FORM 10-Q

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1997

                         Commission file number 0-28352

                         TECHNOLOGY SERVICE GROUP, INC.
             (Exact name of Registrant as specified in its charter)

           Delaware                                            59-1637426
 (State or other jurisdiction of                            (I.R.S. Employer
  Incorporation or Organization)                          Identification Number)

20 Mansell Court East - Suite 200                                 30076
        Roswell, Georgia                                        (Zip Code)
(Address of  principal executive offices)

                                 (770) 587-0208
                         (Registrant's Telephone Number,
                              including area code)

                                    No Change
              (Former name, former address and former fiscal year,
                         if changed from last report.)

Indicate by check mark whether  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 _X_     No ___

At October 31,  1997,  there were  4,708,851  shares of common  stock,  $.01 par
value, outstanding.

<PAGE>

                                      INDEX

                                                                            Page
                                                                            ----

PART I.   FINANCIAL INFORMATION

  Item 1. Financial Statements

          Consolidated Balance Sheets at September 26, 1997
           (unaudited) and March 28, 1997                                     3

          Unaudited Consolidated Statements of Operations for the
           Three Months and Six Months Ended September 26, 1997
           and September 27, 1996                                             4

          Unaudited Consolidated Statements of Cash Flows for the
           Six Months Ended September 26, 1997 and September 27, 1996         5

          Unaudited Consolidated Statement of Changes in Stockholders'
           Equity for the Six Months Ended September 26, 1997                 6

          Notes to Consolidated Financial Statements                          7

  Item 2. Management's Discussion and Analysis of
           Financial Condition and Results of Operations                      10

PART II.  OTHER INFORMATION

  Item 6. Exhibits and Reports on Form 8-K                                    20


                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                         TECHNOLOGY SERVICE GROUP, INC.

                                 BALANCE SHEETS
                  (Dollars in thousands except per share data)


<TABLE>
<CAPTION>
                                                                September 26,      March 28,
                                                                    1997             1997
                                                                -------------    -------------
                                                                 (Unaudited)
<S>                                                             <C>              <C>
ASSETS
Current assets:
  Cash                                                          $         205    $          68
  Accounts receivable, less allowance for doubtful
    accounts of $109 and $147                                           4,090            3,235
  Inventories                                                          11,010           10,879
  Refundable income taxes                                                 267             --
  Deferred tax asset                                                      399              543
  Prepaid expenses and other current assets                                39              141
                                                                -------------    -------------
     Total current assets                                              16,010           14,866
Property and equipment, net                                               620              847
Goodwill                                                                3,148            3,252
Other assets                                                              968              807
                                                                -------------    -------------
                                                                $      20,746    $      19,772
                                                                =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Bank overdraft                                                $         768    $         243
  Borrowings under revolving credit agreement                           2,617            3,811
  Accounts payable                                                      3,455            1,047
  Income taxes payable                                                   --                126
  Deferred revenue                                                       --                375
  Accrued liabilities                                                     691            1,015
  Accrued restructuring charges                                          --                 28
                                                                -------------    -------------
        Total current liabilities                                       7,531            6,645
Long-term liabilities                                                    --               --
                                                                -------------    -------------
                                                                        7,531            6,645
                                                                -------------    -------------
Commitments and contingencies (Note 7)                                   --               --
Stockholders' equity:
  Preferred stock, $100 par value, 100,000 shares authorized,
    none issued or outstanding                                           --               --
  Common stock, $.01 par value, 10,000,000 shares authorized,
    4,708,851 and 4,701,760 shares issued and outstanding                  47               47
  Capital in excess of par value                                       11,990           11,963
  Retained earnings                                                     1,186            1,122
  Cumulative translation adjustment                                        (8)              (5)
                                                                -------------    -------------
      Total stockholders' equity                                       13,215           13,127
                                                                -------------    -------------
                                                                $      20,746    $      19,772
                                                                =============    =============
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       3
<PAGE>

                         TECHNOLOGY SERVICE GROUP, INC.

                 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands except per share data)

<TABLE>
<CAPTION>
                                                       Three Months Ended                 Six Months Ended
                                                 ------------------------------    ------------------------------
                                                 September 26,    September 27,    September 26,    September 27,
                                                     1997             1996             1997             1996
                                                 -------------    -------------    -------------    -------------
<S>                                              <C>              <C>              <C>              <C>          
Net sales                                        $       7,084    $      10,062    $      13,301    $      22,140
                                                 -------------    -------------    -------------    -------------
Costs and expenses:
  Cost of goods sold                                     5,906            7,770           11,029           17,610
  General and administrative expenses                      491              718            1,045            1,363
  Marketing and selling expenses                           185              194              350              555
  Engineering, research and               
      development expenses                                 445              655              737            1,064
  Litigation settlement                                   --               --               --               (105)
  Interest expense                                          53               63              125              205
  Restructuring charges                                   --                 63             --                 63
  Other (income)                                           (14)             (13)             (28)             (30)
                                                 -------------    -------------    -------------    -------------
                                                         7,066            9,450           13,258           20,725
                                                 -------------    -------------    -------------    -------------
Income before income tax                
  (expense) benefit                                         18              612               43            1,415
Income tax (expense) benefit                                 9             (227)              21             (445)
                                                 -------------    -------------    -------------    -------------
Net income                                       $          27    $         385    $          64    $         970
                                                 =============    =============    =============    =============
Income per common and common                                                                         
  equivalent share:                                                                                  
    Primary                                      $        0.01    $        0.08    $        0.03    $        0.21
                                                 =============    =============    =============    =============
    Assuming full dilution                       $        0.01    $        0.08    $        0.03    $        0.21
                                                 =============    =============    =============    =============
Weighted average number of common and
  common equivalent shares outstanding:
    Primary                                              5,027            5,008            5,026            4,727
                                                 =============    =============    =============    =============
    Assuming full dilution                               5,027            5,008            5,026            4,727
                                                 =============    =============    =============    =============
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       4
<PAGE>

                         TECHNOLOGY SERVICE GROUP, INC.
                 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                               Six Months Ended
                                                        ------------------------------
                                                        September 26,    September 27,
                                                            1997             1996
                                                        -------------    -------------
<S>                                                     <C>              <C>
Cash flows from operating activities
  Net income                                            $          64    $         970
  Adjustments to reconcile net income to net
    cash provided by (used for) operating activities
      Depreciation and amortization                               415              579
      Provisions for inventory losses and
        warranty expense                                          103              341
      Provision for uncollectible accounts receivable             (37)              56
      Loss on disposition of assets                                 1             --
      Restructuring charges                                      --                 63
      Deferred tax expense (benefit)                              232             (134)
      Changes in operating assets and liabilities
        (Increase) decrease in accounts receivable               (818)             856
        (Increase) in inventories                                (154)          (5,190)
        (Increase) in refundable income taxes                    (267)            --
        Decrease in prepaid expenses and
          other current assets                                    102               18
        (Increase) in other assets                               (239)              (1)
        Increase (decrease) in accounts payable                 2,408             (612)
        Increase (decrease) in income taxes payable              (126)             284
        (Decrease) in deferred revenue                           (375)            (541)
        (Decrease) in accrued liabilities                        (404)            (492)
        (Decrease) in accrued restructuring charges               (28)            --
        Other                                                      (1)               1
                                                        -------------    -------------
        Net cash provided by (used for) operating
         activities                                               876           (3,802)
                                                        -------------    -------------
Cash flows from investing activities
  Capital expenditures                                            (98)            (198)
  Proceeds from disposition of assets                               1             --
                                                        -------------    -------------
        Net cash used for investing activities                    (97)            (198)
                                                        -------------    -------------
Cash flows from financing activities
  Net proceeds (payments) under revolving credit
    agreement                                                  (1,194)             702
  Proceeds from initial public offering, net of
    issuance expenses                                            --              8,635
  Proceeds from exercise of common stock
    options and warrants                                           27              164
  Repayment of notes payable to stockholders                     --             (2,800)
  Principal payments on long-term debt and
    capital lease obligations                                    --             (2,595)
  Increase in bank overdraft                                      525               31
                                                        -------------    -------------
    Net cash provided by (used for)
      financing activities                                       (642)           4,137
                                                        -------------    -------------
Increase in cash                                                  137              137
Cash, beginning of period                                          68               20
                                                        -------------    -------------
Cash, end of period                                     $         205    $         157
                                                        =============    =============
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       5
<PAGE>

                         TECHNOLOGY SERVICE GROUP, INC.

             UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                   FOR THE SIX MONTHS ENDED SEPTEMBER 26, 1997
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                          Capital in                   Cumulative
                                              Common       Excess of      Retained    Translation
                                               Stock       Par Value      Earnings     Adjustment       Total
                                            -----------   -----------   -----------   -----------    -----------
<S>                                         <C>           <C>           <C>           <C>            <C>        
Balance at March 28, 1997                   $        47   $    11,963   $     1,122   $        (5)   $    13,127


Issuance of 7,091 shares upon exercise of
common stock options and purchase rights           --              27          --            --               27

Net income for the period                          --            --              64          --               64

Foreign currency translation adjustment            --            --            --              (3)            (3)
                                            -----------   -----------   -----------   -----------    -----------
Balance at September 26, 1997               $        47   $    11,990   $     1,186   $        (8)   $    13,215
                                            ===========   ===========   ===========   ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       6
<PAGE>

                         TECHNOLOGY SERVICE GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Dollars in thousands)

1. GENERAL

     The accompanying  consolidated  balance sheet as of March 28, 1997 has been
derived from the audited financial  statements of Technology Service Group, Inc.
("TSG")  included in TSG's annual  report on Form 10-K for the fiscal year ended
March 28, 1997.  The  accompanying  unaudited  consolidated  balance sheet as of
September 26, 1997,  unaudited  consolidated  statements  of operations  for the
three months and six months ended  September  26, 1997 and  September  27, 1996,
unaudited  consolidated  statements  of cash  flows  for the  six  months  ended
September 26, 1997 and September 27, 1996 and unaudited  statement of changes in
stockholders'  equity  for the six months  ended  September  26,  1997 have been
derived from TSG's books and records  without  audit and prepared in  accordance
with instructions to Form 10-Q. Accordingly,  the financial information does not
include  all the  information  and  footnotes  required  by  generally  accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management,  all adjustments,  consisting only of normal recurring  accruals and
adjustments,  necessary for a fair presentation of the financial position of TSG
at September 26, 1997 and its operations and its cash flows for the three months
and six months ended  September  26, 1997 and September 27, 1996 have been made.
For further information, refer to the audited financial statements and footnotes
included in TSG's annual report on Form 10-K for the fiscal year ended March 28,
1997.

     The  results  of  operations  for the three  months  and six  months  ended
September 26, 1997 are not necessarily  indicative of the results for the entire
fiscal year ending April 3, 1998.

2. INVENTORIES

     Inventories  at  September  26,  1997 and March 28, 1997  consisted  of the
following:

                                              September 26,      March 28,
                                                  1997             1997
                                              -------------    -------------

     Raw materials                            $       7,189    $       6,154
     Work-in-process                                  1,962            2,117
     Finished goods                                   3,104            4,036
                                              -------------    -------------
                                                     12,255           12,307
     Reserve for potential losses                    (1,245)          (1,428)
                                              -------------    -------------
                                              $      11,010    $      10,879
                                              =============    =============

3. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT

     At  September  26,  1997,  TSG is able to borrow up to a maximum  of $9,000
under the terms of a Loan and Security Agreement (the "Loan Agreement")  between
TSG and its bank. The Loan Agreement provides for revolving credit  indebtedness
up to the maximum amount based on specified  percentages applied to the value of
collateral  consisting of accounts receivable and inventories.  At September 26,
1997 and March 28, 1997, TSG had outstanding  indebtedness of $2,617 and $3,811,
respectively,  under the revolving credit line.  Indebtedness  outstanding under
the  Loan  Agreement  is  collateralized  by  substantially  all  assets  of TSG
including accounts receivable,  inventories and property and equipment. Interest
is payable  monthly at a variable rate per annum equal to 1.5% above a base rate
quoted by Citibank N.A.  (8.5% at September  26, 1997 and March 28,  1997).  The
Loan  Agreement  expires on November  30, 1997,


                                       7
<PAGE>

and is renewable  for one-year  periods  unless  terminated by the bank upon the
occurrence of an event of default or by TSG upon at least 90 days' notice.

4. INCOME PER COMMON AND COMMON EQUIVALENT SHARE

     Income per common and common  equivalent share for the three months and six
months ended  September 26, 1997 and September 27, 1996 is computed on the basis
of the weighted average number of common shares  outstanding and dilutive common
equivalent shares outstanding during the period,  except as required pursuant to
Accounting  Principles Board Opinion No. 15, Earnings per Share, all outstanding
options and warrants have been included in the  calculation  in accordance  with
the modified treasury stock method and except as required pursuant to Securities
and Exchange  Commission Staff Accounting  Bulletin ("SECSAB") Topic 4:D, shares
of common stock  underlying  warrants  issued and options  granted during the 12
months prior to TSG's May 10, 1996 initial  public  offering at prices below the
public offering price have been included in the calculation of weighted  average
of common and common equivalent  shares  outstanding as if they were outstanding
as of the beginning of the period.

5. INCOME TAXES

     Income tax expense (benefit) charged (credited) to operations for the three
months and six  months  ended  September  26,  1997 and  September  27,  1996 is
summarized as follows:

<TABLE>
<CAPTION>
                                             Three Months Ended                Six Months Ended
                                       ------------------------------    ------------------------------
                                       September 26,    September 27,    September 26,    September 27,
                                           1997             1996             1997             1996
                                       -------------    -------------    -------------    -------------
<S>                                    <C>              <C>              <C>              <C>          
     Current tax expense (benefit):
       Federal                         $          28    $         275    $        (229)   $         494
       State                                       5               41              (24)              85
                                       -------------    -------------    -------------    -------------
                                                  33              316             (253)             579
                                       -------------    -------------    -------------    -------------
     Deferred tax expense (benefit):
       Federal                                   (28)             (78)             220             (113)
       State                                     (14)             (11)              12              (21)
                                       -------------    -------------    -------------    -------------
                                                 (42)             (89)             232             (134)
                                       -------------    -------------    -------------    -------------
                                       $          (9)   $         227    $         (21)   $         445
                                       =============    =============    =============    =============
</TABLE>

     A reconciliation of income tax expense (benefit) determined by applying the
U.S.  statutory federal income tax rate to income before income taxes and income
tax expense (benefit) charged  (credited) to operations for the three months and
six months ended September 26, 1997 and September 27, 1996 is as follows:

<TABLE>
<CAPTION>
                                                 Three Months Ended                 Six Months Ended
                                           ------------------------------    ------------------------------
                                           September 26,    September 27,    September 26,    September 27,
                                               1997             1996             1997             1996
                                           -------------    -------------    -------------    -------------
<S>                                        <C>              <C>              <C>              <C>          
     Income tax expense at U.S. statutory
     rate                                  $           7    $         208    $          15    $         481
     State taxes, net of federal benefit               3               18              (16)              44
     Non-deductible expenses                        --                 14               13               29
     Utilization of loss carryforwards              --               --                (72)             (72)
     Other                                           (19)             (13)              39              (37)
                                           -------------    -------------    -------------    -------------
     Income tax expense (benefit)
     charged (credited) to operations      $          (9)   $         227    $         (21)   $         445
                                           =============    =============    =============    =============
</TABLE>


                                       8
<PAGE>

6. SUPPLEMENTAL CASH FLOW INFORMATION

     Supplemental  cash flow  information for the six months ended September 26,
1997 and September 27, 1996 consists of the following:

                                                 Six Months Ended
                                            -----------------------------
                                            September 26,   September 27,
                                                 1997            1996
                                            -------------   -------------
     Interest paid                             $    137        $    340
     Income taxes paid                              140             294
     Deferred offering expenses charged                        
       against proceeds of initial public                      
       offering                                    --               338
     Realization of deferred tax assets                        
       applied to goodwill                           88             235
                                                               
7. COMMITMENTS AND CONTINGENT LIABILITIES

     In  June  1997,  TSG  entered  into an  agreement  with  Southwestern  Bell
Telephone  Company  ("SWB")  that  supersedes  and  terminates  a December  1994
agreement.  Under  the new  agreement,  TSG  agreed to  reduce  SWB's  remaining
purchase commitment to approximately  $3,000 from approximately $8,000 under the
former agreement.  In addition,  TSG provided an upgraded electronic key product
and,  among other  things,  agreed to provide  equipment and software to upgrade
SWB's  payphone  management  system.  SWB made a $250 cash  payment  to TSG upon
execution of the  agreement,  terminated  TSG's  obligation  to pay royalties on
sales  of  a  certain  product  to  other  customers,  terminated  a  contingent
obligation  of TSG to repay  revenue of $375 from the sale of  product  software
under the former  agreement,  and agreed to make additional cash payments to TSG
of $250 on July 2, 1997,  $100 on September  1, 1997,  $150 on December 31, 1997
and $250 on March 31, 1998  subject to TSG's  compliance  with its  obligations,
including  conditions with respect to performance,  service and repair.  SWB has
the right to cancel the agreement  upon default by TSG.  Therefore,  there is no
assurance  that TSG  will  receive  all of the  scheduled  payments  or ship the
products set forth in the agreement.  However, as of September 26, 1997, TSG has
met its  obligations  and has received all  scheduled  payments set forth in the
agreement.

     At September 26, 1997,  the Company is committed to purchase  approximately
$5.5 million of product assemblies under the terms of a manufacturing  agreement
entered  into in  October  1994.  Upon a  termination  of the  agreement  by the
Company,   the  Company  is  obligated  to  purchase  inventories  held  by  the
manufacturer  and  pay  vendor  cancellation  and  restocking  charges,   and  a
reasonable  profit  thereon.  In  addition,  the Company is  obligated  to pay a
cancellation  penalty of up to $500 if it cancels its purchase  obligation  or a
substantial  portion thereof.  The amount of the cancellation  penalty,  if any,
will vary depending upon quantities purchased by the Company.

8. BUSINESS COMBINATION

     On August 13, 1997,  TSG entered into an Agreement  and Plan of Merger with
Elcotel,  Inc.  ("Elcotel") and Elcotel  Hospitality  Service,  Inc. ("EHS"),  a
wholly-owned  subsidiary  of  Elcotel  (the  "Merger  Agreement").   The  Merger
Agreement  provides  for  the  merger  of EHS  into  TSG  and  for TSG to be the
surviving corporation (the "Merger").  At the effective time of the Merger, each
outstanding share of TSG's common stock will be converted into and represent the
right to receive 1.05 shares of Elcotel common stock,  $.01 par value per share.
The  closing  of the Merger is subject  to  certain  conditions  and  approvals,
including the approval of TSG's and Elcotel's stockholders.


                                       9
<PAGE>

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

     All dollar  amounts,  except per share  data,  stated in this  Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations  are
stated in thousands.

Forward Looking Statements

     This report contains  certain forward looking  statements  concerning TSG's
operations,  economic performance and financial  condition.  Such statements are
subject  to  various  risks  and  uncertainties.  Actual  results  could  differ
materially  from  those  currently  anticipated  due  to a  number  of  factors,
including those identified herein.

Results of Operations

          For the Three Months Ended September 26, 1997 Compared to the
                      Three Months Ended September 27, 1996

     The  following  table  shows  certain  line  items  in  TSG's  consolidated
statements  of  operations  for the three  months ended  September  26, 1997 and
September 27, 1996 that are discussed below together with amounts expressed as a
percentage  of sales and with the change  expressed as a percentage  increase or
(decrease).

<TABLE>
<CAPTION>
                                         Three                            Three
                                         Months                           Months
                                         Ended            Percent          Ended           Percent         Percentage
                                      September 26,         of          September 27,         of            Increase
                                          1997             Sales            1996            Sales          (Decrease)
                                      -------------    -------------    -------------   -------------    -------------  
<S>                                     <C>                  <C>          <C>                <C>               <C>  
Sales                                   $   7,084            100%         $  10,062          100%              (30%)
Cost of goods sold                          5,906             83%             7,770           77%              (24%)
General and administrative expenses           491              7%               718            7%              (32%)
Engineering, research and                                                                                  
development expenses                          445              6%               655            7%              (32%)
Interest expense                               53              1%                63            1%              (16%)
Restructuring charges                          --             --                 63            1%             (100%)
Income tax expense (benefit)                   (9)            --                227            2%             (104%)
</TABLE>

     Sales.  The decrease in sales for the three months ended September 26, 1997
as  compared  to  the  three  months  ended  September  27,  1996  is  primarily
attributable  to (i) a decrease in sales  volume of smart  payphone  systems and
processors  and (ii) a reduction  in the sales price of GeminiTM  processors  of
approximately  25%  under  the  terms  of a  sales  agreement  between  TSG  and
Telesector  Resources  Group,  Inc. and its  affiliates,  including  NYNEX Corp.
("NYNEX"),  which has now  merged  into Bell  Atlantic  Corp.,  offset by (i) an
increase in volume of exported  wireless payphone systems and (ii) sales revenue
of $350 under the terms of a new sales  agreement  between TSG and  Southwestern
Bell  Telephone  Company  ("SWB")  entered  into in June  1997.  Sales  of smart
payphone  products  consisted  primarily  of smart  processors  during the three
months ended  September  26, 1997.  During the three months ended  September 27,
1996, higher priced smart payphone systems accounted for approximately $2,288 of
sales. Sales of smart payphone systems and processors decreased by approximately
60%,  from $6,265  during the three  months ended  September  27, 1996 to $2,465
during the three months ended  September 26, 1997.  Export sales  increased from
approximately  $160 during the three  months  ended  September  27, 1996 to $668
during the three months ended September 26, 1997 due primarily to an increase in
volume related to new customers.


                                       10
<PAGE>

     TSG believes that the uncertainty in the  marketplace  caused by a delay in
the   implementation  of  the   Telecommunications   Reform  Act  of  1996  (the
"Telecommunications Act") has adversely affected its smart product sales volume.
In  addition,  following a high level of  start-up  demand at the  beginning  of
NYNEX's  smart  payphone  conversion  program  last year,  NYNEX has reduced its
deployment of TSG's smart payphone  systems and processors  during TSG's current
fiscal  year.  The Company is  attempting  to increase its sales volume of smart
payphone  products through other customer  relationships.  See "Operating Trends
and  Uncertainties,"  below for a discussion of TSG's  dependence on significant
customers and contractual relationships.

     In June 1997,  TSG entered into an agreement  with SWB that  supersedes and
terminates a December 1994  agreement.  Under the new  agreement,  TSG agreed to
reduce  SWB's  remaining  purchase  commitment  of GemStarTM  processor  kits to
approximately  $3,000 from approximately  $8,000 under the former agreement.  In
addition,  TSG  provided an upgraded  electronic  key product  and,  among other
things,  agreed to provide  equipment  and  software to upgrade  SWB's  payphone
management  system.  SWB made a $250 cash  payment to TSG upon  execution of the
agreement,  terminated  TSG's  obligation  to pay  royalties on sales of GemStar
processors  to other  customers,  terminated a contingent  obligation  of TSG to
repay  revenue  of $375  from the sale of  product  software  under  the  former
agreement, and agreed to make additional cash payments to TSG of $250 on July 2,
1997, $100 on September 1, 1997, $150 on December 31, 1997 and $250 on March 31,
1998 subject to TSG's compliance with its obligations, including conditions with
respect to  performance,  service  and  repair.  During the three  months  ended
September 26, 1997, TSG met its obligations, received and recorded sales of $350
under the terms of the agreement.

     Cost of Goods  Sold.  Cost of goods sold  represented  83% of sales for the
three months ended  September 26, 1997 as compared to 77% of sales for the three
months ended  September 27, 1996.  This increase  resulted  principally  from an
increase in manufacturing  costs as a percentage of sales due to the decrease in
sales  volume  of smart  payphone  products  and the  decrease  in sales  prices
referred to above,  offset by the impact of sales  recognized under the terms of
the new  agreement  between TSG and SWB and the  increase in the  percentage  of
higher margin export sales.

     General   and   Administrative   Expenses.   The  decline  in  general  and
administrative  expenses is primarily attributable to a reduction in expenses of
approximately  $72 from the  closure  of one of TSG's  manufacturing  facilities
during the year ended March 28,  1997, a decrease in accrued  performance  based
compensation  of $61 due to the  decline in  income,  a  decrease  in  insurance
expense of $25 due to favorable  policy renewal terms, a decrease in shareholder
communication  costs of $10, a decrease in amortization of intangible  assets of
$43, a decrease in depreciation  expense of $14 and a reduction in the provision
for doubtful  accounts  receivable of $62, offset by an increase in rent expense
of  approximately  $60.  The  additional  rent  expense  related to a lease with
respect  to a new  facility  in Georgia  that  commenced  on April 1, 1997.  TSG
originally  planned  to close  its  present  corporate  office  facility  and to
consolidate its product  assembly  operations and corporate  activities into the
new facility.  However,  in view of the pending  merger between TSG and Elcotel,
Inc.,  TSG delayed the start-up of the new facility,  and on September 30, 1997,
assigned the lease to an unaffiliated third party.

     Engineering,   Research  and   Development   Expenses.   TSG  expanded  its
engineering  resources during its 1997 fiscal year ended March 28, 1997 in order
to  facilitate  the  development  of a new  smart  payphone  processor  and  the
implementation  of  lower-cost  manufacturing  methodologies.  During  the three
months  ended  September  26, 1997,  the  requirement  for contract  engineering
services diminished and the related expense,  net of an increase in salaries and
wages related to personnel  additions of $41,  decreased by approximately  $105.
Also,  TSG  capitalized  approximately  $102 of  software  development  costs in
connection with the development of its new smart payphone  processor  during the
three months ended September 26, 1997.  Software  development  costs capitalized
during the three months ended September 27, 1996 were not significant.


                                       11
<PAGE>

     Interest Expense.  The decrease in interest expense during the three months
ended  September  26, 1997 as compared to the same period last year is primarily
due to the  assignment  of a capital  lease  obligation  related to one of TSG's
manufacturing facilities in November 1996. See "Restructuring Charges," below.

     Restructuring  Charges.  During  August 1996,  TSG approved and initiated a
consolidation  plan  intended to augment its on-going  productivity  and quality
improvement programs. In connection with this plan, TSG initiated the closure of
one of its manufacturing facilities, and recorded a restructuring charge of $63,
consisting primarily of estimated severance obligations, during the three months
ended September 27, 1996.

     Income  Taxes.  During the three  months  ended  September  26,  1997,  TSG
recorded  an income tax  benefit of $9 on pre-tax  income of $18 as  compared to
income tax expense of $227 on pre-tax  income of $612 for the three months ended
September 27, 1996. Current tax expense for the three months ended September 26,
1997  amounted  to $33 as  compared to current tax expense of $316 for the three
months  ended  September  27,  1996.  Deferred tax benefits for the three months
ended September 26, 1997 amounted to $42 as compared to deferred tax benefits of
$89 for the three months ended September 27, 1996. Benefits of acquired deferred
tax assets applied to goodwill  during the three months ended September 26, 1997
approximated $6 versus $75 for the three months ended September 27, 1996.

           For the Six Months Ended September 26, 1997 Compared to the
                       Six Months Ended September 27, 1996

     The  following  table  shows  certain  line  items  in  TSG's  consolidated
statements  of  operations  for the six  months  ended  September  26,  1997 and
September 27, 1996 that are discussed below together with amounts expressed as a
percentage  of sales and with the change  expressed as a percentage  increase or
(decrease).

<TABLE>
<CAPTION>
                                          Six                               Six
                                         Months                            Months
                                          Ended           Percent          Ended           Percent         Percentage
                                      September 26,          of         September 27,         of            Increase
                                          1997             Sales            1996            Sales          (Decrease)
                                      -------------    -------------    -------------   -------------    -------------  
<S>                                     <C>                 <C>            <C>               <C>               <C>  
Sales                                   $ 13,301            100%           $ 22,140          100%              (40%)
Cost of goods sold                        11,029             83%             17,610           80%              (37%)
General and administrative expenses        1,045              8%              1,363            6%              (23%)
Marketing and selling expenses               350              3%                555            3%              (37%)
Engineering, research and                                                                                   
development expenses                         737              5%              1,064            5%              (31%)
Litigation settlement                        --              --                (105)          --              (100%)
Interest expense                             125              1%                205            1%              (39%)
Restructuring charges                        --              --                  63           --              (100%)
Income tax expense (benefit)                 (21)            --                 445            2%             (105%)
</TABLE>
                                             
     Sales. The decrease in sales for the six months ended September 26, 1997 as
compared to the six months ended September 27, 1996 is primarily attributable to
(i) a decrease in sales volume of smart payphone systems and processors and (ii)
a reduction in the sales price of GeminiTM processors of approximately 25% under
the terms of the sales  agreement  between TSG and NYNEX  (which has merged into
Bell Atlantic Corp.),  offset by (i) an increase in volume of exported  wireless
payphone systems and (ii) sales revenue of $975 under the terms of the new sales
agreement  between  TSG and  SWB.  Sales of smart  payphone  products  consisted
primarily of smart  processors  during the six months ended  September 26, 1997.
During the six months ended  September 27, 1996,  higher  priced smart  payphone
systems  accounted


                                       12
<PAGE>

for  approximately  $7,015  of sales.  Sales of smart  payphone  processors  and
systems  decreased to $4,033  during the six months ended  September 26, 1997 as
compared to $14,491 during the six months ended September 27, 1996. Export sales
increased to $1,267  during the six months ended  September 26, 1997 as compared
to $155 for the  corresponding  period last year due primarily to an increase in
volume related to new customers.  Sales related to other products and components
and  refurbishment  and repair  services for the six months ended  September 26,
1997 decreased to $7,026 as compared to $7,494 for the corresponding period last
year.

     Cost of Goods Sold.  Cost of goods sold as a percentage of sales  increased
to 83% for the six months  ended  September  26, 1997 as compared to 80% for the
six months ended September 27, 1996. This increase resulted  principally from an
increase in manufacturing  costs as a percentage of sales due to the decrease in
sales  volume  of smart  payphone  products  and the  decrease  in sales  prices
referred to above,  offset by the impact of sales revenues  recognized under the
terms  of the  new  agreement  between  TSG and  SWB  and  the  increase  in the
percentage of higher margin export sales.

     General   and   Administrative   Expenses.   The  decline  in  general  and
administrative  expenses is primarily attributable to a reduction in expenses of
approximately  $123 from the  closure of one of TSG's  manufacturing  facilities
during the year ended March 28,  1997, a decrease in accrued  performance  based
compensation  of $79 due to the  decline in  income,  a  decrease  in  insurance
expense of $27 due to favorable policy renewal terms, a decrease in depreciation
expense of $32, a decrease in  amortization  of  intangible  assets of $46 and a
reduction in the provision for doubtful accounts receivable of $93, offset by an
increase in rent expense of approximately $100 under the facility lease assigned
to an unaffiliated party on September 30, 1997.

     Marketing  and Selling  Expenses.  The  decrease in  marketing  and selling
expenses  during the six months  ended  September  26,  1997 as  compared to the
corresponding period last year is primarily  attributable to the expiration of a
royalty agreement and the resulting decrease in royalty expense of $205.

     Engineering,   Research  and   Development   Expenses.   TSG  expanded  its
engineering  resources during its 1997 fiscal year ended March 28, 1997 in order
to  facilitate  the  development  of a new  smart  payphone  processor  and  the
implementation of lower-cost manufacturing methodologies.  During the six months
ended  September 26, 1997, the  requirement  for contract  engineering  services
diminished  and the related  expense,  net of an increase in salaries  and wages
related to personnel additions of $98, decreased by approximately $99. Also, TSG
capitalized  approximately $223 of software development costs in connection with
the development of its new smart payphone  processor during the six months ended
September 26, 1997. Software development costs capitalized during the six months
ended September 27, 1996 were not significant.

     Litigation Settlement.  Pursuant to the terms of a settlement agreement and
mutual release dated July 3, 1996, a suit filed against TSG by a former supplier
to  collect   approximately  $400  of  unpaid  obligations  was  dismissed  with
prejudice. As a result of the settlement agreement,  TSG realized a gain of $105
during the six months  ended  September  27, 1996  representing  the  difference
between unpaid obligations  recorded in TSG's accounts and aggregate  settlement
payments set forth in the settlement agreement.

     Interest  Expense.  The decrease in interest  expense during the six months
ended  September  26, 1997 as compared to the same period last year is primarily
due to the repayment of outstanding bank and stockholder debt obligations during
May 1996 from proceeds of TSG's initial public  offering and the assignment of a
capital lease  obligation  related to one of TSG's  manufacturing  facilities in
November 1996.  See  "Restructuring  Charges,"  below and "Liquidity and Capital
Resources."


                                       13
<PAGE>

     Restructuring  Charges.  Restructuring  charges during the six months ended
September  27,  1996  relate  to  the  closure  of one  of  TSG's  manufacturing
facilities as previously discussed.

     Income Taxes.  During the six months ended September 26, 1997, TSG recorded
an income tax benefit of $21 on pre-tax  income of $43 as compared to income tax
expense of $445 on pre-tax  income of $1,415 for the six months ended  September
27,  1996.  Current tax benefits  for the six months  ended  September  26, 1997
amounted  to $253 as  compared to current tax expense of $579 for the six months
ended  September  27,  1996.  Deferred  tax  expense  for the six  months  ended
September 26, 1997 amounted to $232 as compared to deferred tax benefits of $134
for the six months ended  September  27, 1996.  Benefits of net  operating  loss
carryforwards  used to offset current  taxable income amounted to $72 during the
six months ended September 26, 1997 and September 27, 1996. Benefits of acquired
deferred tax assets  applied to goodwill  during the six months ended  September
26, 1997  approximated  $88 versus $235 for the six months ended  September  27,
1996.

Liquidity and Capital Resources

     TSG is able to borrow up to a maximum  of $9,000  under the terms of a Loan
Agreement  between TSG and its bank. The Loan  Agreement  provides for revolving
credit  indebtedness  up to the maximum  amount based on  specified  percentages
applied to the value of eligible  collateral  consisting of accounts  receivable
and  inventories.  At  September  26,  1997  and  March  28,  1997,  outstanding
indebtedness   under  the  Loan   Agreement   amounted  to  $2,617  and  $3,811,
respectively. At September 26, 1997 and March 28, 1997, outstanding indebtedness
under the Loan  Agreement  bore  interest at a variable  rate per annum equal to
1.5% above a base rate quoted by Citibank,  N.A. The base rate at September  26,
1997 and March 28,  1997 was 8.50% per annum.  Amounts  borrowed  under the Loan
Agreement  are  collateralized  by  substantially  all assets of TSG,  including
accounts receivable,  inventories and property and equipment. The Loan Agreement
expires on November 30, 1997,  and is  renewable  annually for one-year  periods
unless  terminated  by the bank upon an  occurrence of an event of default or by
TSG upon at least 90 days' notice.

     The Loan Agreement contains  conditions and covenants that prevent TSG from
engaging in certain  transactions  without  the  consent of the bank,  including
merging or consolidating,  payment of subordinated stockholder debt obligations,
declaration or payment of dividends,  and  disposition of assets,  among others.
Additionally,  the Loan Agreement requires TSG to comply with specific financial
covenants,  including  covenants with respect to cash flow,  working capital and
net worth.  Noncompliance  with any of these  conditions  and  covenants  or the
occurrence of an event of default, if not waived or corrected,  could accelerate
the maturity of the indebtedness outstanding under the Loan Agreement.  Although
TSG is in compliance  with the  covenants set forth in the Loan  Agreement as of
September  26, 1997,  there is no  assurance  that TSG will be able to remain in
compliance with such covenants in the future.

     TSG uses the financing  available  under the Loan  Agreement to finance its
working  capital  requirements.  If an  event  of  default  under  the  existing
revolving credit facility were to occur,  however,  TSG's ability in this regard
could be curtailed. In such event, TSG would seek alternative financing sources,
but there is no assurance that alternative  financing sources would be available
on commercially reasonable terms, or at all.

     TSG also uses the financing  available  under the revolving  credit line to
fund investing  activities and payments on long-term  debt when  necessary.  TSG
repays  borrowed funds with cash, if any,  provided by operating  activities and
equity  transactions.  TSG measures its liquidity based upon the amount of funds
that TSG is able to borrow  under the Loan  Agreement,  which  varies based upon
operating  performance  and the level of  current  assets  and  liabilities.  At
September  26, 1997,  TSG had unused  borrowing  availability  of  approximately
$3,633  under the  revolving  credit  facility  based on the  value of  eligible
collateral.

     TSG has  established  a cash  management  program with its bank pursuant to
which TSG funds drafts as they clear the bank.  Accordingly,  TSG maintains bank
overdrafts  representing  outstanding  drafts


                                       14
<PAGE>

and utilizes the cash management account as a source of working capital funding.
Bank  overdrafts  vary  according  to many  factors,  including  the  volume  of
business, and the timing of purchases and disbursements.

     TSG's cash flows for the six months ended  September 26, 1997 and September
27, 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                                               Six Months Ended
                                                        ------------------------------
                                                        September 26,    September 27,
                                                             1997             1996
                                                        -------------    -------------
<S>                                                     <C>              <C>          
     Operations, net of non-cash charges and credits    $         778    $       1,875
     Changes in operating assets and liabilities                   98           (5,677)
                                                        -------------    -------------
     Cash provided by (used for) operating activities             876           (3,802)
     Investing activities                                         (97)            (198)
     Net proceeds (payments) under revolving credit            (1,194)             702
     Increase in bank overdraft                                   525               31
                                                        -------------    -------------
                                                                  110           (3,267)
                                                        -------------    -------------
     Principle payments on long-term debt and capital
     lease obligations                                           --             (2,595)
     Repayment of stockholder notes                              --             (2,800)
     Proceeds from equity transactions                             27            8,799
                                                        -------------    -------------
                                                                   27            3,404
                                                        -------------    -------------
     Increase in cash                                   $         137    $         137
                                                        =============    =============
</TABLE>

     During the six months ended  September 26, 1997, TSG generated $876 in cash
from operating  activities and $525 in cash from an increase in bank overdrafts,
used $97 of cash to fund investing  activities and repaid $1,194 of indebtedness
under its revolving credit line. Proceeds from equity transactions  consisted of
proceeds from the exercise of options granted under TSG's stock option and stock
purchase  plans.  During the year ended March 28,  1997,  TSG retired all of its
outstanding long-term debt and capital lease obligations.

     During the six months ended  September 27, 1996, TSG used $3,802 of cash to
fund operating  activities and $198 of cash to fund  investing  activities,  and
generated  $31 in  cash  from  an  increase  in bank  overdrafts.  However,  TSG
completed an initial public offering of 1,150,000 Units, each Unit consisting of
one share of common stock and a Redeemable Warrant, at a price of $9.00 per Unit
for gross  proceeds of $10,350 and net proceeds of $8,635  during the six months
ended  September 27, 1996.  TSG used a portion of the proceeds from the offering
to repay outstanding indebtedness under the revolving credit line, which reduced
net proceeds under the credit line to $702 during the six months ended September
27,  1996.  In addition,  TSG used $2,800 of the  proceeds  from the offering to
repay 10% interest bearing subordinated promissory notes payable to stockholders
due  November  1,  1999,  and used  $2,510  of the net  proceeds  to repay  bank
indebtedness  consisting  of a $2,200 term note due  November  30, 1997 and $310
outstanding  under a $650 term  note due  November  30,  1997.  Other  principal
payments on long-term debt and capital lease  obligations  during the six months
ended  September 27, 1996  aggregated  $85,  including  payments under a capital
lease  obligation  assigned to an  unaffiliated  party in  November  1996 with a
then-outstanding  balance of $933.  Proceeds from equity transactions during the
six months ended  September 27, 1996 include  proceeds of $164 from the exercise
of  outstanding  common  stock  warrants and options  granted  under TSG's stock
option and stock purchase plans.

     TSG has not entered into any  significant  commitments  for the purchase of
capital  assets.  The  Company  has  delayed  its plan to  purchase  and install
information  systems and capital  equipment,  including  printed  circuit  board
assembly equipment and other manufacturing  equipment,  to advance its prototype


                                       15
<PAGE>

manufacturing and product testing  capabilities pending the merger with Elcotel.
TSG  believes,  based on its  current  plans  and  assumptions  relating  to its
operations,  that its sources of capital,  including capital available under its
revolving  credit line and cash flow from operations will be adequate to satisfy
its anticipated cash needs,  including anticipated capital expenditures,  for at
least the next  twelve  months.  However,  in the event that TSG's  plans or the
basis for its  assumptions  change or prove to be  inaccurate,  or cash flow and
sources  of  capital  prove  to  be  insufficient  to  provide  for  TSG's  cash
requirements  (due  to  unanticipated   expenses,  loss  of  sales  revenues,  a
significant increase in inventories,  operating difficulties or otherwise),  TSG
would be required to seek additional  financing.  In such an event, there can be
no assurance that additional  financing will be available to TSG on commercially
reasonable terms, or at all.

     Extension of credit to customers  and  inventory  purchases  represent  the
principal  working capital  requirements of TSG. The Loan Agreement  between TSG
and its bank limits outstanding revolving credit indebtedness  collateralized by
eligible inventory to $3,100 and limits aggregate indebtedness collateralized by
inventory and accounts receivable to $9,000. Accordingly,  significant increases
in accounts  receivable  and inventory  balances could have an adverse effect on
TSG's  liquidity.  TSG's  accounts  receivable,  less  allowances  for  doubtful
accounts,  at  September  26,  1997 and March 28,  1997  amounted  to $4,090 and
$3,235,  respectively,  and  consists  primarily  of  amounts  due from its RBOC
customers.  TSG's  inventories,  less  allowances  for  potential  losses due to
obsolescence and excess  quantities,  increased to $11,010 at September 26, 1997
from $10,879 at March 28, 1997. The level of inventory maintained by the Company
is  dependent  on a  number  of  factors,  including  delivery  requirements  of
customers,  availability  and lead-time of components  and the ability of TSG to
estimate  and plan the  volume of its  business.  TSG  markets  a wide  range of
services and products and the  requirements of its customers vary  significantly
from period to period. Accordingly, inventory balances may vary significantly.

     At September  26, 1997,  TSG is  committed to purchase  approximately  $5.5
million  of  smart  payphone  assemblies  under  the  terms  of a  manufacturing
agreement  entered into in October 1994.  Upon a termination of the agreement by
TSG, TSG is obligated to purchase  inventories  held by the manufacturer and pay
vendor cancellation and restocking charges,  and a reasonable profit thereon. In
addition,  TSG is  obligated to pay a  cancellation  penalty of up to $500 if it
cancels its purchase obligation or a substantial portion thereof.  The amount of
the cancellation  penalty, if any, will vary depending upon quantities purchased
by TSG.

     On September 26, 1997, in  contemplation of the merger with Elcotel and the
assignment of the lease with respect to TSG's new Georgia facility,  TSG entered
into an  agreement  with  Elcotel  that  provides for the assembly of certain of
TSG's products by Elcotel at prices equal to TSG's cost. In the event the merger
is not  consummated,  Elcotel  has  agreed,  subject to certain  exceptions,  to
continue to assemble such products at prices equal to TSG's cost until the first
anniversary  of the date  Elcotel  becomes  obligated  to provide  manufacturing
services under the agreement,  and has agreed to reimburse TSG for certain costs
in establishing a new manufacturing facility to replace the Georgia facility not
to exceed $100.

Operating Trends and Uncertainties

     Dependence  on Customers  and  Contractual  Relationships.  During the past
three years,  four of the RBOCs have  accounted for the majority of TSG's sales.
TSG  anticipates  that it will continue to derive most of its revenues from such
customers,  and other regional telephone companies,  for the foreseeable future.
Significant reductions and/or fluctuations in sales volume from these customers,
such as TSG  experienced  during the three months and six months ended September
26, 1997 as  compared to the three  months and six months  ended  September  27,
1996, can have material adverse effects on TSG's business. In addition, the loss
of a  significant  customer  could  have a  material  adverse  effect  on  TSG's
business.


                                       16
<PAGE>

     TSG's prospects for continued  profitability are largely dependent upon the
RBOCs  upgrading  the  technological  capabilities  of their  installed  base of
payphones, and utilizing TSG's products and services for such upgrade conversion
programs.  Also, TSG's prospects and the ability of TSG to maintain a profitable
level of  operations  are  dependent  upon its  ability  to  continue  to secure
contract  awards from the RBOCs.  In addition,  TSG's  prospects  for growth are
dependent upon the market acceptance and success of its smart payphone products,
as  well  as  development  of  smart  products  containing  additional  advanced
features.  If TSG is unable to attract  the  interest of the RBOCs to deploy its
smart payphone products, TSG's sales revenues, business and prospects for growth
would be adversely affected.  Further, TSG's ability to maintain and/or increase
its sales is dependent upon its ability to compete for and maintain satisfactory
relationships with its customers.

     Sales Prices.  TSG's agreements with its contract  manufacturers  generally
provide that TSG will bear certain cost increases  incurred by the manufacturer.
Accordingly,  TSG's manufacturing costs may fluctuate based on costs incurred by
its  contract  manufacturers  and such  fluctuations  could have a material  and
adverse impact on earnings. TSG's sales agreements with customers generally have
fixed prices with limited price escalation provisions.  Consequently, there is a
risk  that TSG may not be able to  increase  sales  prices  when  product  costs
increase.  In the event  TSG's  costs  increase  without a  corresponding  price
increase or orders are lost due to price increases, TSG's profitability would be
adversely affected. TSG encounters substantial competition with respect to smart
payphone contract awards from the RBOCs.  Pending the release of TSG's new smart
payphone  processor later this year, market pressures have eroded margins on the
product  version  currently  being  shipped.  Until TSG  releases  its new smart
payphone  processor,  TSG will realize little to no gross profit with respect to
smart  product  sales to NYNEX as was the case  during the three  months and six
months ended September 26, 1997.

     Seasonality. TSG's sales are generally stronger during periods when weather
does not interfere with the maintenance and  installation of payphone  equipment
by TSG's customers,  and may be adversely  impacted near the end of the calendar
year by the budget shortfalls of customers.  However, TSG may also receive large
year-end orders from its customers for shipment in December depending upon their
budget positions.  In the event TSG does not receive any significant end of year
orders for its smart  payphone  products,  its third  quarter  sales may decline
significantly in relation to other quarters.

     Sources of Supply and Dependence on Contract  Manufacturers.  TSG generally
assembles  its smart  payphone  products  from  assemblies  produced  by certain
manufacturers   under  contractual   arrangements.   To  the  extent  that  such
manufacturers  encounter  difficulties in their production  processes that delay
shipment  to TSG or that  affect the  quality of items  supplied  to TSG,  TSG's
ability to perform its sales  agreements  or otherwise to meet supply  schedules
with its  customers  can be  adversely  affected.  In the  event  that  contract
manufacturers  delay  shipments or supply  defective  materials to TSG, and such
delays or defects are material,  TSG's customer  relations could deteriorate and
its sales and operating results could be materially and adversely affected.

     As a  percentage  of  revenues,  the  majority  of TSG's  products  contain
components or assemblies  that are purchased from single  sources.  TSG believes
that there are  alternative  sources of supply  for most of the  components  and
assemblies  currently  purchased from those sources.  Most of the components and
assemblies used by TSG for which there are not immediately available alternative
sources of supply are provided to TSG under standard purchase  arrangements.  In
addition,  suppliers of certain  electronic  parts and components to TSG and its
contract  manufacturers  occasionally  place their  customers on allocation  for
those parts.  If a shortage or  termination  of the supply of any one or more of
such components or assemblies were to occur,  TSG's business could be materially
and  adversely  affected.  In such  event,  TSG  would  have to incur  the costs
associated  with  redesigning  its products to include  available  components or
assemblies or otherwise  obtain adequate  substitutes,  and those costs could be
material.  Also,  any delays in  redesigning  products or  obtaining  substitute
components could adversely affect TSG's business.


                                       17
<PAGE>

     Telecommunications  Act. On February 8, 1996, the President signed into law
the  Telecommunications  Act of 1996 (the  "Telecommunications  Act"),  the most
comprehensive   reform  of  communications   law  since  the  enactment  of  the
Communications  Act of 1934.  Although TSG believes that the  uncertainty in the
industry caused by a delay in the implementation of certain payphone provisions,
including the "dial around"  compensation order, of the  Telecommunications  Act
has had an  adverse  impact on its  smart  product  sales  volume,  the  Company
believes that passage of the Telecommunications Act will have a favorable impact
on the  profitability  of the  payphone  industry in the long run and  generally
benefit TSG. For example,  the  deregulation of local coin rates in October 1997
will improve  revenues of TSG's  domestic  customers.  However,  there can be no
assurance  that  implementation  of  the  Telecommunications  Act  will  have  a
favorable impact on TSG's operations in the future. In addition,  as a result of
the  Telecommunications  Act,  the RBOCs will be permitted  to  manufacture  and
provide  telecommunications   equipment  and  to  manufacture  customer  premise
equipment when certain competitive conditions have been met. It is possible that
one or more RBOCs will  decide to  manufacture  payphone  products,  which would
increase  the  competition  faced by TSG and  could  decrease  demand  for TSG's
products by such RBOCs.

Net Operating Loss Carryforwards

     As of September 26, 1997,  TSG had net  operating  loss  carryforwards  for
income tax  purposes  of  approximately  $11  million to offset  future  taxable
income.  As a result of an ownership  change on October 31, 1994, TSG is subject
to an annual  limitation on the use of its net operating losses of approximately
$210.  Such  limitation  has the effect of  increasing  TSG's tax  liability and
reducing net income and available  cash resources of TSG when the taxable income
during a year  exceeds  the  allowable  loss  carried  forward to that year.  In
addition,  because of such limitations,  TSG will be unable to use a significant
portion of its net operating loss carryforwards.

New Accounting Pronouncements

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires disclosure of basic earnings per share based on income available to
common stockholders and the weighted average number of common shares outstanding
during the period,  and diluted  earnings per share based on income available to
common  stockholders  and the  weighted  average  number of common and  dilutive
potential common shares  outstanding  during the period. Had the Company adopted
SFAS 128  during  the years  ended  March 29,  1996 and  March 28,  1997,  basic
earnings per share on a pro forma basis would have been $.34 and $.22 per share,
respectively,  and  diluted  earnings  per share on a pro forma basis would have
been $.30 and $.21 per share, respectively.

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards  No. 129,  Disclosure of  Information  about
Capital  Structure  ("SFAS  129").  SFAS 129  requires a Company to explain  the
privileges  and  rights of its  various  outstanding  securities,  the number of
shares issued upon conversion,  exercise or satisfaction of required  conditions
during  the  most  recent  annual  fiscal  period,  liquidation  preferences  of
preferred stock and other matters with respect to preferred stock.  Although the
statement is effective for periods ending after December 15, 1997, the Company's
financial statement disclosures are in compliance with SFAS 129.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 130, Reporting  Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive  income is defined as the change in equity of a business  during a
period from  transactions and events and circumstances  from non-owner  sources,
and includes all changes in equity during a period except those  resulting  from
investments  by owners and  distributions  to owners.  SFAS 130 is effective for
fiscal years  beginning after December 15, 1997. The adoption of SFAS 130 is not
expected 


                                       18
<PAGE>

to have a material  effect on the  Company's  results of operations or financial
position.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  Disclosures  about  Segments  of an
Enterprise  and Related  Information  ("SFAS  131").  SFAS 131  requires  public
entities to report certain information about operating segments,  their products
and  services,  the  geographic  areas in which they  operate,  and their  major
customers,  in complete financial  statements and in condensed interim financial
statements  issued to  stockholders.  SFAS 131 is  effective  for  fiscal  years
beginning  after  December 15, 1997. The adoption of SFAS 131 is not expected to
have a material  effect on the  Company's  results of  operations  or  financial
position.



                                       19
<PAGE>

                           PART II - OTHER INFORMATION

Item 6 - Exhibits and Reports on Form 8-K

(a)  Exhibits

     The following exhibits are filed herewith as a part of this Report.


     Exhibit
       No.                  Description of Exhibit
     -------                ----------------------

      10.1          Assignment,   Assumption  and  Consent   Agreement
                    between  Technology  Service  Group,  Inc.,  World
                    Access,  Inc. and McDonald  Windward  Partners II,
                    L.L.C. dated September 30, 1997

      10.2          Manufacturing  Services Agreement between Elcotel,
                    Inc. and  Technology  Service  Group,  Inc.  dated
                    September 26, 1997

       11.          Statement re computation of per share earnings

       27.          Financial Data Schedule (EDGAR Filing only)

(b)  Reports of Form 8-K

     On August 21,  1997,  TSG filed a report on Form 8-K,  reporting in Item 5.
that on August 13, 1997,  TSG entered into an Agreement  and Plan of Merger with
Elcotel, Inc. and its wholly-owned subsidiary, Elcotel Hospitality Service, Inc.


                                       20
<PAGE>

                                   SIGNATURES

     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 SERVICE GROUP, INC.         
                                                   (Registrant)
                                      
                                      
Date: November 6, 1997                   By: /s/  Vincent C. Bisceglia
                                            ------------------------------------
                                             Vincent C. Bisceglia
                                             President & Chief Executive Officer
                                      
                                      
                                         By: /s/  William H. Thompson
                                            ------------------------------------
                                             William H. Thompson
                                             Vice President of Finance
                                             & Chief Financial Officer


                                       21
<PAGE>

                                  EXHIBIT INDEX

Exhibit                                                                      At
  No.                         Description of Exhibit                        Page
-------                       ----------------------                        ----

 10.1          Assignment,  Assumption and Consent  Agreement  between
               Technology Service Group, Inc., World Access,  Inc. and
               McDonald Windward  Partners II, L.L.C.  dated September
               30, 1997                                                      23

 10.2          Manufacturing  Services Agreement between Elcotel, Inc.
               and Technology  Service Group, Inc. dated September 26,
               1997                                                          26

  11.          Statement re computation of per share earnings                34

  27.          Financial Data Schedule (EDGAR filing only)                   35


                                  22