Part I. Financial Information

Item 2.

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements.

Forward-Looking Statements

Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements concerning the Company's future prospects and the Company's future cash flow requirements are forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projections in the forward looking statements which statements involve risks and uncertainties, including but not limited to the following: the success of the Company's plan for internal growth, the impact of adverse economic conditions on the Company's business; risks relating to the competitive nature of the markets for contract computer programming services; the extent to which market conditions for the Company's contract computer consulting services will continue to adversely affect the Company's business; the concentration of the Company's business with certain customers; uncertainty as to the Company's ability to maintain its relations with existing customers and expand its contract computer consulting services business; the impact of changes in the industry, such as the use of vendor management companies in connection with the consultant procurement process, the increase in customers moving IT operations offshore and other risks and uncertainties set forth in the Company's filings with the Securities and Exchange Commission. The Company is under no obligation to publicly update or revise forward looking statements.

Results of Operations

The following table sets forth, for the periods indicated, certain financial
information derived from the Company's condensed consolidated statements of
operations. There can be no assurance that trends in operating results will
continue in the future:

Three months ended November 30, 2012 compared with three months ended November
30, 2011

                                                            (Dollar amounts in thousands)
                                                                  Three Months Ended
                                                   November 30, 2012              November 30, 2011
                                                                 % of                           % of
                                                 Amount        Revenue          Amount        Revenue
Revenue, net                                   $   10,560          100.0 %    $   11,115          100.0 %
Cost of sales                                       8,805           83.4 %         9,224           83.0 %
Gross profit                                        1,755           16.6 %         1,891           17.0 %
Selling, general and administrative expenses        2,014           19.1 %         1,815           16.3 %
Income (loss) from operations                        (259 )         (2.5 )%           76            0.7 %
Other income (expense), net                            (1 )          0.0 %             7            0.1 %
Income (loss) before income taxes                    (260 )         (2.5 )%           83            0.8 %
Provision (benefit) for income taxes                  (79 )         (0.8 )%           44            0.4 %
Consolidated net income (loss)                 $     (181 )         (1.7 )%   $       39            0.4 %

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the quarter ended November 30, 2012 decreased $555,000 or 5.0% from the prior year quarter. The average number of consultants on billing with customers decreased slightly from approximately 265 for the quarter ended November 30, 2011 to 260 for the quarter ended November 30, 2012.

During the current quarter, the Company experienced a decrease in the number of billable work days due to electrical and flooding issues at several of its major customer locations in the New York Tri-state area due to tropical storm Sandy. One account, which includes several consultants on billing, had not allowed the consultants to resume working as of November 30, 2012.

Cost of Sales

Cost of sales for the quarter ended November 30, 2012, decreased $419,000 or 4.5% to $8,805,000 from $9,224,000 in the prior year period. The decrease in cost of sales resulted primarily from the decrease in the number of billable work days for the consultants on billing with clients. Cost of sales as a percentage of revenue increased from 83.0% in the quarter ended November 30, 2011 to 83.4% in the quarter ended November 30, 2012. The increase in cost of sales as a percentage of revenue was primarily attributable to revenue being reduced by discount programs and rate reductions at a few of the Company's major financial services customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased $199,000 or 10.0% from $1,815,000 in the quarter ended November 30, 2011 to $2,014,000 in the quarter ended November 30, 2012. This increase was primarily attributable to an increase in the number of recruiting and sales personnel and expenses associated with the recruiting training program. The Company has established a program to hire and train recent college graduates to become recruiters. The initial costs associated with the hiring and training of such personnel have increased selling, general and administrative expenses. Technical recruiters have been hired in order to address increased requests by clients for submissions of technical personnel for potential positions. Such increased submissions have not yet led to the expected increases in placements. In addition, hiring new sales executives requires a significant investment to cover their costs while their non-compete agreements, which typically last a year, expire. The Company expects these expenses to continue to increase as more recruiting trainees and sales executives are hired to stimulate growth. Selling, general and administrative expenses, as a percentage of revenue, increased from 16.3% in the quarter ended November 30, 2011 to 19.1% in the quarter ended November 30, 2012 as a result of the increase in the number of technical recruiters and sales executives not yet generating sufficient additional revenue.

Other Income (Expense)

Other income (expense) for the quarter ended November 30, 2012 resulted primarily from an unrealized loss on marketable securities of $4,000, offset by interest and dividend income of $3,000.

Income Taxes

The income tax provision (benefit) included in the Company's results of operations for the quarters ended November 30, 2012 and 2011 reflect the Company's estimated effective tax rate for the years ending May 31, 2013 and 2012, respectively. These rates were 53.1% for the quarter ended November 30, 2011 and (30.4) % for the quarter ended November 30, 2012.

Consolidated Net Income (Loss)

Consolidated net income decreased $220,000 from income of $39,000 in the quarter ended November 30, 2011 to a loss of $181,000 in the quarter ended November 30, 2012. This decrease was primarily attributable to the increase in selling, general and administrative expenses as a result of hiring additional recruiters and sales executives. Losses are expected to continue until such time as the Company's plan for internal growth generates a sufficient increase in revenue.

                           TSR, INC. AND SUBSIDIARIES

Six months ended November 30, 2012 compared with six months ended November 30,
2011

                                                            (Dollar amounts in thousands)
                                                                   Six Months Ended
                                                   November 30, 2012              November 30, 2011
                                                                 % of                           % of
                                                 Amount        Revenue          Amount        Revenue
Revenue, net                                   $   21,849          100.0 %    $   22,488          100.0 %
Cost of sales                                      18,244           83.5 %        18,687           83.1 %
Gross profit                                        3,605           16.5 %         3,801           16.9 %
Selling, general and administrative expenses        3,977           18.2 %         3,617           16.1 %
Income (loss) from operations                        (372 )         (1.7 )%          184            0.8 %
Other income, net                                       1            0.0 %             9            0.1 %
Income (loss) before income taxes                    (371 )         (1.7 )%          193            0.9 %
Provision (benefit) for income taxes                 (116 )         (0.5 )%           91            0.4 %
Consolidated net income (loss)                 $     (255 )         (1.2 )%   $      102            0.5 %

Revenue

Revenue consists primarily of revenue from computer programming consulting services. Revenue for the six months ended November 30, 2012 decreased $639,000 or 2.8% from the prior year period. The average number of consultants on billing with customers decreased slightly from approximately 260 for the six months ended November 30, 2011 to 257 for the six months ended November 30, 2012.

During the current period, the Company had an overall increase in consultants on billing with customers except for one account. Due to budget and possible relocation of the corporate offices, approximately 15 consultants were terminated at this customer on June 30, 2012. The customer has determined not to relocate and new consultants are again being placed at this account. Also during the current period, the Company experienced a decrease in the number of billable work days due to electrical and flooding issues at several of its major customer locations in the New York Tri-state area due to tropical storm Sandy. One account, which includes several consultants on billing, had not allowed the consultants to resume working as of November 30, 2012.

Cost of Sales

Cost of sales for the six months ended November 30, 2012, decreased $443,000 or 2.4% to $18,244,000 from $18,687,000 in the prior year period. The decrease in cost of sales resulted primarily from the decrease in the number of consultants on billing with clients and the decrease in the number of days they worked during the period. Cost of sales as a percentage of revenue increased from 83.1% in the six months ended November 30, 2011 to 83.5% in the six months ended November 30, 2012. The increase in cost of sales as a percentage of revenue was primarily attributable to revenue being reduced by discount programs and rate reductions at a few of the Company's major financial services customers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of expenses relating to account executives, technical recruiters, facilities costs, management and corporate overhead. These expenses increased $360,000 or 10.0% from $3,617,000 in the six months ended November 30, 2011 to $3,977,000 in the six months ended November 30, 2012. This increase was primarily attributable to an increase in the number of recruiting and sales personnel and expenses associated with the recruiting training program. The Company has established a program to hire and train recent college graduates to become recruiters. The initial costs associated with the hiring and training of such personnel have increased selling, general and administrative expenses. Technical recruiters have been hired in order to address increased requests by clients for submissions of technical personnel for potential positions. Such increased submissions have not yet led to the expected increases in placements. In addition, hiring new sales executives requires a significant investment to cover their costs while their non-compete agreements, which typically last a year, expire. The Company expects these expenses to continue to increase as more recruiting trainees and sales executives are hired to stimulate growth. Selling, general and administrative expenses, as a percentage of revenue, increased from 16.1% in the six months ended November 30, 2011 to 18.2% in the six months ended November 30, 2012 as a result of the increase in the number of technical recruiters and sales executives not yet generating sufficient additional revenue.

Other Income

Other income for the six months ended November 30, 2012 resulted primarily from interest and dividend income of $6,000, offset by an unrealized loss on marketable securities of $5,000.

Income Taxes

The income tax provision (benefit) included in the Company's results of operations for the six months ended November 30, 2012 and 2011 reflect the Company's estimated effective tax rate for the years ending May 31, 2013 and 2012, respectively. These rates were 47.2% for the six months ended November 30, 2011 and (31.3) % for the six months ended November 30, 2012.

Consolidated Net Income (Loss)

Consolidated net income decreased $357,000 from income of $102,000 in the six months ended November 30, 2011 to a loss of $255,000 in the six months ended November 30, 2012. This decrease was primarily attributable to the increase in selling, general and administrative expenses as a result of hiring additional recruiters and sales executives. Losses are expected to continue until such time as the Company's plan for internal growth generates a sufficient increase in revenue.

Liquidity and Capital Resources

The Company expects that cash flow generated from operations together with its cash and marketable securities will be sufficient to provide the Company with adequate resources to meet its liquidity requirements for at least the next 12 months.

At November 30, 2012, the Company had working capital (total current assets in excess of total current liabilities) of $9,161,000 including cash and cash equivalents and certificates of deposit and marketable securities of $4,548,000 as compared to working capital of $12,402,000 including cash and cash equivalents and certificates of deposit and marketable securities of $8,035,000 at May 31, 2012.

For the six months ended November 30, 2012, net cash used in operating activities was $489,000 compared to net cash provided by operating activities of $47,000 for the six months ended November 30, 2011, or a decrease in cash provided by operating activities of $536,000. The cash used in operating activities in the six months ended November 30, 2012 primarily resulted from the consolidated net loss of $255,000, an increase of prepaid and recoverable income taxes of $129,000 and a decrease in accounts and other payables and accrued expenses and other current liabilities of $140,000. The cash provided by operating activities in the six months ended November 30, 2011, resulted primarily from consolidated net income. An increase in accounts receivable of $202,000 was offset by an increase in accounts and other payables and accrued expenses and other current liabilities of $196,000.

Net cash used in investing activities of $2,737,000 for the six months ended November 30, 2012 primarily resulted from new investments in US Treasury securities and certificates of deposit. Net cash provided by investing activities of $989,000 for the six months ended November 30, 2011 primarily resulted from the maturities of US Treasury securities and certificates of deposit.

Net cash used in financing activities resulted primarily from a cash dividend of $1.50 per share paid on November 30, 2012, which amounted to $2,970,000, distributions to the noncontrolling interest of $7,000 and the purchases of 3,600 shares of common stock for $16,571 in the six months ended November 30, 2012. In the six months ended November 30, 2011, net cash used in financing activities resulted from a distribution to the noncontrolling interest of $7,000 and the purchases of 25,125 shares of common stock for $104,076.

The Company's capital resource commitments at November 30, 2012 consisted of lease obligations on its branch and corporate facilities. The Company intends to finance these lease commitments from cash flow provided by operations, available cash and short-term marketable securities.

The Company's cash and marketable securities were sufficient to enable it to meet its cash requirements during the six months ended November 30, 2012.

Recent Accounting Pronouncements

The Company is not aware of any new accounting pronouncements that would have a material impact on its consolidated financial statements.

Critical Accounting Policies

The SEC defines "critical accounting policies" as those that require the application of management's most difficult subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The Company's significant accounting policies are described in Note 1 to the Company's consolidated financial statements, contained in its May 31, 2012 Annual Report on Form 10-K, as filed with the SEC. The Company believes that those accounting policies require the application of management's most difficult, subjective or complex judgments. There have been no changes in the Company's significant accounting policies as of November 30, 2012.