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, 2006

Commission file number 0–19433

Technology Solutions Company

Incorporated in the State of Delaware

I.R.S. Employer Identification No. 36-3584201

55 East Monroe
Suite 2600
Chicago, Illinois 60603
(312) 228-4500

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

     Indicate by check mark whether the registrant is a large accelerated filer , an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated Filer o       Accelerated Filer o       Non-accelerated Filer þ

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)
Yes o     No þ

As of November 4, 2006 there were outstanding 2,507,375 shares of TSC Common Stock, par value $.01.

TECHNOLOGY SOLUTIONS COMPANY
Index to Form 10-Q

	Page
	Number
Part I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005		4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005		5
Notes to Consolidated Financial Statements		6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		29
ITEM 4. CONTROLS AND PROCEDURES		29
Part II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		30
ITEM 1A. RISK FACTORS		30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		30
ITEM 5. OTHER INFORMATION		31
ITEM 6. EXHIBITS		31
SIGNATURE		32
Certification of CEO
Certification of CFO
Section 906 Certification of CEO
Section 906 Certification of CFO

 Page 2

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,
	2006			2005
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	14,327		$	20,135
Receivables, less allowance for doubtful receivables of $66		7,889			7,158
Other current assets		842			582
Total current assets		23,058			27,875
COMPUTERS, FURNITURE AND EQUIPMENT, NET		356			390
GOODWILL		2,913			—
INTANGIBLE ASSETS, NET		1,446			979
LONG-TERM RECEIVABLES AND OTHER		3,555			3,555
Total assets	$	31,328		$	32,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	897		$	600
Accrued compensation and related costs		4,059			3,420
Restructuring accruals		518			1,429
Other current liabilities		2,808			2,702
Total current liabilities		8,282			8,151
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; shares authorized — 10,000,000; none issued		—			—
Common stock, $.01 par value; shares authorized — 20,000,000; shares issued — 2,677,452 and 2,526,427; shares outstanding 2,507,375 and 2,356,350		27			25
Capital in excess of par value		129,876			127,889
Accumulated deficit		(102,249	)		(98,687	)
Treasury stock, at cost, 170,077 shares		(4,819	)		(4,819	)
Accumulated other comprehensive income:
Cumulative translation adjustment		211			240
Total stockholders’ equity		23,046			24,648
Total liabilities and stockholders’ equity	$	31,328		$	32,799

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

 Page 3

TECHNOLOGY SOLUTIONS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(unaudited)						(unaudited)
REVENUES:
Revenues before reimbursements	$	8,743		$	9,347		$	29,661		$	28,341
Reimbursements		1,290			1,213			4,032			3,762
		10,033			10,560			33,693			32,103
COSTS AND EXPENSES:
Project personnel		6,139			5,487			17,543			18,516
Other project expenses		2,334			1,706			6,842			6,103
Reimbursable expenses		1,290			1,213			4,032			3,762
Cost of services		9,763			8,406			28,417			28,381
Bad debt expense		—			—			—			—
Management and administrative support		2,687			3,224			8,812			11,818
Intangible asset amortization		260			253			736			765
Goodwill and intangible asset impairment		—			—			—			679
Restructuring and other charges		—			—			—			1,674
Gain on litigation settlement		—			—			—			(2,722	)
		12,710			11,883			37,965			40,595
OPERATING LOSS		(2,677	)		(1,323	)		(4,272	)		(8,492	)
OTHER INCOME:
Net investment income		335			247			710			607
LOSS BEFORE INCOME TAXES		(2,342	)		(1,076	)		(3,562	)		(7,885	)
INCOME TAX PROVISION		—			—			—			—
NET LOSS	$	(2,342	)	$	(1,076	)	$	(3,562	)	$	(7,885	)
BASIC NET LOSS PER COMMON SHARE	$	(0.93	)	$	(0.46	)	$	(1.44	)	$	(3.36	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		2,507			2,351			2,467			2,347
DILUTED NET LOSS PER COMMON SHARE	$	(0.93	)	$	(0.46	)	$	(1.44	)	$	(3.36	)
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING		2,507			2,351			2,467			2,347

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

Page 4

TECHNOLOGY SOLUTIONS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the
	Nine Months Ended
	September 30,
	2006			2005
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,562	)	$	(7,885	)
Restructuring and other charges		—			1,674
Goodwill and intangible asset impairment		—			679
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		816			1,087
Non-cash stock compensation		589			89
Changes in assets and liabilities:
Receivables		(731	)		(1,658	)
Other current assets		(260	)		(284	)
Accounts payable		307			102
Accrued compensation and related costs		646			(1,315	)
Restructuring accruals		(911	)		(1,674	)
Other current liabilities		145			(1,196	)
Other assets		2			2,068
Net cash used in operating activities		(2,959	)		(8,313	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net assets of acquired businesses, net of cash		(2,734	)		—
Capital expenditures		(30	)		(208	)
Net cash used in investing activities		(2,764	)		(208	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit		—			(649	)
Proceeds from exercise of stock options		—			9
Proceeds from employee stock purchase plan		—			128
Net cash used in financing activities		—			(512	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(85	)		(48	)
DECREASE IN CASH AND CASH EQUIVALENTS		(5,808	)		(9,081	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		20,135			30,032
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	14,327		$	20,951
SUPPLEMENTAL DISCLOSURES:
Noncash investing activities:
Common stock issued for acquisition activity	$	1,400		$	—

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

Page 5

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, 2006, the consolidated statements of operations for the three and nine months ended September 30, 2006 and 2005 and the consolidated statements of cash flows for the nine months ended September 30, 2006 and 2005 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, 2006 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, 2005 filed with the United States Securities and Exchange Commission (“SEC”) on March 23, 2006.

Certain reclassifications have been made to prior periods to conform with the current period classifications.

NOTE 2 — THE COMPANY

Technology Solutions Company is a consulting firm committed to helping its clients grow profitably. TSC provides high value services in customer value creation and experience management, operational excellence, targeted solutions in enterprise applications, and digital healthcare. TSC focuses on industries that have a strategic need for these solutions, primarily manufacturing, healthcare and financial services. TSC’s clients are primarily located throughout the United States.

NOTE 3 — NEW ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of the provisions of FIN 48. However, given the size of the Company’s net operating loss carryforwards and that the Company previously recorded a full valuation

 Page 6

TECHNOLOGY SOLUTIONS COMPANY

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

allowance against their entire net deferred tax asset, it is not expected that FIN 48 will have a significant impact on net deferred tax assets or liabilities.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Consideration of Prior Years’ Errors in Quantifying Current Year Misstatements” (“SAB 108”). SAB 108 expresses the SEC Staff’s views regarding the process to be applied in considering the effects of prior years’ misstatements when quantifying misstatements in the current year’s financial statements and was issued to provide consistency between how registrants quantify financial statement misstatements. Historically, the approaches most commonly used in practice to accumulate and quantify the effects of financial statement misstatements are referred to as the “rollover” and “iron curtain” approaches. The rollover approach quantifies a misstatement based on the amount originating in the current year income statement. Exclusive reliance on the rollover approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts. The iron curtain approach quantifies a misstatement based on the effects of correcting the amount of the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. Exclusive reliance on the iron current approach can result in disregarding the effects of misstatements in the current year income statement that results from correction of misstatements existing in previously issued financial statements. The Company currently uses the rollover method for quantifying financial statement misstatements. SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” since it requires quantification of errors under both the rollover and iron curtain methods. SAB 108 allows registrants to initially apply the dual approach by (1) retroactively adjusting prior financial statements as if the dual approach had always been used or (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of the January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company will initially apply SAB 108 using the cumulative effect transition method in connection with the preparation of the Company’s annual financial statements for the year ending December 31, 2006. The accompanying financial statements do no reflect any such potential adjustments.

 Page 7

TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 4 — BUSINESS COMBINATIONS

On March 15, 2006, the Company announced its acquisition of the management consulting business of Charter Consulting, Inc. (“Charter”). This acquisition positions the Company to provide enhanced consulting value in strategic customer demand generation and operational effectiveness. Under the terms of the asset purchase agreement, the Company acquired the consulting assets of Charter for $3,800, which consisted of $1,400 in cash and $1,400 (151,025 shares) in the Company’s common stock plus the assumption of $1,000 in certain liabilities. In addition, the Company agreed to make an additional contingent cash payment to Charter of up to $1,400 if certain revenue and operating profit targets are met for the period April 1, 2006 to March 31, 2007. The Company also recognized a liability of $334 for termination obligations related to the closure of the redundant Charter office. The lease termination activities were completed in the second quarter of 2006. Based upon a purchase price allocation analysis performed by an independent outside appraisal firm, intangible assets of $1,204, related to certain employment contracts, customer relationships, trade name and an agreement not to compete, as well as $2,913 of goodwill have been recorded. The intangible asset related to the trade name, in the amount of $269, has an indefinite life. The intangible assets with definite lives, amount to $935 and are amortized on a straight-line basis based on their estimated useful lives of 3 to 5 years.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of March 15, 2006 in connection with the acquisition of Charter’s business:

Computers, furniture and equipment	$	17
Intangible assets		1,204
Goodwill		2,913
Total asset acquired		4,134
Lease termination		(334	)
Accrued liabilities		(1,000	)
Total liabilities assumed		(1,334	)
Net assets acquired	$	2,800

The acquisition of Charter’s business has been accounted for using the purchase method of accounting. Accordingly, the results of the acquisition of Charter are included in the Company’s consolidated results of operations from the date of the acquisition, March 15, 2006. The excess of purchase price over the estimated fair value of the net identifiable assets acquired has been recorded as goodwill.

 Page 8

TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 5 — STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 123R, “Share-Based Payment” (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, “Accounting for Stock Based Compensation” (SFAS No. 123) and superseded Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Prior to January 1, 2006, the Company had followed the stock compensation rules under APB 25.

SFAS No. 123R requires companies to measure and recognize compensation expense for all employee share-based payments at fair value over the service period underlying the arrangement. Accordingly, the Company determines the grant-date fair value of its stock-based awards, including stock options and restricted stock units, and records an expense in its statement of operations for the amortization of the fair value of the awards. The fair value of the awards is amortized ratably over the vesting periods of the individual awards. The Company adopted the provisions of SFAS No.123R using the “modified prospective” method, whereby fair values of all previously-granted, unvested employee stock-based awards as of January 1, 2006 as well as all awards made on or after January 1, 2006 are considered in determining stock-based compensation expense for the three and nine months ended September 30, 2006. The Company has not restated its operating results for the three and nine months ended September 30, 2005 to reflect charges for the fair value of stock-based arrangements.

     Under the provisions of SFAS No.123R the Company recorded $269 ($0.11 per basic and fully diluted share) and $589 ($0.24 per basic and fully diluted share), respectively, of stock-based compensation expense in our unaudited consolidated statement of operations for the three and nine months ended September 30, 2006. No tax benefit was recognized related to stock-based compensation expense since the Company established and continues to maintain a full valuation allowance to offset all potential tax benefits associated with their net deferred tax assets.

 Page 9

TECHNOLOGY SOLUTIONS COMPANY

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

SFAS No. 123R requires presentation of pro-forma information for the comparative period prior to adoption as if the Company had accounted for all employee stock-based compensation under the fair value method of the original SFAS No. 123. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation. The pro-forma net loss for the three and nine months ended September 30, 2006 is the same since stock-based compensation expense is calculated under the provisions of SFAS No. 123R. The amounts for the three and nine months ended September 30, 2006 are included in the table below only to provide a comparative presentation for the three and nine months ended September 30, 2005.

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
	Actual			Pro-Forma			Actual			Pro-Forma
Net loss:
As reported	$	(2,342	)	$	(1,076	)	$	(3,562	)	$	(7,885	)
Add: Employee stock-based compensation expense included in reported net loss		269			—			589			89
Less: Employee stock-based compensation expense under SFAS 123R/SFAS 123		(269	)		(348	)		(589	)		(941	)
Pro forma	$	(2,342	)	$	(1,424	)	$	(3,562	)	$	(8,737	)
Basic net loss per common share:
As reported	$	(0.93	)	$	(0.46	)	$	(1.44	)	$	(3.36	)
Pro forma				$	(0.61	)				$	(3.72	)
Diluted net loss per common share:
As reported	$	(0.93	)	$	(0.46	)	$	(1.44	)	$	(3.36	)
Pro forma				$	(0.61	)				$	(3.72	)

During the three and nine months ended September 30, 2006, the Company granted no and 220,000 stock options, respectively. The grant during the nine months ended September 30, 2006 included 170,000 inducement options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2006		2005			2006			2005
Expected volatility		—		74.6	%		65.2	%		85.8	%
Risk-free interest rates		—		4.15	%		4.89	%		3.77	%
Expected lives		—	4.5 years			4.5 years			4.5 years
Weighted average grant date fair value		—	$	5.46		$	5.39		$	13.26

Page 10

TECHNOLOGY SOLUTIONS COMPANY

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

The expected volatility is based on historical volatility of the Company’s stock. The risk-free interest rate is based on the US Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected lives of the options are based on evaluations of historical and exercise behavior. The Company has not paid and does not anticipate paying dividends; therefore, the expected dividend yield is assumed to be zero.

The Company has only one stock incentive plan, the Technology Solutions Company 1996 Stock Incentive Plan (the “1996 Plan”). Options granted under the 1996 Plan are generally exercisable beginning twelve months after date of grant and are fully exercisable within thirty-six months from date of grant. Restricted stock units granted under the 1996 Plan are exercisable as to one-third after twelve months from the date of the grant. The second and third one-third of the restricted stock units are exercisable after twenty four and thirty six months, respectively, subject to the Company achieving certain performance measures. As of September 30, 2006 and 2005, options and restricted stock units to purchase 705,601 and 450,616 shares of common stock were outstanding, respectively. The 1996 Plan expired on September 25, 2006 and, accordingly, no shares are available for grant at September 30, 2006. As of September 30, 2005, options to purchase 230,379 shares of common stock were available for grant.

The following is a summary of changes in outstanding options as of September 30, 2006 and changes during the quarters then ended:

						Weighted-
				Weighted-		Average	Aggregate
				Average		Remaining	Intrinsic
				Exercise		Contractual	Value
	Shares			Prices		Life	(000)
Outstanding at December 31, 2005		387,380		$	25.68	8 years
Granted		—			—
Exercised		—			—
Forfeited		(37,763	)	$	22.41	8 years
Outstanding at March 31, 2006		349,617		$	26.03	7 years	$	9,102
Granted – under 1996 Plan		50,000		$	10.87	10 years
Granted – Inducement Options		170,000		$	9.19	10 years
Exercised		—			—
Forfeited		(20,141	)	$	23.55	6 years
Outstanding at June 30, 2006		549,476		$	19.53	8 years	$	10,733
Granted – under 1996 Plan		—			—
Exercised		—			—
Forfeited		(40,551	)	$	33.79	5 years
Outstanding at September 30, 2006		508,925		$	18.40	8 years	$	9,363
Vested at end of period		288,117		$	25.14	6 years	$	7,243
Exercisable at end of period		288,117		$	25.14	6 years	$	7,243

 Page 11

TECHNOLOGY SOLUTIONS COMPANY

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

During the three and nine months ended September 30, 2006, the Company granted 14,875 and 218,000 restricted stock units, respectively. The following is a summary of the status of the Company’s non-vested shares as of September 30, 2006, and changes during the quarters then ended:

				Weighted-
				Average
				Grant-Date
	Shares			Fair Value
Non-vested at December 31, 2005		—			—
Granted		168,625		$	9.29
Vested		—			—
Forfeited		—			—
Non-vested at March 31, 2006		168,625		$	9.29
Granted		34,500		$	10.22
Vested		—			—
Forfeited		—			—
Non-vested at June 30, 2006		203,125		$	9.29
Granted		14,875		$	9.12
Vested		—			—
Forfeited		(21,000	)	$	9.51
Non-vested at September 30, 2006		197,000		$	9.42

As of September 30, 2006, there was approximately $2,570 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements (options and restricted stock units). This cost is expected to be recognized over a weighted-average period of 2.5 years.

There were no options exercised during the three and nine months ended September 30, 2006. The Company received cash from options exercised during the three and nine months ended September 30, 2005 of $0 and $9, respectively. These cash receipts are included in financing activities in the accompanying consolidated statements of cash flows.

NOTE 6 — CAPITAL STOCK

The Company has a stock repurchase program, which allows for share repurchases of up to 576,266 shares of outstanding Company common stock (the “Repurchase Program”). During the nine months ended September 30, 2006 and 2005, the Company did not purchase any shares. The Company has repurchased an aggregate total of 341,906 shares since the inception of this Repurchase Program in September 2000. As of September 30, 2006, there were 234,360 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, the Company’s cash position and other cash requirements.

Page 12

TECHNOLOGY SOLUTIONS COMPANY

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

NOTE 7 — 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 211,256 and 131,866 for the three and nine months ended September 30, 2006 and common equivalent shares of 2,020 and 24,737 for the three and nine months ended September 30, 2005 were not included in the diluted loss per share calculation as they were antidilutive. 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, 2006								September 30, 2005
				Shares		Per						Shares		Per
	Net			(In		Common			Net			(In		Common
	Loss			Thousands)		Share			Loss			Thousands)		Share
Basic loss per share	$	(2,342	)		2,507	$	(0.93	)	$	(1,076	)		2,351	$	(0.46	)
Effect of common equivalent shares		—			—		—			—			—		—
Diluted loss per share	$	(2,342	)		2,507	$	(0.93	)	$	(1,076	)		2,351	$	(0.46	)

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

	September 30, 2006								September 30, 2005
				Shares		Per						Shares		Per
	Net			(In		Common			Net			(In		Common
	Loss			Thousands)		Share			Loss			Thousands)		Share
Basic loss per share	$	(3,562	)		2,467	$	(1.44	)	$	(7,885	)		2,347	$	(3.36	)
Effect of stock options		—			—		—			—			—		—
Diluted loss per share	$	(3,562	)		2,467	$	(1.44	)	$	(7,885	)		2,347	$	(3.36	)

Page 13

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 Months
	Ended September 30,						Ended September 30,
	2006			2005			2006			2005
Net loss	$	(2,342	)	$	(1,076	)	$	(3,562	)	$	(7,885	)
Other comprehensive (loss) income:
Translation adjustment		(5	)		7			(29	)		26
Other comprehensive (loss) income		(5	)		7			(29	)		26
Total comprehensive loss	$	(2,347	)	$	(1,069	)	$	(3,591	)	$	(7,859	)

NOTE 9— OTHER EVENTS

On December 5, 2005, the Company’s Chief Executive Officer resigned and the Company’s Lead Director was named Chairman and Acting Chief Executive Officer. In addition, on December 15, 2005, the Company implemented initiatives to further reduce costs. These cost reductions included headcount reductions, reduction in office space to reflect current needs and the termination of a contract with a vendor. As a result of these events, the Company recorded restructuring and other charges of $1,158 during the quarter ended December 31, 2005. This charge included $438 in severance pay for the former Chief Executive Officer and $720 in headcount reductions of client officers and corporate staff, reduction in office space to reflect current needs, and the termination of a contract with a vendor. As of September 30, 2006 there was an accrual balance of $410. The Company expects to utilize the balance by 2007. The following table provides the components of this charge.

Restructuring and Other Charges –			Cash(1)				Balance as of
Q4 2005	Charge		Payments		Non-cash Usage		September 30, 2006
Former CEO severance costs	$	438	$	181	$	—	$	257
Severance costs (9 employees)		340		340		—		—
Office reduction		273		132		—		141
Other costs		107		95		—		12
Total	$	1,158	$	748	$	—	$	410

⁽¹⁾ Net cash payments totaling $714 were made during the nine months ended September 30, 2006.

During the quarter ended September 30, 2005, the Company recorded $1,687 in restructuring and other charges as a result of a strategic realignment and the related cost reductions. This charge consisted of the severance costs of professional personnel, office closures and other costs. During the quarter ended December 31, 2005, the Company reversed $113 of this charge mainly due to more favorable sublease terms for one of the closed offices. As of September 30, 2006, there was an accrual balance of $108. The Company expects to utilize the balance by 2007. The following table provides the components of this charge.

Page 14

TECHNOLOGY SOLUTIONS COMPANY

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

								Balance as of
Restructuring and Other Charges –				Cash(2)		Non-cash		September 30,
Q2 2005	Charge			Payments		Usage		2006
Severance costs (23 employees)	$	1,173		$	1,111	$	—	$	62
Office closures		511			308		45		158
Other costs		3			2		—		1
Total original charge		1,687			1,421		45		221
Q4 2005 adjustment		(113	)		—		—		(113	)
Total	$	1,574		$	1,421	$	45	$	108

⁽²⁾ Net cash payments totaling $197 were made during the nine months ended September 30, 2006.

In the second quarter of 2003, the Company recorded $5,211 in restructuring and other charges as a result of organizational changes announced in September 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. In the second quarter of 2005, this charge was reduced by $13 to $4,932. The Company made the final payment on its remaining contractual lease obligation in 2005 and, accordingly, no further payments are due on this charge. The following table provides the components of this charge.

Restructuring and Other Charges				Cash(3)		Non-cash		Balance as of
– 2003	Charge			Payments		Usage		Dec. 31, 2005
Severance costs (approximately 30 employees)	$	3,917		$	3,860	$	33	$	24
Office reductions		921			592		64		265
Professional fees		373			383		—		(10	)
Total original charge		5,211			4,835		97		279
2004 adjustment		(266	)		—		—		(266	)
2005 adjustment		(13	)		—		—		(13	)
Total	$	4,932		$	4,835	$	97	$	—

Page 15

TECHNOLOGY SOLUTIONS COMPANY

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

RESULTS OF OPERATIONS

OVERVIEW

Technology Solutions Company is a consulting firm that provides clients comprehensive business solutions that include strategy, operational and organizational improvement, information technology and program management components.

In December 2005, our Chief Executive Officer resigned and our Lead Director was named Chairman and Acting Chief Executive Officer. With this change in leadership, we streamlined our service offerings to focus on enterprise applications, customer relationship management and digital healthcare services. In addition, our process adoption and training service, which underlies these areas, facilitates change management and knowledge transfer throughout our service offerings. We further complemented these service offerings through the acquisition of the consulting assets of Charter Consulting, Inc. (“Charter”) on March 15, 2006. The operating results of Charter are included in our results, from the date of acquisition. Charter provides enhanced consulting value in strategic customer demand generation and operational effectiveness. We combined Charter and our customer relationship management offerings mid-year in order to provide a full spectrum of customer value creation services which cover strategy through implementation.

During the first half of the year, we provided enterprise application services related to SAP^® and PeopleSoft. The decision by Oracle to support older releases of PeopleSoft software indefinitely (reversing their previously announced policies), removed much of the incentive for companies to upgrade to newer software. As a result, we no longer saw a compelling market for our PeopleSoft services and we exited this offering during the third quarter of 2006, concentrating our enterprise application services on SAP^®.

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 business and 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.

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

Page 16

TECHNOLOGY SOLUTIONS COMPANY

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

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 durations, implementation of this strategy may be delayed at times. Accordingly, any decline in revenues without a corresponding and timely reduction in staffing, or a staffing increase that is not accompanied by a corresponding increase in revenues, would have an adverse effect on our business, operating results and financial condition, which could be material.

REVENUES

For presentation purposes, we show two components of revenues: 1) revenues before reimbursements, which consist of revenue for performing consulting services; and 2) reimbursements, consisting of reimbursements we receive from clients for out-of-pocket expenses incurred. We believe revenues before reimbursements is a more meaningful representation of our economic activity since it excludes pass-through, zero-margin expense reimbursements.

COSTS AND EXPENSES

Project Personnel

Project personnel costs consist primarily of professional salaries, fringe benefits and incentive compensation.

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 compensation and travel, marketing costs and recruiting costs. Client officers are a key component in our client relationship model and are also

Page 17

TECHNOLOGY SOLUTIONS COMPANY

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

a billable consulting resource. When our client officers are billable, their costs are included in Project Personnel costs. Each of our clients has a client officer assigned to them. The client officers are responsible for delivery excellence, client relationship and satisfaction, revenues, project margins, and human capital, including recruiting and career development. Infrastructure costs include costs related to our senior corporate management and board of directors; accounting; financial reporting; finance; tax; legal; treasury; human resources; employee benefits; marketing; public and investor relations; office operations; staffing of our project personnel; recruiting; training; internal communications; internal technology applications; management of new business opportunities; planning; quality assurance; and risk management.

Intangible asset amortization

Our acquired intangible assets, which includes amounts related to customer relationships, backlog, employment agreements, agreements not to compete, and other business agreements, with definite lives are amortized over their estimated useful lives. In addition, we evaluate our intangible assets with definite lives to determine whether an adjustment to these amounts or estimated useful lives are required based on current events and circumstances.

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 full range of IT/business consulting 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 based on services performed with performance generally assessed on the ratio of hours incurred to date compared to the total estimated hours over the entire contract. Revenues are subject to revision as the contract progresses to completion. Any revisions in the estimate are charged or credited to operations in the period in which the facts that give rise to the revision become known. Contracts are

Page 18

TECHNOLOGY SOLUTIONS COMPANY

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

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

Accounting for Income Taxes

We use an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided using currently enacted tax rates when tax laws and financial accounting standards differ with respect to (i) the amount of annual income and (ii) the basis of assets and liabilities. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and 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. 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

On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board Statement No. 123R, “Share-Based Payment” (SFAS No. 123R) resulting in a change in our method of recognizing stock-based compensation expense. Specifically, we now record compensation expense for employee stock options and restricted stock units. For the three and nine months ended September 30, 2006, we recorded $269 thousand and $589 thousand of compensation expense related to stock options and restricted stock units, respectively. Had we expensed employee stock options and restricted stock units for the three and nine months ended

 Page 19

TECHNOLOGY SOLUTIONS COMPANY

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

September 30, 2005, we estimate that stock-based compensation expense would have increased by $348 thousand and $852 thousand, respectively.

Goodwill and Intangible Assets

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

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

Restructuring and Other Charges

When industry and market conditions dictate, we realign our business and record accruals for restructuring and other charges as necessary. These charges mainly relate to severance costs, office reductions and closures, asset write-offs and other costs. The office space reductions, office closures and associated contractual lease obligations are based in part on assumptions and estimates of the timing and amount of sublease rentals. To the extent estimates of the success of our sublease efforts change in the future, adjustments increasing or decreasing the related accruals will be recognized. The severance costs represent amounts for identified employees and the asset write-offs are determined when the charge is made. The severance costs and asset write-offs are not subject to significant revisions.

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2005

Revenues

Consolidated revenues were $10.0 million for the three months ended September 30, 2006, a decrease of 5 percent from the same period in the prior year. Revenues before reimbursements decreased 6 percent to $8.7 million from $9.3 million. This decrease resulted from the streamlining of our service offerings at the end of 2005 and exiting our PeopleSoft service offering during the third quarter of 2006, partially offset by revenues from our acquisition of Charter.

During the three months ended September 30, 2006, two clients accounted for more than 10 percent of revenues before reimbursements (Electro-Motive Diesel, Inc. – 35 percent and

Page 20

TECHNOLOGY SOLUTIONS COMPANY

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

Motorola, Inc – 15 percent). The cancellation or significant reduction in the use of services by these major customers could have a material adverse effect on our results of operations. In terms of client concentration, during the three months ended September 30, 2006, our top two and top five clients accounted for 50 percent and 64 percent of revenues before reimbursements, respectively. This compares to 33 percent and 51 percent for these same categories for the three months ended September 30, 2005. As our client concentration increases, changes in spending by our top clients as well as our ability to replace these clients or projects when completed may result in fluctuations in revenue and profitability. We added 13 new clients and 28 new projects during the three months ended September 30, 2006 compared to 9 new clients and 38 new projects during the same period in the prior year. In total we performed work for 40 clients and 60 projects from new and existing clients during the three months ended September 30, 2006 compared to 61 clients and 99 projects during the same period in the prior year. The decrease in total clients and projects reflects the significant amount of work we performed at our top two clients in 2006 and our resulting increase in client concentration.

Costs and Expenses

Project personnel costs were $6.1 million for the three months ended September 30, 2006, an increase of 12 percent from the same period in the prior year. This increase was primarily due to an accrual for incentive compensation of $0.5 million for the three months ended September 30, 2006. There was no accrual for incentive compensation in the same period in the prior year. Project personnel costs as a percentage of revenues before reimbursements increased to 70 percent for the three months ended September 30, 2006 compared to 59 percent in the same period in the prior year as a result of a decrease in utilization as well as the cost for our aforementioned incentive compensation accrual. Utilization decreased to 66 percent from 68 percent and our average hourly billing rate remained unchanged at $148.

Other project expenses were $2.3 million for the three months ended September 30, 2006, an increase of 37 percent from the same period in the prior year. The increase in subcontractor costs of $0.6 million, due to the use of subcontractors for certain specialized skills, accounted for the majority of the increase in other project. Other project expenses as a percentage of revenues before reimbursements increased to 27 percent for the three months ended September 30, 2006 from 18 percent from the same period in the prior year.

There was no bad debt expense for the three months ended September 30, 2006 or 2005.

Management and administrative support costs decreased to $2.7 million for the three months ended September 30, 2006 from $3.2 million for the same period in the prior year. This decrease resulted from a $0.1 million decrease in occupancy costs due to our office relocation during the second quarter of 2006 as well as office closures; a $0.1 million net decrease in labor costs due to our headcount reductions during 2005 (decrease in salary related costs of $0.3 million partially offset by $0.2 million in stock-based compensation expense under SFAS No. 123R); a $0.1 million reduction in travel costs due to the aforementioned headcount reductions and cost controls; and a $0.2 million reduction in various other costs due to our ongoing cost controls.

Page 21

TECHNOLOGY SOLUTIONS COMPANY

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

Intangible asset amortization was $0.3 million for the three months ended September 30, 2006 compared to $0.3 million for the three months ended September 30, 2005.

Operating Loss

Consolidated operating loss was $2.7 million for the three months ended September 30, 2006 compared to $1.3 million for the same period in the prior year. The increase in the operating loss mainly resulted from our decrease in revenues as well as our accrual for incentive compensation.

Other Income

Other income for the three months ended September 30, 2006 was $0.3 million, an increase of $0.1 million from the same period in the prior year. This increase resulted from higher interest rates. Our cash and cash equivalents were primarily invested in overnight money market type accounts. Average interest rates were approximately 5.2 percent for the three months ended September 30, 2006 compared to approximately 3.5 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, 2006 or 2005 since we recorded a full valuation allowance against our deferred taxes in 2003 and we continue to provide a full valuation allowance for all tax benefits since then.

Shares Outstanding

Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased to 2,507,000 from 2,351,000 mainly due to effect of the 151,025 shares issued on March 15, 2006 as a result of the Charter acquisition.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2005

Revenues

Consolidated revenues were $33.7 million for the nine months ended September 30, 2006, an increase of 5 percent from the same period in the prior year. Revenues before reimbursements increased 5 percent to $29.7 million from $28.3 million. This increase was primarily due to our acquisition of Charter on March 15, 2006, partially offset by the streamlining of our service offerings at the end of 2005 as well as our exiting lower margin projects.

Costs and Expenses

Project personnel costs were $17.5 million for the nine months ended September 30, 2006, a decrease of 5 percent from the same period in the prior year. This decrease was mainly due to a decrease in professional headcount as a result of our headcount reductions during 2005. Project personnel costs for the nine months ended September 30, 2006 includes an accrual for incentive compensation of $1.3 million and $0.1 million in stock-based compensation expense under SFAS No. 123R. There was no accrual for incentive compensation in the same period in the

Page 22

TECHNOLOGY SOLUTIONS COMPANY

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

prior year. Project personnel costs as a percentage of revenues before reimbursements decreased to 59 percent for the nine months ended September 30, 2006 compared to 65 percent in the same period in the prior year as a result of an improvement in utilization as well as an increase in average hourly billing rates. Utilization improved to 69 percent from 64 percent and average hourly billing rates increased 6 percent to $155.

Other project expenses were $6.8 million for the nine months ended September 30, 2006, an increase of 12 percent from the same period in the prior year. While other project expenses increased by $0.7 million, subcontractor costs increased $1.5 million due to the use of subcontractors for certain specialized skills. This increase was partially offset by a $0.4 million decrease in non-billable travel costs due to fewer projects with limits on travel costs as well as better cost controls; a decrease in severance costs of $0.1 million; and a decrease in various other costs of $0.3 million such as depreciation and other costs for laptop computers and overall cost controls. Other project expenses as a percentage of revenues before reimbursements increased to 23 percent for the nine months ended September 30, 2006 from 22 percent from the same period in the prior year.

There was no bad debt expense for the nine months ended September 30, 2006 or 2005.

Management and administrative support costs decreased to $8.8 million for the nine months ended September 30, 2006 from $11.8 million for the same period in the prior year. This decrease resulted from a net $1.6 million decrease in labor costs due to our headcount reductions during 2005 (decrease in salary related costs of $2.1 million partially offset by $0.5 million in stock-based compensation expense under SFAS No. 123R); a $0.5 million reduction in travel costs due to the aforementioned headcount reductions and cost controls; a $0.3 million reduction in legal expenses, mainly due to the settlement of a litigation matter in the second quarter of 2006; a $0.2 million decrease in telephone costs due to office closures and new telecommunication contract; and a $0.4 million reduction in various other costs due to our ongoing cost controls.

Intangible asset amortization was $0.7 million for the nine months ended September 30, 2006 compared to $0.8 million for the nine months ended September 30, 2005.

We recorded a goodwill and intangible asset impairment loss of $0.7 million during the nine months ended September 30, 2005 related to the Proceed acquisition due to our strategic realignment and the termination of a business agreement.

During the nine months ended September 30, 2005, we recorded $1.7 million in restructuring and other charges as a result of a strategic realignment and the related cost reductions. This charge consisted of the severance costs of professional personnel, office closures and other costs. During the nine months ended September 30, 2005, we also reversed restructuring and other charges of $13 thousand relating to the charges recorded during the second quarter of 2003.

During the nine months ended September 30, 2005, we settled a contractual dispute that has been pending since 1992. In connection with the settlement and after paying our legal expenses, we received $4.7 million in cash which exceeded by $2.7 million our long-term receivable of $2.0

Page 23

TECHNOLOGY SOLUTIONS COMPANY

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

million related to this matter. As a result of this settlement, we reported a one-time gain in the amount of $2.7 million during the nine months ended September 30, 2005.

Operating Loss

Consolidated operating loss was $4.3 million for the nine months ended September 30, 2006 compared to $8.5 million for the same period in the prior year. Our operating loss for the nine months ended September 30, 2005 included restructuring and other charges of $1.7 million, goodwill and intangible asset impairment of $0.7 million and the gain on the litigation settlement of $2.7 million. Excluding these items, the operating loss for the nine ended September 30, 2005 was $8.9 million. The decrease in the operating loss resulted from the decrease in headcount due to our headcount reductions during 2005 and continued costs controls as well as a slight increase in revenues.

Other Income

Other income for the nine months ended September 30, 2006 was $0.7 million, an increase of $0.1 million from the same period in the prior year. This increase, despite lower cash balances, resulted from an increase in average interest rates. Our cash and cash equivalents were primarily invested in overnight money market type accounts. Average interest rates were approximately 4.8 percent for the nine months ended September 30, 2006 compared to approximately 2.9 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, 2006 or 2005 since we recorded a full valuation allowance against our deferred taxes in 2003 and we continue to provide a full valuation allowance for all tax benefits since then.

Shares Outstanding

Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased to 2,467,000 from 2,347,000 mainly due to the 151,025 shares issued on March 15, 2006 for the Charter acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $3.0 million and $8.3 million for the nine months ended September 30, 2006 and 2005, respectively. Net cash used in operating activities for the nine months ended September 30, 2006 mainly resulted from the loss for the period and payments on our restructuring accruals, less non-cash charges for depreciation, amortization and non-cash stock compensation. Days sales outstanding increased by 4 days to 71 days at September 30, 2006 as compared to 67 days at September 30, 2005. This increase in days sales outstanding results from the normal payment cycles of our largest clients.

Estimated future cash commitments include various office facilities, property and office equipment under operating leases and other costs that expire at various dates; severance costs relating to restructuring and other charges; committed computer system costs; and an annual

Page 24

TECHNOLOGY SOLUTIONS COMPANY

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

commitment for telecommunications. The Company has no guarantees of third party debt or any other off-balance sheet commitments as of September 30, 2006. A summary of our contractual obligations at September 30, 2006 is as follows:

	Payments Due By Period (In thousands)
	Remaining
	Quarter in
	2006		2007		2008		Thereafter		Total
Operating leases (net of restructuring and other charges)	$	79	$	251	$	207	$	231	$	768
Operating leases (included in other current liabilities)		108		215		—		—		323
Cash outlay for restructuring and other charges		184		334		—		—		518
Purchase obligations (net of restructuring and other charges)		56		199		5		—		260
Total	$	427	$	999	$	212	$	231	$	1,869

Net cash used in investing activities was $2.8 million during 2006. Capital expenditures of less than $0.1 million represented software purchases. We currently have no material commitments for capital expenditures. We made cash payments of $2.4 million related to our acquisition of Charter and the payment of liabilities assumed as part of this acquisition as well as a payment of $0.3 million related to the closure of the Charter office in the second quarter of 2006.

There were no cash flows related to financing activities during the nine months ended September 30, 2006.

Our cash and cash equivalents at September 30, 2006 were $14.3 million. Our investment policy is to maintain most of our cash and cash equivalents in highly liquid, large money market type funds. This policy exposes us to short-term interest rate fluctuations.

Until such time as we are able to generate positive cash flow (i.e., revenues increase sufficiently to cover operating costs), our primary sources of liquidity are our existing cash and cash equivalents. If we are not successful in increasing revenues and eliminating negative cash flows, it could become necessary to raise additional capital to offset losses from operations. There can be no assurance that we will be able to obtain any financing or that, if we were to be successful in finding financing, it would be on favorable terms.

Operating results and liquidity, including our ability to raise additional capital if necessary, may be materially and adversely affected by continued low demand for the Company’s services. In addition, a number of other factors, including general economic conditions, technological changes, competition and other factors affecting the information technology and consulting 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

Page 25

TECHNOLOGY SOLUTIONS COMPANY

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

December 31, 2005 under Item 1A – Risk Factors and this Quarterly Report on Form 10-Q for the period ended September 30, 2006 under Item 1A – Risk Factors.

NEW ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of the adoption of the provisions of FIN 48. However, given the size of the Company’s net operating loss carryforwards and that the Company previously recorded a full valuation allowance against their entire net deferred tax asset, it is not expected that FIN 48 will have a significant impact on net deferred tax assets or liabilities.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Consideration of Prior Years’ Errors in Quantifying Current Year Misstatements” (“SAB 108”). SAB 108 expresses the SEC Staff’s views regarding the process to be applied in considering the effects of prior years’ misstatements when quantifying misstatements in the current year’s financial statements and was issued to provide consistency between how registrants quantify financial statement misstatements. Historically, the approaches most commonly used in practice to accumulate and quantify the effects of financial statement misstatements are referred to as the “rollover” and “iron curtain” approaches. The rollover approach quantifies a misstatement based on the amount originating in the current year income statement. Exclusive reliance on the rollover approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts. The iron curtain approach quantifies a misstatement based on the effects of correcting the amount of the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. Exclusive reliance on the iron current approach can result in disregarding the effects of misstatements in the current year income statement that results from correction of misstatements existing in previously issued financial statements. The Company currently uses the rollover method for quantifying financial statement misstatements. SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” since it requires quantification of errors under both the rollover and iron curtain methods. SAB 108 allows registrants to initially apply the dual approach by (1) retroactively adjusting prior financial statements as if the dual approach had

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TECHNOLOGY SOLUTIONS COMPANY

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

always been used or (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of the January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company will initially apply SAB 108 using the cumulative effect transition method in connection with the preparation of the Company’s annual financial statements for the year ending December 31, 2006. The accompanying financial statements do no reflect any such potential adjustments.

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

This Form 10-Q contains or may contain certain forward-looking statements concerning our financial position, results of operations, cash flows, business strategy, budgets, projected costs and plans and objectives of management for future operations as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions. These forward-looking statements involve significant risks and uncertainties. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that such expectations will prove correct and that actual results and developments may differ materially from those conveyed in such forward-looking statements. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements in this Form 10-Q include, among others, our ability to manage decreased revenue levels; our need to attract new business and increase revenues; our declining cash position; our ability to manage costs and headcount relative to expected revenues; our ability to achieve proper utilization rates or charge acceptable rates for our services could adversely affect our ability to successfully introduce new service offerings; our dependence on a limited number of clients for a large portion of our revenue; the potential loss of significant clients; our ability to attract new clients and sell additional work to existing clients; our ability to attract and retain employees; the rapidly changing nature of information technology services, including our ability to keep pace with technological and market changes and our ability to refine and add to existing service offerings; the lack of shareholder approved stock options available for grants by the Company to retain existing employees; our ability to successfully integrate the Charter business with our business; and changing business, economic or market conditions and changes in competitive and other factors, all as more fully described herein and in our Annual Report on Form 10-K for the year ended December 31, 2005 under Risk Factors 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

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TECHNOLOGY SOLUTIONS COMPANY

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

correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. Actual results may vary materially.

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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 4.8 percent during the nine months ended September 30, 2006 compared to 2.9 percent during the same period in the prior year and approximately 5.2 percent during the three months ended September 30, 2006 compared to 3.4 percent during the same period in the prior year. Based on the cash and cash equivalents balances as of September 30, 2006 and 2005, a hypothetical 1.00 percent increase in interest rates would have resulted in approximately $36 thousand and $52 thousand in additional net investment income during each of the quarters ended September 30, 2006 and 2005, respectively, and approximately $107 thousand and $157 thousand during each of the nine months ended September 30, 2006 and 2005, respectively.

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

ITEM 4—CONTROLS AND PROCEDURES

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

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TECHNOLOGY SOLUTIONS COMPANY

PART II. OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

There are no material changes to the Legal Proceedings described under the title “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 1A—RISK FACTORS

There are no material changes to the Risk Factors described under the title “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005.

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

(c) STOCK REPURCHASES

					(c) Total number		(d) Maximum number of
					of shares		shares (or approximate
	(a) Total				purchased as part		dollar value of shares)
	number		(b) Average		of publicly		that may yet be
	of shares		price paid per		announced plans		purchased under the
Period	purchased		share		or programs		plans or programs
July 1, 2006 – July 31, 2006		0	$	—		0		234,360
August 1, 2006 – August 31, 2006		0	$	—		0		234,360
September 1, 2006 – September 30, 2006		0	$	—		0		234,360
Total		0	$	—		0		234,360

The Company has a stock repurchase program, which allows for share repurchases of up to 576,266 shares of outstanding Company common stock (the “Repurchase Program”). The Repurchase Program was approved by the Board of Directors during September 2000 (150,000 shares), August 2001 (100,000 shares), April 2002 (196,516 shares) and February 2003 (129,750 shares). The Company has repurchased an aggregate total of 341,906 shares since the inception of this Repurchase Program in September 2000. All previous period repurchases were made in the open market, subject to market conditions and trading restrictions. The timing and size of any future stock repurchases are subject to market conditions, stock prices, the Company’s cash position and other cash requirements.

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TECHNOLOGY SOLUTIONS COMPANY

PART II. OTHER INFORMATION — (Continued)

ITEM 5—OTHER INFORMATION

None.

ITEM 6—EXHIBITS

     (a) Exhibits

Exhibit #	Description of Document
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

All other items in Part II, specifically Item 3 – Default on Senior Securities since the Company has no Senior Securities, are either not applicable to the Company during the quarter ended September 30, 2006, 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

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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 COMPANY
Date: November 13, 2006	By:	/s/ SANDOR GROSZ
		Sandor Grosz
		Chief Financial Officer

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