UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2005

Commission file number 0–19433

Technology Solutions Company

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

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

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

As of May 4, 2005 there were outstanding 46,935,038 shares of TSC Common Stock, par value $.01.

TECHNOLOGY SOLUTIONS COMPANY
Index to Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

TECHNOLOGY SOLUTIONS COMPANY

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

TECHNOLOGY SOLUTIONS COMPANY

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

TECHNOLOGY SOLUTIONS COMPANY

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Technology Solutions Company and its subsidiaries (“TSC” or the “Company”). The consolidated balance sheet as of March 31, 2005, the consolidated statements of operations for the three months ended March 31, 2005 and 2004 and the consolidated statements of cash flows for the three months ended March 31, 2005 and 2004 have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of March 31, 2005 and for all periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the United States Securities and Exchange Commission (“SEC”) on March 24, 2005.

NOTE 2 — 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 3 — NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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. In April 2005, the Securities and Exchange Commission (“SEC”) issued Release No. 33-8568 which amended the compliance date of SFAS No. 123R to be effective beginning with the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. SFAS No. 123R will be effective for the Company starting with the quarter ending March 31, 2006. 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 under SFAS No. 123 (see Note 4).

TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 4 — STOCK OPTIONS

The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Compensation costs for employee stock options are 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. For options issued during the three months ended March 31, 2005 and 2004, no stock-based compensation is reflected in net loss in the accompanying consolidated statements of operations, as all such options had an exercise price equal to the market value of the underlying common stock on the date of grant. Stock based compensation of $89 was recorded during the three months ended March 31, 2005 relating to an option grant that took place within a six month period prior to a cancellation.

     The following table illustrates the effect on net loss and 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.

As of March 31, 2005 and 2004, options to purchase 12,993,123 and 9,988,063 shares of common stock were outstanding, respectively, and options to purchase an additional 1,310,227 and 3,036,920 shares of common stock were available for grant, respectively, under the Technology Solutions Company 1996 Stock Incentive Plan.

TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 5 — CAPITAL STOCK

The Company has a stock repurchase program, which allows for share repurchases of up to 11,525,327 shares of outstanding Company common stock (the “Repurchase Program”). During the three months ended March 31, 2005 and 2004, the Company did not purchase any shares. The Company has repurchased an aggregate total of 6,838,127 shares since the inception of this Repurchase Program in September 2000. As of March 31, 2005, there were 4,687,200 shares available to be purchased under the Repurchase Program.

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

NOTE 6 — LOSS PER COMMON SHARE

The Company discloses basic and diluted loss per share in the consolidated statements of operations under the provisions of SFAS No. 128, “Earnings Per Share.” Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented, plus the dilutive effect of common equivalent shares arising from the assumed exercise of stock options using the treasury stock method. Common equivalent shares of 1,418,792 and 1,633,574 were not included in the diluted loss per share calculation as they were antidilutive for the three months ended March 31, 2005 and 2004, respectively. Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented.

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

TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 7 — COMPREHENSIVE (LOSS) INCOME

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

NOTE 8 — BUSINESS SEGMENTS

TSC currently operates within one reportable business segment. The following is revenue and long-lived asset information by geographic area:

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

NOTE 9 — OTHER EVENTS

In the second quarter of 2003, the Company recorded $5,211 in restructuring and other charges as a result of organizational changes announced in June 2003. These charges consisted of the severance costs of professional personnel and executives, and office reductions as well as professional fees incurred in connection with terminated negotiations with a party that had expressed interest in acquiring the Company. During the three months ended March 31, 2004, this charge was reduced by $266 to $4,945 as the Company was able to favorably terminate one of its office leases. As of March 31, 2005, there was an accrual balance of $529. The Company expects to utilize the balance by the third quarter of 2005. The following table provides the components of this charge.

TECHNOLOGY SOLUTIONS COMPANY

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

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

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

TECHNOLOGY SOLUTIONS COMPANY

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

provides the components of this charge.

TECHNOLOGY SOLUTIONS COMPANY

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

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. 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 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 may be 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 described 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. We expect quarterly revenues in the second quarter of 2005 to be approximately $9.5 million to $10.5 million, broadly in-line with the first quarter of 2005. We incurred operating losses during the three months ended March 31, 2005 and each quarter in 2004 and we expect to incur an operating loss for 2005 as we continue our efforts to transform and rebuild our business.

We believe the information technology services industry continues to undergo 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

TECHNOLOGY SOLUTIONS COMPANY

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

innovative consultants will increase over time. The complexity of corporate IT functions is not diminishing.

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, dampened 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, 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.

TECHNOLOGY SOLUTIONS COMPANY

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

COSTS AND EXPENSES

Project Personnel

Project personnel costs consist primarily of professional salaries and benefits.

Other Project Expenses

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

Reimbursable Expenses

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

Bad Debt Expense

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

Management and Administrative Support

Management and administrative support costs consist of client officer costs and infrastructure costs. Client officer costs include client officer salaries and travel, marketing costs and recruiting costs. Client officers are a critical component in our client relationship-selling model. Each of our clients has at least one client officer assigned to them. The client officers are responsible for delivery excellence, client relationship and satisfaction, revenues, utilization, project margins, days sales outstanding and human capital, including recruiting and career development. In addition, each client officer is also a billable consulting resource. Infrastructure costs include costs related to our senior corporate management and board of directors; accounting; financial reporting; finance; tax; legal; treasury; human resources; employee benefits; marketing; public and investor relations; office operations; staffing of our project personnel; recruiting; training; internal communications; internal technology applications; management of new business opportunities; planning; quality assurance; and risk management.

Intangible asset amortization

Our acquired intangible assets, consist of amounts related to customer relationships, backlog, agreements not to compete and other business agreements, with definitive lives are amortized over their estimated useful lives. 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.

TECHNOLOGY SOLUTIONS COMPANY

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

Incentive Compensation

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

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

Allowance for Doubtful Receivables

An allowance for doubtful receivables is maintained for potential credit losses. When evaluating the adequacy of our allowance for doubtful receivables, management specifically analyzes

TECHNOLOGY SOLUTIONS COMPANY

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

accounts receivable on a client by client basis, including customer credit worthiness and current economic trends, and records any necessary bad debt expense based on the best estimate of the facts known to date. Should the facts regarding the collectability of receivables change, the resulting change in the allowance would be charged or credited to income in the period such determination is made. Such a change could materially impact our financial position and results of operations.

Accounting for Income Taxes

We use an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided using currently enacted tax rates when tax laws and financial accounting standards differ with respect to the amount of income for a year and the basis of assets and liabilities. Significant management 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

We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Compensation costs for employee stock options are 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.

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 as 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

We account 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

TECHNOLOGY SOLUTIONS COMPANY

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

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. 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.

THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2004

Revenues

Consolidated net revenues were $11.1 million for the three months ended March 31, 2005, an increase of 14 percent from the same period in the prior year. Revenues before reimbursements increased 14 percent to $9.8 million from $8.6 million. This increase was due to the acquisition of Zamba on December 31, 2004.

During the three months ended March 31, 2005 and 2004, no client accounted for more than 10 percent of revenues before reimbursements. We added 28 new clients and 54 new projects during the three months ended March 31, 2005 compared to 7 new clients and 27 new projects during the same period in the prior year. The new clients and projects added during the three months ended March 31, 2005 included 12 new clients related to the acquisition of Zamba.

Costs and Expenses

Project personnel costs were $6.8 million for the three months ended March 31, 2005, an increase of 23 percent from the same period in the prior year. This increase was due to an increase in professional headcount as a result of the acquisition of Zamba. Project personnel costs as a percentage of revenues before reimbursements increased to 70 percent for the three months ended March 31, 2005 compared to 64 percent in the same period in the prior year as a result of a decline in utilization, partially offset by an increase in average hourly billing rates. Utilization declined to 59 percent from 72 percent and average hourly billing rates increased 9 percent to $153.

Other project expenses were $2.5 million for the three months ended March 31, 2005, an increase of 70 percent from the same period in the prior year. This increase was a result of additional subcontractor costs of $0.6 million, due to the increased use of subcontractors for certain specialized skills; severance costs of $0.2 million; and an increase in various other costs of $0.2 million such as hiring and non-billable travel costs. Other project expenses as a percentage of

TECHNOLOGY SOLUTIONS COMPANY

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

revenues before reimbursements increased to 25 percent for the three months ended March 31, 2005 from 17 percent from the same period in the prior year mainly due to the increase in subcontractor and severance costs.

There was no bad debt expense for the three months ended March 31, 2005 compared to a credit of $0.1 million in the same period in the prior year.

Management and administrative support costs increased to $4.6 million for the three months ended March 31, 2005 from $3.4 million for the same period in the prior year. This increase mainly resulted from an increase in labor costs due to additional client officers added during the second half of 2004 as well as the acquisition of Zamba.

Intangible asset amortization was $0.3 million for the three months ended March 31, 2005 due to the acquisitions of Zamba and Proceed.

During the three months ended March 31, 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.

No incentive compensation was recorded during the three months ended March 31, 2005 as we did not meet our quarterly objective. Incentive compensation expense was $0.2 million for the three months ended March 31, 2004. If the Company and our employees meet their 2005 quarterly and annual quantitative and qualitative objectives, we expect to accrue incentive compensation during the remaining quarters of 2005.

Operating Loss

Consolidated operating loss was $4.4 million for the three months ended March 31, 2005 compared to $1.3 million for the same period in the prior year. Our operating loss for the quarter ended March 31, 2004 included restructuring and other credits of $0.6 million. The increase in the operating loss, excluding this credit, mainly resulted from the increased headcount from the Zamba acquisition and additional client officers hired during the second half of 2004, increased use of subcontractors and an increase in severance costs, partially offset by an increase in revenues.

Other Income

Other income for the three months ended March 31, 2005 was $0.2 million, a slight decrease from the same period in the prior year. This decrease was a result of lower cash balances. Our cash and cash equivalents were primarily invested in overnight money market type accounts. Average interest rates were approximately 2.44 percent for the three months ended March 31, 2005 compared to approximately 0.90 percent during the same period in the prior year.

TECHNOLOGY SOLUTIONS COMPANY

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

Income Tax Provision

We did not recognize an income tax benefit for the three months ended March 31, 2005 or 2004 since we recorded a full valuation allowance against our deferred taxes in 2003.

Shares Outstanding

Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased to 46,855,000 from 40,819,000 mainly due to 5,838,182 shares issued as a result of the Zamba acquisition, as well as shares issued under our employee stock purchase plan and stock option plans.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $5.3 million and $1.9 million for the three months ended March 31, 2005 and 2004, respectively. Net cash used in operating activities for the three months ended March 31, 2005 primarily resulted from the loss for the quarter, payments related to the acquisitions of Zamba and Proceed and an increase in receivables due to the increase in revenues and days sales outstanding. Days sales outstanding increased by 5 days to 60 days at March 31, 2005 as compared to 55 days at March 31, 2004. The payments relating to the acquisitions of Zamba and Proceed resulted in a decrease in other current liabilities.

Estimated future cash commitments include various office facilities, property and office equipment under operating leases and other costs that expire at various dates; an annual commitment for telecommunications; and cash payment related to the acquisition of Proceed. The Company has no guarantees of third party debt or any other off-balance sheet commitments as of March 31, 2005. A summary of our contractual obligations at March 31, 2005 is as follows:

There were no cash flows used in investing activities during the three months ended March 31, 2005. We currently have no material commitments for capital expenditures.

TECHNOLOGY SOLUTIONS COMPANY

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

Net cash used in financing activities was $0.6 million for the three months ended March 31, 2005 as the line of credit, which was recorded as part of our acquisition of Zamba on December 31, 2004, was paid in full. Partially offsetting this amount were proceeds from the exercise of stock options and our employee stock purchase plan.

Our cash and cash equivalents at March 31, 2005 were $24.1 million. Depending on revenues and cash collections, we expect our cash and cash equivalent balance at June 30, 2005 to be approximately $16.5 million to $18.0 million. 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. We expect to experience continued operating losses until revenues increase sufficiently to cover operating costs. Until such time as we are able to generate positive cash flow, our primary sources of liquidity are our existing cash and cash equivalents. If we are not successful in increasing revenues and eliminating negative cash flows, it could become necessary to raise additional capital to offset losses from operations. There can be no assurance that we will be able to obtain any financing or that, if we were to be successful in finding financing, it would be on favorable terms.

Operating results and liquidity, including our ability to raise additional capital if necessary, may be materially and adversely affected by continued low demand for the Company’s services. In addition, a number of other factors, including general economic conditions, technological changes, competition and other factors affecting the IT industry generally, and the suspension or cancellation of a large project could have an adverse effect on future results and liquidity. These aforementioned factors, as well as other factors, are more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 under Management’s Discussion and Analysis of Financial Condition and Results of Operations “Assumptions Underlying Certain Forward-Looking Statements and Factors that May Affect Future Results.”

NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“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. In April 2005, the SEC issued Release No. 33-8568 which amended the compliance date of SFAS No. 123R to be effective beginning with the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. SFAS No. 123R will be effective for us starting with the quarter ended March 31, 2006. 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 as shown in our current disclosure under SFAS No. 123.

TECHNOLOGY SOLUTIONS COMPANY

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

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

This Form 10-Q contains or may contain certain forward-looking statements concerning our financial position, results of operations, cash flows, business strategy, budgets, projected costs and plans and objectives of management for future operations as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions. These forward-looking statements involve significant risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that such expectations will prove correct and that actual results and developments may differ materially from those conveyed in such forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contain in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements in this Form 10-Q include, among others, our ability to successfully introduce new service offering, our ability to manage the pace of technological change including our ability to refine and add to our service offerings to adapt to technological changes, our ability to manage the current downturn in our business and in our industry and the economy in general, our ability to manage our current decreased revenue levels, our ability to attract new business and increase revenues, our ability to attract and retain employees, the decreasing level of options available for grants to attract new employees and to retain existing employees, our ability to accommodate a changing business environment, general business and economic conditions in our operating regions, market conditions and competitive factors, our dependence on a limited number of clients and the potential loss of significant clients, our ability to continue to attract new clients and sell additional work to existing clients, our ability to successfully integrate the Zamba business with our business, and our ability to manage costs and headcount relative to expected revenues, all as more fully described herein and in our Annual Report on Form 10-K for the year ended December 31, 2004 under Management’s Discussion and Analysis of Financial Condition and Results of Operations “Assumptions Underlying Certain Forward-Looking Statements and Factors that May Affect Future Results” and elsewhere from time to time in our other SEC reports. Such forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. Actual results may vary materially.

TECHNOLOGY SOLUTIONS COMPANY

PART I. FINANCIAL INFORMATION
(Continued)

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TSC is exposed to interest rate fluctuations. Changes in interest rates affect interest income and expense on cash and cash equivalents. The Company’s cash and cash equivalents are primarily invested in overnight money market type accounts. Average interest rates were approximately 2.44 percent during the three months ended March 31, 2005 compared to 0.90 percent during the same period in the prior year. Based on the cash and cash equivalents balances as of March 31, 2005 and 2004, a hypothetical 1.00 percent increase in interest rates would have resulted in approximately $0.1 million in additional net investment income during each of the quarters ended March 31, 2005 and 2004.

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

ITEM 4—CONTROLS AND PROCEDURES

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

TECHNOLOGY SOLUTIONS COMPANY

PART II. OTHER INFORMATION

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company has a stock repurchase program, which allows for share repurchases of up to 11,525,327 shares of outstanding Company common stock (the “Repurchase Program”). The Repurchase Program was approved by the Board of Directors during September 2000 (3,000,000 shares), August 2001 (2,000,000 shares), April 2002 (3,930,327 shares) and February 2003 (2,595,000 shares). During the three months ended March 31, 2005, the Company did not purchase any shares. The Company has repurchased an aggregate total of 6,838,127 shares since the inception of this Repurchase Program in September 2000. As of March 31, 2005, there were 4,687,200 shares available to be purchased under the Repurchase Program. All repurchases were made in the open market, subject to market conditions and trading restrictions. The timing and size of any future stock repurchases are subject to market conditions, stock prices, cash position and other cash requirements.

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

The Company’s 2005 Annual Meeting of Stockholders (the “Annual Meeting”) was held on May 5, 2005. Represented at the Annual Meeting, either in person or by proxy, were 36,229,356 voting shares. The following actions were taken by a vote of the Company’s stockholders at the Annual Meeting:

	1.	Ms. Paula Krueger and Messrs. Raymond P. Caldiero, Carl F. Dill, Jr., Michael R. Gorsage, Gerald Luterman, Stephen B. Oresman and John R. Purcell were elected to serve as members of the Company’s Board of Directors receiving 35,167,450; 34,995,141; 35,185,071; 26,580,086; 35,544,244; 26,576,631; and 35,159,789 votes in favor of election, respectively, and 1,061,905; 1,234,214; 1,044,284; 9,649,269; 685,111; 9,652,724; and 1,069,566 votes withheld, respectively.
	2.	The appointment of Grant Thornton LLP to serve as the Company’s independent auditors for its fiscal year ending December 31, 2005 was ratified; 36,011,445 votes were cast for the ratification; 152,612 votes were cast against the ratification; and there were 65,299 abstentions. There were no broker non-votes

TECHNOLOGY SOLUTIONS COMPANY

PART II. OTHER INFORMATION — (continued)

ITEM 6—EXHIBITS

(a)

Exhibits

All other items in Part II are either not applicable to the Company during the quarter ended March 31, 2005, the answer is negative, or a response has been previously reported and an additional report of the information is not required, pursuant to the instructions to Part II.

SIGNATURE

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

	TECHNOLOGY SOLUTIONS COMPANY
Date: May 11, 2005	By:	/s/ SANDOR GROSZ
		Sandor Grosz
		Chief Financial Officer