  We present a rigorous analysis of the Schr\"{o}dinger picture quantization
for the $SU(2)$ Chern-Simons theory on 3-manifold torus$\times$line, with
insertions of Wilson lines. The quantum states, defined as gauge covariant
holomorphic functionals of smooth $su(2)$-connections on the torus, are
expressed by degree $2k$ theta-functions satisfying additional conditions. The
conditions are obtained by splitting the space of semistable
$su(2)$-connections into nine submanifolds and by analyzing the behavior of
states at four codimension $1$ strata. We construct the
Knizhnik-Zamolodchikov-Bernard connection allowing to compare the states for
different complex structures of the torus and different positions of the Wilson
lines. By letting two Wilson lines come together, we prove a recursion relation
for the dimensions of the spaces of states which, together with the (unproven)
absence of states for spins$\s>{_1\over^2}$level implies the Verlinde dimension
formula.
