500 shares upon  exercise of stock options |   | 1                 |   | 20                      |   |                                        |   |                   |   | 21                                    |   |
| Net loss (Comprehensive Loss)                                            |   |              |   |                    |   |                                        |   | (1,524                 | )      | (1,524                                | )      |
| Balances at January 3, 2004                                              |   | $                 | 2,421  |                    | $      | 20,149                                      |   |                   |   | $                                     | 46,093 |   | $ | 68,663 |   |

 

See notes to consolidated financialstatements.

 

26

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**A. Summary ofSignificant Accounting Policies**

 

*Description of business*- Analysts International Corporation(the Company) is a diversified IT services company.  Services are provided through the Business Solutions Group, whichprovides business solutions and network infrastructure services; the ManagedServices Group, which provides a comprehensive range of outsourced businessfunctions; and IT supplemental resources (also referred to as technical staffaugmentation), which provides resources for supporting clients’ IT staffingneeds.

 

*Basis of presentation*- The consolidated financial statements include the accounts ofAnalysts International and our subsidiaries. All intercompany accounts and transactions have been eliminated.

 

*Change in fiscal year*- We changed our fiscal year end to December 31 from June 30,effective December 31, 2000.  EffectiveDecember 28, 2002, we again changed our fiscal year to end on the Saturdayclosest to December 31.  This change inyear end did not have a material impact on our operations.  References to fiscal 2003 and fiscal 2002refer to the fiscal periods from December 29, 2002 to January 3, 2004 and fromJanuary 1, 2002 to December 28, 2002, respectively.

 

*Depreciation*- Property and equipment is being depreciated using thestraight-line method over the estimated useful lives (1 to 10 years forleasehold improvements and 2 to 7 years for office furniture and equipment) ofthe assets for financial statement purposes and accelerated methods for incometax purposes.

 

*Financial instruments*- In accordance with the requirements of Statement of FinancialAccounting Standards (SFAS) No. 107, “Disclosures about Fair Value of FinancialInstruments,” management estimates the carrying value of all financialinstruments, including the variable rate short-term debt balance at December28, 2002, approximate fair value because of the short-term nature of theseinstruments.

 

*Revenue recognition*- We recognize revenue for our staffing business and themajority of our business solutions and infrastructure business as services areperformed or products are delivered. Certain of our outsourcing and help desk engagements provide for aspecific level of service each month for which we bill a standard monthlyfee.  Revenue for these engagements isrecognized in monthly installments over the period of the contract.  In some such contracts we invoice in advancefor two or more months of service.  Whenwe do this, the revenue is deferred and recognized over the term of theinvoicing agreement.  

 

In certain client situations, where the nature of the engagementrequires it, we utilize the services of other companies in our industry.  If these services are provided under anarrangement whereby we agree to retain only a fixed portion of the amountbilled to the client to cover our management and administrative costs, weclassify the amount billed to the client as subsupplier revenue.  These revenues, however, are recorded on agross vs. net basis because we retain credit risk and are the primary obligorto our client.  All revenue derived fromservices provided by our employees or other independent contractors workingdirectly for us are recorded as direct revenue.

 

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

 

In all of our services, risk associated with client satisfactionexists.  Although management feels theserisks are adequately addressed by our adherence to proven project managementmethodologies and other procedures, the potential exists for future revenuecharges relating to unresolved project issues with a small number of clients.

 

*Comprehensive income/loss*- Other comprehensive income/lossconsists of realized and unrealized losses on available-for-salesecurities.  

 

*Net income (loss) per share*- Basic and diluted earnings pershare (EPS) are presented in accordance with SFAS No. 128, “Earnings perShare.”  Basic EPS excludes dilution andis computed by dividing income available to common stockholders by theweighted-average

 

27

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number of common shares outstanding for the period.  The difference between weighted-averagecommon shares and average common and common equivalent shares used in computingdiluted EPS is the result of outstanding stock options.  Options to purchase 2,126,000, 2,067,000 and1,819,000 shares of common stock were outstanding at the end of fiscal periods2003, 2002 and 2001, respectively, but were excluded from the computation ofcommon stock equivalents because they were anti-dilutive.

 

*Cash equivalents*- Temporary cash investments in money market accounts areconsidered to be cash equivalents.

 

*Shares reserved*- At January 3, 2004, there were approximately 29,229,000 sharesreserved for issuance under the stock option plans and the shareholders’ rightsplan.

 

*Estimates*- The preparation of consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions affecting the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from these estimates.

 

*Intangible assets*- Intangible assets consistof tradenames and customer lists.  Thecustomer list is amortized on a straight-line basis over 15 years.  At January 3, 2004, management assessed whetherindications of impairment in the value of intangible assets were present.  The factors considered by management inperforming this assessment included current operating results, trends andprospects, as well as the anticipated effects of demand, competition and othereconomic factors.  No indicators of impairmentwere identified at January 3, 2004.

 

*Goodwill assets*- Effective January 1, 2002,we adopted the provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets.”  SFAS No. 142 prohibitscompanies from amortizing purchased goodwill. Instead, we examine our goodwill at least annually to determine if animpairment has occurred.  See Note J fordiscussion of the impact of this adoption. We have selected the first day of our fiscal year as the date upon whichwe will perform our annual examination for impairment.

 

*Derivatives*- The Company’s policy is not touse freestanding derivatives and not to enter into contracts with terms thatcannot be designated as normal purchases or sales.

 

*Stock Option Plans*- Analysts Internationalhas four stock-based compensation plans, which are described below.  We have adopted the disclosure provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation,” and have continued toapply Accounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations in accounting for theseplans.  Accordingly, no compensationcost has been recognized for these stock option plans.  Had compensation cost for our stock-basedcompensation plans been determined based on the fair value at the grant datesas calculated in accordance with SFAS No. 123, our pro forma net loss and lossper share for the years ended January 3, 2004, December 28, 2002 and December31, 2001 would have been the amounts indicated below:

 
|                          |   | **Year Ended**       |   |
|-------------------------------|--------|----------------------|--------|
|                          |   | **January 3,  2004** |   | **December  28,  2002** |   | **December  31,  2001** |   |
| Net loss *(in thousands):*    |   |                 |   |   |   |   |   |
| As reported                   |   | $                    | (1,524 | ) | $ | (21,031 | ) | $ | (2,980 | ) |
| Pro forma                     |   | (2,211               | )      | (22,173 | ) | (3,949 | ) |
| Net loss per share (basic):   |   |                 |   |   |   |   |   |
| As reported                   |   | $                    | (.06   | ) | $ | (.87 | ) | $ | (.12 | ) |
| Pro forma                     |   | (.09                 | )      | (.92 | ) | (.16 | ) |
| Net loss per share (diluted): |   |                 |   |   |   |   |   |
| As reported                   |   | $                    | (.06   | ) | $ | (.87 | ) | $ | (.12 | ) |
| Pro forma                     |   | (.09                 | )      | (.92 | ) | (.16 | ) |

 

28

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The fair market value of each stock option is estimated on the date ofgrant using the Black-Scholes option-pricing model with the followingweighted-average assumptions: 

 
|                    |   | **Year Ended**       |   |
|-------------------------|--------|----------------------|--------|
|                    |   | **January 3,  2004** |   | **December  28,  2002** |   | **December  31,  2001** |   |
|                    |   |                 |   |   |   |   |   |
| Expected life           |   | 5 years              |   | 5 years |   | 5 years |   |
| Expected volatility     |   | 158                  | %      | 111 | % | 74 | % |
| Expected dividend yield |   | 0.0                  | %      | 0.0 | % | 0.0 | % |
| Risk-free interest rate |   | 2.6                  | %      | 5.0 | % | 6.0 | % |

 

The weighted average fair value of options granted during the yearsended January 3, 2004, December 28, 2002 and December 31, 2001 was $2.61, $2.50and $2.23, respectively.

 

Analysts International has options outstanding under four optionplans.  Under the 1994 Incentive StockOption Plan, the Company may grant options to its employees for up to 1,200,000shares of common stock.  Under the 1996Stock Option Plan for Non-Employee Directors, the Company may grant options toits non-employee directors for up to 240,000 shares of common stock.  Under the 1999 Stock Option Plan, theCompany may grant options to its employees for up to 1,000,000 shares of commonstock.  Under the 2000 Stock OptionPlan, the Company may grant non-qualified options to its employees for up to225,000 shares of common stock.  Underall plans, the exercise price of each option equals the market price of theCompany’s stock on the date of grant and an option’s maximum term is generally10 years.  Options are generallyexercisable 25% annually beginning one year after date of grant. 

 

A summary of the status of the Company’s stock option plans as ofJanuary 3, 2004, December 28, 2002 and December 31, 2001 and changes during theperiods ending on those dates is presented below:

 
|                             |   | **Shares** |   | **Weighted-Average  Exercise Price** |   |
|----------------------------------|--------|------------|--------|--------------------------------------|--------|
| Outstanding at December 31, 2000 |   | 1,792,097  |   | $                                    | 12.34  |   |
|                             |   |       |   |                                 |   |
| Granted                          |   | 520,250    |   | 4.37                                 |   |
| Exercised                        |   | (1,719     | )      | 3.19                                 |   |
| Expired                          |   | (491,574   | )      | 12.55                                |   |
| Outstanding at December 31, 2001 |   | 1,819,054  |   | 10.01                                |   |
|                             |   |       |   |                                 |   |
| Granted                          |   | 536,500    |   | 3.27                                 |   |
| Exercised                        |   | (2,828     | )      | 3.19                                 |   |
| Expired                          |   | (285,314   | )      | 10.65                                |   |
| Outstanding at December 28, 2002 |   | 2,067,412  |   | 8.18                                 |   |
|                             |   |       |   |                                 |   |
| Granted                          |   | 287,000    |   | 2.85                                 |   |
| Exercised                        |   | (12,500    | )      | 1.68                                 |   |
| Expired                          |   | (216,230   | )      | 4.88                                 |   |
| Outstanding at January 3, 2004   |   | 2,125,682  |   | $                                    | 7.83   |   |

 

Shares available for future grant at January 3, 2004 and December 28,2002 were 382,736 and 453,506, respectively.

 

29

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The following table summarizes information about stock optionsoutstanding at January 3, 2004:

 
|                          |   | **Options  Outstanding**           |   | **Options  Exercisable**                          |   |
|-------------------------------|--------|------------------------------------|--------|---------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding  at 1/3/04** |   | **Weighted-Average  Remaining  Contractual Life** |   | **Weighted-Average  Exercise Price** |   | **Number  Exercisable  at 1/3/04** |   | **Weighted-Average  Exercise Price** |   |
| $2.00 - $3.00                 |   | 589,500                            |   | 9.18                                              |   | $ | 2.93 |   | 86,125 |   | $ | 2.88 |   |
| $3.19 - $4.40                 |   | 599,723                            |   | 7.34                                              |   | $ | 4.00 |   | 390,115 |   | $ | 3.83 |   |
| $5.01 - $10.38                |   | 484,750                            |   | 6.67                                              |   | $ | 9.08 |   | 328,563 |   | $ | 9.51 |   |
| $10.81 - $34.94               |   | 451,709                            |   | 4.73                                              |   | $ | 17.95 |   | 450,543 |   | $ | 17.96 |   |
|                          |   |                               |   |                                              |   |   |   |   |   |   |   |
| $2.00 - $34.94                |   | 2,125,682                          |   | 7.15                                              |   | $ | 7.83 |   | 1,255,346 |   | $ | 10.32 |   |

 

*Accounting Pronouncements*- In June 2001, theFASB issued SFAS Nos. 141, “Business Combinations” and 142, “Goodwill and OtherIntangible Assets.”  SFAS No. 141 waseffective for all business combinations initiated after June 30, 2001, and hashad no impact on our financial statements. SFAS No. 142 addresses how intangible assets should be accountedfor.  We initially adopted the fullprovisions of SFAS No. 142 in 2002 and recorded an impairment charge of $16.4million.  SFAS No. 142 requirescompanies to no longer amortize purchased goodwill but instead to test suchassets for impairment at least annually. Based on the impairment tests, we reduced the carrying value of goodwillfor our infrastructure reporting unit to its implied fair value.  The impairment was required because economicconditions at the time of testing reduced the estimated future expectedperformance for this reporting unit.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  SFAS 145 rescinds SFASNo. 4, “Reporting Gains and Losses from Extinguishment of Debt,” which requiredall gains and losses from extinguishment of debt to be classified as anextraordinary item.  SFAS 145 iseffective for fiscal years beginning after May 15, 2002, with early adoptionencouraged.  We adopted SFAS 145 as ofDecember 28, 2002, at which time we reclassified the loss resulting from theextinguishment of debt as a separate component in income from continuingoperations. 

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure,” which amends SFAS No.123, “Accounting for Stock-Based Compensation.”  SFAS 148 provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure requirements of SFAS 123 to require moreprominent and more frequent disclosures in financial statements of the effectsof stock-based compensation.  Thetransition guidance and annual disclosure provisions of SFAS 148 are effectivefor fiscal years ending after December 15, 2002.  The interim disclosure provisions are effective for financialreports containing condensed financial statements for interim periods beginningafter December 15, 2002.  The adoptionof SFAS 148 did not have a material impact on our consolidated balance sheet orresults of operations.  We provided theinterim disclosures required by SFAS 148 beginning in the first quarter of2003.

 

*Reclassifications*– Certain balances in priorfiscal years have been reclassified to conform to the presentation adopted inthe current fiscal year.  Thesereclassifications had no impact on our results of operations or shareholders’ equityas previously reported.

 

**B. Property andEquipment**

 
| **(In thousands)**               |   | **January 3,  2004** |   | **December  28,  2002** |   |
|----------------------------------|--------|----------------------|--------|-------------------------|--------|
|                             |   |                 |   |                    |   |
| Leasehold improvements           |   | $                    | 3,105  |                    | $      | 3,113 |   |
| Office furniture & equipment |   | 30,668               |   | 29,778                  |   |
|                             |   | 33,773               |   | 32,891                  |   |
| Accumulated depreciation         |   | 27,476               |   | 25,820                  |   |
|                             |   | $                    | 6,297  |                    | $      | 7,071 |   |

 

30

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On May 15, 2002, we completed the sale of our corporate headquartersbuilding.  The net proceeds of the salewere $16,380,000.  The Company recordeda $1,860,000 loss on the sale.  TheCompany remains a major tenant in the building following the sale.  The balance in leasehold improvementsincludes improvements in leased office spaces throughout the Company.

 

**C. Intangible Assets**

 

For the year ended January 3, 2004, we did not acquire or dispose ofany intangible assets.  Otherintangibles consisted of the following:

 
|               |   | **January 3,  2004**        |   | **December  28, 2002**         |   |
|--------------------|--------|-----------------------------|--------|--------------------------------|--------|
| **(In thousands)** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amoritization** |   | **Other  Intangibles,  Net** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Other  Intangibles,  Net** |   |
|               |   |                        |   |                           |   |   |   |   |   |   |   |   |   |
| Customer list      |   | $                           | 12,270 |                           | $      | (2,608 | ) | $ | 9,662 |   | $ | 12,270 |   | $ | (1,835 | ) | $ | 10,435 |   |
| Tradename          |   | 1,720                       |   | (133                           | )      | 1,587 |   | 1,720 |   | (133 | ) | 1,587 |   |
|               |   | $                           | 13,990 |                           | $      | (2,741 | ) | $ | 11,249 |   | $ | 13,990 |   | $ | (1,968 | ) | $ | 12,022 |   |

 

The customer list is scheduled to be fully amortized by 2015 withcorresponding amortization estimated to be approximately $800,000 peryear.  The tradename is considered tohave an indefinite life and is not amortized.

 

**D. DeferredCompensation**

 

Analysts International has a Deferred Compensation Plan for keymanagement employees as determined by the Compensation Committee.  Included in liabilities at January 3, 2004and December 28, 2002 is $3,716,000 and $2,845,000, respectively, representingthe Company’s liability under the Plan. This liability is being partially funded by the purchase of lifeinsurance and annuity contracts. Included in assets at January 3, 2004 and December 28, 2002 is$1,195,000 and $981,000, respectively, representing the carrying value, whichapproximates market value, of the annuities and insurance cash value.  During 2002, under the terms of ouragreements with three former executives, we made lump sum payments totaling$5,986,000.  These payments werepartially funded by the liquidation of annuities and loans against the cashvalue of insurance policies totaling $5,016,000.  The remainder of the payments were funded using our line ofcredit.  Deferred compensation expensefor the years ended January 3, 2004, December 28, 2002 and December 31, 2001was approximately $1,003,000, $162,000 and $299,000, respectively.

 

**E. Long-term Debt**

 

Effective April 11, 2002, we consummated an asset-based revolvingcredit facility with up to $55,000,000 of availability.  We reduced the level of availability to $45,000,000 following the sale of ourcorporate headquarters building on May 15, 2002.  Borrowings under this credit agreement are secured by all of theCompany’s assets.  We used an initialadvance under the line of credit of $29,800,000 to pay the outstanding balanceof the senior notes ($19,100,000, including make-whole obligations), theoutstanding balance on an existing line of credit ($10,300,000), and certaintransaction expenses.  Under the newrevolving credit agreement, which matures on April 10, 2005, the Company musttake advances or pay down the outstanding balance daily.  We can, however, choose to requestfixed-term advances of one, two, or three months for a portion of theoutstanding balance on the line of credit. Daily advances on the line of creditbear interest at the Wall Street Journal’s “Prime Rate” plus .75% (4.75% onJanuary 3, 2004) while the fixed-term advances bear interest at the LIBOR rateplus 3.0%.  The credit agreementrequires the payment of a commitment fee of .50% of the unused portion of theline plus an

 

31

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annual administration fee of $50,000. The agreement restricts, among other things, the payment of dividends,establishes limits on capital expenditures and requires us to maintain aminimum accounts payable turnover ratio. We believe we will be able to continue to meet the requirements ofthis  agreement for the foreseeablefuture. Repayment of the senior notes resulted in a loss on the earlyextinguishment of debt of $744,000 in the quarter ended June 30, 2002.

 

**F.  Shareholders’ Rights Plan**

 

On June 15, 1989, the Board of Directors adopted a common stockshareholders’ rights plan.  Under thisplan, the Board of Directors declared a dividend of one common share purchaseright for each outstanding share of common stock and stock options granted andavailable for grant.  The Board ofDirectors amended the plan on April 29, 1996 and April 16, 1998. The rights,which expire on April 16, 2006, are exercisable only under certain conditions,and when exercisable the holder will be entitled to purchase from the Companyone share of common stock at a price of $160.00, subject to certainadjustments.  The rights will becomeexercisable after a person or group acquires beneficial ownership of 15% ormore (or as low as 10% as the Board of Directors may determine) of theCompany’s common stock or after a person or group announces an offer, theconsummation of which would result in such person or group owning 15% or moreof the common stock.

 

If the Company is acquired at any time after the rights becomeexercisable, the rights will be adjusted so as to entitle a holder to purchasea number of shares of common stock of the acquiring company at one-half oftheir market value.  If any person orgroup acquires beneficial ownership of 15% or more of the Company’s shares, therights will be adjusted so as to entitle a holder (other than such person orgroup whose rights become void) to purchase a number of shares of common stockof Analysts International Corporation at one-half of their market value or theBoard of Directors may exchange the rights, in whole or in part, at an exchangeratio of one common share per right (subject to adjustment).

 

At any time prior to an acquisition by a person or group of beneficialownership of 15% or more of the Company’s shares, the Board of Directors mayredeem the rights at $.01 per right.

 

**G.  Income Taxes**

 

The provision for income tax expense (benefit) was as follows:

 
|                                       |   | **Fiscal  Year** |   |
|--------------------------------------------|--------|------------------|--------|
| **(In thousands)**                         |   | **2003**         |   | **2002** |   | **2001** |   |
|                                       |   |             |   |   |   |   |   |
| Currently payable (receivable):            |   |             |   |   |   |   |   |
| Federal                                    |   | $                | 277    |   | $ | (4,818 | ) | $ | (2,075 | ) |
| State                                      |   | 53               |   | — |   | (393 | ) |
|                                       |   | 330              |   | (4,818 | ) | (2,468 | ) |
|                                       |   |             |   |   |   |   |   |
| Deferred:                                  |   |             |   |   |   |   |   |
| Federal                                    |   | (296             | )      | (2,220 | ) | 1,298 |   |
| State                                      |   | (34              | )      | (1,185 | ) | 243 |   |
|                                       |   | (330             | )      | (3,405 | ) | 1,541 |   |
| Valuation allowance for deferred tax asset |   | —           |   | 7,117 |   | 1,143 |   |
|                                       |   | (330             | )      | 3,712 |   | 2,684 |   |
|                                       |   |             |   |   |   |   |   |
| Total:                                     |   | $                | 0      |   | $ | (1,106 | ) | $ | 216 |   |

 

32

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Net deferred tax assets (liabilities) are comprised of the following:

 
| **(In thousands)**                      |   | **January 3,  2004** |   | **December  28,  2002** | ** ** |
|-----------------------------------------|--------|----------------------|--------|-------------------------|------------|
| Deferred compensation                   |   | $                    | 1,449  |                    | $          | 1,191 |   |
| Accrued vacation and compensatory time  |   | 487                  |   | 720                     |       |
| Accrued reorganization costs            |   | 238                  |   | 467                     |       |
| Self-insured health care reserves       |   | 36                   |   | 47                      |       |
| Allowance for doubtful accounts         |   | 588                  |   | 501                     |       |
| Depreciation                            |   | 169                  |   | 203                     |       |
| Capital loss carryforward               |   | 1,148                |   | 1,174                   |       |
| Goodwill and other intangibles          |   | 4,063                |   | 5,108                   |       |
| State net operating losses              |   | 1,120                |   | 944                     |       |
| Federal net operating loss carryforward |   | 1,509                |   | —                  |       |
| Other                                   |   | 81                   |   | 112                     |       |
| Valuation allowance                     |   | (8,292               | )      | (8,292                  | )          |
|                                    |   |                 |   |                    |       |
| Net deferred tax assets                 |   | $                    | 2,596  |                    | $          | 2,175 |   |
|                                    |   |                 |   |                    |       |
| Whereof:                                |   |                 |   |                    |       |
| Current                                 |   | $                    | 968    |                    | $          | 1,179 |   |
| Noncurrent                              |   | 1,628                |   | 996                     |       |
|                                    |   | $                    | 2,596  |                    | $          | 2,175 |   |

 

The provision for income taxes differs from the amount of income taxdetermined by applying the federal statutory income tax rates to pretax (loss)income as a result of the following differences:

 
|                                            |   | **Fiscal  Year** |   |
|-------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                              |   | **2003**         |   | **2002** |   | **2001** |   |
|                                            |   |             |   |   |   |   |   |
| Income tax (benefit) at statutory federal  rate |   | $                | (533   | ) | $ | (7,748 | ) | $ | (965 | ) |
| State and local taxes, net of federal  benefit  |   | (59              | )      | (863 | ) | (107 | ) |
| Valuation allowance for deferred tax asset      |   | —           |   | 7,117 |   | 1,143 |   |
| Other                                           |   | 592              |   | 388 |   | 145 |   |
| Total tax provision                             |   | $                | 0      |   | $ | (1,106 | ) | $ | 216 |   |

 

33

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**H. Commitments**

 

At January 3, 2004 aggregate net minimum rental commitments undernoncancelable operating leases having an initial or remaining term of more thanone year are payable as follows:

 
| **(In thousands)**       |   |   |   |
|--------------------------|--------|--------|--------|
|                     |   |   |   |
| Year ending December 31, | 2004   |   | $      | 5,959 |   |
|                     | 2005   |   | 5,715  |   |
|                     | 2006   |   | 5,120  |   |
|                     | 2007   |   | 3,160  |   |
|                     | 2008   |   | 1,545  |   |
|                     | Later  |   | 6      |   |
| Total minimum obligation |   | $      | 21,505 |   |

 

Rent expense, primarily for office facilities, for the years endedJanuary 3, 2004, December 28, 2002 and December 31, 2001 was $6,216,000,$6,327,000 and $5,570,000, respectively.

 

Analysts International has compensation arrangements with its corporateofficers and certain other employees which provide for certain payments in theevent of a change of control of the Company.

 

We also sponsor a 401(k) plan. Substantially all employees are eligible to participate and maycontribute up to 50% of their pretax earnings, subject to IRS maximumcontribution amounts.  After one year ofemployment, we make matching contributions in the form of Company stock of 18%of a participant’s pre-tax contribution. The Company’s contributions fully vest after the employee has completedfive years of service and for the years ended January 3, 2004, December 28,2002 and December 31, 2001 amounted to approximately $663,000, $852,000 and$1,208,000, respectively.

 

**I. RestructuringCharge**

 

In December 2000, we recorded a restructuring charge of $7.0 millionincluding $4.4 million to cover lease terminations and abandonment costs (netof sublease income).  A summary of therestructuring charge and subsequent activity in the restructuring accrualaccount, which is included in other current and other non-current liabilities,is as follows:

 
| **(In thousands)**           |   | **Workforce  Reduction** |   | **Office  Closure/  Consolidation** |   | **Total** |   |
|------------------------------|--------|--------------------------|--------|-------------------------------------|--------|-----------|--------|
|                         |   |                     |   |                                |   |      |   |
| Balance at December 31, 2000 |   | $                        | 2,204  |                                | $      | 4,344     |   | $ | 6,548 |   |
|                         |   |                     |   |                                |   |      |   |
| Cash expenditures            |   | 2,180                    |   | 1,517                               |   | 3,697     |   |
| Non-cash charges             |   | —                   |   | 197                                 |   | 197       |   |
| Balance at December 31, 2001 |   | $                        | 24     |                                | $      | 2,630     |   | $ | 2,654 |   |
|                         |   |                     |   |                                |   |      |   |
| Cash expenditures            |   | 24                       |   | 1,511                               |   | 1,535     |   |
| Non-cash charges             |   | —                   |   | 96                                  |   | 96        |   |
| Additional accrual           |   | —                   |   | 175                                 |   | 175       |   |
| Balance at December 28, 2002 |   | $                        | — |                                | $      | 1,198     |   | $ | 1,198 |   |
|                         |   |                     |   |                                |   |      |   |
| Cash expenditures            |   |                     |   | 587                                 |   | 587       |   |
| Non-cash charges             |   |                     |   | —                              |   | —    |   |
| Balance at January 3, 2004   |   |                     |   | $                                   | 611    |      | $      | 611 |   |

 

During fiscal 2002, we were less successful than anticipated insubleasing certain of the vacated spaces. As a result it became necessary to add $175,000 to the reserve.  While we believe the reserve is currentlyadequate, negative sublease activity in the future, including any defaults ofexisting subleases could create the need for future adjustments to thisreserve.

 

34

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**J. Adoption of SFASNo. 141 and SFAS No. 142**

 

In preparation for the adoption of SFAS No. 141 and SFAS No. 142 weevaluated our goodwill and intangible assets acquired prior to June 30, 2001,the effective date of SFAS No. 141, using the criteria of SFAS No. 141.  This evaluation resulted in $1,080,000 ofother intangibles (comprised entirely of assembled workforce intangibles) beingsubsumed into goodwill at January 1, 2002. 

 

SFAS No. 142 prohibits companies from continuing to amortize purchasedgoodwill and certain indefinite-lived intangible assets. Instead companies musttest such assets for impairment at least annually.  We evaluated our intangible assets as of January 1, 2002 anddetermined that the customer list had a determinable life while the tradenamedid not.  Effective January 1, 2002 weceased amortization of the tradename asset.

 

SFAS No. 142 prescribes a two-phase process for impairment testing ofgoodwill.  The first phase screens forimpairment, while the second phase measures the impairment.  We completed our first phase impairmentanalysis during the first quarter of 2003 and found no indication of impairmentof our recorded goodwill; accordingly, the second phase testing was notrequired.

 

Based on the impairment tests for fiscal 2002, we recognized atransitional impairment loss of $16,389,000 in the first quarter of 2002 toreduce the carrying value of goodwill at our infrastructure reporting unit toits implied fair value.  We did not recorda tax benefit for this adjustment, as our current operating performancerequired the establishment of a reserve against the deferred tax asset createdby this impairment.  

 

The impairment was required because economic conditions at the time oftesting (including declining operating margins and lower demand for ourservices) reduced the estimated future expected performance for this operatingunit.  Under SFAS 142, the impairmentadjustment recognized at adoption of the new rules was reflected as a cumulativeeffect of accounting change in our first quarter 2002 statement ofoperations.  Impairment adjustmentsrecognized after adoption, if any, generally are required to be recognized asoperating expenses.

 

Following the initial adoption of SFAS No. 142, at least annually, weare required to test our remaining goodwill for impairment.  We will perform these tests each year, as ofthe first day of our fiscal year.  Thefair value of the Infrastructure and the Solutions reporting units approximatethe carrying values of these reporting units as of January 4, 2004.  

 

Under SFAS No. 142, we have prospectively ceased amortization ofgoodwill effective January 1, 2002. Supplemental comparative disclosure as if the change had beenretroactively applied to January 1, 2001 is as follows:

 
|                                          |   | **Year Ended**       |   |
|-----------------------------------------------|--------|----------------------|--------|
| **(In thousands, except per share  amounts)** |   | **January 3,  2004** |   | **December  28,  2002** | ** ** | **December  31,  2001** | ** ** |
|                                          |   |                 |   |   |   |   |   |
| Net loss:                                     |   |                 |   |   |   |   |   |
| As reported                                   |   | $                    | (1,524 | ) | $ | (21,031 | ) | $ | (2,980 | ) |
| Goodwill amortization                         |   | —               |   | — |   | 1,552 |   |
| As adjusted                                   |   | $                    | (1,524 | ) | $ | (21,031 | ) | $ | (1,428 | ) |
|                                          |   |                 |   |   |   |   |   |
| Basic and diluted net loss per share:         |   |                 |   |   |   |   |   |
| As reported                                   |   | $                    | (.06   | ) | $ | (.87 | ) | $ | (.12 | ) |
| Goodwill amortization                         |   | —               |   | — |   | 06 |   |
| As adjusted                                   |   | $                    | (.06   | ) | $ | (.87 | ) | $ | (.06 | ) |

 

35

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**Independent Auditors’ Report**

 

Shareholders and Board of Directors

Analysts International Corporation

Minneapolis, Minnesota

 

We have audited the accompanying consolidated balance sheets ofAnalysts International Corporation and its subsidiaries (the Company) as ofJanuary 3, 2004 and December 28, 2002 and the related consolidated statementsof operations, shareholders’ equity and cash flows for the years ended January3, 2004, December 28, 2002 and December 31, 2001.  These consolidated financial statements are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe our audits provide a reasonable basis for our opinion. 

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the consolidated financial position of the Company asof January 3, 2004 and December 28, 2002, and the results of their operationsand their cash flows for the years ended January 3, 2004, December 28, 2002 andDecember 31, 2001, in conformity with accounting principles generally acceptedin the United States of America.

 

As discussed in Note J to the consolidated financial statements, theCompany changed its method of accounting for goodwill and certain intangiblesin 2002.

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
| Minneapolis, Minnesota        |
| March 5, 2004                 |

 

36

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**Report of Management**

 

The consolidated financial statements of Analysts InternationalCorporation published in this report were prepared by company management, whichis responsible for their integrity and objectivity.  The statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America applying certainestimates and judgments as required. The financial information elsewhere in this report is consistent withthe statements.

 

Analysts International maintains internal controls adequate to providereasonable assurance its transactions are appropriately recorded and reported,its assets are protected and its established policies are followed.  The structure is enforced by writtenpolicies and procedures, internal audit activities and a qualified financialstaff.

 

Our independent auditors, Deloitte & Touche LLP, provide anobjective independent review by audit of Analysts International’s consolidatedfinancial statements and issuance of a report thereon.  Their audit is conducted in accordance withauditing standards generally accepted in the United States of America.

 

The Audit Committee of the Board of Directors, comprised solely ofoutside directors, meets with the independent auditors and representatives frommanagement to appraise the adequacy and effectiveness of the audit functions,internal controls and quality of our financial accounting and reporting.

 

 
|  /s/ Michael J. LaVelle          |   |  /s/ David J. Steichen     |
|---------------------------------------|--------|---------------------------------|
| Michael J. LaVelle                    |   | David J. Steichen               |
| President and Chief Executive Officer |   | Interim Chief Financial Officer |

 

37

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**Stock Data**

 
|                                    |   | **Market  Range** |   |
|-----------------------------------------|--------|-------------------|--------|
|                                    |   | **High**          |   | **Low** |   | **Close** |   |
| **Fiscal Year Ended January 3, 2004**   |   |              |   |   |   |   |   |
| Fourth Quarter                          |   | $                 | 3.70   |   | $ | 2.10 |   | $ | 3.18 |   |
| Third Quarter                           |   | 3.15              |   | 2.11 |   | 2.56 |   |
| Second Quarter                          |   | 2.54              |   | 1.25 |   | 2.45 |   |
| First Quarter                           |   | 2.15              |   | 1.15 |   | 1.51 |   |
|                                    |   |              |   |   |   |   |   |
| **Fiscal Year Ended December 28, 2002** |   |              |   |   |   |   |   |
| Fourth Quarter                          |   | $                 | 2.89   |   | $ | 1.10 |   | $ | 1.98 |   |
| Third Quarter                           |   | 4.45              |   | 2.50 |   | 2.90 |   |
| Second Quarter                          |   | 5.30              |   | 3.17 |   | 4.25 |   |
| First Quarter                           |   | 4.95              |   | 3.25 |   | 4.00 |   |

 

The Company’s common shares are traded on The Nasdaq Stock Market®under the symbol ANLY.  As of March 5,2004, there were approximately 1,174 shareholders of record.  The above table sets forth for the periodsindicated the market prices for the Company’s Common Stock as reported byNasdaq.

 

During the quarter ended September 30, 2001, the Board elected tosuspend the quarterly dividend to retain capital.  The Company’s current debt arrangement prohibits the payment ofdividends.  There can be no assurancethe Company will be able to reinstate a dividend paying policy in thefuture.  

 

*Sales of Unregistered Securities*

 

On December 29, 2000, the Company acquired the 19.9% of SequoiaNET.comit previously did not own in a business combination accounted for as apurchase.  The Company issued 1,588,000shares of its common stock, having an aggregate value of $6.1 million, to theformer shareholders of SequoiaNET.com. In addition, the Company exchanged 386,216 options to purchase commonstock of SequoiaNET.com for 193,108 non-qualified options to purchase commonstock of the Company.  These shares werenot registered under the Securities Act of 1933.  The unregistered shares were issued in reliance upon Section 4(2)of the Securities Act of 1933, as amended, as a sale by the Company notinvolving a public offering.  Nounderwriters were involved with such issuance of common stock.

 

38

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**Five Year Financial Summary**

 
| **(Dollars in thousands except  per share amounts)**                                       |   | **Fiscal Year** |    | **Six Months  Ended  December 31,  2000** |     | **Fiscal  Year** |     |
|--------------------------------------------------------------------------------------------|--------|-----------------|---------|-------------------------------------------|----------|------------------|----------|
| **2003**                                                                                   |   | **2002**        |    | **2001**                                  | **2000** |             | **1999** |
| Professional services revenues:                                                            |   |            |    |                                      |     |             |     |   |   |   |   |   |   |
| Provided directly                                                                          |   | $               | 281,356 |                                      | $        | 327,582          |     | $ | 411,387 |   | $ | 226,706 |   | $ | 420,140 |   | $ | 480,790 |   |
| Provided through subsuppliers                                                              |   | 50,543          |    | 98,578                                    |     | 140,340          |     | 61,634 |   | 138,591 |   | 139,366 |   |
| Total revenues                                                                             |   | 331,899         |    | 426,160                                   |     | 551,727          |     | 288,340 |   | 558,731 |   | 620,156 |   |
| Salaries, contracted services and direct charges                                           |   | 271,205         |    | 353,715                                   |     | 457,706          |     | 235,238 |   | 452,334 |   | 486,816 |   |
| Amortization of goodwill and other intangible  assets                                      |   | 773             |    | 785                                       |     | 3,212            |     | 1,370 |   | 1,025 |   | 415 |   |
| Loss on sale of corporate headquarters                                                     |   | —          |    | 1,860                                     |     | —           |     | — |   | — |   | — |   |
| Restructuring charges                                                                      |   | —          |    | —                                    |     | —           |     | 7,000 |   | — |   | — |   |
| Non-operating income                                                                       |   | 79              |    | 122                                       |     | 247              |     | 68 |   | 1,452 |   | 1,408 |   |
| Loss on investment                                                                         |   | —          |    | 190                                       |     | 3,012            |     | — |   | — |   | — |   |
| Interest expense                                                                           |   | 13              |    | 1,042                                     |     | 2,899            |     | 1,494 |   | 1,584 |   | 178 |   |
| Loss on debt extinguishment                                                                |   | —          |    | 744                                       |     | —           |     | — |   | — |   | — |   |
| Income taxes (benefit) and minority interest                                               |   | —          |    | (1,106                                    | )        | 216              |     | (3,631 | ) | 5,769 |   | 14,535 |   |
| Net (loss) income before cumulative effect of  change in accounting for goodwill           |   | (1,524          | )       | (4,642                                    | )        | (2,980           | )        | (6,302 | ) | 9,788 |   | 22,733 |   |
|                                                                                       |   |            |    |                                      |     |             |     |   |   |   |   |   |   |
| Cumulative effect of change in accounting for  goodwill                                    |   | —          |    | 16,389                                    |     | —           |     | — |   | — |   | — |   |
|                                                                                       |   |            |    |                                      |     |             |     |   |   |   |   |   |   |
| Total assets                                                                               |   | 101,895         |    | 106,744                                   |     | 192,884          |     | 201,729 |   | 192,144 |   | 186,216 |   |
| Long-term liabilities                                                                      |   | 4,038           |    | 3,605                                     |     | 7,588            |     | 45,615 |   | 41,739 |   | 27,534 |   |
| Shareholders’ equity                                                                  |   | 68,663          |    | 70,166                                    |     | 91,083           |     | 95,083 |   | 99,053 |   | 98,014 |   |
| Per share data:                                                                            |   |            |    |                                      |     |             |     |   |   |   |   |   |   |
| Net (loss) income before cumulative effect of  change in accounting for goodwill (basic)   |   | (.06            | )       | (.19                                      | )        | (.12             | )        | (.28 | ) | .43 |   | 1.01 |   |
| Net (loss) income before cumulative effect of  change in accounting for goodwill (diluted) |   | (.06            | )       | (.19                                      | )        | (.12             | )        | (.28 | ) | .43 |   | 1.00 |   |
| Cash dividends                                                                             |   | .00             |    | .00                                       |     | .10              |     | .20 |   | .40 |   | .40 |   |
| Shareholders’ equity                                                                  |   | 2.84            |    | 2.90                                      |     | 3.76             |     | 3.93 |   | 4.38 |   | 4.35 |   |
|                                                                                       |   |            |    |                                      |     |             |     |   |   |   |   |   |   |
| Average common shares outstanding                                                          |   | 24,201,000      |    | 24,198,000                                |     | 24,196,000       |     | 22,624,000 |   | 22,583,000 |   | 22,524,000 |   |
| Average common and common equivalent shares  outstanding                                   |   | 24,201,000      |    | 24,198,000                                |     | 24,196,000       |     | 22,624,000 |   | 22,624,000 |   | 22,732,000 |   |
| Number of personnel                                                                        |   | 3,000           |    | 3,075                                     | *        | 3,800            |     | 4,750 |   | 4,800 |   | 4,900 |   |
|                                                                                            |        |                 |         |                                           |          |                  |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Personnel staff restated for 2002 due to a change in the way theCompany counts technical consultants who are between projects or have left thecompany but not yet been terminated in its accounting systems.

 

We changed our fiscal year end to December 31 from June 30, effectiveDecember 31, 2000.  Accordingly, we havepresented financial information for the six months ended December 31, 2000 (thetransition period).  Effective December28, 2002, we changed our fiscal year to end on the Saturday closest to December31.  Accordingly, references herein toour fiscal year 2002 refer to the fiscal period from January 1, 2002 toDecember 28, 2002 and to our fiscal year 2003 refer to the fiscal period fromDecember 29, 2002 to January 3, 2004.

 

39

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**Quarterly Revenuesand Income**

 

The following table sets forth certain statements of operations datafor each of the quarters indicated below, and in the opinion of management,contains all adjustments, consisting only of normal recurring adjustments,necessary for a fair presentation thereof.

 
| **(Dollars in thousands except per  share amounts)** |   | **Quarter  Ended  March 29** |   | **Quarter  Ended  June 28** |   | **Quarter  Ended  September 27** |   | **Quarter  Ended  January 3** |   | **Total** |   |
|------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|----------------------------------|--------|-------------------------------|--------|-----------|--------|
| Fiscal 2003                                          |   |                         |   |                        |   |                             |   |                          |   |      |   |
| Total revenue                                        |   | $                            | 86,041 |                        | $      | 82,610                           |   | $                             | 80,036 |      | $      | 83,212 |   | $ | 331,899 |   |
| Loss before income taxes                             |   | (373                         | )      | (168                        | )      | (559                             | )      | (424                          | )      | (1,524    | )      |
| Income taxes (benefit)                               |   | (57                          | )      | —                      |   | —                           |   | 57                            |   | —    |   |
| Net loss                                             |   | (316                         | )      | (168                        | )      | (559                             | )      | (481                          | )      | (1,524    | )      |
| Net loss per share (basic and diluted)               |   | (.01                         | )      | (.01                        | )      | (.02                             | )      | (.02                          | )      | (.06      | )      |
|                                                      |        |                              |        |                             |        |                                  |        |                               |        |           |        |  |  |  |  |  |

 
|                                                                             |   | **Quarter  Ended  March 31** |    | **Quarter  Ended  June 30** | ** ** | **Quarter  Ended  September 30** | ** ** | **Quarter  Ended  December 28** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|-----------|------------|
| Fiscal 2002                                                                      |   |                         |    |                        |       |                             |       |                            |       |      |       |
| Total revenue                                                                    |   | $                            | 114,684 |                        | $          | 110,744                          |       | $                               | 107,414    |      | $          | 93,318 |   | $ | 426,160 |   |
| Loss before income taxes and change in  accounting for goodwill                  |   | (913                         | )       | (3,800                      | )*         | (907                             | )          | (128                            | )          | (5,748    | )          |
| Income tax benefit                                                               |   | (212                         | )       | (623                        | )          | (224                             | )          | (47                             | )          | (1,106    | )          |
| Net loss before change in accounting for  goodwill                               |   | (701                         | )       | (3,177                      | )*         | (683                             | )          | (81                             | )          | (4,642    | )          |
| Cumulative effect of change in accounting  for goodwill                          |   | (16,389                      | )       | —                      |       | —                           |       | —                          |       | (16,389   | )          |
| Net loss                                                                         |   | (17,090                      | )       | (3,177                      | )*         | (683                             | )          | (81                             | )          | (21,031   | )          |
| Net loss before change in accounting for  goodwill per share (basic and diluted) |   | (.03                         | )       | (.13                        | )*         | (.03                             | )          | (.00                            | )          | (.19      | )          |
| Net loss per share (basic and diluted)                                           |   | (.71                         | )       | (.13                        | )*         | (.03                             | )          | (.00                            | )          | (.87      | )          |
|                                                                                  |        |                              |         |                             |            |                                  |            |                                 |            |           |            |  |  |  |  |  |

 

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*Includes loss on sale of corporate headquarters ($1.9 million) andloss on extinguishment of debt ($744,000).

 

40

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**Boardof Directors**

**Inside Directors**

 

Michael J. LaVelle

President and Chief Executive Officer

 

John D. Bamberger

Executive Vice President

and Chief Operating Officer

 

**Outside Directors**

 

Frederick W. Lang

Chairman of the Board

 

Krzysztof K. Burhardt

Partner, Clotho & Associates

 

Willis K. Drake

Retired Chairman of the Board

Data Card Corporation

 

Michael B. Esstman

Retired Vice President

GTE Corporation

 

Margaret A. Loftus

Principal, Loftus Brown-Wescott, Inc.

 

Edward M. Mahoney

Retired Chairman and Chief Executive Officer

Fortis Investors, Inc. and Fortis Advisers, Inc.

 

Robb L. Prince

Retired Vice President and Treasurer

Jostens,  Inc.

 

**Officers**

 

Michael J. LaVelle

President and Chief Executive Officer

 

John D. Bamberger

Executive Vice President

And Chief Operating Officer 

 

David J. Steichen

Interim Chief Financial Officer and Treasurer

 

Paulette M. Quist

Senior Vice President, 

Business Development and Strategy

 

Colleen M. Davenport

Secretary and General Counsel 

 

**Corporate Information**

 

**10-K and OtherReports Available**

A copy of the Company’s 2003 Annual Report on Form 10-K and otherreports, filed with the Securities and Exchange Commission, is available tosecurity holders without charge upon request to the Treasurer at: AnalystsInternational Corporation, 3601 West 76th Street, Minneapolis,Minnesota 55435-3000.

 

**Stock Transfer Agent**

EquiServe Trust Company, N.A. 

P.O. Box 43023

Providence, Rhode Island 02940-3023

 

Shareholder Inquiries:

800-254-5196

http://www.equiserve.com

 

**Independent Auditors**

Deloitte & Touche LLP

Minneapolis, Minnesota

 

**World Wide WebAddress**

http://www.analysts.com

 

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** **

**Analysts International Corporation**

3601 West 76thStreet

Minneapolis,Minessota 55435-3000

 

Telephone:952-835-5900

www.analysts.com

 

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