##### Table of Contents



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, 2004 Commission file number 0-19433 (TSC LOGO) Technology Solutions Company Incorporated in the
State of Delaware
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. Yes
[ü]   No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes
[  ]   No
[ü] As of October 29, 2004, there were outstanding 40,868,080 shares of TSC
Common Stock, par value $.01.




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TECHNOLOGY SOLUTIONS COMPANY
Index to Form 10-Q PageNumberPart IFINANCIAL INFORMATION (UNAUDITED)ITEM 1. FINANCIAL STATEMENTSConsolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    13ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 4. CONTROLS AND PROCEDURES
    
    
    25Part IIOTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    26ITEM 6. EXHIBITS
    
    
    26SIGNATURE
    
    
    28Amendment to 1996 Stock Incentive PlanCertificationCertificationCertificationCertification
  Page 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements TECHNOLOGY SOLUTIONS
COMPANY 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    33,602
    
    
    $
    41,104Marketable securities held in trust
    
    
    
    
    
    
    6,712Receivables, less allowance for doubtful receivables
of $93 and $239
    
    
    6,021
    
    
    
    5,802Other current assets
    
    
    1,258
    
    
    
    696Total current assets
    
    
    40,881
    
    
    
    54,314COMPUTERS, FURNITURE AND EQUIPMENT, NET
    
    
    305
    
    
    
    201LONG-TERM RECEIVABLES AND OTHER
    
    
    5,648
    
    
    
    5,654Total assets
    
    $
    46,834
    
    
    $
    60,169LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    642
    
    
    $
    330Accrued compensation and related costs
    
    
    4,940
    
    
    
    3,575Deferred compensation
    
    
    
    
    
    
    6,712Restructuring accruals
    
    
    857
    
    
    
    2,417Other current liabilities
    
    
    2,189
    
    
    
    2,744Total current liabilities
    
    
    8,628
    
    
    
    15,778COMMITMENTS 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 40,868,080 and 40,818,469
    
    
    447
    
    
    
    447Capital in excess of par value
    
    
    121,900
    
    
    
    121,974Accumulated deficit
    
    
    (78,940
    )
    
    
    (72,735
    )Treasury stock, at cost, 3,827,708 and 3,877,319 shares
    
    
    (5,423
    )
    
    
    (5,525
    )Accumulated other comprehensive income:Cumulative translation adjustment
    
    
    222
    
    
    
    230Total stockholders equity
    
    
    38,206
    
    
    
    44,391Total liabilities and stockholders equity
    
    $
    46,834
    
    
    $
    60,169
 The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 3




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##### Table of Contents



TECHNOLOGY SOLUTIONS COMPANY 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three
    
    For the NineMonths Ended
    
    Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)REVENUES:Revenues before reimbursements
    
    $
    7,741
    
    
    $
    8,349
    
    
    $
    24,043
    
    
    $
    33,286Reimbursements
    
    
    1,071
    
    
    
    1,092
    
    
    
    3,220
    
    
    
    3,6668,812
    
    
    
    9,441
    
    
    
    27,263
    
    
    
    36,952COSTS AND EXPENSES:Project personnel
    
    
    4,992
    
    
    
    6,202
    
    
    
    15,713
    
    
    
    23,030Other project expenses
    
    
    1,442
    
    
    
    1,157
    
    
    
    4,172
    
    
    
    4,135Reimbursable expenses
    
    
    1,071
    
    
    
    1,092
    
    
    
    3,220
    
    
    
    3,666Bad debt expense
    
    
    
    
    
    
    85
    
    
    
    12
    
    
    
    342Management and administrative support
    
    
    3,948
    
    
    
    3,243
    
    
    
    10,735
    
    
    
    11,418Restructuring and other (credits) charges
    
    
    
    
    
    
    
    
    
    
    (579
    )
    
    
    5,211Incentive compensation
    
    
    233
    
    
    
    
    
    
    
    789
    
    
    
    31111,686
    
    
    
    11,779
    
    
    
    34,062
    
    
    
    48,113OPERATING LOSS
    
    
    (2,874
    )
    
    
    (2,338
    )
    
    
    (6,799
    )
    
    
    (11,161
    )OTHER INCOME:Net investment income
    
    
    279
    
    
    
    246
    
    
    
    594
    
    
    
    693LOSS BEFORE INCOME TAXES
    
    
    (2,595
    )
    
    
    (2,092
    )
    
    
    (6,205
    )
    
    
    (10,468
    )INCOME TAX PROVISION
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,611NET LOSS
    
    $
    (2,595
    )
    
    $
    (2,092
    )
    
    $
    (6,205
    )
    
    $
    (27,079
    )BASIC NET LOSS
PER COMMON SHARE
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.67
    )WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
    
    
    40,875
    
    
    
    40,583
    
    
    
    40,851
    
    
    
    40,553DILUTED NET LOSS
PER COMMON SHARE
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.67
    )WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
    
    
    40,875
    
    
    
    40,583
    
    
    
    40,851
    
    
    
    40,553
 The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 4




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TECHNOLOGY SOLUTIONS COMPANY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For theNine Months EndedSeptember 30,2004
    
    2003(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (6,205
    )
    
    $
    (27,079
    )Restructuring and other (credits) charges
    
    
    (579
    )
    
    
    5,211Adjustments to reconcile net loss to net cash from operating
activities:Depreciation and amortization
    
    
    313
    
    
    
    420Provisions for receivable valuation allowances and
reserves for possible losses, net of recoveries
    
    
    12
    
    
    
    342Gain on sale of investments
    
    
    
    
    
    
    (9
    )Deferred income taxes
    
    
    
    
    
    
    16,543Changes in assets and liabilities:Receivables
    
    
    (231
    )
    
    
    5,173Sales of trading securities related to deferred
compensation plan, net of market adjustments
    
    
    6,712
    
    
    
    664Other current assets
    
    
    (562
    )
    
    
    (465
    )Accounts payable
    
    
    312
    
    
    
    102Accrued compensation and related costs
    
    
    1,363
    
    
    
    (4,213
    )Deferred compensation liability
    
    
    (6,712
    )
    
    
    (664
    )Restructuring accruals
    
    
    (981
    )
    
    
    (2,211
    )Other current liabilities
    
    
    (500
    )
    
    
    408Other assets
    
    
    11
    
    
    
    400Net cash used in operating activities
    
    
    (7,047
    )
    
    
    (5,378
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from available-for-sale securities
    
    
    
    
    
    
    1,801Capital expenditures
    
    
    (422
    )
    
    
    (48
    )Net cash (used in) provided by investing activities
    
    
    (422
    )
    
    
    1,753CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    1
    
    
    
    26Proceeds from employee stock purchase plan
    
    
    103
    
    
    
    170Purchase of Company stock for treasury
    
    
    (76
    )
    
    
    (286
    )Net cash provided by (used in) financing activities
    
    
    28
    
    
    
    (90
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS
    
    
    (61
    )
    
    
    308DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (7,502
    )
    
    
    (3,407
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    41,104
    
    
    
    47,004CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    33,602
    
    
    $
    43,597
 The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. Page 5




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##### Table of Contents



TECHNOLOGY SOLUTIONS COMPANY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(In thousands, except share and per share data) NOTE 1  BASIS OF PRESENTATION The consolidated financial statements include the accounts of Technology
Solutions Company and its subsidiaries (TSC or the Company). The
consolidated balance sheet as of September 30, 2004, the consolidated
statements of operations for the three and nine months ended September 30, 2004
and 2003 and the consolidated statements of cash flows for the nine months
ended September 30, 2004 and 2003 have been prepared by the Company without
audit. In the opinion of management, these financial statements include all
adjustments necessary to present fairly the financial position, results of
operations and cash flows as of September 30, 2004 and for all periods
presented. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. The Company believes that the disclosures included are adequate and
provide a fair presentation of interim period results. Interim financial
statements are not necessarily indicative of financial position or operating
results for an entire year. It is suggested that these interim financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the United States Securities and Exchange
Commission (SEC) on March 19, 2004. NOTE 2  THE COMPANY Technology Solutions Company is a consulting company that delivers business
benefits to its clients through application of information technology. TSC
helps its clients plan, select, install, upgrade and optimize the software
systems that run their business operations. TSCs range of services include
project planning, software selection, reengineering, implementation, systems
integration, upgrades, training, and outsourcing. The Companys clients are
primarily located throughout the United States but the Company also supports
global deployments. Page 6




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) NOTE 3  STOCK OPTIONS The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Compensation costs for employee stock options is measured as the excess, if
any, of the quoted market price of the Companys common stock at the date of
grant over the amount an employee must pay to acquire the stock. The following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based compensation. For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss:As reported
    
    $
    (2,595
    )
    
    $
    (2,092
    )
    
    $
    (6,205
    )
    
    $
    (27,079
    )Less: Stock-based compensation expense
determined under fair value method
for all
awards, net of related taxes (as
applicable)
    
    
    (479
    )
    
    
    (272
    )
    
    
    (1,422
    )
    
    
    (1,384
    )Pro forma
    
    $
    (3,074
    )
    
    $
    (2,364
    )
    
    $
    (7,627
    )
    
    $
    (28,463
    )Basic net loss per common share:As reported
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.67
    )Pro forma
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (0.70
    )Diluted net loss per common share:As reported
    
    $
    (0.06
    )
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.67
    )Pro forma
    
    $
    (0.08
    )
    
    $
    (0.06
    )
    
    $
    (0.19
    )
    
    $
    (0.70
    )
 As of September 30, 2004 and 2003, options to purchase 11,385,032 and
10,167,922 shares of common stock were outstanding, respectively, and options
to purchase an additional 1,637,688 and 2,959,218 shares of common stock were
available for grant, respectively, under the Technology Solutions Company 1996
Stock Incentive Plan. NOTE 4  CAPITAL STOCK The Company has a stock repurchase program, which allows for share repurchases
of up to 11,525,327 shares of outstanding Company common stock (the Repurchase
Program). During the nine months ended September 30, 2004, the Company
purchased 75,500 shares for $76. During the nine months ended September 30,
2003, the Company purchased 277,000 shares for $286. The Company has purchased
an aggregate total of 6,838,127 shares since the inception of this Repurchase
Program in September 2000. As of September 30, 2004, there were 4,687,200
shares available to be purchased under the Repurchase Program. Page 7




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) The timing and size of any future stock repurchases are subject to market
conditions, stock prices, cash position and other cash requirements. NOTE 5  LOSS PER COMMON SHARE The Company discloses basic and diluted loss per share in the consolidated
statements of operations under the provisions of SFAS No. 128, Earnings Per
Share. Diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during each period
presented, plus the dilutive effect of common equivalent shares arising from
the assumed exercise of stock options using the treasury stock method. Common
equivalent shares of 721,301; 954,882; 921,749 and 961,009 were not included in
the diluted loss per share calculation as they were antidilutive for the three
and nine months ended September 30, 2004 and September 30, 2003, respectively.
Basic loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during each period presented. Reconciliation of basic and diluted loss per share for the three months ended: September 30, 2004
    
    September 30, 2003Shares
    
    Per
    
    
    
    
    
    Shares
    
    PerNet
    
    (In
    
    Common
    
    Net
    
    (In
    
    CommonLoss
    
    Thousands)
    
    Share
    
    Loss
    
    Thousands)
    
    ShareBasic loss per share
    
    $
    (2,595
    )
    
    
    40,875
    
    
    $
    (0.06
    )
    
    $
    (2,092
    )
    
    
    40,583
    
    
    $
    (0.05
    )Effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted loss per share
    
    $
    (2,595
    )
    
    
    40,875
    
    
    $
    (0.06
    )
    
    $
    (2,092
    )
    
    
    40,583
    
    
    $
    (0.05
    )
 Reconciliation of basic and diluted loss per share for the nine months ended: September 30, 2004
    
    September 30, 2003Shares
    
    Per
    
    
    
    
    
    Shares
    
    PerNet
    
    (In
    
    Common
    
    Net
    
    (In
    
    CommonLoss
    
    Thousands)
    
    Share
    
    Loss
    
    Thousands)
    
    ShareBasic loss per share
    
    $
    (6,205
    )
    
    
    40,851
    
    
    $
    (0.15
    )
    
    $
    (27,079
    )
    
    
    40,553
    
    
    $
    (0.67
    )Effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted loss per share
    
    $
    (6,205
    )
    
    
    40,851
    
    
    $
    (0.15
    )
    
    $
    (27,079
    )
    
    
    40,553
    
    
    $
    (0.67
    )
 Page 8




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) NOTE 6  COMPREHENSIVE (LOSS) INCOME The Companys comprehensive (loss) income was as follows: For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (2,595
    )
    
    $
    (2,092
    )
    
    $
    (6,205
    )
    
    $
    (27,079
    )Other comprehensive income (loss):Net unrealized holding gain on
available-for-sale securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119Translation adjustment
    
    
    1
    
    
    
    (3
    )
    
    
    (8
    )
    
    
    260Other comprehensive income (loss)
    
    
    1
    
    
    
    (3
    )
    
    
    (8
    )
    
    
    379Total comprehensive loss
    
    $
    (2,594
    )
    
    $
    (2,095
    )
    
    $
    (6,213
    )
    
    $
    (26,700
    )
 NOTE 7  BUSINESS SEGMENTS The Company operates in a single business segment. The Companys clients are
primarily located throughout the United States but the Company also supports
global deployments. The following is revenue, including reimbursements, and
long-lived asset information by geographic area: For and as of the Three Months
    
    
    
    
    
    ForeignEnded September 30, 2004
    
    United States
    
    Subsidiary
    
    TotalRevenues
    
    $
    8,812
    
    
    
    
    
    
    $
    8,812Identifiable assets
    
    $
    46,644
    
    
    $
    190
    
    
    $
    46,834
 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 Nine Months
    
    
    
    
    
    ForeignEnded September 30, 2004
    
    United States
    
    Subsidiary
    
    TotalRevenues
    
    $
    27,263
    
    
    
    
    
    
    $
    27,263Identifiable assets
    
    $
    46,644
    
    
    $
    190
    
    
    $
    46,834
 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
 Page 9




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) Foreign revenues and identifiable assets are based on the country in which the
legal subsidiary is domiciled. No single foreign countrys revenues or
identifiable assets were material to the consolidated revenues or identifiable
assets of the Company. NOTE 8  OTHER EVENTS In the second quarter of 2003, the Company recorded $5,211 in restructuring and
other charges as a result of organizational changes announced in June 2003.
These charges consisted of the severance costs of professional personnel and
executives as well as office reductions and professional fees incurred in
connection with terminated negotiations with a party that had expressed
interest in acquiring the Company. During the three months ended March 31,
2004, this charge was reduced by $266 to $4,945 as the Company was able to
favorably terminate one of its office leases. As of September 30, 2004, there
was an accrual balance of $857. The Company expects to utilize this balance by
the end of 2005. The following table provides the components of this charge. Restructuring and Other
    
    
    
    
    
    Cash(1)
    
    Non-cash
    
    Balance as ofCharges  2003
    
    Charge
    
    Payments
    
    Usage
    
    Sept. 30, 2004Severance costs (approximately 30
employees)
    
    $
    3,917
    
    
    $
    3,207
    
    
    $
    33
    
    
    $
    677Office reductions
    
    
    921
    
    
    
    463
    
    
    
    2
    
    
    
    456Professional fees
    
    
    373
    
    
    
    383
    
    
    
    
    
    
    
    (10
    )Total original charge
    
    
    5,211
    
    
    
    4,053
    
    
    
    35
    
    
    
    1,1232004 adjustment
    
    
    (266
    )
    
    
    
    
    
    
    
    
    
    
    (266
    )Total
    
    $
    4,945
    
    
    $
    4,053
    
    
    $
    35
    
    
    $
    857
  (1)
    
    Net cash payments totaling $966 were made during the nine months ended
September 30, 2004. In 2000, the Company recorded a pre-tax charge of $4,701 for the closure of its
Latin American operations. Subsequently in 2000, the Company collected $400 of
accounts receivable previously written-off and, as a result, the cumulative
charge was reduced to $4,301. This charge was further reduced by $181 to $4,120
during the three months ended March 31, 2004 as the Company completed the
closure of its Latin American operations and, accordingly, no further payments
are due. The following table provides the components of this charge: Page 10




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TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) Cash(2)
    
    Non-cash
    
    Balance as ofLatin America Charge  2000
    
    Charge
    
    Payments
    
    Usage
    
    Sept. 30, 2004Severance costs
(approximately 40
employees)
    
    $
    1,785
    
    
    $
    1,574
    
    
    $
    
    
    
    $
    211Other costs
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    (30
    )Asset write-offs
    
    
    2,916
    
    
    
    
    
    
    
    2,916
    
    
    
    Total original charge
    
    
    4,701
    
    
    
    1,604
    
    
    
    2,916
    
    
    
    181Accounts receivable
collections - 2000
    
    
    (400
    )
    
    
    (400
    )
    
    
    
    
    
    
    2004 adjustment
    
    
    (181
    )
    
    
    
    
    
    
    
    
    
    
    (181
    )Total
    
    $
    4,120
    
    
    $
    1,204
    
    
    $
    2,916
    
    
    $
    
  (2)
    
    There were no net cash payments during the nine months ended September 30,
2004. In 1999, the Company recorded $6,967 in restructuring and other charges
associated with lease terminations, former executive severance costs, CourseNet
Systems, Inc. acquisition costs and asset write-offs. On February 15, 2000, the
Company distributed the common stock of eLoyalty Corporation (eLoyalty) owned
by the Company to the Companys stockholders (the Spin-Off). eLoyalty
operated within the Company prior to the Spin-Off and is now a separate,
publicly traded company. The Company determined that a portion of the lease
terminations became unnecessary due to changes in TSC office usage by TSC and
eLoyalty and also determined that the actual costs for these lease terminations
would be less than previously anticipated and, as a result, the cumulative
charge was reduced by $2,036 to $4,931 during 2000, 2001 and 2002 and by $132
to $4,799 during the quarter ended March 31, 2004. During the quarter ended
June 30, 2004, the Company made the final payment on its remaining contractual
lease obligation. Accordingly, as of September 30, 2004, no further payments
are due on this charge. The following table provides the components of this
charge. Restructuring and Other
    
    
    
    
    
    Cash(3)
    
    Non-cash
    
    Balance as ofCharges  1999
    
    Charge
    
    Payments
    
    Usage
    
    Sept. 30, 2004Lease terminations
    
    $
    3,011
    
    
    $
    725
    
    
    $
    35
    
    
    $
    2,251Former 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
    
    
    
    2,472
    
    
    
    2,327
    
    
    
    2,1682000 adjustment
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    (404
    )2001 adjustment
    
    
    (1,488
    )
    
    
    
    
    
    
    
    
    
    
    (1,488
    )2002 adjustment
    
    
    (144
    )
    
    
    
    
    
    
    
    
    
    
    (144
    )2004 adjustment
    
    
    (132
    )
    
    
    
    
    
    
    
    
    
    
    (132
    )Total
    
    $
    4,799
    
    
    $
    2,472
    
    
    $
    2,327
    
    
    $
    
  (3)
    
    Net cash payments totaling $15 were made during the nine months ended
September 30, 2004. Page 11




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##### Table of Contents



TECHNOLOGY SOLUTIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)
(Continued) NOTE 9  RELATED PARTY During the nine months ended September 30, 2004 and 2003, the Company provided
services to Bausch & Lomb, Inc (B&L). One of the Companys directors, John R.
Purcell, and a former director, William H. Waltrip, also serve as directors for
B&L. The services performed related to B&Ls global IT integration project and
were awarded following a competitive bidding process. The amount of revenues
recognized for such services during the nine months ended September 30, 2004
and 2003 represented 3 percent and 7 percent of the Companys total revenues
before reimbursements, respectively, and during the quarters ended September
30, 2004 and 2003 represented 1 percent and 3 percent of such revenues before
reimbursements, respectively. The net accounts receivable balances from these
services as of September 30, 2004 and December 31, 2003 were $0 and $272,
respectively. NOTE 10  MERGER AGREEMENT On August 9, 2004, the Company announced that it had entered into a definitive
merger agreement with ZAMBA Corporation (ZAMBA), under which the Company will
acquire ZAMBA. Consummation of the merger is subject to certain conditions
including the approval of ZAMBAs stockholders. Under the terms of the
transaction, which was approved by both companies boards of directors, ZAMBA
stockholders will receive 0.15 shares of the TSCs common stock for each share
of ZAMBA common stock which they hold as of the effective date of the merger.
As of September 30, 2004, there were 38,922,028 shares of ZAMBA common stock
issued and outstanding. Upon completion of the transaction, ZAMBA stockholders
will own approximately 12.5 percent of the Company. TSC and Zamba expect to incur fees and expenses associated with consummating
the merger of approximately $3.3 million, of which approximately $0.3 million
has been incurred as of September 30, 2004. These transaction fees and
expenses represent costs of completing the proposed merger and will be included
as a component of the purchase price for purposes of purchase accounting. NOTE 11  SUBSEQUENT EVENT On October 5, 2004, the Company announced that it had entered into an asset
purchase agreement pursuant to which it acquired the business of Proceed North
America LLC (Proceed). TSC paid Proceed $500 in cash upon closing of the
acquisition and will make additional cash payments of $250 each in January and
April 2005. In addition, TSC agreed to make three additional cash payments to
Proceed of up to $500 each (for a maximum contingent payment total of $1,500)
payable in February 2006, 2007 and 2008, respectively, contingent on certain
conditions. Page 12




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##### Table of Contents



TECHNOLOGY SOLUTIONS COMPANY 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW On August 9, 2004, we announced that we have entered into a definitive merger
agreement with ZAMBA Corporation (ZAMBA), under which we will acquire ZAMBA
(the merger). Under the terms of the transaction, which was approved by both
companies boards of directors, ZAMBA stockholders will receive 0.15 shares of
our common stock for each share of ZAMBA common stock which they hold as of the
effective date of the merger. Upon completion of the transaction, ZAMBA
stockholders will own approximately 12.5 percent of the Company. Consummation
of the merger is subject to certain conditions including the approval of
ZAMBAs stockholders. Since we are not in a position to know when the merger
will close, statements contained in this report regarding our future
performance is for TSC only and, accordingly, excludes any revenues, costs or
cash flows of ZAMBA or otherwise arising from the merger. The results of our operations are affected by general economic conditions as
well as the level of economic activity and changes in the industries that we
serve. While the general economy and the information technology (IT)
consulting services market is improving, there is no assurance that these
improving conditions will result in an increase in our future revenues given
the fundamental changes in the IT service industry as set forth below. In
addition, increases in demand for our services generally tend to lag behind
economic cycles. Accordingly, any benefit to our business of any economic
recovery may take longer to realize. Beginning in the second half of 2003, we took steps to refocus and rebuild our
business. These steps included investing in a range of specialty services in
order to differentiate ourselves from our competition and investing in
marketing initiatives to support these specialty services as well as
maintaining our project personnel headcount at a level to enable us to grow our
business. We continue to refocus our marketing and sales efforts as well as
formulate new service offerings. Our revenues in the third quarter of 2004 were
flat as compared to the second quarter of 2004. We expect quarterly revenues in
the fourth quarter to be comparable or improve as compared to the third quarter
of 2004. We incurred operating losses in the first three quarters of 2004 as
well as all four quarters during 2003 and we expect to incur an operating loss
during the fourth quarter of 2004 as we continue our efforts to refocus and
rebuild our business. In addition to the challenges described above, we believe that the information
technology services industry is undergoing fundamental changes, resulting in
increased competitive pressure. These changes include competition from
application software firms as they continue to enhance services and
implementation capabilities to increase their revenue; offshore application
development and system consulting and support firms which typically have much
lower labor costs and billing rates; and the proliferation of Enterprise
Resource Planning (ERP) expertise within the IT departments of organizations,
reducing the need to engage outside consulting help. The availability of
offshore technical expertise has and will continue to have an impact on the IT Page 13




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) consulting market. However, we believe the demand for high end value added
technically and functionally competent innovative consultants will increase over time. The
complexity of corporate IT functions is not diminishing. In addition, we
believe that the upcoming baby boomer retirement will impact the supply of
trained consultants in the market. Our business is also driven by the pace of technological change, our ability to
differentiate ourselves from our competitors through specialty services that
address targeted industry and business concerns, and the type and level of
spending by our clients in the areas in which we provide services. Many factors
can result in a deferral, reduction or cancellation of services requested by
our prospective or current clients including budget constraints, economic
conditions and perceived project progress, success or value. The economic
uncertainties of recent years has lead many corporations to reassess their IT
goals and budgets. This, combined with the lack of significant new technology
to stimulate spending, has had a further dampening impact on demand for our
services. However, we also believe that many companies have very old systems
and technology and that real time business decision making will fuel growth
in many of our markets. During periods of decreased demand, pricing pressures emerge as companies try
to minimize costs and negotiate lower prices for our services. Our ability to
successfully identify and prepare for these changes is a key driver of our
performance. Therefore, our strategy is to try to anticipate these trends and
identify cost-management initiatives that will allow us to manage costs
relative to expected revenues as well as identifying opportunities to increase
revenues. Although we remain committed to spending our funds wisely, there is a
point at which further cost cutting can be counter-productive. Project personnel costs constitute the majority of our operating costs. Since
project personnel costs are primarily driven by the cost of billable personnel,
mainly compensation and benefits, maintaining these costs at a reasonable and
predictable percentage of revenue is critical to our financial performance.
Project personnel costs as a percentage of revenues are driven by utilization
and average hourly billing rates. Utilization represents the percentage of time
our billable professionals spend on billable work. It is our strategy to try to
match our project personnel supply with demand. At times this requires us to
reduce headcount and reassign employees to other active projects when they are
no longer needed on a particular project. However, because of the mix of skills
needed and project duration, implementation of this strategy may be delayed at
times. Accordingly, any decline in revenues without a corresponding and timely
reduction in staffing, or a staffing increase that is not accompanied by a
corresponding increase in revenues, would have an adverse effect on our
business, operating results and financial condition, which could be material. REVENUES For presentation purposes, we show two components of revenues: 1) revenues
before reimbursements, which consists of revenue for performing consulting
services; and 2) Page 14




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) reimbursements, consisting of reimbursements we receive from
clients for out-of-pocket expenses incurred. We believe revenues before
reimbursements is a more meaningful representation of our economic activity since it excludes pass-through, zero-margin expense
reimbursements. COSTS AND EXPENSES Project Personnel Project personnel costs consist primarily of professional salaries and
benefits. Other Project Expenses Other project expenses consist of the cost for subcontractors hired for use on
our client projects and billed to our clients; employee termination costs; and
nonreimbursable expenses incurred for client projects and business development.
Nonreimbursable expenses include recruiting fees, certain selling expenses, and
personnel training. Reimbursable Expenses Reimbursable expenses represent project related and other out-of-pocket
expenses that are reimbursable by the client. An equivalent amount is included
in revenues under the caption Reimbursements. Bad Debt Expense We maintain an allowance for doubtful receivables resulting from the failure of
our customers to make required payments. We also analyze our notes receivable,
which are included in Long-Term Receivables and Other on our Consolidated
Balance Sheet. Management and Administrative Support Management and administrative support costs consist of client officer costs and
infrastructure costs. Client officer costs include client officer salaries and
travel, marketing costs and recruiting costs. Client officers are a critical
component in our client relationship-selling model. Our client officers are
assigned to every client and are responsible for growing and enhancing the
relationship between us and our current clients, as well as past clients, and
establish us as business partner in the eyes of our client, rather then just a
vendor. In addition, each client officer is also a billable consulting
resource. Infrastructure costs include costs related to our senior corporate
management and board of directors; accounting; financial reporting; finance;
tax; legal; treasury; human resources; employee benefits; marketing; public and
investor relations; office operations; staffing of our project personnel;
recruiting; training; internal communications; internal technology
applications; management of new business opportunities; planning; quality
assurance; and risk management. Incentive Compensation Incentive compensation, if any, is accrued at a set percentage of base salary,
which varies by Page 15




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) level of employee, and is adjusted to reflect the amounts needed for active employees and for performance against targets, goals and
objectives. Payments of incentive compensation, if any, are performance based
and are determined by both objective (financial-based) and subjective
measures. These objectives include both quarterly and full fiscal year
parameters. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Management bases its estimates on
historical experience and other assumptions, which it believes are reasonable.
If actual amounts are ultimately different from these estimates, the revisions
are included in the Companys results of operations for the period in which the
actual amounts become known. Accounting policies are considered critical when they require management to
make assumptions about matters that are highly uncertain at the time the
estimate is made and when different estimates than management reasonably could
have used have a material impact on the presentation of the Companys financial
condition, changes in financial condition or results of operations. Revenue Recognition We derive our revenues from a variety of information technology services,
including systems integration, packaged software integration and implementation
services, programming, training and extended support services. Our services are
contracted on either a time and materials basis or a fixed price basis. For our
time and materials contracts, we recognize revenues as work is performed,
primarily based on hourly billing rates. For our fixed price contracts, we
recognize revenues using the percentage-of-completion method, which is based on
the percentage of work performed in the period compared to the total estimated
work to be performed over the entire contract. Revenues are subject to revision
as the contract progresses to completion. Any revisions in the estimate are
charged to operations in the period in which the facts that give rise to the
revision become known. Contracts are performed in phases. Losses on contracts,
if any, are reserved in full when determined. Contract losses are determined by
the amount by which the estimated cost of the contract exceeds the estimated
total revenues that will be generated by the contract. Extended support
revenues are recognized as services are rendered. Allowance for Doubtful Receivables An allowance for doubtful receivables is maintained for potential credit
losses. When evaluating the adequacy of our allowance for doubtful receivables,
management specifically analyzes accounts receivable on a client by client
basis, including customer credit worthiness and current economic trends, and
records any necessary bad debt expense based on the best estimate of the Page 16




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) facts known to date. Should the facts regarding the collectability of receivables
change, the resulting change in the allowance would be charged or credited to
income in the period such determination is made. Such a change could materially
impact our financial position and results of operations. Accounting for Income Taxes We use an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income taxes are provided using currently enacted
tax rates when tax laws and financial accounting standards differ with respect
to the amount of income for a year and the basis of assets and liabilities.
Significant management judgement is required in determining our provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. We have generated certain
deferred tax assets as a result of operating losses and temporary differences
between book and tax accounting, as well as tax benefits resulting from the
exercise of employee stock options that were recorded as additional paid-in
capital in the period of exercise. Statement of Financial Accounting Standards
(SFAS) No. 109 Accounting for Income Taxes, requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets. During 2003, we recorded a full valuation allowance against our
deferred tax assets. If the realization of our deferred tax assets in future
periods is considered more likely than not, an adjustment to our deferred tax
asset would increase net income in the period such determination is made. The
amount of deferred tax assets considered realizable is based on significant
estimates. Changes in these estimates could materially affect our financial
condition and results of operations in future periods. Stock-Based Compensation We account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Compensation costs
for employee stock options is measured as the excess, if any, of the quoted
market price of the Companys common stock at the date of grant over the amount
an employee must pay to acquire the stock. THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2003 Revenues Consolidated net revenues were $8.8 million for the three months ended
September 30, 2004, a decrease of 7 percent from the same period in the prior
year. Revenues before reimbursements decreased 7 percent to $7.7 million from
$8.3 million. We believe that this decline in revenues was primarily due to
decreased demand for our services arising out of the continuing economic
uncertainties, fundamental changes in the IT services industry, and a decline
in corporate information technology capital expenditures as large and small
companies reassessed their goals and budgets. Page 17




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) During the three months ended September 30, 2004, two clients accounted for 25
percent of revenues before reimbursements (United Water Inc.  14 percent and
Caterpillar Inc.  11 percent). During the three months ended September 30,
2003, two clients accounted for 27 percent of revenues before reimbursements (ExxonMobil Corp.  16 percent and
Caterpillar Inc.  11 percent). We added 22 new clients and 37 new projects
during the three months ended September 30, 2004 compared to 5 new clients and
25 new projects during the same period in the prior year. In addition, we
performed work for 64 clients and 87 projects during the three months ended
September 30, 2004 compared to 44 clients and 78 projects during the same
period in the prior year. During the three months ended September 30, 2004 and 2003, we provided services
to Bausch & Lomb, Inc (B&L). One of our directors, John R. Purcell, and a
former director, William H. Waltrip, also serve as directors for B&L. The
services performed related to B&Ls global IT integration project and were
awarded following a competitive bidding process. The amount of revenues
recognized for such services during the three months ended September 30, 2004
and 2003 represented 1 percent and 3 percent of our total revenues before
reimbursements, respectively. The net accounts receivable balances from these
services as of September 30, 2004 and December 31, 2003 were none and $272
thousand, respectively. Costs and Expenses Project personnel costs were $5.0 million for the three months ended September
30, 2004, a decrease of 20 percent from the same period in the prior year. This
decrease was largely attributable to staff reductions in response to our
declining revenues and our ongoing efforts to keep headcount and costs in line
with demand for our services, as described earlier in this item. Professional
domestic headcount decreased to 137 as of September 30, 2004 compared to 172 as
of September 30, 2003. Annualized voluntary turnover increased to 30 percent
from 23 percent for the three months ended September 30, 2003. Project
personnel costs as a percentage of revenues before reimbursements decreased to
64 percent for the three months ended September 30, 2004 from 74 percent from
the same period in the prior year primarily due to an increase in average
hourly billing rates and increased use of subcontractors for certain
specialized skills. Average hourly billing rates increased 6 percent to $147.
We believe the improvement in average hourly billing rates reflects a firmer
overall market as well as the start of a shift in our services to higher
value-added activities. Staff utilization declined to 62 percent from 71
percent for the three months ended September 30, 2003. Other project expenses were $1.4 million for the three months ended September
30, 2004, an increase of 25 percent from the same period in the prior year.
This increase resulted from an increase in subcontractor costs of $0.4 million,
partially offset by a $0.1 million decrease in headcount related costs, which
includes travel, computer and communication costs. Other project expenses as a
percentage of revenues before reimbursements increased to 19 percent for the
three months ended September 30, 2004 from 14 percent for the same period in
the prior year mainly due to the increased use of subcontractors for certain
specialized skills. Page 18




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) There was no bad debt expense during the three months ended September 30, 2004,
a decrease of $0.1 million from the same period in the prior year. Management and administrative support costs increased 22 percent to $3.9
million for the three months ended September 30, 2004 from $3.2 million in the
same period in the prior year. This increase resulted from executive
termination costs of $0.5 million during the three months ended September 30,
2004 as well as an increase in labor costs of $0.4 million due to the hiring of
additional client officers, as part of our client relationship-selling model.
These increases were partially offset by lower telecommunication costs and
depreciation expense of $0.2 million. Incentive compensation expense was $0.2 million for the three months ended
September 30, 2004. There was no incentive compensation expense in the same
period in the prior year. If the Company and our employees meet their 2004
quarterly and annual quantitative and qualitative objectives, we expect to
continue to accrue incentive compensation during the remainder of 2004. Operating Loss Consolidated operating loss was $2.9 million for the three months ended
September 30, 2004 compared to $2.3 million for the same period in the prior
year. The increase in the operating loss mainly resulted from costs for
executive terminations. Other Income Other income for the three months ended September 30, 2004 was just under $0.3
million compared to just over $0.2 million for the same period in the prior
year. Other income increased as a result improved interest rates year over
year, while our cash balances were lower year over year. Our cash and cash
equivalents were primarily invested in overnight money market type accounts.
Average interest rates were approximately 1.26 percent for the three months
ended September 30, 2004 compared to approximately 0.92 percent during the same
period in the prior year. Income Tax Provision We did not recognize an income tax benefit for the three months ended September
30, 2004 since we recorded a full valuation allowance against our deferred
taxes in 2003. Shares Outstanding Weighted average number of common shares outstanding and weighted average
number of common and common equivalent shares outstanding increased to
40,875,000 from 40,583,000 due to the issuance of shares under our employee
stock purchase plan and stock option plans. During the three months ended
September 30, 2004, we repurchased, under our previously announced repurchase
program, 75,500 shares of our Common Stock at an average price of $1.00 per
share. We did not purchase any of our shares during the three months ended
September 30, 2003. Page 19




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2003 Revenues Consolidated net revenues were $27.3 million for the nine months ended
September 30, 2004, a decrease of 26 percent from the same period in the prior
year. Revenues before reimbursements decreased 28 percent to $24.0 million from
$33.3 million. We believe that this decline in revenues was primarily due to
decreased demand for our services and an increase in competitive pricing
arising out of the continuing economic uncertainties, fundamental changes in
the IT services industry, and a decline in corporate information technology
capital expenditures as large and small companies reassessed their goals and
budgets. Costs and Expenses Project personnel costs were $15.7 million for the nine months ended September
30, 2004, a decrease of 32 percent from the same period in the prior year. This
decrease was largely attributable to staff reductions in response to our
declining revenues and our ongoing efforts to keep headcount and costs in line
with demand for our services, as described earlier in this item. Project
personnel costs as a percentage of revenues before reimbursements decreased
slightly to 65 percent for the nine months ended September 30, 2004 compared to
69 percent from the same period in the prior year primarily as a result of an
increased use of subcontractors for certain specialized skills. Average hourly
billing rates decreased 6 percent to $147. The decline in average hourly
billing rates primarily reflects the increased competitive environment in the
information technology consulting market as well as lower rates for
post-go-live activities. Staff utilization was unchanged at 65 percent. Other project expenses were $4.2 million for the nine months ended September
30, 2004, virtually unchanged from the same period in the prior year. While
other project expenses were almost unchanged in total, headcount related costs,
which includes travel, computer and communication costs, decreased by $0.7
million and employee termination costs decreased by $0.3 million. These
reductions were offset by an increase in subcontractor costs of $1.0 million,
due to the increased use of subcontractors for certain specialized skills.
Other project expenses as a percentage of revenues before reimbursements
increased to 17 percent for the nine months ended September 30, 2004 from 12
percent for the same period in the prior year mainly due to the increase in
subcontractor costs. Bad debt expense was almost zero for the nine months ended September 30, 2004
compared to an expense of $0.3 million for the same period in the prior year.
This decrease was a result of recoveries of previously reserved receivables as
well as fewer collection issues during the nine months ended September 30,
2004. Management and administrative support costs decreased 6 percent to $10.7
million for the nine months ended September 30, 2004 from $11.4 million in the
same period in the prior year. This decrease mainly resulted from a decrease in
labor costs of $0.9 million, as we reduced headcount Page 20




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) as a result of our
organizational changes during the quarter ended June 30, 2003, as well as a
$0.2 million decrease in occupancy costs as a result of office reductions
during the three months ended June 30, 2003. These decreases were partially
offset by executive termination costs of $0.5 million. During the nine months ended September 30, 2004, we reversed restructuring and
other charges of $0.6 million. This amount consisted of $0.3 million related to
certain lease terminations recorded during the three months ended June 30,
2003, $0.2 million related to the closure of our Latin American operations
recorded in 2000 and $0.1 million related to certain lease terminations
recorded in 1999. During the nine months ended September 30, 2003, we recorded
$5.2 million in restructuring and other charges as a result of organizational
changes announced in June 2003. These charges consisted of the severance costs
of professional personnel and executives and office reductions as well as
professional fees incurred in connection with terminated negotiations with a
party that had expressed interest in acquiring us. Incentive compensation expense was $0.8 million for the nine months ended
September 30, 2004 compared with $0.3 million in the same period in the prior
year. Incentive compensation as a percentage of revenues excluding
reimbursements increased to 3 percent during the nine months ended September
30, 2004 compared to 1 percent in the same period in the prior year. If the
Company and our employees meet their 2004 quarterly and annual quantitative and
qualitative objectives, we expect to continue to accrue incentive compensation
during the remainder of 2004. Operating Loss Consolidated operating loss was $6.8 million for the nine months ended
September 30, 2004 compared to $11.2 million for the same period in the prior
year. Our operating loss for 2004 included restructuring and other credits of
$0.6 million and our operating loss for 2003 included restructuring and other
charges of $5.2 million. The increase in the operating loss, excluding these
credits and charges, mainly resulted from the decline in revenues. Other Income Other income for the nine months ended September 30, 2004 was $0.6 million
compared to $0.7 million for the same period in the prior year. This decrease
was a result of lower cash balances as well as lower interest rates year over
year. Our cash and cash equivalents were primarily invested in overnight money
market type accounts. Average interest rates were approximately 1.02 percent
for the nine months ended September 30, 2004 compared to approximately 1.09
percent during the same period in the prior year. Income Tax Provision We did not recognize an income tax benefit for the nine months ended September
30, 2004 since we recorded a full valuation allowance against our deferred
taxes in 2003. Page 21




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) Shares Outstanding Weighted average number of common shares outstanding and weighted average
number of common and common equivalent shares outstanding increased to
40,851,000 from 40,553,000 due to the issuance of shares under our employee
stock purchase plan and stock option plans. We repurchased, under our previously announced repurchase program, 75,500 shares
of our Common Stock at an average price of $1.00 per share and 277,000 shares
of our Common Stock at an average price of $1.03 per share during the nine
months ended September 30, 2004 and 2003, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $7.0 million and $5.4 million for the
nine months ended September 30, 2004 and 2003, respectively. Net cash used in
operating activities for the nine months ended September 30, 2004 primarily
related to the loss for the nine months ended September 30, 2004, net of the
non-cash restructuring and other credits, as well as payments related to the
June 30, 2003 restructuring and other charges and our annual corporate
insurance payments. These restructuring credits and payments and corporate
insurance payments resulted in a decrease in the restructuring accruals and an
increase in other current assets, respectively. Days sales outstanding increased by 1 day to 61 days at September 30, 2004 as
compared to September 30, 2003. Cash commitments relating to remaining restructuring and other charges are $0.7
million in severance costs and $0.2 million in office costs. The anticipated
cash outflows for these restructuring and other charges are $0.2 million for
the remaining quarter in 2004 and the remaining balance of $0.7 million in
2005. As a result of our acquisition of Proceed North America LLC in October
2004, we have cash commitments of $0.5 million for the remaining quarter of
2004 and $0.5 million in 2005. In connection with our pending merger agreement
with Zamba Corporation, we expect to incur future fees and expenses associated
with consummating the merger of approximately $3.0 million. Other estimated
future cash commitments include various office facilities, property and office
equipment under operating leases and other costs that expire at various dates.
The minimum cash commitments under these non-cancelable operating leases and
other obligations with terms in excess of one year, net of restructuring and
other charges, are as follows: $0.1 million for the remaining quarter in 2004,
$0.9 million in 2005, $0.8 million in 2006 and $0.4 million in 2007. In
addition, we have an annual commitment for telecommunications of $0.1 million
for 2005 and 2006. The Company has no guarantees of third party debt as of
September 30, 2004 or other off-balance sheet commitments. Net cash used in investing activities was $0.4 million for the nine months
ended September 30, 2004 for computer purchases. We currently have no material
commitments for capital expenditures. Net cash provided by financing activities was almost zero for the nine months
ended September Page 22




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 30, 2004 as proceeds from our employee stock purchase plan were
almost offset by purchase of our Common Stock under our previously announced
share repurchase program. Until such time as we are able to generate positive cash flow, our primary
sources of liquidity are our existing cash and cash equivalents. Our cash and
cash equivalents at September 30, 2004 were $33.6 million. Depending on revenues and cash collections, we expect our cash
and cash equivalent balance at December 31, 2004 to be approximately $27
million to $28.5 million. While we will continue to incur operating losses in
2004, we believe that our cash and cash equivalents will be sufficient to meet
our cash requirements. Our investment policy is to maintain most of our cash
and cash equivalents in highly liquid, large money market type funds. This
policy exposes us to short-term interest rate fluctuations. Operating results and liquidity, including our ability to raise additional
capital if necessary, may be materially and adversely affected by continued low
demand for the Companys services. In addition, a number of other factors,
including general economic conditions, technological changes, competition and
other factors affecting the IT industry generally, and the suspension or
cancellation of a large project could have an adverse effect on future results
and liquidity. These aforementioned factors, as well as other factors, are more
fully described in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 under Managements Discussion and Analysis of Financial
Condition and Results of Operations Assumptions Underlying Certain
Forward-Looking Statements and Factors that May Affect Future Results. We had a nonqualified deferred compensation plan. All Company executives
(defined as those at the level of Vice President and above) were eligible to
participate in this voluntary program, which permitted participants to defer
receipt of a portion of their compensation. We held deferred amounts in a
rabbi trust for the benefit of plan participants and investment earnings (or
losses) were credited to the participants accounts based on investment
allocation options selected by the participants. We did not guarantee these
investments or earnings thereon. These investments remained assets of the
Company and were available to the general creditors of the Company in the event
of our insolvency. On February 10, 2004, the Company announced that the
Compensation Committee of its Board of Directors decided to terminate the
Companys nonqualified executive deferred compensation plan. Because of
dwindling participation, coupled with recent and proposed changes in tax and
other legislation, the Compensation Committee decided the existence of the plan
was no longer a significant factor in attracting and retaining key executive
talent. Accordingly, the plan was terminated and all funds were distributed to
the participants in late February 2004. ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS This Form 10-Q contains or may contain certain forward-looking statements
concerning our financial position, results of operations, cash flows, business
strategy, budgets, projected costs and plans and objectives of management for
future operations as well as other statements Page 23




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TECHNOLOGY SOLUTIONS COMPANY MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) including words such as
anticipate, believe, plan, estimate, expect, intend, and other
similar expressions. These forward-looking statements involve significant risks
and uncertainties. Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, readers are
cautioned that no assurance can be given that such expectations will prove correct and that actual results and
developments may differ materially from those conveyed in such forward-looking
statements. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements in
this Form 10-Q include, among others, our ability to successfully introduce new
service offering, our ability to manage the pace of technological change
including our ability to refine and add to our service offerings to adapt to
technological changes, our ability to manage the current downturn in our
business and in our industry and the economy in general, our ability to manage
our current decreased revenue levels, our ability to attract new business and
increase revenues, our ability to attract and retain employees, the decreasing
level of options available for grants to attract new employees and to retain
existing employees, our ability to accommodate a changing business environment,
general business and economic conditions in our operating regions, market
conditions and competitive factors, our dependence on a limited number of
clients and the potential loss of significant clients, our ability to continue
to attract new clients and sell additional work to existing clients, our
ability to consummate the pending Zamba transaction and successfully integrate
the Zamba business with our business, and our ability to manage costs and
headcount relative to expected revenues, all as more fully described herein and
in our Annual Report on Form 10-K for the year ended December 31, 2003 under
Managements Discussion and Analysis of Financial Condition and Results of
Operations Assumptions Underlying Certain Forward-Looking Statements and
Factors that May Affect Future Results and elsewhere from time to time in our
other SEC reports. Such forward-looking statements speak only as of the date on
which they are made and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this Form 10-Q. If we do update or correct one or more forward-looking
statements, investors and others should not conclude that we would make
additional updates or corrections with respect thereto or with respect to other
forward-looking statements. Actual results may vary materially. Page 24




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TECHNOLOGY SOLUTIONS COMPANY PART I. FINANCIAL INFORMATION
(Continued) 
 ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK TSC is exposed to interest rate fluctuations. Changes in interest rates affect
interest income and expense on cash and cash equivalents. The Companys cash
and cash equivalents are primarily invested in overnight money market type
accounts. Average interest rates were approximately 1.02 percent during the
nine months ended September 30, 2004 compared to approximately 1.09 percent
during the same period in the prior year and approximately 1.26 percent during
the three months ended September 30, 2004 compared to 0.92 percent during the
same period in the prior year. Based on the cash and cash equivalents balances
as of September 30, 2004 and 2003, a hypothetical 1.00 percent increase in
interest rates would have resulted in approximately $0.1 million in additional
net investment income during each of the quarters ended September 30, 2004 and
2003 and approximately $0.3 million during each of the nine months ended
September 30, 2004 and 2003. The financial statements of the Companys non-U.S. subsidiaries are remeasured
into U.S. dollars using the local currency as the functional currency. The
market risk associated with the foreign currency exchange rates is not material
in relation to the Companys consolidated financial position, results of
operations or cash flows. The Company does not have any significant accounts
payable, account receivable or commitments in a currency other than that of the
reporting units functional currency. The Company does not utilize derivative
financial instruments to manage the exposure in non-U.S. operations. 
 ITEM 4-CONTROLS AND PROCEDURES The management of the Company, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Companys disclosure controls and procedures pursuant to Exchange Act Rule
13a-15 (b) as of the end of the period covered by this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in providing reasonable assurance that all material information relating to the
Company that is required to be included in the reports that the Company files
with the SEC is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. There have been no changes in
the Companys internal controls over financial reporting that were identified
during the evaluation that occurred during the Companys last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. Page 25




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TECHNOLOGY SOLUTIONS COMPANY 
 PART II. OTHER INFORMATION 
 ITEM 2-UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS  During the three months ended September 30, 2004, the Company
purchased 75,500 shares of its common stock for approximately $76,
under a 11,525,327 share repurchase program approved by the Board
of Directors during September 2000 (3,000,000 shares), August 2001
(2,000,000 shares), April 2002 (3,930,327 shares) and February
2003 (2,595,000 shares). All repurchases were made in the open
market, subject to market conditions and trading restrictions.
There is no expiration date on the current authorization and,
during the period covered by the table, no determination was made
by the Company to suspend or cancel purchases under the program.
The timing and size of any future stock repurchases are subject to
market conditions, stock prices, cash position and other cash
requirements. Issuer Purchases of Equity Securities Approximate NumberTotal Number of
    
    of Shares That MayTotal Number
    
    Average
    
    Shares Purchased as
    
    Be Repurchasedof Shares
    
    Price Paid
    
    Part of the
    
    Under thePeriod
    
    Purchased
    
    Per Share
    
    Repurchase Program
    
    Repurchase ProgramJuly 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,762,700August 2004
    
    
    30,200
    
    
    $
    1.00
    
    
    
    30,200
    
    
    
    4,732,500September 2004
    
    
    45,300
    
    
    $
    1.00
    
    
    
    45,300
    
    
    
    4,687,200Total
    
    
    75,500
    
    
    $
    1.00
    
    
    
    75,500
 
 ITEM 6-EXHIBITS (a) Exhibits Exhibit #
    
    Description of Document10.01*
    
    Amendment No. 1 to Technology Solutions Company 1996 Stock
Incentive Plan31.1*
    
    CEO Certification31.2*
    
    CFO Certification32.1*
    
    Certification of Michael R. Gorsage Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
 Page 26




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TECHNOLOGY SOLUTIONS COMPANY PART II. OTHER INFORMATION  (Continued) 32.2*
    
    Certification of Sandor Grosz Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
  All other items in Part II are either not applicable to the
Company during the quarter ended September 30, 2004, the answer
is negative, or a response has been previously reported and an
additional report of the information is not required, pursuant
to the instructions to Part II.   *Filed herewith Page 27




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. TECHNOLOGY SOLUTIONS COMPANYDate: November 12, 2004
    
    By:
    
    /s/ SANDOR GROSZSandor GroszChief Financial Officer
 Page 28