##### 





UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 Commission file number 019433 (TSC LOGO) Technology Solutions Company Incorporated in the State of Deleware
I.R.S. Employer Identification No. 36-3584201
 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. YesüNo Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule
12b-2). Yes   Noü As of November 3, 2003, there were outstanding 40,606,991 shares of TSC
Common Stock, par value $.01.




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##### 



TECHNOLOGY SOLUTIONS COMPANYIndex to Form 10-Q

PageNumberPart IFINANCIAL INFORMATION (UNAUDITED)ITEM 1.
    
    
    FINANCIAL STATEMENTSConsolidated Balance Sheets as of
September 30, 2003 and December 31, 2002
    
    
    3Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002
    
    
    4Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2.
    
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3.
    
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    27ITEM 4.
    
    
    CONTROLS AND PROCEDURES
    
    
    27Part IIOTHER INFORMATIONITEM 6.
    
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    28SIGNATURE
    
    
    
    
    29




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PART I. FINANCIAL INFORMATION




ITEM 1. Financial Statements


TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

September 30,
    
    
    December 31,2003
    
    
    2002(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    43,597
    
    
    $
    47,004Marketable securities
    
    
    
    
    
    
    1,624Marketable securities held in trust
    
    
    6,071
    
    
    
    6,735Receivables, less allowance for doubtful receivables
of $740 and $2,377
    
    
    6,286
    
    
    
    11,829Deferred income taxes
    
    
    
    
    
    
    7,198Other current assets
    
    
    1,270
    
    
    
    807Total current assets
    
    
    57,224
    
    
    
    75,197COMPUTERS, FURNITURE AND EQUIPMENT, NET
    
    
    324
    
    
    
    719DEFERRED INCOME TAXES
    
    
    
    
    
    
    15,614LONG-TERM RECEIVABLES AND OTHER
    
    
    7,316
    
    
    
    7,714Total assets
    
    $
    64,864
    
    
    $
    99,244LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    1,204
    
    
    $
    1,099Accrued compensation and related costs
    
    
    4,913
    
    
    
    9,128Deferred compensation
    
    
    6,071
    
    
    
    6,735Restructuring accruals
    
    
    3,431
    
    
    
    466Other current liabilities
    
    
    2,540
    
    
    
    2,114Total current liabilities
    
    
    18,159
    
    
    
    19,542DEFERRED INCOME TAXES DUE TO FORMER SUBSIDIARY
    
    
    
    
    
    
    6,210Total liabilities
    
    
    18,159
    
    
    
    25,752COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, $.01 par value; shares authorized 
10,000,000; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; shares authorized 
100,000,000; shares issued  44,695,788;
shares outstanding 40,667,248 and 40,665,141
    
    
    447
    
    
    
    447Capital in excess of par value
    
    
    122,082
    
    
    
    122,282Accumulated deficit
    
    
    (70,311
    )
    
    
    (43,232
    )Treasury stock, at cost, 4,028,540 and 4,030,647 shares
    
    
    (5,740
    )
    
    
    (5,853
    )Accumulated other comprehensive income (loss):Unrealized holding loss, net
    
    
    
    
    
    
    (119
    )Cumulative translation adjustment
    
    
    227
    
    
    
    (33
    )Total stockholders equity
    
    
    46,705
    
    
    
    73,492Total liabilities and stockholders equity
    
    $
    64,864
    
    
    $
    99,244


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



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TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

For the Three
    
    
    For the NineMonths Ended
    
    
    Months EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002(unaudited)
    
    
    (unaudited)REVENUES:Revenues before reimbursements
    
    $
    8,349
    
    
    $
    19,088
    
    
    $
    33,286
    
    
    $
    65,934Reimbursements
    
    
    1,092
    
    
    
    2,173
    
    
    
    3,666
    
    
    
    7,4639,441
    
    
    
    21,261
    
    
    
    36,952
    
    
    
    73,397COSTS AND EXPENSES:Project personnel
    
    
    6,202
    
    
    
    10,419
    
    
    
    23,030
    
    
    
    36,328Other project expenses
    
    
    1,157
    
    
    
    2,961
    
    
    
    4,135
    
    
    
    10,017Reimbursable expenses
    
    
    1,092
    
    
    
    2,173
    
    
    
    3,666
    
    
    
    7,463Bad debt expense
    
    
    85
    
    
    
    480
    
    
    
    342
    
    
    
    1,209Management and administrative support
    
    
    3,243
    
    
    
    4,106
    
    
    
    11,418
    
    
    
    14,899Restructuring and other (credits) charges
    
    
    
    
    
    
    (289
    )
    
    
    5,211
    
    
    
    (289
    )Incentive compensation
    
    
    
    
    
    
    807
    
    
    
    311
    
    
    
    3,31111,779
    
    
    
    20,657
    
    
    
    48,113
    
    
    
    72,938OPERATING (LOSS) INCOME
    
    
    (2,338
    )
    
    
    604
    
    
    
    (11,161
    )
    
    
    459OTHER INCOME:Net investment income
    
    
    246
    
    
    
    300
    
    
    
    693
    
    
    
    860(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (2,092
    )
    
    
    904
    
    
    
    (10,468
    )
    
    
    1,319INCOME TAX PROVISION
    
    
    
    
    
    
    364
    
    
    
    16,611
    
    
    
    536NET (LOSS) INCOME
    
    $
    (2,092
    )
    
    $
    540
    
    
    $
    (27,079
    )
    
    $
    783BASIC NET (LOSS) EARNINGS
PER COMMON SHARE
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.67
    )
    
    $
    0.02WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
    
    
    40,583
    
    
    
    41,027
    
    
    
    40,553
    
    
    
    42,268DILUTED NET (LOSS) EARNINGS
PER COMMON SHARE
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.67
    )
    
    $
    0.02WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
    
    
    40,583
    
    
    
    41,562
    
    
    
    40,553
    
    
    
    43,607


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



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TECHNOLOGY SOLUTIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For theNine Months EndedSeptember 30,2003
    
    
    2002(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (27,079
    )
    
    $
    783Restructuring and other charges (credits)
    
    
    5,211
    
    
    
    (289
    )Adjustments to reconcile net (loss) income to net
cash from operating activities:Depreciation and amortization
    
    
    420
    
    
    
    970Provisions for receivable valuation allowances and
reserves for possible losses, net of recoveries
    
    
    342
    
    
    
    1,209Gain on sale of investments
    
    
    (9
    )
    
    
    Deferred income taxes
    
    
    16,543
    
    
    
    (52
    )Changes in assets and liabilities:Receivables
    
    
    5,173
    
    
    
    3,915Purchases of trading securities related to deferred
compensation plan, net of market adjustments
    
    
    (1,219
    )
    
    
    77Sales of trading securities related to deferred
compensation plan
    
    
    1,883
    
    
    
    1,293Other current assets
    
    
    (465
    )
    
    
    (553
    )Accounts payable
    
    
    102
    
    
    
    203Accrued compensation and related costs
    
    
    (4,213
    )
    
    
    (5,054
    )Deferred compensation liability
    
    
    (664
    )
    
    
    (1,370
    )Restructuring accruals
    
    
    (2,211
    )
    
    
    (1,281
    )Other current liabilities
    
    
    408
    
    
    
    (2,480
    )Other assets
    
    
    400
    
    
    
    171Net cash used in operating activities
    
    
    (5,378
    )
    
    
    (2,458
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from available-for-sale securities
    
    
    1,801
    
    
    
    Capital expenditures
    
    
    (48
    )
    
    
    (428
    )Net cash provided by (used in) investing activities
    
    
    1,753
    
    
    
    (428
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    26
    
    
    
    318Proceeds from employee stock purchase plan
    
    
    170
    
    
    
    422Purchase of Company stock for treasury
    
    
    (286
    )
    
    
    (4,493
    )Net cash used in financing activities
    
    
    (90
    )
    
    
    (3,753
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS
    
    
    308
    
    
    
    (58
    )DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,407
    )
    
    
    (6,697
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    47,004
    
    
    
    50,115CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    43,597
    
    
    $
    43,418


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



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TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 1 BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Technology
Solutions Company and its subsidiaries (TSC or the Company). The
consolidated balance sheet as of September 30, 2003, the consolidated
statements of operations for the three and nine months ended September 30, 2003
and 2002 and the consolidated statements of cash flows for the nine months
ended September 30, 2003 and 2002 have been prepared by the Company without
audit. In the opinion of management, these financial statements include all
adjustments necessary to present fairly the financial position, results of
operations and cash flows as of September 30, 2003 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, 2002 filed with the United States Securities and Exchange
Commission (SEC) on March 20, 2003.

NOTE 2  THE COMPANY

Delivering business benefits to companies through process and technology
expertise, TSC is a systems integration and information technology consulting
firm that focuses on rapid results. TSCs core competencies include:
enterprise resource management, supply chain management, customer relationship
management, support services, and change management and training. Its services
span the entire technology lifecycle  from strategy definition and planning;
through implementation and integration; to extended support. The Companys
clients are primarily located throughout the United States but the Company also
supports global deployments and some international clients in Europe.



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TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 3  NEW ACCOUNTING STANDARDS

In January 2003, the Financial Accounting Standards Board (FASB) issued
Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.
EITF Issue No. 00-21 will be effective for arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company does not expect that the
provisions of EITF Issue No. 00-21 will have a material impact on the Companys
results of operations or financial position.

In January 2003, the FASB issued FASB Interpretation No.46, Consolidation of
Variable Interest Entities  an interpretation of ARB No. 51 (FIN 46). FIN
46 requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 requires that its provisions are effective
immediately for all arrangements entered into after January 31, 2003. For
those arrangements entered into prior to February 1, 2003, the FIN 46
provisions are required to be adopted at the beginning of the first interim or
annual period beginning after December 15, 2003. The Company does not expect
that the provisions of FIN 46 will have a material impact on the Companys
results of operations or financial position.

In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS
No. 133, Accounting for Derivative instruments and Hedging Activities. SFAS
No. 149 is effective for contracts entered into or modified after June 30,
2003. The Company believes that the adoption of SFAS No. 149 will not have a
material impact on the Companys results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company believes that the adoption of SFAS No. 150 will not have a material
impact on the Companys results of operations or financial position.



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TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 4  DEFERRED INCOME TAXES

The Company uses an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income taxes are provided using currently
enacted tax rates when tax laws and financial accounting standards differ with
respect to the amount of income for a year and the basis of assets and
liabilities. Significant management judgement is required in determining its
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against its net deferred tax assets.

The Company has 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 which were
recorded as additional paid-in capital in the period of exercise.

SFAS No. 109 Accounting for Income Taxes, requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets. As a result of operating losses incurred and reported during 2000, 2001
and the second quarter of 2003, as well as anticipated operating losses in the
third quarter of 2003, and the uncertainty of the timing and amount of taxable
income, the Company recorded a full valuation allowance against its deferred
tax assets of approximately $19.9 million during the quarter ended June 30,
2003. This allowance was increased by $0.8 million to $20.7 million during the
quarter ended September 30, 2003. If the realization of 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 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.

NOTE 5  STOCK OPTIONS

Effective for fiscal 2003, the Company adopted the disclosure requirements
under SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, as an amendment to SFAS No. 123.

The Companys stock-based employee compensation, including stock options, was
accounted for under the intrinsic value-based method as prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. Therefore, no compensation expense was recognized for
these stock options as they had no intrinsic value on the date of grant.



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TECHNOLOGY SOLUTIONS COMPANY

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

If the Company were to recognize compensation expense over the relevant service
period under the fair-value method of SFAS No. 123 with respect to stock
options granted and employee stock purchases for the three and nine months
ended September 30, 2003 and all prior periods, net earnings would have
decreased, resulting in pro forma net losses and losses per share as presented
below:

For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Net (loss) income:As reported
    
    $
    (2,092
    )
    
    $
    540
    
    
    $
    (27,079
    )
    
    $
    783Less: Stock-based compensation expense
determined under fair value method
for all
awards, net of related taxes (as
applicable)
    
    
    (272
    )
    
    
    (569
    )
    
    
    (1,384
    )
    
    
    (1,527
    )Pro forma
    
    $
    (2,364
    )
    
    $
    (29
    )
    
    $
    (28,463
    )
    
    $
    (744
    )Basic net earnings (loss)
per common share:As reported
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.67
    )
    
    $
    0.02Pro forma
    
    $
    (0.06
    )
    
    $
    0.00
    
    
    $
    (0.70
    )
    
    $
    (0.02
    )Diluted net earnings (loss)
per common share:As reported
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    (0.67
    )
    
    $
    0.02Pro forma
    
    $
    (0.06
    )
    
    $
    0.00
    
    
    $
    (0.70
    )
    
    $
    (0.02
    )


As of September 30, 2003 and 2002, options to purchase 10,167,922 and
10,764,488 shares of common stock were outstanding, respectively, and options
to purchase an additional 2,959,218 and 2,453,466 shares of common stock were
available for grant, respectively, under the Technology Solutions Company 1996
Stock Incentive Plan.

NOTE 6  CAPITAL STOCK

The Company has a stock repurchase program, which allows for share repurchases
of up to 11,525,327 shares of outstanding Company common stock (the Repurchase
Program). During the nine months ended September 30, 2003 and 2002, the
Company repurchased 277,000 shares for $286 and 3,285,600 shares for $4,493,
respectively. The Company has repurchased an aggregate total of 6,762,627
shares since the inception of the Repurchase Program. As of September 30,
2003, there were 4,762,700 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.



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TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 7  (LOSS) EARNINGS PER COMMON SHARE

The Company discloses basic and diluted (loss) earnings per share in the
consolidated statements of operations under the provisions of SFAS No. 128,
(Loss) Earnings Per Share. Diluted (loss) earnings per common share is
computed by dividing net (loss) income 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 954,882 and
961,009 were not included in the diluted loss per share calculation as they
were antidilutive for the three and nine months ended September 30, 2003,
respectively. Basic (loss) earnings per common share is computed by dividing
net (loss) income by the weighted average number of common shares outstanding
during each period presented.

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

September 30, 2003
    
    
    September 30, 2002Shares
    
    
    Per
    
    
    
    
    
    
    Shares
    
    
    PerNet
    
    
    (In
    
    
    Common
    
    
    Net
    
    
    (In
    
    
    CommonLoss
    
    
    Thousands)
    
    
    Share
    
    
    Income
    
    
    Thousands)
    
    
    ShareBasic (loss) earnings
per share
    
    $
    (2,092
    )
    
    
    40,583
    
    
    $
    (0.05
    )
    
    $
    540
    
    
    
    41,027
    
    
    $
    0.01Effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535Diluted (loss)
earnings per share
    
    $
    (2,092
    )
    
    
    40,583
    
    
    $
    (0.05
    )
    
    $
    540
    
    
    
    41,562
    
    
    $
    0.01


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

September 30, 2003
    
    
    September 30, 2002Shares
    
    
    Per
    
    
    
    
    
    
    Shares
    
    
    PerNet
    
    
    (In
    
    
    Common
    
    
    Net
    
    
    (In
    
    
    CommonLoss
    
    
    Thousands)
    
    
    Share
    
    
    Income
    
    
    Thousands)
    
    
    ShareBasic (loss) earnings
per share
    
    $
    (27,097
    )
    
    
    40,553
    
    
    $
    (0.67
    )
    
    $
    783
    
    
    
    42,268
    
    
    $
    0.02Effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339Diluted (loss)
earnings per share
    
    $
    (27,097
    )
    
    
    40,553
    
    
    $
    (0.67
    )
    
    $
    783
    
    
    
    43,607
    
    
    $
    0.02




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TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 8  COMPREHENSIVE (LOSS) INCOME

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

For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Net (loss) income
    
    $
    (2,092
    )
    
    $
    540
    
    
    $
    (27,079
    )
    
    $
    783Other comprehensive income (loss):Net unrealized holding gains on
available-for-sale securities, net of tax
    
    
    
    
    
    
    10
    
    
    
    119
    
    
    
    49Translation adjustment
    
    
    (3
    )
    
    
    (40
    )
    
    
    260
    
    
    
    (108
    )Other comprehensive (loss) income
    
    
    (3
    )
    
    
    (30
    )
    
    
    379
    
    
    
    (59
    )Total comprehensive (loss) income
    
    $
    (2,095
    )
    
    $
    510
    
    
    $
    (26,700
    )
    
    $
    724


NOTE 9  BUSINESS SEGMENTS

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

For and as of the three months
    
    
    
    
    
    Foreignended September 30, 2003
    
    United States
    
    
    Subsidiary
    
    
    TotalRevenues
    
    $
    9,390
    
    
    $
    51
    
    
    $
    9,441Identifiable assets
    
    $
    63,491
    
    
    $
    1,373
    
    
    $
    64,864


For and as of the three months
    
    
    
    
    
    Foreignended September 30, 2002
    
    United States
    
    
    Subsidiary
    
    
    TotalRevenues
    
    $
    20,661
    
    
    $
    600
    
    
    $
    21,261Identifiable assets
    
    $
    99,803
    
    
    $
    865
    
    
    $
    100,668


For and as of the nine months
    
    
    
    
    
    Foreignended September 30, 2003
    
    United States
    
    
    Subsidiary
    
    
    TotalRevenues
    
    $
    36,545
    
    
    $
    407
    
    
    $
    36,952Identifiable assets
    
    $
    63,491
    
    
    $
    1,373
    
    
    $
    64,864


For and as of the nine months
    
    
    
    
    
    Foreignended September 30, 2002
    
    United States
    
    
    Subsidiary
    
    
    TotalRevenues
    
    $
    70,642
    
    
    $
    2,755
    
    
    $
    73,397Identifiable assets
    
    $
    99,803
    
    
    $
    865
    
    
    $
    100,668




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Page 11




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##### 



TECHNOLOGY SOLUTIONS COMPANY

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

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

NOTE 10  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. As of September 30, 2003, there was an
accrual balance of $3,056. The Company expects to utilize the balance by 2005.
The following table provides the components of this charge.

Restructuring and Other
    
    
    
    
    
    Cash
    
    
    Non-cash
    
    
    Balance as ofCharges - 2003
    
    Charge
    
    
    Payments
    
    
    Usage
    
    
    Sept. 30, 2003Severance costs
(approximately 30
employees)
    
    $
    3,917
    
    
    $
    1,678
    
    
    $
    33
    
    
    $
    2,206Office reductions
    
    
    921
    
    
    
    109
    
    
    
    2
    
    
    
    810Professional fees
    
    
    373
    
    
    
    333
    
    
    
    
    
    
    
    40Total
    
    $
    5,211
    
    
    $
    2,120
    
    
    $
    35
    
    
    $
    3,056


In 2001, the Company recorded $9,256 in restructuring and other charges
comprised of $6,930 relating to the closure of its Peer3 software development
operation and $2,326 in non-Peer3 severance related costs. The Peer3 charge
was more than originally anticipated and, as a result, this charge was
increased by $82 to $7,012 during 2002. The non-Peer3 severance related costs
were $227 lower than originally anticipated and, as a result, this charge was
reduced by $227 to $2,099 during 2002. The Company made final payments related
to these restructuring and other charges during 2002 and, accordingly, no
further payments are due. The following tables provide the components of these
charges.

Cash
    
    
    Non-cash
    
    
    Balance as ofPeer3 Charge  2001
    
    Charge
    
    
    Payments
    
    
    Usage
    
    
    Sept. 30, 2003Goodwill impairment
    
    $
    3,014
    
    
    $
    
    
    
    $
    3,014
    
    
    $
    Asset write-offs
    
    
    866
    
    
    
    
    
    
    
    951
    
    
    
    (85
    )Lease terminations
    
    
    668
    
    
    
    687
    
    
    
    56
    
    
    
    (75
    )Severance costs
(approximately 30
employees)
    
    
    1,430
    
    
    
    1,364
    
    
    
    
    
    
    
    66Professional fees
    
    
    357
    
    
    
    357
    
    
    
    
    
    
    
    Computer lease,
commitments and other
costs
    
    
    595
    
    
    
    495
    
    
    
    88
    
    
    
    12Total original charge
    
    
    6,930
    
    
    
    2,903
    
    
    
    4,109
    
    
    
    (82
    )2002 adjustment
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Total
    
    $
    7,012
    
    
    $
    2,903
    
    
    $
    4,109
    
    
    $
    




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Page 12




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##### 



TECHNOLOGY SOLUTIONS COMPANY

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

Non-Peer3 Severance
    
    
    
    
    
    Cash
    
    
    Non-cash
    
    
    Balance as ofCharge  2001
    
    Charge
    
    
    Payments
    
    
    Usage
    
    
    Sept. 30, 2003Severance costs
(approximately 70
employees)
    
    $
    1,480
    
    
    $
    1,466
    
    
    $
    
    
    
    $
    14Asset write-offs
    
    
    520
    
    
    
    
    
    
    
    520
    
    
    
    Other costs
    
    
    326
    
    
    
    113
    
    
    
    
    
    
    
    213Total original charge
    
    
    2,326
    
    
    
    1,579
    
    
    
    520
    
    
    
    2272002 adjustment
    
    
    (227
    )
    
    
    
    
    
    
    
    
    
    
    (227
    )Total
    
    $
    2,099
    
    
    $
    1,579
    
    
    $
    520
    
    
    $
    


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. As of September 30, 2003, there was an accrual
balance of $211, which represented professional fees and various other closure
costs and is expected to be utilized by the end of 2003. The following table
provides the components of this charge.

Cash
    
    
    Non-cash
    
    
    Balance as ofLatin America Charge - 2000
    
    Charge
    
    
    Payments
    
    
    Usage
    
    
    Sept. 30, 2003Severance costs
(approximately 40employees)
    
    $
    1,785
    
    
    $
    1,574
    
    
    $
    
    
    
    $
    211Asset write-offs
    
    
    2,916
    
    
    
    
    
    
    
    2,916
    
    
    
    Total original charge
    
    
    4,701
    
    
    
    1,574
    
    
    
    2,916
    
    
    
    211Accounts receivable
collections  2000
    
    
    (400
    )
    
    
    (400
    )
    
    
    
    
    
    
    Total
    
    $
    4,301
    
    
    $
    1,174
    
    
    $
    2,916
    
    
    $
    211


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 $1,892 to $5,075 during 2000 and 2001 and by $144 to
$4,931 during 2002. As of September 30, 2003, there was an accrual balance of
$163, which relates to amounts that the Company is contractually obligated to
pay through 2004 as a result of the lease terminations. The following table
provides the components of this charge.



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Page 13




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##### 



TECHNOLOGY SOLUTIONS COMPANY

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

Restructuring and Other
    
    
    
    
    
    Cash
    
    
    Non-cash
    
    
    Balance as ofCharges  1999
    
    Charge
    
    
    Payments(1)
    
    
    Usage
    
    
    Sept. 30, 2003Lease terminations
    
    $
    3,011
    
    
    $
    693
    
    
    $
    35
    
    
    $
    2,283Former executive
severance costs
    
    
    1,814
    
    
    
    1,747
    
    
    
    150
    
    
    
    (83
    )CourseNet Systems, Inc.
acquisition costs
    
    
    1,300
    
    
    
    
    
    
    
    1,300
    
    
    
    Asset write-offs
    
    
    842
    
    
    
    
    
    
    
    842
    
    
    
    Total original charge
    
    
    6,967
    
    
    
    2,440
    
    
    
    2,327
    
    
    
    2,2002000 adjustment
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    (404
    )2001 adjustment
    
    
    (1,488
    )
    
    
    
    
    
    
    
    
    
    
    (1,488
    )2002 adjustment
    
    
    (144
    )
    
    
    
    
    
    
    
    
    
    
    (144
    )Total
    
    $
    4,931
    
    
    $
    2,440
    
    
    $
    2,327
    
    
    $
    164




|(1) |  | Net cash payments totaling $91 were made during the nine months ended September 30, 2003.
|--- |  | -----------------------------------------------------------------------------------------

NOTE 11  RELATED PARTY

During the nine months ended September 30, 2003 and 2002, the Company provided
services to Bausch & Lomb, Inc (B&L). The Companys former chairman, William
H. Waltrip, and its current chairman, John R. Purcell, also serve as directors
for B&L. The services performed related to B&Ls global IT integration project
and were awarded following a competitive bidding process. The amount of
revenues recognized for such services during the nine months ended September
30, 2003 and 2002 represented 7 percent and 2 percent of the Companys total
revenues before reimbursements, respectively, and during the quarters ended
September 30, 2003 and 2002 represented 3 percent and 3 percent of such
revenues before reimbursements, respectively. The net accounts receivable
balances from these services as of September 30, 2003 and December 31, 2002
were $248 and $1,158, respectively.



---

Page 14




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##### 



TECHNOLOGY SOLUTIONS COMPANY

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

RESULTS OF OPERATIONS

OVERVIEW

Revenues in 2003 continue to be impacted by economic uncertainties and weakness
in the United States and global economies. As a result, demand for information
technology services, such as those we provide, continues to be adversely
impacted and our quarterly revenues have continued to decline. We expect that
these general economic uncertainties and weaknesses may continue well into 2004
and perhaps beyond. We expect quarterly revenues in the fourth quarter to
decline as compared to the third quarter of 2003.

In addition to the challenges presented by the difficult economic environment,
we also believe we are in the midst of some fundamental changes in the
information technology (IT) services industry. These changes include
competition from application software firms as they continue to enhance
services and implementation capabilities to increase their corporate revenue;
offshore application development and system consulting and support firms which
typically have lower labor costs and billing rates; and the proliferation of
Enterprise Resource Planning (ERP) expertise within the IT departments of
organizations, reducing the need to engage outside consulting help. This
increase in supply of trained personnel will likely result in continued
downward pressure on billing rates and gross margins, even after the overall
economic climate improves and demand for IT services recovers from its current
depressed state.

As a result of the difficult economic environment and the resulting depressed
market conditions, we implemented business and organizational changes during
the quarter ended June 30, 2003. These changes, which resulted in a pre-tax
charge of $5.2 million, included the resignation and replacement of both our
Chairman of the Board and our Chief Executive Officer and the rightsizing of
our capacity (pursuant to our reduction in work force program) to better align
it with our current and anticipated near-term demand (including personnel
terminations and office reductions). The pre-tax charge also included
professional fees incurred in connection with terminated negotiations with a
party that had expressed interest in acquiring 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. Our business is also driven by the pace of technological change 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. 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 early in
their cycles 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. In addition, a significant
portion of our revenues may be derived from large projects for a limited number
of
Page 15


TECHNOLOGY SOLUTIONS COMPANYMANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)clients. Accordingly, the loss of a significant client or the loss or delay of
a significant project could adversely impact our revenues and financial
position.Project personnel costs constitute the majority of our operating costs. Since
project personnel costs are driven primarily 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 our
billable professionals time spent 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, could have a material
adverse effect on our business, operating results and financial condition.Management believes that judgement and estimates related to the following
critical accounting policies could materially affect its consolidated financial
statements. Our critical accounting policies are as follows:
 
 Revenue recognition
 
 Estimating the allowance for doubtful receivables
 
 Accounting for income taxesThese policies are discussed further in this section under Revenues, Bad
Debt Expense and Income Taxes.REVENUESWe derive our revenues from a variety of information technology services,
including systems integration, packaged software integration and implementation
services, programming, training and extended support services. For most of our
engagements, we recognize revenues on contracts on a time and materials basis
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.Page 16


TECHNOLOGY SOLUTIONS COMPANYMANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)COSTS AND EXPENSESProject 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 as well as nonbillable expenses
incurred for client projects and business development. Nonbillable 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 note receivables.
Management specifically analyzes accounts receivable, on a client by client
basis, when evaluating the adequacy of our allowance for doubtful receivables
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.Management and Administrative Support
Management and administrative support costs consist of practice area costs and
infrastructure costs. Practice area costs include practice area management,
support personnel, marketing costs and recruiting costs. Infrastructure costs
include senior corporate management and our board of directors; accounting;
financial reporting; finance; tax; legal; treasury; human resources; employee
benefits; marketing; public and investor relations; office operations;
recruiting; training; internal communications; internal technology
applications; planning; quality assurance; and risk management.Incentive Compensation
Incentive compensation, if any, is accrued at a set percentage of base salary,
which varies by level of employee, and 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.Page 17


TECHNOLOGY SOLUTIONS COMPANYMANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)Income Taxes
We use an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income taxes are provided using currently enacted
tax rates when tax laws and financial accounting standards differ with respect
to the amount of income for a year and the basis of assets and liabilities.
Significant management judgement is required in determining its provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against its 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 which 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. As a result of operating losses incurred and reported in 2000, 2001
and the second quarter of 2003, as well as anticipated operating losses in the
third quarter of 2003, and the uncertainty of the timing and amount of future
taxable income, we recorded a full valuation allowance against our deferred tax
assets of approximately $19.9 million during the quarter ended June 30, 2003.
This valuation allowance represents approximately $16.5 million in net deferred
tax assets at March 31, 2003 plus an approximate $3.4 million tax benefit for
the pre-tax loss for the three months ended June 30, 2003. This allowance was
increased to $20.7 million as of September 30, 2003 due to an approximate $0.8
million tax benefit for the pre-tax loss for the three months ended September
30, 2003. 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.THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2002Revenues
Consolidated net revenues were $9.4 million for the three months ended
September 30, 2003, a decrease of 56 percent from the same period in the prior
year. Revenues before reimbursements decreased 56 percent to $8.3 million from
$19.1 million. We believe that this decline in revenues was primarily due to
decreased demand for our services and an increase in competitive pricing
arising out of the continuing economic uncertainties, fundamental changes in
the IT services industry, and a decline in corporate information technology
capital expenditures as large and small companies reassessed their goals and
budgets.During the three months ended September 30, 2003, two clients accounted for 27
percent of revenues before reimbursements (ExxonMobil Corp.  16 percent and
Caterpillar Inc.  11 percent). During the three months ended September 30,
2002, two customers accounted for 38Page 18

TECHNOLOGY SOLUTIONS COMPANY

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

percent of revenues before reimbursements (ExxonMobil Corp.  22 percent and
Caterpillar Inc.  16 percent). We added 5 new clients and 25 new projects
during the three months ended September 30, 2003 compared to 12 new clients and
24 new projects during the same period in the prior year. In addition, we
performed work for 44 clients and 78 projects during the three months ended
September 30, 2003 compared to 55 clients and 117 projects during the same
period in the prior year.

During the quarters ended September 30, 2003 and 2002, we provided services to
Bausch & Lomb, Inc (B&L). Our former chairman, William H. Waltrip, and our
current chairman, John R. Purcell, also serve as directors for B&L. The
services performed related to B&Ls global IT integration project and were
awarded following a competitive bidding process. The amount of revenues
recognized for such services during the quarters ended September 30, 2003 and
2002 represented 3 percent and 3 percent of our total revenues before
reimbursements, respectively. The net accounts receivable balances from these
services as of September 30, 2003 and December 31, 2002 were $248 thousand and
$1,158 thousand, respectively.

Costs and Expenses
Project personnel costs were $6.2 million for the three months ended September
30, 2003, a decrease of 40 percent from the same period in the prior year.
This decrease was largely attributable to staff and salary reductions driven by
our ongoing efforts to keep headcount and costs in line with demand for our
services, as described earlier in this item. Professional domestic headcount
decreased to 172 as of September 30, 2003 compared to 310 as of September 30,
2002. Annualized voluntary turnover increased to 23 percent from 16 percent
for the three months ended September 30, 2002. Project personnel costs as a
percentage of revenues before reimbursements increased to 74 percent for the
three months ended September 30, 2003 from 55 percent from the same period in
the prior year primarily due to a decline in average hourly billing rates.
Average hourly billing rates decreased 20 percent to $139. The decline in
hourly billing rates primarily reflects the increased competitive environment
in the information technology consulting market as well as our project mix.
Staff utilization remained unchanged at 71 percent.

Other project expenses were $1.2 million for the three months ended September
30, 2003, a decrease of 61 percent from the same period in the prior year. The
decrease in other project expenses consisted of the following: a decrease in
subcontractor costs of $0.3 million due to the decline in revenues and the
corresponding limited use of subcontractors; a decrease in business development
costs of $0.3 million, such as, travel, certain marketing costs and practice
area development costs; a decrease in our normal severance costs of $0.8
million; and a decrease in various other costs of $0.4 million, primarily
selling and sales related expenses. Other project expenses as a percentage of
revenues before reimbursements decreased to 14 percent for the three months
ended September 30, 2003 from 16 percent for the same period in the prior year
as a result of our ongoing cost controls.

Bad debt expense was $0.1 million for the three months ended September 30, 2003
compared to $0.5 million for the same period in the prior year. This decrease
was due to fewer collection
Page 19

TECHNOLOGY SOLUTIONS COMPANY

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

issues and lower revenues during the quarter compared to the same period in the
prior year.

Management and administrative support costs decreased 21 percent to $3.2
million for the three months ended September 30, 2003 from $4.1 million in the
same period in the prior year. This decrease resulted from a decrease in labor
costs of $0.9 million as we reduced headcount as a result of our
cost-management initiatives and our organizational changes announced in June
2003 (as discussed earlier in the Overview section).

During the quarter ended September 30, 2002, we reversed restructuring and
other charges of $0.3 million. This amount consisted of $0.2 million from the
non-Peer3 severance related costs recorded in 2001 and $0.1 million related to
certain lease terminations recorded in 1999.

There was no incentive compensation expense for the three months ended
September 30, 2003 as performance targets, goals and objectives were not
achieved. For the quarter ended September 30, 2002, incentive compensation
expense was $0.8 million. Depending on the Companys performance in the fourth
quarter of 2003 relative to quantitative and qualitative objectives, we will
review and adjust incentive compensation, as appropriate.

Operating Loss/Income
Consolidated operating loss was $2.3 million for the three months ended
September 30, 2003 compared to operating income of $0.6 million for the same
period in the prior year. The operating loss was mainly due to the decline in
revenues as well as higher project personnel costs as a percent of revenues due
to lower billing rates.

Other Income
Other income for the three months ended September 30, 2003 was $0.2 million
compared to $0.3 million for the same period in the prior year. The decrease
was a result of lower interest rates year over year. Our cash and cash
equivalents were primarily invested in overnight money market type accounts.
Average interest rates were approximately 0.92 percent for the
three months ended September 30, 2003 compared to approximately 1.72 percent during
the same period in the prior year.

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

Shares Outstanding
Weighted average number of common shares outstanding and weighted average
number of common and common equivalent shares outstanding decreased due to the
repurchase of outstanding shares during prior periods under our previously
announced repurchase program as well as a reduction in the dilutive effect of
common equivalent shares due to a decline in our stock price. We did not
purchase any of our shares during the three months ended September 30,
Page 20

TECHNOLOGY SOLUTIONS COMPANY

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

2003. During the three months ended September 30, 2002, we repurchased
1,536,900 shares of our Common Stock at an average price of $1.11 per share.

NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2002

Revenues
Consolidated net revenues were $37.0 million for the nine months ended
September 30, 2003, a decrease of 50 percent from the same period in the prior
year. Revenues before reimbursements decreased 50 percent to $33.3 million
from $65.9 million. We believe that this decline in revenues was primarily due
to decreased demand for our services and an increase in competitive pricing
arising out of the continuing economic uncertainties, fundamental changes in
the IT services industry and a decline in corporate information technology
capital expenditures as large and small companies reassessed their goals and
budgets.

Costs and Expenses
Project personnel costs were $23.0 million for the nine months ended September
30, 2003, a decrease of 37 percent from the same period in the prior year.
This decrease was largely attributable to staff and salary reductions driven by
our ongoing efforts to keep headcount and costs in line with associated demand
for our services, as described earlier in this item. Project personnel costs as
a percentage of revenues before reimbursements increased to 69 percent for the
nine months ended September 30, 2003 from 55 percent from the same period in
the prior year primarily due to a decline in average hourly billing rates and
staff utilization. Average hourly billing rates decreased 11 percent to $156.
The decline in hourly billing rates reflects the increased competitive
environment in the information technology consulting market. Staff utilization
declined to 65 percent from 69 percent.

Other project expenses were $4.1 million for the nine months ended September
30, 2003, a decrease of 59 percent from the same period in the prior year. The
decrease in other project expenses consisted of the following: a decrease in
subcontractor costs of $1.4 million due to the decline in revenues and the
corresponding limited use of subcontractors; a decrease in business development
costs of $1.6 million, such as, travel, certain marketing costs and practice
area development costs; a decrease in headcount related costs of $0.4 million,
which included training, computer and communication costs; a decrease in our
normal severance costs of $1.5 million; and a decrease in various other costs
of $1.0 million, primarily selling and sales related expenses. Other project
expenses as a percentage of revenues before reimbursements decreased to 12
percent for the nine months ended September 30, 2003 from 15 percent for the
same period in the prior year as a result of the Companys ongoing cost
controls.

Bad debt expense was $0.3 million for the nine months ended September 30, 2003
compared to $1.2 million for the same period in the prior year. This decrease
was due to fewer collection
Page 21

TECHNOLOGY SOLUTIONS COMPANY

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

issues and lower revenues during the nine months ended September 30, 2003
compared to the same period in the prior year.

Management and administrative support costs decreased by 23 percent to $11.4
million for the nine months ended September 30, 2003 from $14.9 million in the
same period in the prior year. This decrease mainly resulted from a decrease
in labor costs of $2.1 million as we reduced headcount and salaries 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 various
other costs, such as, office and occupancy related, travel and legal costs of
$1.4 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 September 30, 2003, there was an accrual
balance of $3.1 million. We expect to utilize the balance by 2005. The
following table provides the components of this charge.

Restructuring and Other
    
    
    
    
    
    Cash
    
    
    Non-cash
    
    
    Balance as ofCharges - 2003 (in thousands)
    
    Charge
    
    
    Payments
    
    
    Usage
    
    
    Sept. 30, 2003Severance costs
(approximately 30
employees)
    
    $
    3,917
    
    
    $
    1,678
    
    
    $
    33
    
    
    $
    2,206Office reductions
    
    
    921
    
    
    
    109
    
    
    
    2
    
    
    
    810Professional fees
    
    
    373
    
    
    
    333
    
    
    
    
    
    
    
    40Total
    
    $
    5,211
    
    
    $
    2,120
    
    
    $
    35
    
    
    $
    3,056


During the quarter ended September 30, 2002, we reversed restructuring and
other charges of $0.3 million. This amount consisted of $0.2 million from the
non-Peer3 severance related costs recorded in 2001 and $0.1 million related to
certain lease terminations recorded in 1999.

Incentive compensation expense was $0.3 million for the nine months ended
September 30, 2003 compared with $3.3 million in the same period in the prior
year. Incentive compensation as a percentage of revenues excluding
reimbursements decreased to 1 percent during the nine months ended September
30, 2003 compared to 5 percent in the same period in the prior year since there
was no incentive compensation expense for the three months ended September 30,
2003 and the three months ended June 30, 2003 as performance targets, goals and
objectives were not achieved. Depending on the Companys performance in the
fourth quarter of 2003 relative to quantitative and qualitative objectives, we
will review and adjust incentive compensation, as appropriate.

Operating Loss/Income
Consolidated operating loss was $11.2 million for the nine months ended
September 30, 2003
Page 22

TECHNOLOGY SOLUTIONS COMPANY

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

compared to consolidated operating income of $0.5 million for the same period
in the prior year. Our operating loss for the nine months ended September 30,
2003 included restructuring and other charges of $5.2 million. The operating
loss, excluding the restructuring charge, was mainly due to the decline in
revenues as well as higher project personnel costs as a percent of revenues due
to lower staff utilization and billing rates.

Other Income
Other income for the nine months ended September 30, 2003 was $0.7 million
compared to $0.9 million for the same period in the prior year. The decrease
is a result of lower interest rates year over year. Our cash and cash
equivalents were primarily invested in overnight money market type accounts.
Average interest rates were approximately 1.09 percent during the nine months
ended September 30, 2003 compared to approximately 1.85 percent during the same
period in the prior year.

Income Tax Provision
Our tax provision for the nine months ended September 30, 2003 was $16.6
million compared to $0.5 million for the same period for the prior year. The
2003 charge results from the $20.7 million valuation allowance for our deferred
tax assets, net of approximately $4.1 million in tax benefits related to our
operating losses in the second and third quarters of 2003.

Shares Outstanding
Weighted average number of common shares outstanding and weighted average
number of common and common equivalent shares outstanding decreased due to the
repurchase of outstanding shares under our previously announced repurchase
program as well as a reduction in the dilutive effect of common equivalent
shares due to a decline in our stock price. During the nine months ended
September 30, 2003 under the repurchase program, we purchased 277,000 shares of
our Common Stock at an average price of $1.03 per share compared to 3,285,600
shares at an average price of $1.37 per share in the same period in the prior
year.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $5.4 million and $2.5 million for the
nine months ended September 30, 2003 and 2002, respectively. Net cash used in
operating activities for the nine months ended September 30, 2003 included
payments related to the 2002 incentive compensation and 401k match payments
(but funded during the first quarter of 2003), payments related to the June 30,
2003 restructuring and other charges as well as annual corporate insurance
payments, partially offset by accounts receivable collections. These payments
resulted in a decrease in accrued compensation and related costs as well as
restructuring accruals and an increase in other current assets. The accounts
receivable collections contributed to improved days sales outstanding during
the period. Days sales outstanding improved by 4 days to 60 days at September
30, 2003 as compared to September 30, 2002 primarily due to enhanced
collections
Page 23



TECHNOLOGY SOLUTIONS COMPANYMANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)efforts.Cash commitments relating to remaining restructuring and other charges are $2.2
million in severance costs, $0.9 million in office costs and $0.3 million in
other commitments. The anticipated cash outflows for these restructuring and
other charges are as follows: $0.7 million for the fourth quarter of 2003, $1.5
million in 2004 and the remaining balance of $1.2 million in 2005 and
thereafter. Other estimated future cash commitments include various office
facilities, property and office equipment under operating leases and other
costs that expire at various dates. The minimum cash commitments under these
non-cancelable operating leases and other obligations with terms in excess of
one year, net of restructuring and other charges, are as follows: $0.4 million
for the remaining quarter in 2003, $1.2 million in 2004 and $0.4 million in
2005. In addition, we have a minimum remaining annual commitment for
telecommunications of $0.3 million for the remaining quarter in 2003. The
Company has no guarantees of third party debt as of September 30, 2003.Net cash provided by investing activities was $1.8 million for the nine months
ended September 30, 2003 from the sale of available-for-sale securities. We
currently have no material commitments for capital expenditures.Net cash used in financing activities was $0.1 million for the nine months
ended September 30, 2003. During the nine months ended September 30, 2003 we
purchased 277,000 shares of our Common Stock under our share repurchase program
for $0.3 million and received $0.2 million from purchases under the employee
stock purchase plan.Our primary sources of liquidity are our existing cash and cash equivalents.
Our cash and cash equivalents at September 30, 2003 were $43.6 million.
Depending on revenues and cash collections, we expect our cash and cash
equivalent balance at December 31, 2003 to be approximately $37 million to $39
million. We believe that these sources are sufficient to meet our current 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 reduced demand for the Companys
services. While it is our general and ongoing strategy to match our capacity
with demand for our services, this is not always practical given long-term
strategic plans and, even when implemented, may not achieve the necessary cost
savings. In addition, a number of other factors, including changes in general
economic conditions, technological changes, competition, 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, 2002 under Managements Discussion and Analysis of Financial
Condition and Results of Operations Assumptions Underlying Certain
Forward-Looking Statements and Factors that May Affect Future Results.We have a nonqualified deferred compensation plan. All Company executives
(defined as thosePage 24


TECHNOLOGY SOLUTIONS COMPANYMANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)at the level of Vice President and above) are eligible to participate in this
voluntary program, which permits participants to defer receipt of a portion of
their compensation. We hold deferred amounts in a rabbi trust for the benefit
of plan participants and investment earnings (or losses) are credited to the
participants accounts based on investment allocation options selected by the
participants. We do not guarantee these investments or earnings thereon.
These investments remain assets of the Company and are available to the general
creditors of the Company in the event of our insolvency.We had a $10.0 million unsecured line of credit facility (the Facility) with
Bank of America National Trust and Savings Association that expired on March
31, 2003. We had never borrowed against the Facility and accordingly, we chose
not to renew it upon its expiration.NEW ACCOUNTING STANDARDSIn January 2003, the Financial Accounting Standards Board (FASB) issued
Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.
EITF Issue No. 00-21 will be effective for arrangements entered into in fiscal
periods beginning after June 15, 2003. We do not expect that the provisions of
EITF Issue No. 00-21 will have a material impact on our results of operations
or financial position.In January 2003, the FASB issued FASB Interpretation No.46, Consolidation of
Variable Interest Entities  an interpretation of ARB No. 51 (FIN 46). FIN
46 requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 requires that its provisions are effective
immediately for all arrangements entered into after January 31, 2003. For
those arrangements entered into prior to February 1, 2003, the FIN 46
provisions are required to be adopted at the beginning of the first interim or
annual period beginning after December 15, 2003. We do not expect that the
provisions of FIN 46 will have a material impact on our results of operations
or financial position.In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS
No. 133, Accounting for Derivative instruments and Hedging Activities. SFAS
No. 149 is effective for contracts entered into or modified after June 30,
2003. The Company believes that the adoption of SFAS No. 149 will not have a
material impact on the Companys results of operations or financial position.Page 25


TECHNOLOGY SOLUTIONS COMPANYMANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company believes that the adoption of SFAS No. 150 will not have a material
impact on the Companys results of operations or financial position.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. 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 manage the pace of technological change, our ability to manage the
current downturn in our industry and the economy in general, our ability to
manage growth and attract and retain employees in the event the economy turns
around, our ability to accommodate a changing business environment, general
business and economic conditions in our operating regions, market conditions
and competitive and other factors, our ability to continue to attract new
clients and sell additional work to existing clients 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,
2002 under Managements Discussion and Analysis of Financial Condition and
Results of Operations Assumptions Underlying Certain Forward-Looking
Statements and Factors that May Affect Future Results and elsewhere from time
to time in our other SEC reports. Such forward-looking statements speak only
as of the date on which they are made and we do not undertake any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of this Form 10-Q. If we do update or correct one or more
forward-looking statements, investors and others should not conclude that we
would make additional updates or corrections with respect thereto or with
respect to other forward-looking statements. Actual results may vary
materially.Page 26


TECHNOLOGY SOLUTIONS COMPANYPART I. FINANCIAL INFORMATION
(Continued)ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKTSC is exposed to interest rate fluctuations. Changes in interest rates affect
interest income and expense on cash and cash equivalents and marketable securities held in trust. The Companys cash and cash
equivalents are primarily invested in overnight money market type accounts.
Average interest rates were approximately 1.09 percent during the nine months
ended September 30, 2003 compared to approximately 1.85 percent during the same
period in the prior year and 0.92 percent during the three months ended
September 30, 2003 compared to approximately 1.72 percent during the same
period in the prior year. Based on the cash and cash equivalents balances as
of September 30, 2003 and 2002, a hypothetical 1.00 percent increase in
interest rates would have resulted in approximately $0.1 million in additional
net investment income during each of the quarters ended September 30, 2003 and
2002 and approximately $0.3 million during each of the nine months ended
September 30, 2003 and 2002.The financial statements of the Companys non-U.S. subsidiaries are remeasured
into U.S. dollars using the U.S. dollar 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 PROCEDURESThe management of the Company, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 (b) as of the end of the period covered by this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in ensuring 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
made known to them in a timely fashion. 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 has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.Page 27


TECHNOLOGY SOLUTIONS COMPANYPART II. OTHER INFORMATIONITEM 6EXHIBITS AND REPORT ON FORM 8-K(a)   ExhibitsExhibit #
    
    
    
    Description of Document31.1*
    
    
    
    CEO Certification31.2*
    
    
    
    CFO Certification32.1*
    
    
    
    Certification of Stephen B. Oresman Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.32.2*
    
    
    
    Certification of Timothy P. Dimond Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.


(b)
    
    Reports on Form 8-KOne report on Form 8-K was filed during the quarter
ended September 30, 2003. This report, dated July 31,
2003, announced the Companys second quarter 2003 results
of operations.All other items in Part II are either not applicable to the
Company during the quarter ended September 30, 2003, 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.


*
    
    Filed herewithPage 28


SIGNATUREPursuant 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 COMPANYDate:
    
    November 12, 2003
    
    By:
    
    /s/ TIMOTHY P. DIMONDTimothy P. DimondChief Financial Officer

Page 29