UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

Commission file number 0-19433

Technology Solutions Company

205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
(312) 228-4500

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

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2). Yes [  ]   No [ü]

As of October 29, 2004, there were outstanding 40,868,080 shares of TSC Common Stock, par value $.01.

TECHNOLOGY SOLUTIONS COMPANY
Index to Form 10-Q

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

TECHNOLOGY SOLUTIONS COMPANY

The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.

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TECHNOLOGY SOLUTIONS COMPANY

The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.

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TECHNOLOGY SOLUTIONS COMPANY

The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(In thousands, except share and per share data)

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Technology Solutions Company and its subsidiaries (“TSC” or the “Company”). The consolidated balance sheet as of September 30, 2004, the consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003 and the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of September 30, 2004 and for all periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the United States Securities and Exchange Commission (“SEC”) on March 19, 2004.

NOTE 2 — THE COMPANY

Technology Solutions Company is a consulting company that delivers business benefits to its clients through application of information technology. TSC helps its clients plan, select, install, upgrade and optimize the software systems that run their business operations. TSC’s range of services include project planning, software selection, reengineering, implementation, systems integration, upgrades, training, and outsourcing. The Company’s clients are primarily located throughout the United States but the Company also supports global deployments.

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(Continued)

NOTE 3 — STOCK OPTIONS

The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Compensation costs for employee stock options is measured as the excess, if any, of the quoted market price of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the stock.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation.

As of September 30, 2004 and 2003, options to purchase 11,385,032 and 10,167,922 shares of common stock were outstanding, respectively, and options to purchase an additional 1,637,688 and 2,959,218 shares of common stock were available for grant, respectively, under the Technology Solutions Company 1996 Stock Incentive Plan.

NOTE 4 — CAPITAL STOCK

The Company has a stock repurchase program, which allows for share repurchases of up to 11,525,327 shares of outstanding Company common stock (the “Repurchase Program”). During the nine months ended September 30, 2004, the Company purchased 75,500 shares for $76. During the nine months ended September 30, 2003, the Company purchased 277,000 shares for $286. The Company has purchased an aggregate total of 6,838,127 shares since the inception of this Repurchase Program in September 2000. As of September 30, 2004, there were 4,687,200 shares available to be purchased under the Repurchase Program.

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(Continued)

The timing and size of any future stock repurchases are subject to market conditions, stock prices, cash position and other cash requirements.

NOTE 5 — LOSS PER COMMON SHARE

The Company discloses basic and diluted loss per share in the consolidated statements of operations under the provisions of SFAS No. 128, “Earnings Per Share.” Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented, plus the dilutive effect of common equivalent shares arising from the assumed exercise of stock options using the treasury stock method. Common equivalent shares of 721,301; 954,882; 921,749 and 961,009 were not included in the diluted loss per share calculation as they were antidilutive for the three and nine months ended September 30, 2004 and September 30, 2003, respectively. Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented.

Reconciliation of basic and diluted loss per share for the three months ended:

Reconciliation of basic and diluted loss per share for the nine months ended:

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(Continued)

NOTE 6 — COMPREHENSIVE (LOSS) INCOME

The Company’s comprehensive (loss) income was as follows:

NOTE 7 — BUSINESS SEGMENTS

The Company operates in a single business segment. The Company’s clients are primarily located throughout the United States but the Company also supports global deployments. The following is revenue, including reimbursements, and long-lived asset information by geographic area:

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(Continued)

Foreign revenues and identifiable assets are based on the country in which the legal subsidiary is domiciled. No single foreign country’s revenues or identifiable assets were material to the consolidated revenues or identifiable assets of the Company.

NOTE 8 — OTHER EVENTS

In the second quarter of 2003, the Company recorded $5,211 in restructuring and other charges as a result of organizational changes announced in June 2003. These charges consisted of the severance costs of professional personnel and executives as well as office reductions and professional fees incurred in connection with terminated negotiations with a party that had expressed interest in acquiring the Company. During the three months ended March 31, 2004, this charge was reduced by $266 to $4,945 as the Company was able to favorably terminate one of its office leases. As of September 30, 2004, there was an accrual balance of $857. The Company expects to utilize this balance by the end of 2005. The following table provides the components of this charge.

(1)

Net cash payments totaling $966 were made during the nine months ended September 30, 2004.

In 2000, the Company recorded a pre-tax charge of $4,701 for the closure of its Latin American operations. Subsequently in 2000, the Company collected $400 of accounts receivable previously written-off and, as a result, the cumulative charge was reduced to $4,301. This charge was further reduced by $181 to $4,120 during the three months ended March 31, 2004 as the Company completed the closure of its Latin American operations and, accordingly, no further payments are due. The following table provides the components of this charge:

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(Continued)

(2)

There were no net cash payments during the nine months ended September 30, 2004.

In 1999, the Company recorded $6,967 in restructuring and other charges associated with lease terminations, former executive severance costs, CourseNet Systems, Inc. acquisition costs and asset write-offs. On February 15, 2000, the Company distributed the common stock of eLoyalty Corporation (“eLoyalty”) owned by the Company to the Company’s stockholders (the “Spin-Off”). eLoyalty operated within the Company prior to the Spin-Off and is now a separate, publicly traded company. The Company determined that a portion of the lease terminations became unnecessary due to changes in TSC office usage by TSC and eLoyalty and also determined that the actual costs for these lease terminations would be less than previously anticipated and, as a result, the cumulative charge was reduced by $2,036 to $4,931 during 2000, 2001 and 2002 and by $132 to $4,799 during the quarter ended March 31, 2004. During the quarter ended June 30, 2004, the Company made the final payment on its remaining contractual lease obligation. Accordingly, as of September 30, 2004, no further payments are due on this charge. The following table provides the components of this charge.

(3)

Net cash payments totaling $15 were made during the nine months ended September 30, 2004.

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TECHNOLOGY SOLUTIONS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Unaudited)
(Continued)

NOTE 9 — RELATED PARTY

During the nine months ended September 30, 2004 and 2003, the Company provided services to Bausch & Lomb, Inc (B&L). One of the Company’s directors, John R. Purcell, and a former director, William H. Waltrip, also serve as directors for B&L. The services performed related to B&L’s global IT integration project and were awarded following a competitive bidding process. The amount of revenues recognized for such services during the nine months ended September 30, 2004 and 2003 represented 3 percent and 7 percent of the Company’s total revenues before reimbursements, respectively, and during the quarters ended September 30, 2004 and 2003 represented 1 percent and 3 percent of such revenues before reimbursements, respectively. The net accounts receivable balances from these services as of September 30, 2004 and December 31, 2003 were $0 and $272, respectively.

NOTE 10 — MERGER AGREEMENT

On August 9, 2004, the Company announced that it had entered into a definitive merger agreement with ZAMBA Corporation (“ZAMBA”), under which the Company will acquire ZAMBA. Consummation of the merger is subject to certain conditions including the approval of ZAMBA’s stockholders. Under the terms of the transaction, which was approved by both companies’ boards of directors, ZAMBA stockholders will receive 0.15 shares of the TSC’s common stock for each share of ZAMBA common stock which they hold as of the effective date of the merger. As of September 30, 2004, there were 38,922,028 shares of ZAMBA common stock issued and outstanding. Upon completion of the transaction, ZAMBA stockholders will own approximately 12.5 percent of the Company.

TSC and Zamba expect to incur fees and expenses associated with consummating the merger of approximately $3.3 million, of which approximately $0.3 million has been incurred as of September 30, 2004. These transaction fees and expenses represent costs of completing the proposed merger and will be included as a component of the purchase price for purposes of purchase accounting.

NOTE 11 — SUBSEQUENT EVENT

On October 5, 2004, the Company announced that it had entered into an asset purchase agreement pursuant to which it acquired the business of Proceed North America LLC (“Proceed”). TSC paid Proceed $500 in cash upon closing of the acquisition and will make additional cash payments of $250 each in January and April 2005. In addition, TSC agreed to make three additional cash payments to Proceed of up to $500 each (for a maximum contingent payment total of $1,500) payable in February 2006, 2007 and 2008, respectively, contingent on certain conditions.

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TECHNOLOGY SOLUTIONS COMPANY

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

On August 9, 2004, we announced that we have entered into a definitive merger agreement with ZAMBA Corporation (“ZAMBA”), under which we will acquire ZAMBA (“the merger”). Under the terms of the transaction, which was approved by both companies’ boards of directors, ZAMBA stockholders will receive 0.15 shares of our common stock for each share of ZAMBA common stock which they hold as of the effective date of the merger. Upon completion of the transaction, ZAMBA stockholders will own approximately 12.5 percent of the Company. Consummation of the merger is subject to certain conditions including the approval of ZAMBA’s stockholders. Since we are not in a position to know when the merger will close, statements contained in this report regarding our future performance is for TSC only and, accordingly, excludes any revenues, costs or cash flows of ZAMBA or otherwise arising from the merger.

The results of our operations are affected by general economic conditions as well as the level of economic activity and changes in the industries that we serve. While the general economy and the information technology (“IT”) consulting services market is improving, there is no assurance that these improving conditions will result in an increase in our future revenues given the fundamental changes in the IT service industry as set forth below. In addition, increases in demand for our services generally tend to lag behind economic cycles. Accordingly, any benefit to our business of any economic recovery may take longer to realize.

Beginning in the second half of 2003, we took steps to refocus and rebuild our business. These steps included investing in a range of specialty services in order to differentiate ourselves from our competition and investing in marketing initiatives to support these specialty services as well as maintaining our project personnel headcount at a level to enable us to grow our business. We continue to refocus our marketing and sales efforts as well as formulate new service offerings. Our revenues in the third quarter of 2004 were flat as compared to the second quarter of 2004. We expect quarterly revenues in the fourth quarter to be comparable or improve as compared to the third quarter of 2004. We incurred operating losses in the first three quarters of 2004 as well as all four quarters during 2003 and we expect to incur an operating loss during the fourth quarter of 2004 as we continue our efforts to refocus and rebuild our business.

In addition to the challenges described above, we believe that the information technology services industry is undergoing fundamental changes, resulting in increased competitive pressure. These changes include competition from application software firms as they continue to enhance services and implementation capabilities to increase their revenue; offshore application development and system consulting and support firms which typically have much lower labor costs and billing rates; and the proliferation of Enterprise Resource Planning (“ERP”) expertise within the IT departments of organizations, reducing the need to engage outside consulting help. The availability of offshore technical expertise has and will continue to have an impact on the IT

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

consulting market. However, we believe the demand for “high end” value added technically and functionally competent innovative consultants will increase over time. The complexity of corporate IT functions is not diminishing. In addition, we believe that the upcoming “baby boomer” retirement will impact the supply of trained consultants in the market.

Our business is also driven by the pace of technological change, our ability to differentiate ourselves from our competitors through specialty services that address targeted industry and business concerns, and the type and level of spending by our clients in the areas in which we provide services. Many factors can result in a deferral, reduction or cancellation of services requested by our prospective or current clients including budget constraints, economic conditions and perceived project progress, success or value. The economic uncertainties of recent years has lead many corporations to reassess their IT goals and budgets. This, combined with the lack of significant new technology to stimulate spending, has had a further dampening impact on demand for our services. However, we also believe that many companies have very old systems and technology and that “real time” business decision making will fuel growth in many of our markets.

During periods of decreased demand, pricing pressures emerge as companies try to minimize costs and negotiate lower prices for our services. Our ability to successfully identify and prepare for these changes is a key driver of our performance. Therefore, our strategy is to try to anticipate these trends and identify cost-management initiatives that will allow us to manage costs relative to expected revenues as well as identifying opportunities to increase revenues. Although we remain committed to spending our funds wisely, there is a point at which further cost cutting can be counter-productive.

Project personnel costs constitute the majority of our operating costs. Since project personnel costs are primarily driven by the cost of billable personnel, mainly compensation and benefits, maintaining these costs at a reasonable and predictable percentage of revenue is critical to our financial performance. Project personnel costs as a percentage of revenues are driven by utilization and average hourly billing rates. Utilization represents the percentage of time our billable professionals spend on billable work. It is our strategy to try to match our project personnel supply with demand. At times this requires us to reduce headcount and reassign employees to other active projects when they are no longer needed on a particular project. However, because of the mix of skills needed and project duration, implementation of this strategy may be delayed at times. Accordingly, any decline in revenues without a corresponding and timely reduction in staffing, or a staffing increase that is not accompanied by a corresponding increase in revenues, would have an adverse effect on our business, operating results and financial condition, which could be material.

REVENUES

For presentation purposes, we show two components of revenues: 1) revenues before reimbursements, which consists of revenue for performing consulting services; and 2)

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

reimbursements, consisting of reimbursements we receive from clients for out-of-pocket expenses incurred. We believe revenues before reimbursements is a more meaningful representation of our economic activity since it excludes pass-through, zero-margin expense reimbursements.

COSTS AND EXPENSES

Project Personnel

Project personnel costs consist primarily of professional salaries and benefits.

Other Project Expenses

Other project expenses consist of the cost for subcontractors hired for use on our client projects and billed to our clients; employee termination costs; and nonreimbursable expenses incurred for client projects and business development. Nonreimbursable expenses include recruiting fees, certain selling expenses, and personnel training.

Reimbursable Expenses

Reimbursable expenses represent project related and other out-of-pocket expenses that are reimbursable by the client. An equivalent amount is included in revenues under the caption “Reimbursements.”

Bad Debt Expense

We maintain an allowance for doubtful receivables resulting from the failure of our customers to make required payments. We also analyze our notes receivable, which are included in Long-Term Receivables and Other on our Consolidated Balance Sheet.

Management and Administrative Support

Management and administrative support costs consist of client officer costs and infrastructure costs. Client officer costs include client officer salaries and travel, marketing costs and recruiting costs. Client officers are a critical component in our client relationship-selling model. Our client officers are assigned to every client and are responsible for growing and enhancing the relationship between us and our current clients, as well as past clients, and establish us as business partner in the eyes of our client, rather then just a vendor. In addition, each client officer is also a billable consulting resource. Infrastructure costs include costs related to our senior corporate management and board of directors; accounting; financial reporting; finance; tax; legal; treasury; human resources; employee benefits; marketing; public and investor relations; office operations; staffing of our project personnel; recruiting; training; internal communications; internal technology applications; management of new business opportunities; planning; quality assurance; and risk management.

Incentive Compensation

Incentive compensation, if any, is accrued at a set percentage of base salary, which varies by

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

level of employee, and is adjusted to reflect the amounts needed for active employees and for performance against targets, goals and objectives. Payments of incentive compensation, if any, are performance based and are determined by both objective (financial-based) and subjective measures. These objectives include both quarterly and full fiscal year parameters.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and other assumptions, which it believes are reasonable. If actual amounts are ultimately different from these estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known.

Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and when different estimates than management reasonably could have used have a material impact on the presentation of the Company’s financial condition, changes in financial condition or results of operations.

Revenue Recognition

We derive our revenues from a variety of information technology services, including systems integration, packaged software integration and implementation services, programming, training and extended support services. Our services are contracted on either a time and materials basis or a fixed price basis. For our time and materials contracts, we recognize revenues as work is performed, primarily based on hourly billing rates. For our fixed price contracts, we recognize revenues using the percentage-of-completion method, which is based on the percentage of work performed in the period compared to the total estimated work to be performed over the entire contract. Revenues are subject to revision as the contract progresses to completion. Any revisions in the estimate are charged to operations in the period in which the facts that give rise to the revision become known. Contracts are performed in phases. Losses on contracts, if any, are reserved in full when determined. Contract losses are determined by the amount by which the estimated cost of the contract exceeds the estimated total revenues that will be generated by the contract. Extended support revenues are recognized as services are rendered.

Allowance for Doubtful Receivables

An allowance for doubtful receivables is maintained for potential credit losses. When evaluating the adequacy of our allowance for doubtful receivables, management specifically analyzes accounts receivable on a client by client basis, including customer credit worthiness and current economic trends, and records any necessary bad debt expense based on the best estimate of the

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

facts known to date. Should the facts regarding the collectability of receivables change, the resulting change in the allowance would be charged or credited to income in the period such determination is made. Such a change could materially impact our financial position and results of operations.

Accounting for Income Taxes

We use an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided using currently enacted tax rates when tax laws and financial accounting standards differ with respect to the amount of income for a year and the basis of assets and liabilities. Significant management judgement is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have generated certain deferred tax assets as a result of operating losses and temporary differences between book and tax accounting, as well as tax benefits resulting from the exercise of employee stock options that were recorded as additional paid-in capital in the period of exercise. Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. During 2003, we recorded a full valuation allowance against our deferred tax assets. If the realization of our deferred tax assets in future periods is considered more likely than not, an adjustment to our deferred tax asset would increase net income in the period such determination is made. The amount of deferred tax assets considered realizable is based on significant estimates. Changes in these estimates could materially affect our financial condition and results of operations in future periods.

Stock-Based Compensation

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Compensation costs for employee stock options is measured as the excess, if any, of the quoted market price of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the stock.

THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2003

Revenues

Consolidated net revenues were $8.8 million for the three months ended September 30, 2004, a decrease of 7 percent from the same period in the prior year. Revenues before reimbursements decreased 7 percent to $7.7 million from $8.3 million. We believe that this decline in revenues was primarily due to decreased demand for our services arising out of the continuing economic uncertainties, fundamental changes in the IT services industry, and a decline in corporate information technology capital expenditures as large and small companies reassessed their goals and budgets.

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

During the three months ended September 30, 2004, two clients accounted for 25 percent of revenues before reimbursements (United Water Inc. – 14 percent and Caterpillar Inc. – 11 percent). During the three months ended September 30, 2003, two clients accounted for 27 percent of revenues before reimbursements (ExxonMobil Corp. – 16 percent and Caterpillar Inc. – 11 percent). We added 22 new clients and 37 new projects during the three months ended September 30, 2004 compared to 5 new clients and 25 new projects during the same period in the prior year. In addition, we performed work for 64 clients and 87 projects during the three months ended September 30, 2004 compared to 44 clients and 78 projects during the same period in the prior year.

During the three months ended September 30, 2004 and 2003, we provided services to Bausch & Lomb, Inc (B&L). One of our directors, John R. Purcell, and a former director, William H. Waltrip, also serve as directors for B&L. The services performed related to B&L’s global IT integration project and were awarded following a competitive bidding process. The amount of revenues recognized for such services during the three months ended September 30, 2004 and 2003 represented 1 percent and 3 percent of our total revenues before reimbursements, respectively. The net accounts receivable balances from these services as of September 30, 2004 and December 31, 2003 were none and $272 thousand, respectively.

Costs and Expenses

Project personnel costs were $5.0 million for the three months ended September 30, 2004, a decrease of 20 percent from the same period in the prior year. This decrease was largely attributable to staff reductions in response to our declining revenues and our ongoing efforts to keep headcount and costs in line with demand for our services, as described earlier in this item. Professional domestic headcount decreased to 137 as of September 30, 2004 compared to 172 as of September 30, 2003. Annualized voluntary turnover increased to 30 percent from 23 percent for the three months ended September 30, 2003. Project personnel costs as a percentage of revenues before reimbursements decreased to 64 percent for the three months ended September 30, 2004 from 74 percent from the same period in the prior year primarily due to an increase in average hourly billing rates and increased use of subcontractors for certain specialized skills. Average hourly billing rates increased 6 percent to $147. We believe the improvement in average hourly billing rates reflects a firmer overall market as well as the start of a shift in our services to higher value-added activities. Staff utilization declined to 62 percent from 71 percent for the three months ended September 30, 2003.

Other project expenses were $1.4 million for the three months ended September 30, 2004, an increase of 25 percent from the same period in the prior year. This increase resulted from an increase in subcontractor costs of $0.4 million, partially offset by a $0.1 million decrease in headcount related costs, which includes travel, computer and communication costs. Other project expenses as a percentage of revenues before reimbursements increased to 19 percent for the three months ended September 30, 2004 from 14 percent for the same period in the prior year mainly due to the increased use of subcontractors for certain specialized skills.

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

There was no bad debt expense during the three months ended September 30, 2004, a decrease of $0.1 million from the same period in the prior year.

Management and administrative support costs increased 22 percent to $3.9 million for the three months ended September 30, 2004 from $3.2 million in the same period in the prior year. This increase resulted from executive termination costs of $0.5 million during the three months ended September 30, 2004 as well as an increase in labor costs of $0.4 million due to the hiring of additional client officers, as part of our client relationship-selling model. These increases were partially offset by lower telecommunication costs and depreciation expense of $0.2 million.

Incentive compensation expense was $0.2 million for the three months ended September 30, 2004. There was no incentive compensation expense in the same period in the prior year. If the Company and our employees meet their 2004 quarterly and annual quantitative and qualitative objectives, we expect to continue to accrue incentive compensation during the remainder of 2004.

Operating Loss

Consolidated operating loss was $2.9 million for the three months ended September 30, 2004 compared to $2.3 million for the same period in the prior year. The increase in the operating loss mainly resulted from costs for executive terminations.

Other Income

Other income for the three months ended September 30, 2004 was just under $0.3 million compared to just over $0.2 million for the same period in the prior year. Other income increased as a result improved interest rates year over year, while our cash balances were lower year over year. Our cash and cash equivalents were primarily invested in overnight money market type accounts. Average interest rates were approximately 1.26 percent for the three months ended September 30, 2004 compared to approximately 0.92 percent during the same period in the prior year.

Income Tax Provision

We did not recognize an income tax benefit for the three months ended September 30, 2004 since we recorded a full valuation allowance against our deferred taxes in 2003.

Shares Outstanding

Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased to 40,875,000 from 40,583,000 due to the issuance of shares under our employee stock purchase plan and stock option plans. During the three months ended September 30, 2004, we repurchased, under our previously announced repurchase program, 75,500 shares of our Common Stock at an average price of $1.00 per share. We did not purchase any of our shares during the three months ended September 30, 2003.

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2003

Revenues

Consolidated net revenues were $27.3 million for the nine months ended September 30, 2004, a decrease of 26 percent from the same period in the prior year. Revenues before reimbursements decreased 28 percent to $24.0 million from $33.3 million. We believe that this decline in revenues was primarily due to decreased demand for our services and an increase in competitive pricing arising out of the continuing economic uncertainties, fundamental changes in the IT services industry, and a decline in corporate information technology capital expenditures as large and small companies reassessed their goals and budgets.

Costs and Expenses

Project personnel costs were $15.7 million for the nine months ended September 30, 2004, a decrease of 32 percent from the same period in the prior year. This decrease was largely attributable to staff reductions in response to our declining revenues and our ongoing efforts to keep headcount and costs in line with demand for our services, as described earlier in this item. Project personnel costs as a percentage of revenues before reimbursements decreased slightly to 65 percent for the nine months ended September 30, 2004 compared to 69 percent from the same period in the prior year primarily as a result of an increased use of subcontractors for certain specialized skills. Average hourly billing rates decreased 6 percent to $147. The decline in average hourly billing rates primarily reflects the increased competitive environment in the information technology consulting market as well as lower rates for post-go-live activities. Staff utilization was unchanged at 65 percent.

Other project expenses were $4.2 million for the nine months ended September 30, 2004, virtually unchanged from the same period in the prior year. While other project expenses were almost unchanged in total, headcount related costs, which includes travel, computer and communication costs, decreased by $0.7 million and employee termination costs decreased by $0.3 million. These reductions were offset by an increase in subcontractor costs of $1.0 million, due to the increased use of subcontractors for certain specialized skills. Other project expenses as a percentage of revenues before reimbursements increased to 17 percent for the nine months ended September 30, 2004 from 12 percent for the same period in the prior year mainly due to the increase in subcontractor costs.

Bad debt expense was almost zero for the nine months ended September 30, 2004 compared to an expense of $0.3 million for the same period in the prior year. This decrease was a result of recoveries of previously reserved receivables as well as fewer collection issues during the nine months ended September 30, 2004.

Management and administrative support costs decreased 6 percent to $10.7 million for the nine months ended September 30, 2004 from $11.4 million in the same period in the prior year. This decrease mainly resulted from a decrease in labor costs of $0.9 million, as we reduced headcount

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

as a result of our organizational changes during the quarter ended June 30, 2003, as well as a $0.2 million decrease in occupancy costs as a result of office reductions during the three months ended June 30, 2003. These decreases were partially offset by executive termination costs of $0.5 million.

During the nine months ended September 30, 2004, we reversed restructuring and other charges of $0.6 million. This amount consisted of $0.3 million related to certain lease terminations recorded during the three months ended June 30, 2003, $0.2 million related to the closure of our Latin American operations recorded in 2000 and $0.1 million related to certain lease terminations recorded in 1999. During the nine months ended September 30, 2003, we recorded $5.2 million in restructuring and other charges as a result of organizational changes announced in June 2003. These charges consisted of the severance costs of professional personnel and executives and office reductions as well as professional fees incurred in connection with terminated negotiations with a party that had expressed interest in acquiring us.

Incentive compensation expense was $0.8 million for the nine months ended September 30, 2004 compared with $0.3 million in the same period in the prior year. Incentive compensation as a percentage of revenues excluding reimbursements increased to 3 percent during the nine months ended September 30, 2004 compared to 1 percent in the same period in the prior year. If the Company and our employees meet their 2004 quarterly and annual quantitative and qualitative objectives, we expect to continue to accrue incentive compensation during the remainder of 2004.

Operating Loss

Consolidated operating loss was $6.8 million for the nine months ended September 30, 2004 compared to $11.2 million for the same period in the prior year. Our operating loss for 2004 included restructuring and other credits of $0.6 million and our operating loss for 2003 included restructuring and other charges of $5.2 million. The increase in the operating loss, excluding these credits and charges, mainly resulted from the decline in revenues.

Other Income

Other income for the nine months ended September 30, 2004 was $0.6 million compared to $0.7 million for the same period in the prior year. This decrease was a result of lower cash balances as well as lower interest rates year over year. Our cash and cash equivalents were primarily invested in overnight money market type accounts. Average interest rates were approximately 1.02 percent for the nine months ended September 30, 2004 compared to approximately 1.09 percent during the same period in the prior year.

Income Tax Provision

We did not recognize an income tax benefit for the nine months ended September 30, 2004 since we recorded a full valuation allowance against our deferred taxes in 2003.

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Shares Outstanding

Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased to 40,851,000 from 40,553,000 due to the issuance of shares under our employee stock purchase plan and stock option plans. We repurchased, under our previously announced repurchase program, 75,500 shares of our Common Stock at an average price of $1.00 per share and 277,000 shares of our Common Stock at an average price of $1.03 per share during the nine months ended September 30, 2004 and 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $7.0 million and $5.4 million for the nine months ended September 30, 2004 and 2003, respectively. Net cash used in operating activities for the nine months ended September 30, 2004 primarily related to the loss for the nine months ended September 30, 2004, net of the non-cash restructuring and other credits, as well as payments related to the June 30, 2003 restructuring and other charges and our annual corporate insurance payments. These restructuring credits and payments and corporate insurance payments resulted in a decrease in the restructuring accruals and an increase in other current assets, respectively.

Days sales outstanding increased by 1 day to 61 days at September 30, 2004 as compared to September 30, 2003.

Cash commitments relating to remaining restructuring and other charges are $0.7 million in severance costs and $0.2 million in office costs. The anticipated cash outflows for these restructuring and other charges are $0.2 million for the remaining quarter in 2004 and the remaining balance of $0.7 million in 2005. As a result of our acquisition of Proceed North America LLC in October 2004, we have cash commitments of $0.5 million for the remaining quarter of 2004 and $0.5 million in 2005. In connection with our pending merger agreement with Zamba Corporation, we expect to incur future fees and expenses associated with consummating the merger of approximately $3.0 million. Other estimated future cash commitments include various office facilities, property and office equipment under operating leases and other costs that expire at various dates. The minimum cash commitments under these non-cancelable operating leases and other obligations with terms in excess of one year, net of restructuring and other charges, are as follows: $0.1 million for the remaining quarter in 2004, $0.9 million in 2005, $0.8 million in 2006 and $0.4 million in 2007. In addition, we have an annual commitment for telecommunications of $0.1 million for 2005 and 2006. The Company has no guarantees of third party debt as of September 30, 2004 or other off-balance sheet commitments.

Net cash used in investing activities was $0.4 million for the nine months ended September 30, 2004 for computer purchases. We currently have no material commitments for capital expenditures.

Net cash provided by financing activities was almost zero for the nine months ended September

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

30, 2004 as proceeds from our employee stock purchase plan were almost offset by purchase of our Common Stock under our previously announced share repurchase program.

Until such time as we are able to generate positive cash flow, our primary sources of liquidity are our existing cash and cash equivalents. Our cash and cash equivalents at September 30, 2004 were $33.6 million. Depending on revenues and cash collections, we expect our cash and cash equivalent balance at December 31, 2004 to be approximately $27 million to $28.5 million. While we will continue to incur operating losses in 2004, we believe that our cash and cash equivalents will be sufficient to meet our cash requirements. Our investment policy is to maintain most of our cash and cash equivalents in highly liquid, large money market type funds. This policy exposes us to short-term interest rate fluctuations.

Operating results and liquidity, including our ability to raise additional capital if necessary, may be materially and adversely affected by continued low demand for the Company’s services. In addition, a number of other factors, including general economic conditions, technological changes, competition and other factors affecting the IT industry generally, and the suspension or cancellation of a large project could have an adverse effect on future results and liquidity. These aforementioned factors, as well as other factors, are more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 under Management’s Discussion and Analysis of Financial Condition and Results of Operations “Assumptions Underlying Certain Forward-Looking Statements and Factors that May Affect Future Results.”

We had a nonqualified deferred compensation plan. All Company executives (defined as those at the level of Vice President and above) were eligible to participate in this voluntary program, which permitted participants to defer receipt of a portion of their compensation. We held deferred amounts in a “rabbi trust” for the benefit of plan participants and investment earnings (or losses) were credited to the participants’ accounts based on investment allocation options selected by the participants. We did not guarantee these investments or earnings thereon. These investments remained assets of the Company and were available to the general creditors of the Company in the event of our insolvency. On February 10, 2004, the Company announced that the Compensation Committee of its Board of Directors decided to terminate the Company’s nonqualified executive deferred compensation plan. Because of dwindling participation, coupled with recent and proposed changes in tax and other legislation, the Compensation Committee decided the existence of the plan was no longer a significant factor in attracting and retaining key executive talent. Accordingly, the plan was terminated and all funds were distributed to the participants in late February 2004.

ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

This Form 10-Q contains or may contain certain forward-looking statements concerning our financial position, results of operations, cash flows, business strategy, budgets, projected costs and plans and objectives of management for future operations as well as other statements

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TECHNOLOGY SOLUTIONS COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions. These forward-looking statements involve significant risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that such expectations will prove correct and that actual results and developments may differ materially from those conveyed in such forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements in this Form 10-Q include, among others, our ability to successfully introduce new service offering, our ability to manage the pace of technological change including our ability to refine and add to our service offerings to adapt to technological changes, our ability to manage the current downturn in our business and in our industry and the economy in general, our ability to manage our current decreased revenue levels, our ability to attract new business and increase revenues, our ability to attract and retain employees, the decreasing level of options available for grants to attract new employees and to retain existing employees, our ability to accommodate a changing business environment, general business and economic conditions in our operating regions, market conditions and competitive factors, our dependence on a limited number of clients and the potential loss of significant clients, our ability to continue to attract new clients and sell additional work to existing clients, our ability to consummate the pending Zamba transaction and successfully integrate the Zamba business with our business, and our ability to manage costs and headcount relative to expected revenues, all as more fully described herein and in our Annual Report on Form 10-K for the year ended December 31, 2003 under Management’s Discussion and Analysis of Financial Condition and Results of Operations “Assumptions Underlying Certain Forward-Looking Statements and Factors that May Affect Future Results” and elsewhere from time to time in our other SEC reports. Such forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we would make additional updates or corrections with respect thereto or with respect to other forward-looking statements. Actual results may vary materially.

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TECHNOLOGY SOLUTIONS COMPANY

PART I. FINANCIAL INFORMATION
(Continued)

ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TSC is exposed to interest rate fluctuations. Changes in interest rates affect interest income and expense on cash and cash equivalents. The Company’s cash and cash equivalents are primarily invested in overnight money market type accounts. Average interest rates were approximately 1.02 percent during the nine months ended September 30, 2004 compared to approximately 1.09 percent during the same period in the prior year and approximately 1.26 percent during the three months ended September 30, 2004 compared to 0.92 percent during the same period in the prior year. Based on the cash and cash equivalents balances as of September 30, 2004 and 2003, a hypothetical 1.00 percent increase in interest rates would have resulted in approximately $0.1 million in additional net investment income during each of the quarters ended September 30, 2004 and 2003 and approximately $0.3 million during each of the nine months ended September 30, 2004 and 2003.

The financial statements of the Company’s non-U.S. subsidiaries are remeasured into U.S. dollars using the local currency as the functional currency. The market risk associated with the foreign currency exchange rates is not material in relation to the Company’s consolidated financial position, results of operations or cash flows. The Company does not have any significant accounts payable, account receivable or commitments in a currency other than that of the reporting unit’s functional currency. The Company does not utilize derivative financial instruments to manage the exposure in non-U.S. operations.

ITEM 4-CONTROLS AND PROCEDURES

The management of the Company, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 (b) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that all material information relating to the Company that is required to be included in the reports that the Company files with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no changes in the Company’s internal controls over financial reporting that were identified during the evaluation that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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TECHNOLOGY SOLUTIONS COMPANY

PART II. OTHER INFORMATION

ITEM 2-UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended September 30, 2004, the Company purchased 75,500 shares of its common stock for approximately $76, under a 11,525,327 share repurchase program approved by the Board of Directors during September 2000 (3,000,000 shares), August 2001 (2,000,000 shares), April 2002 (3,930,327 shares) and February 2003 (2,595,000 shares). All repurchases were made in the open market, subject to market conditions and trading restrictions. There is no expiration date on the current authorization and, during the period covered by the table, no determination was made by the Company to suspend or cancel purchases under the program. The timing and size of any future stock repurchases are subject to market conditions, stock prices, cash position and other cash requirements.

Issuer Purchases of Equity Securities

ITEM 6-EXHIBITS

     (a) Exhibits

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TECHNOLOGY SOLUTIONS COMPANY

PART II. OTHER INFORMATION — (Continued)

All other items in Part II are either not applicable to the Company during the quarter ended September 30, 2004, the answer is negative, or a response has been previously reported and an additional report of the information is not required, pursuant to the instructions to Part II.

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SIGNATURE

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

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