TECHNOLOGY SOLUTIONS COMPANY
FORM 10-K
TABLE OF CONTENTS

Technology Solutions Company

PART I.

ITEM 1. BUSINESS

Introduction

Delivering business benefits through the application of information technology (“IT”), Technology Solutions Company (“TSC”) is a consulting company committed to helping clients in Manufacturing, Healthcare, Consumer and Retail, and Financial Services. TSC focuses on IT Strategy, Planning and Process Transformation; Enterprise Application Services; Customer Relationship Management; Business Technology; Extended Support; Compliance; and Process Adaptation & Training.

As used herein, the terms “TSC” or the “Company,” unless the context otherwise clearly requires, refers to Technology Solutions Company and its subsidiaries. TSC trades on the Nasdaq Stock Market^® under the symbol “TSCC.” TSC is incorporated under the laws of the state of Delaware and operates within one reportable business segment. This report discusses the twelve months ended December 31, 2004.

Since its inception in May 1988, the Company has performed over 2,400 successful projects with more than 890 clients (including 22 of the Dow 30 and 64 of the Fortune 100).

The Company’s principal executive office is located in Chicago, Illinois, with additional offices in Atlanta, Georgia; New York, New York; Minneapolis, Minnesota; and Herndon, Virginia.

This 10-K Report includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to economic, business, competitive, market, regulatory and other factors. For a discussion of certain of the assumptions and risk factors underlying any forward-looking statements contained herein and which could otherwise affect our business, refer to the section entitled “Assumptions Underlying Certain Forward-Looking Statements and Factors That May Affect Future Results” contained in Item 7 hereof.

Overview

Technology Solutions Company provides a full range of IT/business consulting services. From IT strategy and planning to process transformation and systems integration, TSC consultants work collaboratively with each client. TSC is committed to thought leadership, innovation and execution, guiding clients through the design and deployment of business, process and technology strategies. This commitment is demonstrated in the knowledge and leadership TSC brings to every client engagement resulting in consistently high client satisfaction ratings and repeat or add-on work.

Services and Offerings

Building on its strong heritage in Manufacturing and systems integration, in mid 2004 TSC continued transforming its business model by increasing focus on and strengthening its vertical industry and competency groups. Two new industry groups, Healthcare and Consumer & Retail, were established in the second half of 2004. These groups, along with Financial Services and Manufacturing, comprise the firm’s four industry groups. (See Figure 1)

Figure 1

Complementing the industry expertise is the firm’s emphasis on core competencies including IT Strategy, Planning and Process Transformation; Enterprise Applications Service; Customer Relationship Management (“CRM”); Business Technology; Extended Support; Compliance; Process Adaptation & Training; and SAP ® Packaged Services as well as services to help address complex industry and business concerns. (See Figure 2)

Figure 2

TSC’s industry groups as well as the core competencies are led by senior-level executive consultants (client officers) who provide insightful and thorough understanding of either the business and technology issues in the four key industries or the functional and technical issues within each competency.

TSC’s services range across all phases of a project lifecycle within the four core industries. (See figure 3)

Figure 3

Acquisitions

As part of TSC’s transformation and growth strategy, the firm acquired two companies in 2004. On December 31, 2004, the Company completed the acquisition of Zamba Corporation, which gives the firm a stronger position in the customer relationship management market. On October 5, 2004, TSC acquired the assets of Proceed North America LLC, the primary implementation partner for SAP ^® Packaged Services in the United States.

Clients

TSC’s business is primarily focused on the commercial market. TSC primarily serves clients based in the United States, but also supports global deployments and some international clients. The Company’s typical clients are firms with between $500 million and $3 billion in annual revenue or similar sized divisions of larger companies. During 2004, TSC performed project work for 90 corporations, including 7 of the Fortune 100 companies. During 2004, our top client represented 10 percent (United Water Inc.) of revenues before reimbursements. During 2003, the top two clients represented 15 percent (Exxon Mobil Corp.) and 11 percent (Caterpillar Inc.) of revenues before reimbursements, respectively. During 2002, the top three clients represented 21 percent (Exxon Mobil Corp.), 16 percent (Caterpillar Inc.) and 10 percent (Pfizer Inc.) of revenues before reimbursements, respectively.

Competition

The IT/business consulting market is highly competitive and continually changing due to shifting business requirements and evolving technology. The Company’s revenue is primarily derived from Fortune 1000 companies and their divisions, and there is increasing competition for these consulting engagements.

TSC’s competitors include international, national and regional consulting and implementation organizations, contract programming companies (including offshore groups), and the professional services divisions of application software firms. The firm also competes with clients’ internal IT resources. Some competitors have significantly greater financial, technical and marketing resources as well as greater name recognition.

Competition has intensified in recent years as a result of both economic and market pressures. Clients continue to try to minimize costs, negotiate lower prices, or perform IT services in-house. In addition, the reduced demand for IT services has led to greater price competition within the industry for the available work.

TSC believes the principal competitive factors in the consulting industry include:

	•	Industry and technology expertise and the ability to deliver innovative service offerings
	•	Quality of services and solutions, as well as the skills to achieve results on a timely basis and to add value to the client’s business
	•	Long-term client relationships, as well as a reputation for delivering successful projects

Competitive Differentiation

TSC believes that it differentiates itself from its competitors in four key areas:

	•	Organizational structure: TSC’s current organizational matrix of four industry verticals supported by core competencies is designed to bring out the best and most innovative thinking for TSC clients. Industry experts have unique and differentiated points of view on compelling business and technology issues. They drive industry-specific content while competencies provide critical functional and technical expertise in current and emerging technologies and solution areas.
	•	Distinguishable intellectual capital, innovation and execution: TSC has a tradition of turning leading-edge ideas into real-world business strategies and processes for its clients. The firm’s industry and competency experts drive the development of innovative services to enhance clients’ business and IT operations. TSC’s consulting staff utilizes continuous peer knowledge exchange to share best practices from current projects and from strategic relationships with software and technology providers. This intellectual capital forms the foundation of TSC’s value-add services and methodologies.
	•	Client officer-driven business model: Senior client officers with deep expertise in functional business and technology fields facilitate the growth of strong client relationships across TSC’s industries and competencies. Client officers are responsible for delivery excellence, client relationships and satisfaction, revenues, utilization, project

		margins, days sales outstanding and human capital, including recruiting and career development.
	•	Highly skilled and results-driven engagement teams: TSC has produced measurable benefits to its clients over the years through seasoned and experienced consulting professionals (with an average of 19 years experience); the use of proprietary implementation tools; the ability to apply new technologies and innovative business solutions; a flat project staffing model of more experienced personnel and less personnel per project; and the quality of its work product.

Business Development

TSC employs several primary revenue generation approaches — through relationships cultivated by its client officers; through selling efforts of its business development professionals; through specialty services that address targeted industry and business concerns; and through intellectual capital and lead-generating marketing programs.

Strategic Relationships

The Company has strategic relationships with software and technology providers that complement and support its service offerings, including SAP ^® and Oracle/PeopleSoft. TSC enters these relationships to provide integrated, high-value solutions to clients and to leverage joint business development opportunities. Many of these strategic relationships are aligned with industries and competencies to enhance offerings. TSC’s relationships are non-exclusive, and TSC remains independent from these providers giving clients unbiased counsel and a broad spectrum of services to meet their business needs.

International

TSC did not have any international operations for the year ended December 31, 2004 and had limited international operations, which represented one percent of revenues, for the year ended December 31, 2003 (see Note 16 in “Notes to Consolidated Financial Statements”). The international operations during 2003 were in Europe. TSC had no international projects in Europe as of December 31, 2004 and, as a result, there was no international staffing as of December 31, 2004. For discussion of certain risks related to the Company’s International Operations, see “Risks of Conducting International Operations” under “Assumptions Underlying Certain Forward-Looking Statements and Factors That May Affect Future Results.”

Personnel

As of December 31, 2004, TSC had a total professional staff of 180 (excluding Infrastructure). The following table summarizes, as of December 31, 2004, the experience levels of TSC’s professional staff (excluding sales and marketing personnel).

Infrastructure

As of December 31, 2004, TSC had a staff of 22 individuals who comprised the corporate infrastructure support function. The services provided by infrastructure include: senior corporate management; 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.

Intellectual Property Rights

Most of the Company’s clients require that the Company grant to them proprietary and intellectual property rights with respect to the work product resulting from the Company’s performance of services, including the intellectual property rights to any custom software developed by the Company for them. Each grant of proprietary and intellectual property rights limits the Company’s ability to reuse work product with other clients. In a limited number of such situations, the Company has obtained, and in the future may attempt to obtain, an ownership interest or a license from its clients to permit the Company to reuse or resell such work product. These arrangements may be nonexclusive or exclusive, and licensors to the Company may retain the right to sell products and services that compete with those of the Company. There can be no assurance, however, that the Company will be able to negotiate such licenses in the future.

The Company also has developed certain foundation and application software tools, methodologies and products that are owned by the Company and licensed to its clients. During 2004, less than one percent of revenues related to the licensing of intellectual property rights. The Company regards these software tools, methodologies and products as proprietary and intends to protect its rights, where appropriate. However, there can be no assurance that any steps taken by the Company will be adequate to deter misappropriation of its proprietary rights or independent third party development of functionally equivalent products.

In addition, the Company’s success is related to its specialized expertise and methodologies. To protect its proprietary information, the Company relies upon a combination of trade secret and common law, employee nondisclosure policies and third party confidentiality agreements. However, there can be no assurance that any of these steps taken by the Company will be adequate to deter misappropriation of its specialized expertise and methodologies.

Although the Company believes that its services and products do not infringe on the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted against the Company in the future.

Executive Officers of the Registrant

The executive officers of TSC are as follows:

Stephen B. Oresman, age 72, has been a Director of the Company since July 1988 and Chairman of the Board since May 2004. He served as Chief Executive Officer and Chairman of the Executive Committee from June 2003 until May 2004. Since 1990, he has served as President of Saltash, Ltd., a management consulting firm. He previously served as Senior Vice President of Booz, Allen & Hamilton, Inc. and Chairman of Booz, Allen & Hamilton International, parent and subsidiary consulting firms. He is also a Director of Cleveland-Cliffs Inc. and iStar Financial Inc.

Michael R. Gorsage, age 53, has been President and Chief Executive Officer and a Director of the Company since May 2004. Mr. Gorsage has over 30 years of business experience, including 20 years of experience in IT consulting. Prior to joining TSC, he served as Global Vice President and Managing Director for the Customer Relationship and Business Intelligence Unit of Electronic Data Systems Corp (EDS) from February 2002 until April 2004. Prior to his tenure at EDS, Mr. Gorsage served as Vice President and Global Managing Director of the Customer Solutions Practice of A.T. Kearney, Inc., a subsidiary of EDS from September 2000 until February 2002. From May 1991 until August 2000, Mr. Gorsage served as Vice President and Managing Director of the Advanced Technologies Practice at First Consulting Group. He is also a Director of Qsent, Inc., a private company headquartered in Portland, Oregon.

Philip J. Downey, age 53, has been Vice President — General Counsel and Corporate Secretary since October 1, 2004. Mr. Downey joined TSC in December 1997 as Director of Taxes and was promoted to Vice President Tax and Tax Counsel in January 2000. Prior to joining TSC, he had over 24 years of tax and law experience, including Chief Operating Officer at Empire Carpet, Director of International Taxes for Quaker Oats, and five years with the Internal Revenue Service. He is a member of the Illinois Bar and a Certified Public Accountant.

Sandor Grosz, age 49, has been Vice President and Chief Financial Officer of Technology Solutions Company since October 1, 2004. Mr. Grosz joined TSC in March 1997 as International Controller and was promoted to the role of Corporate Controller in December 1997. From 1988 to 1997, he was Vice President of Finance for Management Consulting Group PLC, an international consulting firm. His prior experience includes public accounting and litigation support consulting, most recently as a Senior Audit Manager with KPMG Peat Marwick. He is a Certified Public Accountant.

Available Information

The Company maintains an Internet web site at http://www.techsol.com that includes a hypertext link to the Securities and Exchange Commission’s (SEC) web site where the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time that they are filed with or furnished to the SEC.

ITEM 2. PROPERTIES

TSC’s principal executive office is located at 205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601. TSC’s lease on these premises expires July 31, 2007. TSC also leases facilities in Atlanta, Georgia; New York, New York; Minneapolis, Minnesota; and Herndon, Virginia. TSC believes that these facilities are adequate for its current business needs and that it will be able to obtain suitable space as needed.

ITEM 3. LEGAL PROCEEDINGS

The Company is party to lawsuits arising in the normal course of its business. In the opinion of management, based upon presently available information relating to all such matters, the ultimate costs resulting from these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 2004.

Technology Solutions Company

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock is traded on The Nasdaq Stock Market ^® under the symbol “TSCC.” As of March 11, 2005, there were 387 holders of record of the Company’s Common Stock. That number does not include beneficial owners of Common Stock whose shares are held in the name of banks, brokers, nominees or other fiduciaries.

The following table sets forth the range of high and low trade prices on The Nasdaq Stock Market ^® for the Company’s Common Stock for each calendar quarter in the years ended December 31, 2004 and 2003.

On March 11, 2005, the last reported sale price on The Nasdaq Stock Market ^® for the Company’s Common Stock was $0.99.

The market price for the Company’s Common Stock may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors, technological innovation by the Company, its competitors or other vendors, quarterly variations in the Company’s operating results or the operating results of the Company’s competitors, general conditions in the Company’s and its customers’ markets, changes in the earnings estimates by analysts or reported results that vary materially from such estimates. In addition, from time to time the stock market experiences significant price fluctuations that affect the market prices of equity securities of many companies and that often are unrelated to the operating performance of such companies. These broad market fluctuations may materially and adversely affect the market price of the Company’s Common Stock. Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted

against such a company and its officers and directors. Any such litigation against the Company could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on the Company’s business, financial condition, operating results and cash flows.

The Company has never paid cash dividends on its Common Stock and currently intends to retain all earnings for use in the expansion of its business and other corporate purposes. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data that is derived from the Company’s audited financial statements. The selected financial data should be read in conjunction with the Company’s audited statements of operations for the years ended December 31, 2004, 2003, and 2002 and the audited balance sheets as of December 31, 2004 and 2003, including, in each case, the notes thereto, as well as, Management’s Discussion and Analysis of Financial Condition and Results of Operations, all of which are included elsewhere in this filing. All amounts are in thousands, except per share data.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

During 2004 we acquired two businesses in separate transactions, Zamba Corporation (“Zamba”) and Proceed North America LLC (“Proceed”). On December 31, 2004 we completed the acquisition of Zamba, which gives us a stronger position in the customer relationship management market. Under the terms of the transaction Zamba stockholders received 0.15 shares of our Common Stock for each share of Zamba Common Stock effective December 31, 2004. Accordingly statements regarding our future performance and our balance sheet as of December 31, 2004 are for TSC and Zamba combined; however, the operating results for 2004 do not include the results for Zamba.

On October 5, 2004, we entered into an asset purchase agreement with Proceed under which we acquired Proceed’s business. Proceed is the primary implementation partner for SAP ^® Packaged Services in the US. The operating results of Proceed are included in our results from the date of acquisition.

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 maybe improving, there is no assurance that 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.

In the second half of 2003, we began to refocus and rebuild our business by investing in a range of specialty services in order to differentiate ourselves from our competition. In mid 2004, we continued this rebuilding process and transformation of our business model by increasing focus on and strengthening both our vertical industry and competency groups. As part of this transformation, we hired new client officers during the second half of 2004 to provide additional expertise in these industries and functional capabilities. In addition, we made two acquisitions, as discussed above. We continue to look at appropriate acquisition opportunities that meet our business model. As a result of these changes, as well as the addition of several client officers, our revenues in the fourth quarter of 2004 increased 6 percent compared to the third quarter of 2004. We expect quarterly revenues in the first quarter of 2005 to improve as compared to the fourth quarter of 2004, partially as a result of our acquisition of Zamba. We incurred operating losses during 2004 and 2003 and we expect to incur an operating loss during 2005 as we continue our efforts to transform and rebuild our business.

We believe 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 services. The availability of offshore technical expertise has

and will continue to have an impact on the IT 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 have led many corporations to reassess their IT goals and budgets. This, combined with the lack of significant new technology to stimulate spending, had a further dampening impact on demand for our services. However, we believe that many companies have very old systems and technology and “real time” business decision making capabilities 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 consist of revenue for performing consulting services; and 2) 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

Other Project Expenses

Reimbursable Expenses

Bad Debt Expense

Management and Administrative Support

Incentive Compensation

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

Allowance for Doubtful Receivables

Accounting for Income Taxes

assets and liabilities. Significant management judgment 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.

Valuation of Stock Options and Warrants

In connection with our acquisition of Zamba, we used the Black-Scholes option-pricing model for the valuation of the options and warrants issued in connection with this acquisition. The Black-Scholes option-pricing model requires assumptions in regards to the expected lives of the options and warrants, expected volatility of our stock price and risk-free interest rates. As we have not and do not anticipate paying dividends, the dividend yield is assumed to be zero.

Goodwill and Intangible Assets

SFAS No. 142 requires that goodwill be evaluated for impairment annually or if an event occurs or if circumstances change that may reduce the fair value of the acquisition below its book value. The impairment test is conducted (based on the revenues derived from the acquired entity) utilizing a “fair value” methodology. We evaluate the fair value of our acquisitions utilizing various valuation techniques including discounted cash flow analysis. This implied fair value is compared to the carrying amount of the goodwill for the individual acquisition. If the fair value is less, we would then recognize an impairment loss. In addition, we evaluate the intangible assets with definite lives to determine whether adjustment to these amounts or estimated useful lives are required based on current events and circumstances.

2004 COMPARED WITH 2003

Revenues

During 2004, our top client accounted for 10 percent of revenues before reimbursements (United Water Inc.). During 2003, the top two clients accounted for 26 percent of revenues before reimbursements (Exxon Mobil Corp. – 15 percent and Caterpillar Inc. – 11 percent). We added 49 new clients and 128 new projects during 2004 compared to 42 new clients and 116 new projects in 2003.

Costs and Expenses

Other project expenses were $6.3 million 2004, an increase of 22 percent from 2003. This increase was a result of additional subcontractor costs of $1.9 million, due to the increased use of subcontractors for certain specialized skills. Offsetting this increase was a reduction in headcount related costs of $0.4 million, including travel and computer costs, and employee termination costs of $0.4 million. Other project expenses as a percentage of revenues before reimbursements increased to 19 percent for 2004 from 13 percent for 2003 mainly due to the increase in subcontractor costs.

Bad debt expense was a slight credit for 2004 compared to an expense of $1.5 million for 2003. This improvement was a result of recoveries of previously reserved receivables as well as fewer collection issues during 2004.

Management and administrative support costs increased slightly to $14.7 million for 2004 from $14.5 million for 2003. This increase mainly resulted from executive termination costs of $0.5 million. This increase was offset by a decrease in labor costs of $0.3 million, as we reduced headcount as a result of our organizational changes during the quarter ended June 30, 2003. Despite the reduction in labor costs year over year, we anticipate an increase in labor costs in 2005 as a result of additional client officers hired in the second half of 2004. As we expand our offerings, we may incur costs prior to the corresponding revenues being generated.

During 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 quarter 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 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. As of December 31, 2004, there was an accrual balance relating to the 2003 charge of $0.7 million. We expect to utilize the balance by the third quarter of 2005.

Incentive compensation expense was $0.8 million for 2004. No incentive compensation was recorded for 2003. If the Company and our employees meet their 2005 quarterly and annual quantitative and qualitative objectives, we expect to accrue incentive compensation during 2005.

Operating Loss

Other Income

Income Tax Provision

Shares Outstanding

2003 COMPARED WITH 2002

Revenues

During 2003, the top two clients accounted for 26 percent of revenues before reimbursements (Exxon Mobil Corp. – 15 percent and Caterpillar Inc. – 11 percent). During 2002, the top three clients accounted for 47 percent of revenues before reimbursements (Exxon Mobil Corp. – 21 percent, Caterpillar Inc. – 16 percent and Pfizer Inc. – 10 percent). We added 42 new clients and 116 new projects during 2003 compared to 42 new clients and 129 new projects in 2002.

Costs and Expenses

Other project expenses were $5.1 million in 2003, a decrease of 57 percent from 2002. The decrease in other project expenses consisted of the following: a decrease in business development costs of $1.9 million, such as, travel, certain marketing costs and practice area development costs; a decrease in employee termination costs of $1.8 million; a decrease in subcontractor costs of $1.5 million due to the decline in revenues and the corresponding limited use of subcontractors; a decrease in other costs of $1.2 million, primarily selling and sales related expenses; and a decrease in headcount related costs of $0.5 million, which included training, computer and communication costs. Other project expenses as a percentage of revenues before reimbursements decreased to 13 percent for 2003 from 15 percent in 2002 primarily as a result of the aforementioned decrease in subcontractor costs and employee termination costs.

Bad debt expense was $1.5 million for 2003 compared to $1.6 million for 2002. Our bad debt expense for 2003 consisted of a $1.7 million charge for a full valuation reserve of a long-term receivable that is currently in litigation, offset by a $0.2 million credit as a result of recoveries of previously reserved receivables as well as fewer collection issues in 2003.

Management and administrative support costs decreased by 28 percent to $14.5 million in 2003 from $20.1 million in 2002. This decrease mainly resulted from a decrease in labor costs of $2.9 million as we reduced headcount as a result of our cost-management initiatives and our

organizational changes announced in June 2003 (as discussed in the following paragraph); and a decrease in office and occupancy related costs of $1.6 million due to office closures and reduction in office space as part of our continued cost controls. In addition, various other costs, such as travel and marketing, decreased $1.1 million due to reduced headcount and our continued cost controls.

In the second quarter of 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. As of December 31, 2003, there was an accrual balance of $2.1 million. The following table provides the components of this charge.

During 2002, we reversed restructuring and other charges of $0.3 million. This amount consisted of $0.2 million from severance related costs recorded in 2001 and $0.1 million related to certain lease terminations recorded in 1999.

There was no incentive compensation expense in 2003 compared with $3.8 million in 2002. During the three months ended December 31, 2003, we reversed $0.3 million in incentive compensation expense that was recorded during the three months ended March 31, 2003, as we did not achieve our full year performance targets, goals and objectives for 2003.

Operating Loss/Income

Other Income

Income Tax Provision

Shares Outstanding

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $9.4 million and $8.0 million for 2004 and 2003, respectively. Net cash used in operating activities for 2004 primarily related to the loss for the year, net of the non-cash restructuring and other credits, as well as payments related to the June 30, 2003 restructuring and other charges, partially offset by improved accounts receivable collections.

Days sales outstanding improved by 9 days to 51 days at December 31, 2004 as compared to 60 days at December 31, 2003.

In connection with our acquisition of Zamba, we expect to incur future fees, expenses and other cash outlays associated with consummating the merger of approximately $1.8 million. Included in this amount is Zamba’s line of credit which was recorded on our balance sheet as part of our acquisition of Zamba. This line of credit was subsequently paid-off during January 2005. Other estimated future cash commitments include various office facilities, property and office equipment under operating leases and other costs that expire at various dates. In addition, we have an annual commitment for telecommunications. The Company has no guarantees of third party debt or any other off-balance sheet commitments as of December 31, 2004. A summary of our contractual obligations at December 31, 2004 is as follows:

Net cash used in investing activities was $1.7 million during 2004. Capital expenditures of $0.6 million mainly represented computer purchases. We currently have no material commitments for capital expenditures. In addition in connection with the acquisitions during 2004, we made cash payments of $0.5 million for Proceed and a net amount of $0.6 million for Zamba.

Net cash provided by financing activities was $0.1 million for 2004. During 2004 we purchased 75,500 shares of our Common Stock under our share repurchase program for $0.1 million and received $0.2 million from the exercise of stock options and purchases under the employee stock purchase plan.

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 December 31, 2004 were $30.0 million. Depending on revenues and cash collections, we expect our cash and cash equivalent balance at March 31, 2005 to be approximately $23.5 million to $25 million. While we will continue to incur operating losses in the first half of 2005, 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 discussed further in this section under “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. The plan was terminated and all funds were distributed to the participants in February 2004.

IMPACT OF INFLATION AND BACKLOG

Inflation should not have a significant impact on our operating results to the extent we are able to raise our hourly billing rates commensurate with our staff compensation rates. However, if we are unable to raise our hourly billing rates, it could have a material adverse effect on our business, operating results and financial condition. Because the majority of our contracts may be terminated on relatively short notice, we do not consider backlog to be meaningful.

NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision to SFAS No. 123. SFAS No. 123R will, with certain exceptions, require entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements. The measurements of that cost will be based on the fair value of the equity or liability instruments issued. SFAS No. 123R will be effective for us starting with the quarter ended September 30, 2005. While we are currently evaluating the impact of the adoption of SFAS No. 123R, we believe the impact will be material to our results of operations based on our current disclosures under of SFAS No. 123.

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

This Form 10-K contains or may contain 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. Forward-looking statements may be preceded by, followed by or include the words “may,” “will,” “should,” “could,” “would,” “potential,” “possible,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “hopes” or similar expressions.

These forward-looking statements involve significant risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that the expectations will prove correct and that actual results and developments may differ materially from those conveyed in the forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

Forward-looking statements are not guarantees of performance. Forward-looking statements speak only as of the date on which they are made and, except as may be otherwise required by law, we do not undertake any obligation to update any forward-looking statement to reflect subsequent events or circumstances. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. The outcomes expressed or implied in these forward-looking statements could be affected by many important factors.

Factors which could cause our actual financial and other results to differ materially from any results that we might project, forecast, estimate or budget in the forward-looking statements include, but are not limited to, the following:

Rapid Technological Change

Need for Increased Revenues

Among the strategic initiatives that we have taken to address the need for increased revenues has been the introduction of new service offerings. The acquisition of Zamba is part of that strategy, as are the introductions of our healthcare and consumer and retail service offerings. No assurance can be given that these or any future service offerings will gain acceptance with our existing clients or any prospective clients. The absence of successful new service offerings or substantial expansion of existing service lines will have an adverse impact on our future revenues.

In addition, in recent years no major technological developments have been introduced that could replace the applications with respect to which we currently provide services or render some of our existing expertise obsolete. If such developments occur there can be no assurance that we will have the technological expertise to provide services covering such developments.

Our revenues in the fourth quarter of 2004 increased 6 percent compared to the third quarter of 2004. We expect quarterly revenues in the first quarter of 2005 to improve as compared to the fourth quarter of 2004, partially as a result of our acquisition of Zamba. However, we expect to incur an operating loss during 2005 as we continue our efforts to refocus and rebuild our business. If we are unable to continue to increase revenues, manage growth and projects effectively and regain profitability, we may realize a material adverse effect in the quality of our

services and products, our ability to retain key personnel and our business, financial condition and results of operations.

Restructuring Initiatives

Availability of Cash Resources

Utilization and Charge Rates

The rates we are able to recover for our services are affected by a number of factors, including:

•	the demand for our services compared to the supply of consultants available to deliver the services;
•	our clients’ perceptions of our ability to add value through our services;
•	the sensitivity of our clients to changes in prices for our services;
•	our reputation for delivering quality work in a timely manner;
•	the introduction of new in-demand services or products by us or our competitors;
•	our competitors’ pricing policies; and
•	the use of globally sourced, lower-cost service delivery capabilities by our competitors and our clients.

We face continuous pressure from several directions on the rates charged to clients. Many of our competitors, including larger consulting firms with greater financial and personnel resources, smaller consulting firms with lower cost structures and large consulting firms in offshore locations such as India that have access to pools of technical consultants at lower costs than consultants based in the United States may be willing to provide the services at a lower incremental cost than us.

Utilization rates are affected by a number of factors, including:

•	our ability to transition employees from completed projects to new engagements;
•	our ability to enter into long-term contractual relationships with clients;
•	our ability to forecast demand for our services and thereby maintain an appropriate headcount;
•	our ability to increase the ratio of billable employees to non-billable employees; and
•	our ability to manage attrition.

We must balance our supply of consultants skilled in a particular service with the demand for that service. If the combined utilization rate of these consultants is very high it may be difficult to add new clients for these services. Conversely, if the combined utilization rate is too low the profitability of our business will be adversely impacted.

Any negative changes to our retention of consultants, utilization rates or billable rates could materially adversely affect our business, financial condition and results of operations.

Management of Change in Demand

Our expense levels are based, in part, on expectations of future revenues. In addition, a significant percentage of our operating expenses, particularly rent and depreciation, are fixed. Accordingly, an unanticipated decrease in the number or average size of, or an unanticipated delay in the scheduling for, projects, or other decrease in revenues, could materially and adversely affect our operating results and otherwise adversely affect our operations.

An unanticipated termination or decrease in the size or scope of a major project, a client’s decision not to proceed with a project as anticipated or the completion during a quarter of a major client project could diminish employee utilization and have a material adverse effect on our

business, financial condition and results of operations. Revenues and earnings may also fluctuate from quarter to quarter because of such factors as:

•	the contractual terms and timing of completion of projects, including achievement of certain business results;
•	any delays incurred in connection with projects;
•	the adequacy of provisions for losses and bad debts;
•	the accuracy of our estimates of resources required to complete ongoing projects
•	the loss of key highly skilled personnel necessary to complete projects;
•	increases in expenditures related to growing the business, e.g., acquisitions of people and technology; and
•	general economic conditions.

Ability to Attract and Retain Employees

In addition, the number of stock options available for grant to new and existing employees has decreased in recent periods due to grants made to date. The reduced number of available options could have an adverse impact on our ability to attract and retain the necessary professional personnel. The approval of our stockholders will be required to increase the number of available options. No assurance can be given that such approval would be granted if requested or that the number of options could otherwise be increased.

Although we expect to continue to attract sufficient numbers of highly skilled employees and to retain many of our existing project managers and other senior personnel for the foreseeable future, there can be no assurance that we will be able to do so. Failure to attract and retain key personnel could have a material adverse effect upon our business, operating results and financial condition and inhibit our ability to regain revenues.

Dependence on Key Personnel

Entry Into New Lines of Business

Growth by Acquisition

Litigation

Because of the increase in litigation risk associated with the technology markets, both directors and officers and errors and omissions insurance rates have increased significantly in the past several years. We may be subject to further rate increases for both types of insurance.

Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company and its officers and directors. Any such litigation against us could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

Quarterly Results May Fluctuate
Our results have varied significantly from quarter to quarter in the past, due to a variety of factors, many of which are beyond our control. These factors include, but are not limited to:

•	changing conditions in the information technology market and in the U.S. and global economies in general;
•	the number and timing of new clients and new projects for existing clients;
•	our ability to replace completed projects with new projects in a timely fashion;
•	differences in the number of billing days and/or holidays between quarters;
•	the number of vacation days and sick days taken by our employees in a particular quarter;
•	the utilization of our employees, and our ability to match available employee resources with client service requirements;
•	introductions or announcements of new service offerings;
•	changes in accounting rules, such as expensing employee stock option grants;
•	our ability to integrate and operate the Zamba business;
•	increased competition from low-priced overseas technology consultants; and
•	the costs related to meeting new regulations.

The failure to meet the expectations of the investment community may cause our stock price to decline, possibly substantially. A significant stock price decline could result in litigation, which could be costly, lengthy and divert management’s attention and resources from business operations.

Client Concentration Risks
We derive a significant portion of our revenue from a limited number of clients. During the quarter ended December 31, 2004, our top two clients and top five clients accounted for 17 percent and 34 percent of our revenues before reimbursements, respectively. For 2004, our top two clients accounted for 19 percent of our revenues before reimbursements and our top five clients accounted for 38 percent of our revenues before reimbursements. In 2003, our top two clients accounted for 26 percent of our revenues before reimbursements and our top five clients accounted for 43 percent of our revenues before reimbursements. Although our large clients may vary from time to time, our revenues and our results of operations and financial position could be materially adversely impacted if we were to lose one or more of these clients or if we were unable to collect a large receivable due from one of these clients. Most of our engagements are terminable on 30 to 90 days’ notice without penalty to the client. An unanticipated termination of a major project could result in the loss of substantial anticipated revenues and could require us to maintain or terminate a significant number of underutilized employees, resulting in a higher number of unassigned people and/or higher severance expenses.

Performance of Services
Many of our projects involve technology applications or systems that are critical to the operations of a client’s business and handle very large volumes of transactions. Failure to deliver applications or systems to clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance, could result in substantial claims from clients. While we take precautionary actions to create redundancy and back-up systems, any such failures could result in claims by clients for substantial damages. Although we attempt to limit the amount and type of our contractual liability for defects in the

applications, systems or services provided, and carry errors and omission insurance coverage, we cannot assure that these limitations and insurance coverage will be applicable and enforceable in all cases. Even if these limitations and insurance coverage are found to be applicable and enforceable, our liability to our clients for these types of claims could be material in amount and could affect our business, financial condition and results of operations.

Project Risks
Because of the project-based nature of our work and the fact that many of the projects we undertake are large, there is a risk of a material adverse impact on operating results if there is an unanticipated suspension or cancellation of a large project or a client refuses or fails to pay fees and expenses when due. A project cancellation or suspension or a refusal or failure to pay can be based on any number of causes, many of which are beyond our control. These include financial difficulties of a client; a change in client priorities, client management or client strategies; and a change in client ownership. The suspension or cancellation of a project or a failure or refusal to pay fees and expenses when due could result in a decrease or adjustment in revenues, the need to reassign staff and damage to our reputation.

Because many of our projects are high profile, mission critical projects for major clients, a failure or inability to meet a client’s expectations for the amounts budgeted, timing and deliverables for the projects we undertake could damage our reputation and affect our ability to attract new business.

Additionally, certain clients require payment incentives related to factors such as costs incurred, benefits produced, goals attained and adherence to schedule. In these contracts, payment of all or a portion of the fees owing to us will be contingent upon meeting revenue-enhancement, cost-saving or other contractually defined goals which are often complex and may often be dependent in some measure on the client’s actual levels of business activity. The insistence by our clients to include in contracts incentives related to additional revenues generated, costs incurred, benefits produced or adherence to schedule or other benchmarks could increase the variability of revenues and margins earned by us on such contracts.

Dependence on Third Party Products
Third party products and services are integral to the success of many of our projects. To the extent that third parties do not deliver effective products and services on a timely basis, our project results could be negatively impacted. Although we attempt to limit this risk in our engagement arrangements with clients and maintain errors and omissions insurance, the failure of a project could expose us to significant incremental financial exposure.

Competition
The systems consulting and implementation market includes a large number of participants, is subject to rapid changes and is highly competitive. We compete with and face potential competition from a number of companies that have significantly greater financial, technical and marketing resources and greater name recognition than do we. We also compete with globally sourced, lower-cost service providers as well as smaller service providers with specific, more narrowly focused service offerings. Our clients primarily consist of Fortune 1000 and other large corporations and there are an increasing number of professional services firms seeking systems consulting and implementation engagements from that client base. We believe that our ability to

compete depends in part on a number of factors outside our control, including the ability of our competitors to hire, retain and motivate project managers and staff, the long-term relationships that our major competitors may have with potential clients, the ownership by our competitors of software used by potential clients, the development by others of software that is competitive with our products and services, and the price at which others offer comparable services.

In addition, our clients could develop or acquire in-house expertise in services similar to those we provide, which would significantly reduce demand for our services. No assurance can be given that we will be able to maintain our existing client base, maintain or increase the level of revenue generated by our existing clients or be able to attract new clients.

Susceptibility to Economic and Industry Conditions
Our revenues and results of operations are subject to fluctuations based on the economic conditions in which we operate. During periods of economic uncertainty or downturn, businesses typically reduce or eliminate their spending on discretionary items such as the services that we provide. Under such conditions, our business, operating results and financial condition could be materially adversely affected.

Certain of our customers and potential customers are in industries that experience cyclical variations in profitability, which may in turn affect their willingness or ability to fund systems projects such as those for which we may be engaged. During the downturn of such cycles many of these customers may reduce or eliminate their spending on our services.

Pricing Pressures and Cost Overruns
We contract services on either a time-and-materials basis or a fixed price basis. Both forms of contracts require us to estimate the number of hours and the materials required before entering into the contract. In the case of a time-and-materials contract, failure to achieve the estimated results could subject us to pricing pressures from clients (even though there is no legal obligation to complete the work within the estimates) or could lead to the loss of future work from the client. Failure to complete fixed-price contracts within the contractual parameters will expose us to unrecoverable cost overruns. In either case, these failures could have a material adverse effect on our business, operating results and financial condition.

Intellectual Property Rights
Our future success depends in part upon our proprietary technology. Although we have attempted to protect our proprietary technology through various mechanisms, including copyrights, trademarks, contractual obligations and trade secrets, third parties nevertheless may attempt to use our technology without authorization.

Many of our clients have required that we grant to them all proprietary and intellectual property rights with respect to the work product resulting from our performance of services, including the intellectual property rights to any custom software that we have developed for them. Each such grant of proprietary and intellectual property rights limits our ability to reuse work product components and work product solutions with other clients. In some situations, we have obtained

either an ownership interest or a license from our clients to permit us to market and sell the custom software we have developed for them. There can be no assurance, however, that we will be able to obtain these rights in the future.

We also develop certain foundation and application software tools, methodologies and products that we own and license to our clients. We regard these software tools, methodologies and products as proprietary and intend to protect our rights, where appropriate, with registered copyrights, patents, registered trademarks, trade secret laws and contractual restrictions on disclosure and transferring title. However, there can be no assurance that any of these steps will be adequate to deter misappropriation of our proprietary rights or independent third party development of functionally equivalent products. “TSC” and “Technology Solutions Company” are registered service marks of the Company.

In addition, our success is dependent upon our specialized expertise and methodologies. To protect our proprietary information, we rely on a combination of trade secret and common law employee non-disclosure policies and third-party confidentiality agreements. However, there can be no assurance that any of these steps will be adequate to deter misappropriation of our specialized expertise and methodologies.

Although we believe that our services and products do not infringe on the intellectual property rights of others, there can be no assurance that others will not assert infringement claims against us in the future. Any such claim asserted against us may harm our reputation, cause us to incur costs, prevent us from offering some services or solutions, and divert our management’s attention from the operation and growth of our business.

Rights Plan and Corporate Governance Provisions
Our stockholder rights plan may discourage, delay or prevent a merger or acquisition. In addition, provisions of our charter and by-laws may have a similar effect. For example, the Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences and issue shares of preferred stock.

Nasdaq National Market Listing Requirements
Our common stock is listed on the Nasdaq National Market, which requires that listed stocks maintain a minimum per share closing bid price of $1. The closing bid price of our stock has dropped below $1 from time to time in the past. If we fail to satisfy Nasdaq’s minimum per share closing bid requirements, we could face the possibility of delisting under Nasdaq rules. However, there are a variety of actions that we could take to help prevent a delisting.

Risks of Conducting International Operations
We have engaged in limited international operations. Because the cost of doing business abroad is typically higher for United States businesses than the cost of doing business domestically, we could experience a decline in our operating margins if the significance of our international operations increases. International operations and the provision of services in foreign markets are subject to a number of special risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks, additional security concerns and risks of increases in duties, taxes and governmental royalties, as well as changes in laws and

policies governing operations of foreign-based companies. In addition, any success we experience internationally may depend upon our ability to attract, develop and retain a sufficient number of highly skilled, motivated local professional employees in each of those foreign countries where we conduct operations. Competition for such local personnel qualified to deliver our services can be intense, and there can be no assurance that we will be able to recruit, develop and retain a sufficient number of highly skilled, motivated local professional employees to compete successfully in the international market.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TSC is exposed to interest rate fluctuations. Changes in interest rates affect interest income on cash and cash equivalents and marketable securities held in trust. Our cash and cash equivalents were primarily invested in overnight money market type accounts. Average interest rates for these investments were approximately 1.41 percent in 2004 compared to approximately 1.04 percent in 2003. Based on the cash and cash equivalents balances as of December 31, 2004 and 2003, a hypothetical 1.00 percent increase in interest rates would have resulted in approximately $0.3 and $0.4 million in additional net investment income during each of 2004 and 2003, respectively. As previously noted, marketable securities held in trust were distributed to the participants in the Company’s nonqualified deferred compensation in late February 2004.

As discussed in Note 2 of the consolidated financial statements, the financial statements of our 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 our consolidated financial position, results of operations or cash flows. We do not have any significant accounts payable, accounts receivable or commitments in a currency other than that of the reporting unit’s functional currency. We do not utilize derivative financial instruments to manage the exposure in non-U.S. operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required with respect to this Item 8 are listed in Item 15(a)(1) and (a)(2) in this filing.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

PricewaterhouseCoopers LLP (“PwC”) served as the Company’s independent registered public accounting firm until April 3, 2003. In order to better align our audit service requirements, the Audit Committee selected Grant Thornton LLP (“Grant Thornton”) to serve as the Company’s independent auditors.

On April 3, 2003, at the request of the Audit Committee of the Board of Directors, PwC was dismissed as the Company’s independent auditor. PwC’s reports on the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2002 and 2001 did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the Company’s fiscal years ended

December 31, 2002 and 2001 and the interim period from January 1, 2003 through April 3, 2003, there were no disagreements (as that term is used in Item 304(a)(1)(iv) of Regulation S-K) between the Company and PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its report.

On April 3, 2003, the Audit Committee of the Board of Directors of the Company approved the engagement of Grant Thornton to act as the Company’s independent auditor, effective immediately. During the Company’s fiscal years ended December 31, 2002 and 2001 and the interim period from January 1, 2003 through April 3, 2003, the Company did not consult Grant Thornton LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or any other matters or reportable events listed in Items 304 (a)(2)(i) and (ii) of Regulation S-K. Grant Thornton served as the Company’s independent auditors for 2004.

ITEM 9A. CONTROLS AND PROCEDURES

The management of the Company, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of December 31, 2004. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are reasonably effective to ensure 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 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.

ITEM 9B. OTHER INFORMATION

None.

Technology Solutions Company

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information contained under the headings “Election of Directors,” “Nominees for Director,” “Board of Directors – Communication with the Board,” “- Board Nomination Policy,” “- Director Meetings and Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the Company’s 2005 Annual Meeting of Stockholders (the “Proxy Statement”) and the information contained under the heading “Executive Officers of the Registrant” in Item 1 hereof is incorporated herein by reference.

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial and accounting officer and controller, as well as all its employees, officers and directors. The code of ethics is posted on the Company’s website, the address of which is www.techsol.com. The Company intends to include on its website any amendments to, or waivers from, a provision of its code of ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K.

ITEM 11. EXECUTIVE COMPENSATION

Except for the information relating to Item 13 hereof and except for the information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the heading “Executive Officer Compensation” in the Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information contained under the headings “Security Ownership of Directors and Management,” “Additional Information Relating to Voting Securities” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except for the information relating to Item 11 hereof and except for the information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the heading “Executive Officer Compensation” in the Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

During 2004 and 2003, the Company retained its principal auditors, Grant Thornton LLP in several capacities:

Audit Fees
Audit Fees represent amounts incurred in connection with the audit of the Company’s annual financial statements included in the Company’s Form 10-K and review of financial statements included in the Company’s Forms 10-Q.

Audit Related Fees
Audit Related Fees represent amounts billed for the audit of the Company’s 401(K) plan and other similar audit related services.

Tax Fees
Tax Fees represent amounts billed for tax services. No tax fees were billed during 2004 or 2003.

All Other Fees
All Other Fees for 2004 represents amounts billed in connection with the Registration Statement on Form S-4 filed by the Company with the Securities and Exchange Commission in connection with the acquisition of Zamba Corporation. All Other Fees for 2003 represent amounts billed by PwC for the transition of the audit function from PwC to Grant Thornton, and a review of PwC work papers relating to terminated negotiations for a proposed business combination.

All fees paid by the Company to the Company’s independent auditors were approved by the Audit Committee in advance of the services being performed by such auditors.

Technology Solutions Company

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

TECHNOLOGY SOLUTIONS COMPANY

CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

TABLE OF CONTENTS

All other schedules have been omitted because the required information is included in the financial statements or notes thereto or because they are not required.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Technology Solutions Company

We have audited the accompanying consolidated balance sheets of Technology Solutions Company and Subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Technology Solutions Company and Subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Grant Thornton LLP

Chicago, Illinois
January 28, 2005

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Technology Solutions Company

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15 (a)(1) present fairly, in all material respects, the results of operations, changes in stockholders’ equity and comprehensive income and cash flows of Technology Solutions Company and its subsidiaries for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under item 15 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois
January 29, 2003, except for Note 22 which is as of February 4, 2003 (not included herein)

Technology Solutions Company

CONSOLIDATED BALANCE SHEETS

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

Technology Solutions Company

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Technology Solutions Company

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

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

Technology Solutions Company

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

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

Technology Solutions Company

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

Technology Solutions Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — THE COMPANY

Delivering business benefits through the application of information technology (“IT”), Technology Solutions Company (“TSC”) is a consulting company committed to helping clients in Manufacturing, Healthcare, Consumer and Retail, and Financial Services. TSC focuses on IT Strategy, Planning and Process Transformation; Enterprise Application Services; Customer Relationship Management; Business Technology; Extended Support; Compliance; and Process Adaptation & Training. TSC’s clients are primarily located throughout the United States.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION — The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions have been eliminated.

REVENUE RECOGNITION — The Company derives its revenues from a variety of information technology services, including systems integration, packaged software integration and implementation services, programming, training and extended support services. The Company’s services are contracted on either a time and materials basis or a fixed price basis. For our time and materials contracts, the Company recognizes revenues as work is performed, primarily based on hourly billing rates. For our fixed price contracts, the Company recognizes 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.

CASH AND CASH EQUIVALENTS — The Company considers all highly liquid investments readily convertible into cash (with original maturities of three months or less) to be cash equivalents. These short-term investments are carried at cost plus accrued interest, which approximates market.

MARKETABLE SECURITIES HELD IN TRUST — The Company’s marketable securities held in trust consisted of trading securities. These investments, which were related to the executive deferred compensation plan (see Note 12), were classified as trading securities, with unrealized gains and losses included in the Company’s consolidated statements of operations. Realized gains or losses were determined on the specific identification method.

Technology Solutions Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

COMPUTERS, FURNITURE AND EQUIPMENT — Computers, furniture and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives generally are five years or less. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the underlying lease term. Normal maintenance and repair costs are expensed as incurred. The costs and related accumulated depreciation or amortization of assets sold or disposed of are removed from the balance sheet and any resulting gain or loss is included in operations. The carrying value of computers, furniture and equipment is reviewed whenever events or circumstances indicate that impairment has occurred to assess recoverability based on undiscounted future cash flows.

GOODWILL AND INTANGIBLE ASSETS — The Company accounts for Goodwill and Intangible Assets in accordance with SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and intangibles that are deemed to have indefinite lives are no longer amortized but, instead, are to be reviewed at least annually for impairment. Intangible assets continue to be amortized over their estimated useful lives.

SFAS No. 142 requires that goodwill be evaluated for impairment annually or if an event occurs or if circumstances change that may reduce the fair value of the acquisition below its book value. The impairment test is conducted (based on the revenues derived from the acquired entity) utilizing a “fair value” methodology. The Company evaluates the fair value of its acquisitions utilizing various valuation techniques including discounted cash flow analysis. This implied fair value is compared to the carrying amount of the goodwill for the individual acquisition. If the fair value is less, the Company would then recognize an impairment loss. In addition, the Company evaluates the intangible assets with definite lives to determine whether adjustment to these amounts or estimated useful lives are required based on current events and circumstances.

Technology Solutions Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

EARNINGS (LOSS) PER COMMON SHARE — The Company discloses basic and diluted earnings (loss) per share in the consolidated statements of operations under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Diluted earnings (loss) per common share is computed by dividing net income (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 813,897 and 1,152,449 were not included in the diluted loss per share calculation as they were antidilutive for 2004 and 2003, respectively. Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period presented.

FOREIGN CURRENCY TRANSLATION — The functional currencies for the Company’s foreign subsidiaries are their local currencies. All assets and liabilities of foreign subsidiaries are translated to U.S. dollars at end of period exchange rates. The resulting translation adjustments are recorded as a component of stockholders’ equity and comprehensive income. Income and expense items are translated at average exchange rates prevailing during the period. Gains and losses from foreign currency transactions of these subsidiaries are included in the consolidated statements of operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS — The carrying values of current assets, including marketable securities held in trust, liabilities and long-term receivables approximated their fair values at December 31, 2004 and 2003, respectively.

STOCK-BASED COMPENSATION — The Company accounts 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.

Technology Solutions Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table illustrates the effect of net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation. The following table also provides the amount of Stock-Based compensation cost included in net income (loss) as reported.

NEW ACCOUNTING STANDARDS — In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision to SFAS No. 123. SFAS No. 123R will, with certain exceptions, require entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements. The measurements of that cost will be based on the fair value of the equity or liability instruments issued. SFAS No. 123R will be effective for the Company starting with the quarter ended September 30, 2005. While the Company is currently evaluating the impact of the adoption of SFAS No. 123R, we believe the impact will be material to our results of operations as shown in our current disclosure above.

INCOME TAXES — The Company uses an asset and liability approach, as required under SFAS No. 109 “Accounting for Income Taxes,” for financial accounting and reporting of 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. The Company does not provide U.S. deferred income taxes on earnings of foreign subsidiaries that are expected to be indefinitely reinvested. Judgment is required in determining its provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. A valuation allowance is provided for deferred tax assets whenever it is more likely than not that future tax benefits will not be realized. During 2003, a valuation allowance was recorded for the entire net deferred tax asset (see Note 11). If the realization of the deferred tax assets in future periods is considered more likely than not, an adjustment to the deferred tax asset would increase net income in the period such

Technology Solutions Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

determination is made. The amount of deferred tax assets considered realizable is based on significant estimates. Changes in these estimates could materially affect the Company’s financial condition and results of operations in future periods.

EMPLOYEE BENEFIT PLAN — The Company has a 401(k) Savings Plan (the “ 401(k) Plan”). The 401(k) Plan allows employees to contribute up to 15 percent of their annual compensation, subject to Internal Revenue Service statutory limitations. Company contributions to the 401(k) Plan are discretionary. The Company contributed $250, $488 and $1,142 to the 401(k) Plan in the years ended December 31, 2004, 2003 and 2002, respectively.

ESTIMATES AND ASSUMPTIONS — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions that affect the reported amounts of assets and liabilities and the 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. Actual results could differ from those estimates.

RECLASSIFICATIONS — Certain reclassifications have been made to prior periods to conform to the current period classification. These reclassifications had no impact on net earnings (loss) or shareholders’ equity.

NOTE 3 — BUSINESS COMBINATIONS

During the year ended December 31, 2004, the Company acquired two businesses in separate transactions. The acquisitions were as follows:

Proceed North America, LLC — On October 5, 2004, the Company entered into an asset purchase agreement whereby it acquired the business of Proceed North America LLC (“Proceed”). Proceed is an SAP® Services Partner and serves as the primary implementation partner for SAP® Packaged Services in the U.S. Under the terms of the acquisition, the Company paid $500 in cash during 2004 and will make additional cash payments of $250 each in January and April 2005. These amounts are accrued on the balance sheet as of December 31, 2004 under Other Current Liabilities. In addition, the Company 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. Based upon a purchase price allocation analysis performed by an independent outside appraisal firm, intangible assets of $410, related to agreements not to compete and other business agreements were recorded, as well as $587 of goodwill. The intangible assets of $410 are being amortized on a straight-line basis based on the estimated useful lives of 4 to 10 years.

Zamba Corporation — On August 6, 2004, the Company entered into a definitive merger agreement with Zamba Corporation (“Zamba”), whereby the Company would acquire Zamba. Zamba is a customer relationship management (“CRM”) services company. The Company believes that CRM services are a complimentary offering to the Company’s service offerings.

Technology Solutions Company

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The merger was approved by Zamba shareholders on December 29, 2004 and it became effective December 31, 2004.

The aggregate purchase price was $6,811, including $5,137 of the Company’s common stock, $737 for the exchange of options and warrants to purchase shares of Zamba Common Stock for options and warrants to purchase share of TSC common stock, and $937 of transaction related costs. The value of the Company’s common shares issued was determined based on the average market price of the Company’s common shares over the 2-day period before and after the terms of the acquisition were agreed to and announced. The value of the Company’s options and warrants exchanged was determined using the Black-Scholes option-pricing model with the following weighted-average assumptions: