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

                                FORM 10KSB

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
                                   For the fiscal year ended August 31, 2001


[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
                         For the transition period from _________ to _________


                                      Commission File Number: 00018250


                                     TMS, Inc.
                 (Name of small business issuer in its charter)


         Oklahoma                                             91-1098155
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)


   206 West 6th Avenue
     P.O. Box 1358
   Stillwater, Oklahoma                                          74076
(Address of principal executive offices)                       (Zip Code)


                                 (405)377-0880
                           (Issuer's telephone number)


    SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
    SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: Common
    Stock, $.05 par value


     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 at least the past 90 days.

                                   YES[X]  NO__

     Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]


     The Issuer's revenues for its most recent fiscal year were  $3,641,602
                                                                 -----------

     As of October 31, 2001 the aggregate market value of voting stock held by
nonaffiliates of such stock was $2,517,690 (based on the average bid and asked
price of such common equity on such date).

     As of October 31, 2001 there were 13,104,659 shares of Common Stock
$.05 par value, outstanding.

                        Documents Incorporated By Reference

     Following is a list of documents incorporated by reference and the part
of the Form 10-KSB into which the document is incorporated:
     The Company's Proxy Statement in connection with its Annual Meeting of
     Shareholders to be held on February 22, 2002 is incorporated by reference
     in Part III, Items 9, 10, 11 and 12.


     Transitional Small Business Disclosure Format: YES__ NO[X]

<PAGE>
___________
Form 10-KSB
for the fiscal year ended August 31, 2001

Table of Contents                              PAGE

PART I                                          3
--------

Item 1. Description of Business                 3

Item 2. Description of Property                15

Item 3. Legal Proceedings                      15

Item 4. Submission of Matters to a Vote of
        Security Holders                       15

PART II                                        16
---------

Item 5.  Market for Common Equity and Related
         Stockholder Matters                   16

Item 6.  Management's Discussion and Analysis
         or Plan of Operation                  17

Item 7.  Financial Statements                  25

Item 8.  Changes In and Disagreements With
         Accountants on Accounting and
         Financial Disclosure                  25


PART III                                       26
----------

Item 13. Exhibits and Reports on Form 8-K      26

Signatures                                     27

Index to Financial Statements and
         Financial Statement Schedule          F1

Companies and products named in this document may be trademarks of the
respective companies with which they are associated.

<PAGE> 2

----------------
Part I

ITEM 1. DESCRIPTION OF BUSINESS

General Development of Business

TMS, Inc., doing business as TMSSequoia ("TMSSequoia") has been engaged in the
computer software business since 1981 and was incorporated in 1990. TMSSequoia
licenses computer software products and provides services to enable businesses
to use document imaging to solve critical business problems. Typically,
businesses wish to solve these problems by electronically publishing and
disseminating information. We offer customers the following imaging technology
solutions and services:

Component Products
     Software toolkits for:
       Image Viewing
       Image Enhancement
       Forms Processing
       Color Image Processing
     Software applications for:
       Web-based Image Viewing
       Image Enhancement
Assessment Scoring Products
     Web-based Scoring Center
     Digital Mark Recognition
Services
     Consulting and Integration Services
     Data Capture and Conversion Services


Component Products
---------------------------------------------------------------------------

     TMSSequoia sells software development toolkits and applications and
receives license fees and/or royalties from the sales of these component
products.

     Software development toolkits include the core "building block"
technologies necessary for a customer to develop new software applications or
enhance existing applications. In particular, our toolkits provide fundamental
technologies necessary for creating document imaging and forms processing
applications.  Programming knowledge is required to implement the functionality
in our software toolkits.

     Applications are stand-alone software programs that install directly on
the user's system or on the server in a client/server environment. This software
may function independently of any other software or may be closely associated
with another software package.  Typically a customer will not need to have
programming knowledge to use a TMSSequoia software application.

<PAGE> 3

     Customers use our toolkit products to create custom applications to
address critical business needs that are often not available in pre-packaged
software applications. Our toolkit products may be used to capture, display,
magnify and enhance digitized images such as engineering drawings, legal or
financial transaction documents, reference or regulatory documents and
photographs on many kinds of computer workstations or personal computers, local
area networks, corporate intranets, the Internet or extranets via secure or
authenticated servers.

     Customers use our application products to enhance or optimize images
through a stand-alone interface, and to display, annotate or extract text from
digitized images using optical character recognition technology through a
browser-based interface. Our applications apply to many types of digitized
images such as engineering drawings, legal or financial transaction documents,
reference or regulatory documents and photographs that may be accessed via many
kinds of computer workstations or personal computers, local area networks,
corporate intranets, the Internet and/or extranets via secure or authenticated
servers. Users may transmit the images to other computers or facsimile machines,
share the images with other users, and manipulate, modify or print the images.

Image Viewing Toolkits

ViewDirector(TM)Imaging Toolkit.  ViewDirector(TM) products are software
development tools that provide image display capabilities for black and white
and color imaging applications. The ViewDirector tools are typically used to
enable existing applications to display images or for creating custom
applications for the document management industry. ViewDirector functionality
includes rapid image display and an extensive suite of image display tools
including magnifiers, rotation, hyperlinking and annotations. It is available as
cross platform C/C++ libraries or as an ActiveX control. We license ViewDirector
toolkits to a wide variety of document imaging, workflow and document management
solution providers including value-added resellers, system integrators,
independent software vendors, original equipment manufacturers, government
agencies and corporations who use the product internally to develop proprietary
software. Users agree to pay us a royalty for each computer workstation or
server on which they use the product.

Prizm(R) ActiveX Control. The Prizm(R) ActiveX control provides a core subset of
the document image viewing, manipulation and printing functionality available
with the ViewDirector ActiveX control.  However, the Prizm ActiveX control
includes technology designed specifically to facilitate viewing via a web server
in the Microsoft Internet Explorer web browser environment. The Prizm ActiveX
Control is also licensed on a per web server basis rather than by developer seat
with an associated runtime royalty agreement as the product is used for web-
enabled image viewing. Similar to retrieving information over the Internet,
users of corporate intranets or extranets access corporate image documents using
standard web browsers. Most standard web browsers do not have the ability or
flexibility to display and manipulate these scanned images without the
assistance of additional third-party technology such as the Prizm plug-in or
ActiveX control described below.

<PAGE> 4

Image Viewing Applications

Prizm(R) Plug-in.  The Prizm(R) plug-in is an application that greatly extends
the capabilities of Microsoft Internet Explorer or Netscape
Navigator/Communicator browsers, delivering the power to collaborate with its
rich feature set.  The Prizm plug-in provides document image viewing,
manipulation and printing of TIFF, JPEG and other compressed images. It offers
image batch printing, virtual multi-page documents, image annotation, and
optional optical character recognition for text extraction, hyperlinking and
magnifying capabilities at each end user's desktop. We sell a unit of the
product for each individual user. Units are sold both to corporate users in high
volumes and on a single copy basis through our web site. The product is
supported on the Windows, Macintosh and UNIX platforms. On August 1, 2001,
Microsoft abruptly and without warning discontinued support for certain types of
plug-ins, with the release of Internet Explorer 5.5 Service Pack 2, citing
security issues.  This meant that users who upgraded to Internet Explorer 5.5
Service Pack 2 or Internet Explorer 6.0 lost the functionality of the Prizm
plug-in. As a result, we began immediate work on a new version of the Prizm
plug-in and successfully notified all of our plug-in customers to postpone
upgrading their version of Internet Explorer until our new plug-in could be
delivered. The new Prizm plug-in v4.2 was released on October 19, 2001.  It uses
an ActiveX adaptor and will support Internet Explorer going forward.

Image Enhancement Toolkits

ScanFix(R) bitonal image enhancement toolkit.  ScanFix(R) software technology
automatically enhances black and white scanned images by removing specks, lines,
shading, broken characters, and black borders. It also deskews scanned images.
The ScanFix C/C++ libraries and ActiveX control are used in virtually all types
of document imaging applications, especially where optical character recognition
processing is required. We license the ScanFix toolkit to original equipment
manufacturers such as IBM, Minolta, Ricoh, Panasonic and Xerox as well as
corporate customers, government organizations, and service bureaus. Users agree
to pay us a royalty for each computer workstation on which they use the product.

Image Enhancement Application

ScanFix(R) bitonal image optimizer.  The ScanFix(R) bitonal image optimizer is a
stand-alone application that offers corporate clients, small office/home office
and individual users the functionality of the ScanFix toolkit. We primarily sell
the ScanFix bitonal image optimizer through a direct sales channel and we also
bundle and co-market this product with original equipment manufacturers and
other independent software vendors.

<PAGE> 5

Forms Processing Toolkit

FormFix(R) forms processing toolkit.  We market the FormFix(R) toolkit to
customers that have highly-skilled development staffs to develop custom
applications for high volume data capture systems, as well as to independent
software vendors who provide forms processing tailored to specific vertical
markets such as the healthcare market. Customers can create custom forms
processing applications with the FormFix development tool. Users can
automatically identify a specific form and extract typed or handwritten text,
which can then be read by optical character recognition systems and converted
for use in relational databases, billing systems and other high volume data
storage and retrieval systems. Examples include tax forms, medical
administration/billing, financial transactions and insurance claims.  FormFix
technology was used in the 2000 Decennial Census as well as the 2001 British
Census. The product is available as a C library. We license FormFix technology
to value-added resellers, system integrators, software developers and government
agencies, as well as companies that use the software internally. Users agree to
pay us a royalty for each computer workstation on which they use the FormFix
product.

Color Image Processing Toolkit

Prizm(R) Color Image Processing toolkit.  We launched the Prizm(R) color IP
C/C++ toolkit in December 2000, and the Prizm color IP COM/ActiveX toolkit in
May 2001.  The product is employed by independent software vendors and service
bureaus to deskew, crop, drop and extract colors from color and grayscale
document images. The Prizm color IP toolkit also includes a module specifically
designed for color forms processing which extends the feature set available in
our current FormFix product to include color form identification, registration
and removal. As the market for color imaging technology matures with the
introduction of more and more color scanning hardware, we believe we will be
poised to take advantage of the need for a complete, robust color imaging tool
set.  The Prizm color IP toolset allows end users to take advantage of the
additional information available in color images to streamline their workflow,
reduce exception images and provide more accurate optical character recognition
and intelligent character recognition, whether or not the end user requires a
color image for archival purposes or plans to convert the color image used for
processing to a black and white image for long-term storage.

<PAGE> 6

Component Product Markets

The primary markets for our component products are large corporations, system
integrators, original equipment manufacturers, independent software vendors,
service bureaus, value-added resellers and branches of the federal government.

     Our customers include financial institutions, law firms, pharmaceutical
companies, transportation, energy, engineering and aerospace companies,
insurance companies, software companies, private and public utilities,
manufacturers, and defense agencies. The increasing use of the World Wide Web,
the Internet and secure and authenticated servers offers us the opportunity to
market our products to customers looking to exploit the opportunity for
distributed scanning and document handling. We market our products primarily
through cultivating strategic partnerships with industry-leading original
equipment manufacturers, value-added resellers and software developers,
tradeshow marketing, field sales calls, telemarketing, direct mail, print and
Internet advertising.

     Many of our products are listed in a General Services Administration
contract schedule to enable all agencies and branches of the federal government
and government contractors to easily purchase products, training and technical
support directly from us.

     We currently employ seven people in the marketing and sales of our
component products, and we have marketing and sales offices in Stillwater and
Tulsa, Oklahoma.

Component Product Distribution Methods

We distribute products through a direct sales force, domestic and international
resellers, an online Internet-based store, and through firms creating and
selling turnkey solutions.

Component Product Competition

The computer software field is highly competitive with many companies in the
industry and is characterized by rapid changes in technology and frequent
introductions of new platforms and features.  We compete with a number of
companies that have greater financial, technical and marketing resources. We
believe the primary competitive factors with respect to our products are the
features of our products, the technical capabilities of our personnel, quality
of services and price. We believe we can compete favorably with respect to all
of these factors and are focusing on markets where we believe we can achieve a
leadership position; however, there can be no assurance that we will be able to
continue to compete effectively in our market, that competition will not
intensify or that future competition will not have a material adverse effect on
our business, operating results, cash flows and financial condition.

<PAGE> 7

     We have competitors in each of the basic imaging tools and end-user
applications markets to which we supply products. These companies, which include
AccuSoft, Medical Informatics Engineering, Inc., Accordex, Pixel Translations,
Snowbound Software, Kofax Image Products, Lead Technologies, Spicer, Seaport
Imaging and Visionshape, sell products aimed at our customer base in the black
and white image enhancement, forms processing, Internet/intranet image viewing
and toolkit markets. As we move forward with color image processing and
enhancement software, Dunord Technologies, J&K Imaging LP, Kofile Inc., Tower
Technologies and Picture Elements will be among our competitors. We expect that
additional companies will enter the color image enhancement toolkit and
application markets with the increased sales of production level color scanners.


Assessment Scoring Products
------------------------------------------------------------------------------

During fiscal 2000, we created a new operating segment to develop technologies
that will improve the overall process of scoring large-scale assessment tests
for grades K-12 in the education marketplace, leveraging our core competencies
in forms recognition, image processing, viewing and enhancement. Following is a
description of the status of our assessment scoring products.

Web-based Scoring

VSC(R) Virtual Scoring Center.  Our new Virtual Scoring Center ("VSC(R)")
product has been designed to provide qualified raters the ability to score
student responses to open-ended test questions in a web-enabled environment.
Open-ended test questions require students to respond in the form of a written
essay, short response, or "show your work" type of answer. The Virtual Scoring
Center includes capabilities for the test answer sheets to be scanned into image
form and displayed in a standard web browser for raters to score in any location
where access to the Internet exists. Open-ended assessment items can be quickly
and efficiently scored to provide test results to school administrators,
teachers and parents faster than through traditional paper-based scoring
methods.

Digital Mark Recognition

DMR(R)engine.  The Digital Mark Recognition ("DMR(R)") engine is patent-pending
software designed to replace the need for traditional hardware-based optical
mark recognition technology.  High-end optical mark recognition is typically
performed using specialized hardware that measures the light reflectivity of
paper to determine if a pencil-lead mark is present in any of the pre-defined
response locations.  Optical mark recognition is generally employed in scoring
"bubble tests." Using our core imaging technology and expertise, we have created
software-based imaging technology that we believe rivals the output of the
mechanical optical mark recognition scanners. This technology analyzes digital
grayscale or color images in computer memory rather than optically measuring
reflectivity directly from the paper. The analysis of the digital images results
in substantially similar results compared to the mechanical reflectivity
scanners, using commercially available grayscale or color scanners and forms
printed from a variety of print sources.  We believe our DMR technology has a
competitive advantage because it permits users to adopt general purpose image
scanners and be more flexible in the design and printing of "bubble test" forms;
factors which contribute to an end user's ability to reduce costs.  We are
currently integrating DMR technology into the Virtual Scoring Center so that one
system will be able to efficiently process both "bubble" and "show your work"
tests.

<PAGE> 8

Assessment Scoring Product Markets

We plan to license our Virtual Scoring Center product to individual state
departments of education, school districts, and to collections of small school
districts through educational service agencies that have the desire to control
the scoring process; or to third-party vendors that provide scoring services to
states or school districts.  We plan to offer DMR technology as a component to
third-party vendors that provide scoring services to states or school districts
with large volumes of "bubble tests." Once DMR technology is integrated with the
Virtual Scoring Center we will offer the resulting system to state departments
of education, school districts, educational service agencies and third-party
scoring vendors who need to effectively and efficiently process tests with both
"bubbles" and "show your work" answers.    During fiscal year 2001, we made
significant progress towards introducing Digital Mark Recognition technology to
third-party vendors as a replacement for hardware-based "bubble scoring."

     We market our products in the educational assessment scoring marketplace
primarily through education industry trade conferences, field sales calls and
telemarketing to identify leads for school districts with plans to implement or
automate the process of scoring open-ended assessments.

     We currently employ four people in the marketing and sales of our
Assessment scoring products, and we have marketing and sales offices in
Stillwater and Tulsa, Oklahoma.

Assessment Scoring Product Competition

The education assessment field is highly competitive and includes many vendors
with an already established presence in providing services, equipment and/or
tools for scoring open-ended assessments and "bubble tests". Those vendors
include entities such as Harcourt Educational Measurement, Educational Testing
Services, NCS Pearson, CTB-McGraw Hill, Measured Progress, Measurement
Incorporated and Scan-Optics. Most of these vendors provide both test
development and scoring services, and some provide the ability for educational
entities to use their own teachers for scoring at regional centers throughout
the United States. Some of these companies have also developed computerized
assessment scoring systems to facilitate their scoring services. We are not
aware of any open-ended assessment scoring systems that are offered for licensed
use independent of services provided by scoring vendors. Nor are we aware of any
software replacements for optical mark recognition technology that are not tied
to specific hardware. However, it is possible that competitive technologies will
enter the marketplace in the future.

<PAGE> 9

     We expect that the market for open-ended assessments and opportunities
for the Virtual Scoring Center will continue to grow because many educators
believe that the measurement of children is more effective through the open-
ended assessment process.  Many states and school districts have developed or
are developing custom tests that expand the use of open-ended test questions and
desire to use their own teachers to score these custom tests. Because open-ended
responses cannot be machine-scored, many of the existing scoring vendors are
already at or have exceeded the supply of qualified raters that are available to
go to central locations to score student responses.

The rater supply issue has already delayed the timely reporting of test results
in many cases and the delays are not expected to improve, considering the
projected increase in open-ended testing.  Additionally, most of the existing
scoring vendors do not currently allow educational entities to use their own
teachers to score. We believe the Virtual Scoring Center offers a competitive
advantage against existing open-ended scoring alternatives because it does not
limit the physical location of raters, and thus potentially expands the
population of qualified raters. It also provides educational entities the
ability to control and have more flexibility in assessment activities by
integrating their teachers into the scoring process and improving the turn-
around time for reporting results.

     Digital Mark Recognition technology offers a viable alternative to
hardware-based scoring systems that cannot take advantage of imaging technology.
Inherent in traditional hardware-based "bubble test" scoring systems are costly
and precise printing requirements, paper-based labor-intensive correction of
data, and paper-based storage and retrieval of tests.  Digital Mark Recognition
allows for flexibility in printing, automated data correction, and image-based
storage; thus providing scoring vendors and educational entities the ability to
more cost effectively scale up their scoring operations to keep up with the
expected continued growth in the number of assessments being given and scored.

     We believe that the Virtual Scoring Center and the Digital Mark
Recognition engine address critical needs in the educational assessment
marketplace, but there can be no assurance that we will be able to compete
successfully against our current and future competitors, many of which have
larger technical staffs, greater brand name recognition and market presence,
more established and larger marketing and sales organizations and substantially
greater financial resources. Further, we cannot assure that the competitive
pressures we face will not have a material adverse effect on our business,
operating results, cash flows and financial condition.

<PAGE> 10

Services
----------------------------------------------------------------------------

Consulting and Integration Services

We have historically offered a variety of services for analyzing business and
information management processes as well as integrating business solutions.
These services are included in the Professional Services segment in the
Financial Statements. During fiscal 2000, we decided to transition out of our
existing professional service business model, and substantially completed
projects for all of our remaining customer contracts. During fiscal 2001, we
undertook system maintenance obligations for two of those customers, and will
continue to fulfill maintenance obligations for one customer in fiscal 2002.

Data Capture and Conversion Services

We have also historically provided data capture and conversion services for
customers desiring the ability to use electronic data for online information
retrieval, intranet or Internet distribution, permanent archives, electronic
publishing or printing on demand. During fiscal 1999, we decided to scale back
our Data Capture and Conversion Services. We ceased marketing and selling these
services, but continued to provide services to pre-existing customers including
Pennwell Publishing, TORO, ARI, US Coast Guard and Nissan Diesel America during
fiscal 2001. We have no further contractual obligations to fulfill and will have
no revenue or expenses associated with this business unit going forward.

Backlog
------------------------------------------------------------------------------

As of October 31, 2001, we had a backlog of component product and assessment
scoring product and software maintenance revenue of approximately $353,000.  At
October 31, 2000, we had a backlog of component product and assessment scoring
product and software maintenance revenue of approximately $651,000.

<PAGE> 11

Copyrights, Patents, Proprietary Information, Trademarks and Licenses

The copyright laws permit us to copyright many aspects of our software. We have
obtained copyright registrations for our software products and we expect to
apply for additional registrations in the future as appropriate.

     We hold eight patents awarded by the United States Patent and Trademark
office relating to our ScanFix product. These patents cover the following
technology areas: image processing, image line removal, detection of scanned
page skew, a method of deskewing (incremental digital image rotation), document
registration, dot shading removal, image despecking, horizontal and vertical
line removal, line intersection repair, automatic correction of inverted (white)
text and general methods of high speed image manipulation. The patents cover
most of the key elements of the ScanFix product line. The patents expire during
the years 2011 through 2015. The scope and extent of patent rights protecting
computer software is evolving; therefore, we cannot be assured that the issuance
of such patents will be upheld as valid or will prevent the development of
competing products.

     In addition, we have applied with the United States Patent and Trademark
office for patents covering technology developed in connection with the Digital
Mark Recognition engine. We do not believe that any of our products or soon to
be released products present questions of patent infringement or violations of
any other intellectual property rights belonging to others, although we cannot
assure you that claims of infringement of the intellectual property rights of
others will not arise that could require us to procure licenses for the use of
third-party technology, to make additional investments to modify or replace
technologies to remove the basis for an allegation of infringement, or to
discontinue use of technology accused of infringement, any of which could have a
material adverse effect on our operations or financial condition.

     We also cannot assure you that third-parties will not infringe on our
intellectual property rights or that we will have the financial or other
resources available to adequately enforce infringement of our intellectual
property rights.

     We treat as proprietary any software we develop and protect our software
through licensing and distribution agreements. In addition, we require written
undertakings of confidentiality from all of our employees as well as in all
customer agreements, including license agreements, which prohibit unauthorized
duplication of our software.


     We have registered trademarks on the ScanFix, FormFix, VSC, DMR and Prizm
marks when used in association with the Company's products. We have also
developed, through use, common law trademark rights in RasterView, InnerView and
MasterView.

<PAGE> 12

     We grant our customers a non-exclusive, non-transferable license for the
ViewDirector, ScanFix, Prizm and FormFix toolkit products for use on computers
used by personnel or customers of licensees. We typically receive an initial
license fee for the toolkit and offer a required annual maintenance fee for such
products. Licenses of our toolkits entitle licensees to develop custom
applications using the toolkits, and then distribute the software to users
inside their organization or to their end customers. We then receive a royalty
for each computer workstation on which the software is used. The duration of
license agreements generally ranges from one to five years.


Research and Development
------------------------------------------------------------------------------

We recognize the need to continually develop new and improved products. Current
plans include adding extended viewing, annotation and printing support in the
Prizm plug-in product and the development of a new thin client viewing product
that will contain a similar robust feature set to the Prizm plug-in and which
will support multiple platforms.  We plan to introduce a color document image
processing application that takes advantage of the functionality available in
the Prizm color IP toolkit to crop, enhance and threshold color document images,
as well as to continue to add functionality to the Prizm color IP toolkit.  In
addition, we plan to develop Internet-based document imaging products related to
improving the efficiency and economics of scoring large-scale standardized tests
for K-12 public schools. During the third quarter of fiscal 2001, we installed
and received acceptance for the first customized version of the Internet-based
product, the Virtual Scoring Center software product, from the North Dakota
Department of Public Instruction.  In addition, during fiscal 2001, we began a
pilot program of the Virtual Scoring Center, offering multiple school districts
and one scoring vendor the opportunity to evaluate the product. We plan to use
knowledge gained in these activities to generate further improvements in a
commercial release of the Virtual Scoring Center product.

     We also plan to continue to pursue development activities specific to
Digital Mark Recognition technology. During fiscal 2001 we completed two
equating studies in which DMR results were directly compared to optical mark
recognition results generated by optical mark recognition scanners. The intent
of the first study was to determine if the DMR process could determine the same
student intent as that produced using optical mark recognition, while taking
erasures and double marks into consideration. DMR produced an accuracy rate of
99.84% compared to the original results.  The primary goal of the second
equating study was to determine if DMR recognition could report substantially
the same mark intensity levels as the optical mark recognition scanners. We used
our DMR technology to read each complete set of bubbles and provide the results.
In this case DMR recognition consistently produced an accuracy rate of over 99%
compared to the original results.

<PAGE> 13

     During fiscal 2000, we applied for a patent on the Digital Mark
Recognition Technology.  We believe once the system is developed, it can be
commercialized and marketed to third-party vendors as well as districts and
states that currently rely on optical mark recognition for processing forms.
Pursuing these efforts will necessitate further improvements in our core
technologies and new technology development.

  In fiscal years 2001 and 2000, we spent $1,629,000 and $951,000,
respectively, in research and development costs.  Additionally, we capitalized
software development costs of $494,511 and $332,190, respectively, related to
new products and existing product enhancements.  In fiscal 2000 we secured a
financial commitment of $237,000 for funded development from a customer to add
and enhance features to the Prizm Plug-in product.  Approximately $171,000 and
$66,000 of the funded development dollars were applied against development costs
during the years ended August 31, 2001 and 2000, respectively.  We recognized
funded development dollars in revenue to the extent that those funded
development dollars exceeded actual costs upon final acceptance of the product
by the customer.

Employees
------------------------------------------------------------------------------

At August 31, 2001, we had 36 full-time salaried employees and 2 part-time
hourly employees for a total of 38 employees.  Our business depends in large
part on our ability to attract and retain qualified technical, marketing and
management personnel, and we must compete with larger and more established
companies for such persons.

Customers
------------------------------------------------------------------------------

No individual customer accounted for greater than 10% of our revenue in fiscal
2001.  One customer accounted for $414,807, or 12%, of our total revenue in
fiscal 2000. Total funding under the agreement with that customer was
approximately $890,000.  That project was completed in the fourth quarter of
fiscal 2001 and resulted in revenue of approximately $235,000 in fiscal 2001.
Approximately $129,000 of maintenance revenue will be recognized over the
remaining two-year maintenance agreement term.

Sales to Foreign Customers

Approximately 18% and 15% of total revenues for fiscal 2001 and 2000,
respectively, are attributable to sales to foreign customers.

<PAGE> 14

ITEM 2. DESCRIPTION OF PROPERTY

Our headquarters consist of approximately 14,700 square feet of office space
located at 206 West Sixth Avenue in Stillwater, Oklahoma. We purchased the
building in fiscal 1994 and occupied the space in fiscal 1995 after renovation
was complete. We secured a mortgage on the building in fiscal 1995 and at August
31, 2001, $254,000 in principal remained owing under such mortgage.

     We have approximately 3,100 square feet of office space in Tulsa,
Oklahoma with a monthly rental of approximately $3,600.  In the second quarter
of fiscal 2000 we closed our Burlingame, California office.  Monthly rental on
that property was approximately $3,500.


     We believe our facilities are in adequate condition and will meet
capacity requirements for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

On September 12, 2000 we filed an arbitration with the American Arbitration
Association against Hummingbird USA, Inc. for failing to comply with royalty
reporting and payment obligations as outlined in our value added reseller
agreement.  We were seeking a one-time royalty payment of $440,000 plus interest
and legal fees. On August 31, 2001, the American Arbitration Association awarded
us $525,800 in actual damages, $41,702 in transactional costs, and $525,800 for
Hummingbird's unfair and deceptive acts and practices.  Hummingbird filed a
"Motion to Vacate the Arbitration Award" in the federal court system on October
2, 2001.  We anticipate resolution of the matter in six to eight months.  Due to
the appeal of the award, no revenue has been reported in the fiscal year 2001
operating results related to the arbitrator's award.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

<PAGE> 15

---------------------------
Part II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information
------------------------------------------------------------------------------

Our Common Stock is traded in the over-the-counter market, and prices are quoted
by Pink Sheets LLC (formerly the National Quotation Bureau, Incorporated) on the
"pink sheets," and the NASD Non-NASDAQ OTC Bulletin Board. The following table
sets forth the quarterly range of high and low bid prices of our Common Stock
for fiscal years 2001 and 2000. The quotations are inter-dealer prices without
retail markups, markdowns, or commissions and may not represent actual
transactions. The source of such quotations is Pink Sheets LLC.

<TABLE>
<CAPTION>
                      BID PRICES
FISCAL 2001         HIGH    LOW
------------------------------------------
<S>                 <C>     <C>
First Quarter       $.281   .156

Second Quarter       .280   .156

Third Quarter        .230   .120

Fourth Quarter       .310   .160

<CAPTION>

FISCAL 2000         HIGH    LOW
------------------------------------------
<S>                 <C>     <C>
First Quarter       $.300   .140

Second Quarter       .750   .150

Third Quarter       1.188   .250

Fourth Quarter       .438   .210
</TABLE>


Dividends
------------------------------------------------------------------------------

We have not declared nor paid any cash dividends since our incorporation, nor do
we anticipate that we will pay dividends in the foreseeable future. Any earnings
we realize are expected to be reinvested in our business; however, the
declaration and payment of dividends in the future will be determined by the
Board of Directors in light of conditions then existing, including, among
others, our earnings, our financial condition and capital requirements
(including working capital needs), and any arrangements restricting the payment
of dividends.

<PAGE> 16

Shareholders
------------------------------------------------------------------------------

As of October 31, 2001, there were approximately 700 shareholders of record
according to the records of our transfer agent.  As of that date, we had
approximately 1,040 shareholders including beneficial owners holding shares in
nominee.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

This analysis of our results of operations and financial condition should be
read in conjunction with the financial statements, description of our business
and other information included elsewhere herein. Except for the historical
information contained herein, this Form 10-KSB contains certain forward-looking
statements regarding our business and prospects that are based upon numerous
assumptions about future conditions which may ultimately prove to be inaccurate
and actual events and results may materially differ from anticipated results
described in such statements. Our ability to achieve such results is subject to
certain risks and uncertainties, such as those inherent generally in the
computer software industry and the impact of competition, pricing and changing
market conditions. We disclaim, however, any intent or obligation to update
these forward-looking statements. As a result, the reader is cautioned not to
place reliance on these forward-looking statements.

Component Product Technologies Segment

                                           2001               2000
-----------------------------------------------------------------------
Revenue from external customers         $ 3,159,529         2,982,195
-----------------------------------------------------------------------
Operating income                        $   767,850           649,007
-----------------------------------------------------------------------


Fiscal 2001 revenue for the component product technologies segment was
$3,159,529 compared to $2,982,195 for fiscal 2000, an increase of $177,334, or
6%.  During fiscal 2001 we focused a significant part of our technical
development and sales and marketing efforts on our web-based image display
(Prizm Plug-in) product, our bitonal image processing (ScanFix) product, and our
new Prizm Color Image Processing toolkit.  In addition, we made concerted
efforts to enroll new customers in maintenance agreements and renew maintenance
agreements with existing customers.  The result of these efforts is that
combined revenue for those products and maintenance increased 11% over the prior
year which more than offset the 15% decrease that we experienced from our more
mature forms processing (FormFix) and image display (ViewDirector) toolkits
which use older technologies. We expect revenue from these two products to
continue to decrease over time because our investment in new technology will
focus on products for color image processing and web-based viewing which are
more in line with market requirements.

<PAGE> 17

     Historically the profitability of this segment has depended, in part, on
the ability to secure significant sales of multiple licenses to individual
customers. In fiscal 2001 we increased the volume of customers that purchased
multiple licensing arrangements in an effort to reduce our reliance on a few
significant transactions to achieve profitable results.  For the year ended
August 31, 2001, only 10% of web-based image display product revenue was from
one customer, while 29% of that revenue for fiscal 2000 was from one customer.
Furthermore, no one customer made up more than 10% of total segment revenue for
fiscal 2001, while 14% of total segment revenue was from one customer in fiscal
2000.

     Beginning in fiscal 2000, we reallocated resources from the discontinued
Professional Services segment as projects were completed in order to further
develop the image viewing and image enhancement products in an effort to make
them more competitive in the current marketplace.  Additionally, in fiscal 2001
we leveraged our expertise in image enhancement and forms processing to produce
the new Prizm(R)Color Image Processing toolkit to support the emerging document
imaging color market.  We believe our decision to refocus on our core
competencies as a software product company was warranted based on the positive
financial operating results reported by the component product technologies
segment over the past two years.

     Operating income margins for the component product technologies segment
were 24% and 22% for the fiscal year ending August 31, 2001 and 2000,
respectively. The increase in operating margins is primarily a result of the 6%
increase in component product revenue. Total operating expenses for the segment
increased approximately $59,000, or 3%, over the prior year. We increased our
direct labor investment in new product development by approximately $225,000 in
fiscal 2001 over the prior year, of which $125,000 of the increase was reported
as a capital asset for future amortization upon product releases. A $55,000
decrease in cost of revenue which was primarily related to a decrease in product
amortization expense in fiscal 2001 over the prior year offset the $100,000 net
increase in product development expense.  Product amortization decreased because
of a timing difference between new product releases and older products becoming
fully amortized.

Assessment Scoring Technologies Segment

                                           2001           2000
-----------------------------------------------------------------------
Revenue from external customers        $   221,180        3,000
-----------------------------------------------------------------------
Operating loss                         $  (705,244)    (420,978)
-----------------------------------------------------------------------

<PAGE> 18

During fiscal 2001 and 2000 we made a substantial investment in two new software
products designed to target and take advantage of the expected growth in the
market for scoring K-12 educational assessments ("tests").  These products are
the Virtual Scoring Center(TM),or VSC(R),and Digital Mark Recognition,or DMR(R).
The Virtual Scoring Center(TM),or VSC(R),provides the ability for qualified
raters to score student responses to open-ended test questions in a web-enabled
environment. We completed the installation of the initial version of the Virtual
Scoring Center during the third quarter of fiscal 2001 and recognized
approximately $205,000 of revenue for that customer in fiscal 2001.  Although
the initial version of the Virtual Scoring Center was created for a specific
customer, we are in the process of leveraging its features and functionalities
to create a commercial version of the product to sell to other customers in
fiscal 2002. The next commercial version of the Virtual Scoring Center will also
include integration of our DMR software.  The Digital Mark Recognition software
is designed to replace the need for hardware-based optical mark recognition
commonly used for scoring "fill in the bubble" tests.  The combination of the
Virtual Scoring Center and DMR in one product offering will result in a
comprehensive software system that can more efficiently and cost effectively
process both open-ended and "fill in the bubble" test answer sheets than many
other scoring technologies and processes currently in use.

We incurred approximately $600,000 in product development costs for the Virtual
Scoring Center and DMR during fiscal year 2001, of which $168,000 was reported
as a capital asset for amortization upon product release.  Selling, marketing
and general and administrative expenses approximated $500,000 in fiscal 2001,
representing a 100% increase over the prior year.  The increase in costs
primarily reflects the assignment of additional personnel to the segment for
increased promotion of the products and a higher allocation of general company
overhead costs.

Professional Consulting and Integration Services Segment

                                          2001          2000
------------------------------------------------------------------------
Revenue from external customers         $ 56,720      360,615
------------------------------------------------------------------------
Operating income (loss)                 $ 35,537     (318,092)
------------------------------------------------------------------------


Fiscal 2001 revenue for the professional consulting and integration services
segment was $56,720 compared to $360,615 for fiscal 2000, a decrease of
$303,895, or 84%. The revenue decline was anticipated due to our decision in
fiscal 2000 to transition out of the existing professional service business
model. Two customers accounted for approximately 95% of service revenue for
fiscal year 2001. Three customer contracts accounted for approximately 80% of
service revenue for fiscal year 2000.

<PAGE> 19

     Operating income for the professional consulting and integration services
segment was 63% of revenue for the fiscal year ended August 31, 2001, compared
to a loss margin equal to 88% of revenue for the year ended August 31, 2000.
Fiscal year 2000 operating margins were negatively impacted by continuing cost
overruns on two fixed-fee projects.  These two projects accounted for
approximately 65% of fiscal 2000 revenue.  One of those projects was completed
in the fourth quarter of fiscal 2000, while the other was completed and accepted
by the customer during the first quarter of fiscal 2001. Operating margins for
fiscal 2001 improved over fiscal 2000 due to better cost controls for the work
performed on these projects in fiscal 2001.  We will continue to provide
maintenance for one project during fiscal 2002 but will not offer professional
services to any new customers.  We allocated professional services segment
resources to product development upon completion of these projects.

Document Conversion Segment

                                          2001          2000
---------------------------------------------------------------------
Revenue from external customers         $ 204,173     259,439
---------------------------------------------------------------------
Operating income (loss)                 $  74,254        (906)
--------------------------------------------------------------------

Fiscal 2001 revenue for the document conversion segment was $204,173 compared to
$259,439 for fiscal 2000, a decrease of $55,266 or 21%. Approximately 88% of
fiscal 2001 revenue came from three customers and 92% of fiscal 2000 revenue
came from four customers.  During the second quarter of fiscal 2001, we decided
to discontinue document conversion services to several customers.  All work for
these customers was complete at August 31, 2001.

     Operating income for the document services segment was 36% of revenue for
the fiscal year ended August 31, 2001, compared to a loss margin equal to 0% of
revenue for the year ended August 31, 2000.  The increase in margin from fiscal
2000 primarily resulted from a decrease in general and administrative costs of
approximately $106,000, or 86%, for fiscal 2001 compared to fiscal 2000. These
decreases are due to a reallocation of resources to the other segments and the
expiration of two capital leases during the first quarter of fiscal 2001 for
certain document conversion equipment.

<PAGE> 20

Total Company Operating Results

Following is a report of total company revenue and a reconciliation of
reportable segments' operating loss to our total net loss for fiscal year ending
2001 and 2000.

<TABLE>
<CAPTION>
                                     2001       2000
-------------------------------------------------------------
<S>                             <C>            <C>
Total company revenue           $ 3,641,602    3,605,249
-------------------------------------------------------------
Operating income (loss) for
  reportable segments               172,397     (90,969)

Unallocated corporate expenses     (310,804)   (350,016)

Interest income                      51,206      60,531

Interest expense                    (17,733)    (21,161)

Other, net                              632       5,587
-------------------------------------------------------------
Income tax expense                        -        (800)
-------------------------------------------------------------
Net loss                        $  (104,302)   (396,558)
-------------------------------------------------------------
Loss per share:
  Basic                          $   ( 0.01)      (0.03)
  Diluted                        $    (0.01)      (0.03)
-------------------------------------------------------------
</TABLE>

     Total revenue for fiscal 2001 was $3,641,602 compared to $3,605,249 for
fiscal 2000, an increase of $36,353, or 1%. Although the professional services
segment revenue decreased approximately $304,000, or 84% for fiscal 2001
compared to fiscal 2000, total company revenue increased slightly, primarily due
to an increase of approximately $367,000, or 12% in licensing and royalty
revenue. The decline in professional services revenue was expected based on our
decision to discontinue the professional services segment. Licensing and royalty
revenue increased based on the sales of the new Prizm Color IP toolkit and
revenue increases for the bitonal image processing products and maintenance as
discussed above in the Component Product Technologies section.  In addition,
licensing and royalty revenue increased due to the sale of the initial version
of the Virtual Scoring Center product as discussed in the Assessment Scoring
Technologies section.

<PAGE> 21

     Net loss for fiscal year ending 2001 was $104,302 or $0.01 loss per share
(basic and diluted), compared to net loss of $396,558, or $0.03 loss per share
(basic and diluted), for fiscal 2000. The decrease in the loss from fiscal 2000
is primarily due to the transition out of the unprofitable professional
consulting and integration services segment over the past two years in favor of
focusing on our higher margin component product segment of the business.

     Our income tax expense rate was 0% for fiscal 2001 and 2000. The
effective income tax rates for both fiscal years 2001 and 2000 differed from the
"expected" Federal tax expense rate of 34%, primarily because of a change in the
valuation allowance provided against our deferred tax assets. Deferred tax
assets are primarily the result of our net operating loss carryforwards. See
"Income Taxes" in Note 3 to the financial statements.

Financial Condition

Working capital at August 31, 2001, was $1,029,555 with a current ratio of 2.3:1
compared to $1,376,235 with a current ratio of 2.9:1, at August 31, 2000. The
declines in working capital and current ratio are primarily due to the
approximately $690,000 decrease in cash from August 31, 2000 to August 31, 2001,
as explained below. Partially offsetting this decrease in cash is an
approximately $464,000 increase in accounts receivable from August 31, 2000 to
August 31, 2001.

     Net cash provided by operations for fiscal 2001 was $4,596 compared to
$865,864 for fiscal 2000. The decrease in operating cash flows is due to several
factors.  First, during fiscal 2000 we collected large final payments for
professional services work as we finalized several large custom software
development contracts. We also increased our research and development spending
by approximately $520,000 in fiscal 2001 over the prior year on new products
that were released near the end of the year.  Operating cash flows also
decreased because we spent approximately $250,000 of cash related to the
arbitration discussed in "Item 3. Legal Proceedings" above. Finally, the timing
of cash collections in the fourth quarter of fiscal 2001 compared to the same
period of fiscal 2000 led to a decrease in operating cash flows.  This also led
to the increase in the accounts receivable balance at August 31, 2001.

     Net cash used in investing activities for fiscal 2001 was $584,214
compared to $397,471 for fiscal 2000. The increase in investing cash flows
primarily relates to the increase in capitalized software development costs due
to the increased product development related primarily to the Prizm(TM)Color
Image Processing toolkit and the Virtual Scoring Center during fiscal 2001
compared to fiscal 2000.  Net cash used in financing activities for fiscal 2001
was $110,787 compared to $166,411 for fiscal 2000.  This decrease is primarily
due to the expiration of two capital leases in the first quarter of fiscal 2001
and the cash inflows during fiscal 2001 from the sale of common stock to
employees under the employee stock purchase plan.  Our purchase and retirement
of common shares accounted for $100,000 and $87,500 of the cash used in
financing activities for the years ending August 31, 2001 and 2000,
respectively.

<PAGE> 22

     During fiscal year 2000 we did not borrow against our line of credit and
did not renew the line of credit upon its expiration in the third quarter of
fiscal 2000. In October of 2001, we obtained a new line of credit that allows
maximum borrowing of $1,000,000.  We anticipate that operating cash flows and
the line of credit will be adequate to meet our current obligations and current
operating and capital requirements. Due to the expected timing of the
arbitration settlement and the expectation that a majority of the assessment
scoring technologies segment revenue will occur in the latter half of fiscal
2002 coinciding with the test scoring season, we expect that we may need to
borrow against the new line of credit during the first two quarters of fiscal
2002. The funding of long-term needs (including funding for increased product
development, expanded marketing and promotion of us and our products, and for
potential merger/acquisition activities) is dependent upon increased revenue and
profitability and obtaining funds through outside debt and equity sources.

Factors Affecting Business

The computer software industry is subject to rapid change that could result in
significant additional costs or our products and services becoming obsolete.

The markets for our products are characterized by rapid technological advances
and can be significantly affected by new product introductions and changing
customer requirements.  Our future success will depend upon our ability to
continue to improve existing products and to develop and introduce products with
new or enhanced capabilities that address the increasingly sophisticated needs
of our customers and keep pace with technological and competitive developments.
We cannot assure you that we will be able to successfully develop and market new
or enhanced products or respond effectively to technological changes or new
product announcements by others.  Any failure by us to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
material adverse effect on our business, operating results, cash flows and
financial condition.

Our markets are highly competitive, and if we do not compete effectively, we
could suffer price reductions and loss of market share.

The computer software and education assessment fields are highly competitive and
include many companies in those industries.  The computer software field is
characterized by rapid changes in technology and frequent introductions of new
platforms and features.  Competitors in this market include AccuSoft, Pixel
Translations, Snowbound Software, Kofax Image Products, Lead Technologies,
Seaport Imaging and Visionshape.  As we move forward with color image processing
and enhancement software, Dunord Technologies, J&K Imaging LP, Kofile Inc.,
Tower Technologies and Picture Elements can also be considered competitors.
Certain of our competitors for our component products have greater financial,
technical and marketing resources than we do.  We believe that the primary
competitive factors with respect to our component products are the features of
our products, the technical capabilities of our personnel, quality of services
and price.  We believe that we can compete favorably with respect to all of
these factors and are focusing on markets where we believe we can achieve a
leadership position; however, we cannot assure you that we will be able to
continue to compete effectively in our market, that competition will not
intensify or that future competition will not have a material adverse effect on
our business, operating results, cash flows and financial condition.

<PAGE> 23

     The education assessment market includes many vendors with an already
established presence in providing services for the scoring of open-ended
assessments and "bubble tests". Those vendors include entities such as Harcourt
Educational Measurement, Educational Testing Services, NCS Pearson, CTB-McGraw
Hill, Measured Progress, and Measurement Incorporated. We believe that the
Virtual Scoring Center and the Digital Mark Recognition engine are products that
address critical needs in the educational assessment marketplace, but there can
be no assurance that we will be able to compete successfully against current and
future competitors, many of which have larger technical staffs, greater brand
name recognition and market presence, more established and larger marketing and
sales organizations and substantially greater financial resources than us. There
can also be no assurances that the competitive pressures we face will not have a
material adverse effect on our business, operating results, cash flows and
financial condition.

If we are unable to protect our intellectual property we may lose a valuable
asset, experience reduced market share or incur costly litigation to protect our
rights.

We rely on a combination of patent rights, copyright and trademark laws,
nondisclosure agreements and other contractual provisions and technical measures
to protect our intellectual property rights. We do not believe that any of our
products or soon to be released products present questions of patent
infringement or violations of any other intellectual property rights belonging
to others.  We cannot assure you, however, that claims of infringement of the
intellectual property rights of others will not arise that could require us to
procure license for the use of third-party technology, to make additional
investments to modify or replace technologies to remove the basis for an
allegation of infringement, or to discontinue use of technology allegedly the
subject of infringement, any of which could have a material adverse effect on
our operations or financial condition.  We also cannot assure you that others
will not infringe on our intellectual property rights or that we will have
financial or other resources available to adequately enforce infringement of our
intellectual property rights. We cannot assure you that a third party will not
assert that our technology violates its intellectual property rights in the
future. As the number of products in our target markets increases and the
functionality of these products further overlap, developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time consuming and expensive to defend. There can be no assurance
that third parties will not assert infringement claims against us in the future
with respect to our current or future products or that any such assertion will
not require us to enter into royalty arrangements or litigation that could be
costly to us.

<PAGE> 24

Defects in our products could result in claims against us that could cause
unanticipated losses.

Our license agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in our license
agreements may not be effective under the laws of certain state and foreign
jurisdictions. The sale and support of our products by us and by retailers and
other resellers may entail the risk of such claims, and there can be no
assurance that we will not be subject to such claims in the future. A product
liability claim brought against us could have a material adverse effect upon our
business, results of operations and financial condition.

Our operating results and financial condition could suffer if we are unable to
continue to secure significant sales of multiple licenses to individual
customers.

We have historically relied upon large sales transactions with individual
customers to achieve positive operating results.  In fiscal 2001 and 2000, a
single customer accounted for 6% and 12%, respectively, of our total revenue.
There can be no assurance that we will continue to obtain such large sales
transactions on a consistent basis and, as such, our inability to obtain
sufficient large sales could have a material adverse effect on our business,
operating results and financial position.


ITEM 7. FINANCIAL STATEMENTS

The financial statements required by this Item are set forth beginning on page
F1 hereof.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

<PAGE> 25

-----------------
Part III

Information required in response to Items 9-12 shall appear in our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days of the
fiscal year end covered hereby, and shall be incorporated herein by reference
when filed.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits  The following exhibits are included with this report; all
employment contracts and compensatory plans are marked with an asterisk (*):

Exhibit   Name of Exhibit

------------------------------------------------------------------------------

10.1*     Employee Stock Option Plan, incorporated herein by reference to
          Exhibit No. 10.1 to the Registrant's Form 10 Registration Statement,
          filed with the Commission on January 15, 1990 (the "Form 10").

10.2*     Senior Employee Stock Option Plan, incorporated herein by reference
          to Exhibit No. 10.2 to the Registrant's Form 10.

10.3*     Employee Incentive Stock Option Plan, incorporated herein by
          reference to Exhibit No. 10.3 to the Registrant's Form 10.

10.4*     TMS, Inc. Employee Stock Purchase Plan, incorporated herein by
          reference to Exhibit No. 4.2 to the Registrant's Form S-8 as filed
          with the Commission on July 23, 2001.

10.5      Agreement for Contract Services, North Dakota Department of Public
          Instruction, incorporated herein by reference to Exhibit No. 10.1 to
          the Registrant's Form 10-QSB for the quarterly period ended February
          28, 2001.

10.6      Software Licensing Agreement entered into by and between the
          Registrant and the State of North Dakota, Department of Public
          Instruction, incorporated herein by reference to Exhibit No. 10.2 to
          the Registrant's Form 10-QSB for the quarterly period ended February
          28, 2001.

10.7      Corporate Software License Agreement between the Registrant and The
          Boeing Company, incorporated herein by reference to Exhibit No. 10.1
          to the Registrant's Form 10-QSB for the quarterly period ended May
          31, 2000.

10.8      Development Agreement between the Registrant and The Boeing Company,
          incorporated herein by reference to Exhibit No. 10.2 to the
          Registrant's Form 10-QSB for the quarterly period ended May 31,
          2000.

10.9      Purchase Contract number W 311305 between the Registrant and The
          Boeing Company, incorporated herein by reference to Exhibit No. 10.3
          to the Registrant's Form 10-QSB for the quarterly period ended May
          31, 2000.

23.1      Consent of KPMG LLP


(b) Reports on Form 8-K No Form 8-K Current Reports were filed by the Company
during the last quarter of fiscal 2001.


<PAGE> 26


---------------
Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

                         REGISTRANT: TMS, INC.
-----------------------------------------------------------------------------

Date:  11/27/01  BY: /s/ Deborah D. Mosier
                         ----------------------------------------------------
                         Deborah D. Mosier, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Date: 11/27/01   BY:  /s/ Rudy J. Alvarado
                         -----------------------------------------------------
                         Rudy J. Alvarado, Director

Date: 11/27/01   BY:  /s/ Doyle E. Cherry
                         -----------------------------------------------------
                         Doyle E. Cherry, Director

Date: 11/27/01   BY:  /s/ Deborah D. Mosier
                         -----------------------------------------------------
                         Deborah D. Mosier, President
                         Principal Executive and Financial Officer

Date: 11/27/01   BY:  /s/ James R. Rau, M.D.
                         -----------------------------------------------------
                         James R. Rau, M.D., Director

Date: 11/27/01   BY:  /s/ Russell W. Teubner
                         -----------------------------------------------------
                         Russell W. Teubner, Director

Date: 11/27/01   BY:  /s/ Marshall C. Wicker
                         -----------------------------------------------------
                         Marshall C. Wicker, Director



<PAGE> 27


Index to Financial Statements and Financial Statement Schedule
------------------------------------------------------------------------------
                                              PAGE

Independent Auditors' Report                  F1

Financial Statements
   Balance Sheets: August 31, 2001
   and 2000                                   F2 and F3

   Statements of Operations: Years Ended
   August 31, 2001 and 2000                   F4

   Statements of Shareholders' Equity:
   Years Ended August 31, 2001 and 2000       F5

   Statements of Cash Flows: Years Ended
   August 31, 2001 and 2000                   F6

   Notes to Financial Statements:
   August 31, 2001 and 2000                   F7 through F20

Financial Statement Schedule
   Schedule II -- Valuation and Qualifying Accounts:
   Years Ended August 31, 2001 and 2000       F21


All other schedules are omitted as they are inapplicable or not required, or the
required information is included in the Financial Statements or Notes to
Financial Statements.

Independent Auditors' Report

The Board of Directors and Shareholders
TMS, Inc.:

We have audited the financial statements of TMS, Inc. (dba TMSSequoia) as listed
in the accompanying index. In connection with our audits of the financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TMS, Inc. as of
August 31, 2001 and 2000 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG LLP

Oklahoma City, Oklahoma
October 1, 2001


<PAGE> F1


<TABLE>
<CAPTION>

Balance Sheets
August 31, 2001 and 2000



TMS, Inc. (dba TMSSequoia)                     2001         2000
----------------------------------------------------------------------
<S>                                         <C>          <C>
Assets

Current assets:
  Cash and cash equivalents                   $669,287    $1,359,692
  Trade accounts receivable, net of
    allowance for doubtful accounts
    of $36,715 in 2001 and
    $54,032 in 2000                          1,007,839        461,549
  Contract service work in process               6,300        146,848
  Deferred income taxes                         60,921         64,007
  Prepaid expenses and other current assets     88,912         54,285
----------------------------------------------------------------------
      Total current assets                   1,833,259      2,086,381
----------------------------------------------------------------------
Property and equipment:
  Land                                         111,000        111,000
  Building                                     744,372        747,634
  Computer equipment                         1,353,575      1,515,148
  Furniture and fixtures                       362,554        349,015
----------------------------------------------------------------------
                                             2,571,501      2,722,797
  Less accumulated depreciation and         (1,608,480)    (1,649,589)
  amortization
----------------------------------------------------------------------
      Net property and equipment               963,021      1,073,208
----------------------------------------------------------------------
Other assets:
  Capitalized software development costs,
   Net of accumulated amortization of
   $266,270 in 2001 and $422,306 in 2000       709,384        388,258
  Deferred income taxes                        423,579        420,493
  Accounts receivable, long-term                    --         77,406
  Other assets                                  52,427         43,508
----------------------------------------------------------------------
      Total other assets                     1,185,390        929,665
----------------------------------------------------------------------
  Total assets                              $3,981,670     $4,089,254
----------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


<PAGE> F2


<TABLE>
<CAPTION>
                                                  2001      2000
-----------------------------------------------------------------------
<S>                                            <C>         <C>
Liabilities and Stockholders' Equity

Current liabilities:
  Current obligations under capital leases    $      --        11,705
  Current installments of long-term debt         27,016        28,943
  Accounts payable                              231,311        80,879
  Accrued payroll expenses                      264,382        301,107
  Deferred revenue                              280,995        287,512
-----------------------------------------------------------------------
      Total current liabilities                 803,704        710,146
-----------------------------------------------------------------------
Long-term debt, net of current
  Installments                                  227,376        252,456
Other liabilities                                    --         10,375
-----------------------------------------------------------------------
      Total liabilities                       1,031,080        972,977
-----------------------------------------------------------------------
Shareholders' equity:
  Preferred stock, $.01 par value.
       Authorized  1,000,000 shares;
       None issued                                   --            --
  Common stock, $.05 par value. Authorized
       50,000,000 shares; 13,102,659
       shares issued and 13,072,333
       outstanding in 2001
       and 13,490,659 shares issued and
       13,292,690 outstanding in 2000           655,133        674,533
  Additional paid-in capital                 11,347,872     11,422,299
  Unamortized deferred compensation                  --         (1,809)
  Accumulated deficit                        (9,040,887)    (8,884,719)
  Treasury stock, at cost,
       30,326 shares in 2001
       and 197,969 shares in 2000               (11,528)        94,027)
-----------------------------------------------------------------------
      Total shareholders' equity              2,950,590      3,116,277
-----------------------------------------------------------------------
Commitments (Note 8)
-----------------------------------------------------------------------
Total liabilities and shareholders' equity   $3,981,670     $4,089,254
-----------------------------------------------------------------------
</TABLE>

<PAGE> F3



Statements of Operations
Years Ended August 31, 2001 and 2000

<TABLE>
<CAPTION>
TMS, Inc. (dba TMSSequoia)               2001        2000
-----------------------------------------------------------------
<S>                                      <C>         <C>
Revenue:
  Licensing and royalties               $3,348,715   $2,982,195
  Assessment scoring consulting services    31,994        3,000
  Software development services             56,720      360,615
  Document conversion services             204,173      259,439
-----------------------------------------------------------------
                                         3,641,602    3,605,249
-----------------------------------------------------------------
Operating costs and expenses:

  Cost of licensing and royalties          357,591      513,865
  Cost of software development services     19,095      463,807
  Cost of document conversion services     112,856      137,569
  Selling, general and administrative    2,276,770    2,279,734
  Research and development               1,013,697      651,259
-----------------------------------------------------------------
                                         3,780,009    4,046,234
-----------------------------------------------------------------

Operating loss                            (138,407)    (440,985)
Other income, net                           34,105       45,227
-----------------------------------------------------------------
Loss before income taxes                  (104,302)    (395,758)
Income tax expense                             --           800
-----------------------------------------------------------------
Net loss                                 $(104,302)    (396,558)
-----------------------------------------------------------------
Net loss per share
  Basic                                    $ (0.01)       (0.03)
  Diluted                                  $ (0.01)       (0.03)
-----------------------------------------------------------------
Weighted average shares:
  Basic                                 13,080,624   13,364,352
  Diluted                               13,080,624   13,364,352
-----------------------------------------------------------------
</TABLE>



SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

<PAGE> F4



Statements of Shareholders' Equity
Years Ended August 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                       ADDITIONAL   UNAMORTIZED                              TOTAL
TMS, Inc.                            COMMON STOCK        PAID-IN      DEFERRED    ACCUMULATED   TREASURY   SHAREHOLDERS
(dba TMSSequoia)                SHARES      AMOUNT       CAPITAL    COMPENSATION   DEFICIT       STOCK       EQUITY
-----------------------------------------------------------------------------------------------------------------------
<S>                             <C>         <C>        <C>          <C>           <C>           <C>          <C>
Balance at August 31, 1999     13,820,622  $691,031  $ 11,501,760    $(20,072)  $(8,488,161)   $(111,185)   $3,573,373

Exercise of stock options          16,000       800         1,200          --             --          --         2,000

Issuance of common stock
  to employees                      4,037       202         1,022          --             --          --         1,224

Sale of common stock
  held in treasury                     --        --            --          --             --      18,211        18,211

Issuance of common stock held
  in treasury to employees             --        --           479          --             --       2,787         3,266

Purchase of common stock
  held in treasury                     --        --            --          --             --     (3,840)        (3,840)

Purchase and retirement
  of common stock                (350,000)  (17,500)      (70,000)         --             --          --       (87,500)

Amortization of deferred
  compensation                         --        --            --       6,101             --          --         6,101

Forfeiture of stock options            --        --       (12,162)      12,162            --          --            --

Net loss                               --        --            --          --       (396,558)          --     (396,558)
------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2000      13,490,659  674,533    11,422,299       (1,809)   (8,884,719)    (94,027)    3,116,277

Issuance of common stock
  to employees                     12,000       600         6,527          --             --          --         7,127

Sale of common stock
  held in treasury                     --        --            --          --        (51,866)     82,499        30,633

Purchase and retirement
  of common stock                (400,000)  (20,000)      (80,000)         --             --          --      (100,000)

Amortization of deferred
  compensation                         --        --            --         855             --          --           855

Forfeiture of stock options            --        --          (954)        954             --          --            --

Net loss                               --        --            --          --      (104,302)          --      (104,302)
------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2001     13,102,659  $655,133   $11,347,872     $    --   $(9,040,887)     $(11,528)  $2,950,590
------------------------------------------------------------------------------------------------------------------------

</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



<PAGE> F5


Statements of Cash Flows
Years Ended August 31, 2001 and 2000

<TABLE>
<CAPTION>
TMS, Inc. (dba TMSSequoia)                                  2001         2000
---------------------------------------------------------------------------------
<S>                                                         <C>          <C>
Cash flows from operating activities:
     Net loss                                             $(104,302)    (396,558)
     Adjustments to reconcile net loss to net cash provided
       by operating activities:
          Depreciation and amortization                     358,509      509,272
          Loss on disposal of equipment                       5,052       20,626
          Loss on write-off of software development costs        --      192,681
          Employee stock-based compensation                   7,982       10,591
          Net change in:
            Accounts receivable                            (468,884)      35,112
            Work in process                                 140,548      269,137
            Prepaid expenses and other assets               (31,124)         183
            Accounts payable                                150,432      (22,462)
            Accrued payroll expenses                        (47,100)      75,412
            Deferred revenue                                (6,517)      171,870
---------------------------------------------------------------------------------
          Net cash provided by operating activities           4,596      865,864
---------------------------------------------------------------------------------
Cash flows from investing activities:
     Purchases of property and equipment                    (77,920)     (66,532)
     Proceeds from disposal of equipment                      3,170        1,251
     Capitalized software development costs                (494,511)    (332,190)
     Patent costs                                           (14,953)    --
---------------------------------------------------------------------------------
          Net cash used in investing activities            (584,214)    (397,471)
---------------------------------------------------------------------------------
Cash flows from financing activities:
     Repayment of long-term debt                            (27,007)     (28,588)
     Repayment of capital lease                             (14,413)     (66,694)
     Sale of common stock                                        --        2,000
     Sale of treasury stock, at cost                         30,633       18,211
     Purchase of treasury stock, at cost                   (100,000)     (91,340)
---------------------------------------------------------------------------------
          Net cash used in financing activities            (110,787)    (166,411)
---------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents       (690,405)     301,982

Cash and cash equivalents at beginning of year            1,359,692    1,057,710
---------------------------------------------------------------------------------
Cash and cash equivalents at end of year                  $ 669,287   $1,359,692
---------------------------------------------------------------------------------
Supplemental cash flow information:
     Cash paid for interest                                 $17,733      $21,161
     Cash paid for income taxes                                  --          800
---------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


<PAGE> F6


Notes to Financial Statements August 31, 2001 and 2000

Note 1: Summary of Significant Accounting Policies

Organization

The Company is involved in the research, design, development, and marketing of
software tools and applications for document capture, image enhancement, image
viewing, forms processing, intranets and the Internet.  The Company is also
developing technologies to improve the overall process of scoring large-scale
assessments ("tests") for grades K-12 in the educational marketplace. During
fiscal 2001 and 2000 the Company also provided document conversion services to
corporations and government organizations to assist them in migrating from paper
to electronic information systems. At August 31, 2001, the Company had completed
all outstanding document conversion projects and discontinued those services. In
fiscal 2000 the Company decided to transition out of its professional service
business model for which the Company had historically offered a variety of
services for analyzing business and information management processes as well as
integrating business solutions.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of highly liquid money market
accounts with an original maturity of three months or less and overnight
investments carried at cost plus accrued interest, which approximates fair
value.

Computer Software Costs

Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed" (SFAS No. 86),
requires capitalization of software development costs incurred subsequent to
establishment of technological feasibility and prior to the availability of the
product for general release to customers. The Company capitalized $494,511 and
$332,190 of software development costs, which primarily includes personnel
costs, in 2001 and 2000, respectively.  Funding received from customers for the
development of products is first applied against the capitalized software
development costs and any remaining funding is recognized as revenue upon
product acceptance.  In fiscal 2001 and 2000, the Company applied approximately
$100,000 and $43,000, respectively, of customer funding against capitalized
software costs.

<PAGE> F7

     Systematic amortization of capitalized costs begins when a product is
available for general release to customers and is computed on a
product-by-product basis at a rate not less than straight-line over the
product's remaining estimated economic life. The Company amortized $173,385 and
$232,420 of software development costs in 2001 and 2000, respectively. The
Company compares the unamortized capitalized software development costs to the
estimated net realizable values of its products on a periodic basis. If the
estimated net realizable values fall below the unamortized costs, the excess
costs are charged directly to operations. No such costs were charged to
operations in fiscal 2001. During fiscal 2000, the Company charged approximately
$118,000 to cost of revenue and $75,000 to research and development to write-
down the unamortized development costs for SpectrumFix, ScanFix Twain, and Prizm
Image Server.

Property and Equipment

Property and equipment are stated at cost. Depreciation on the building is
calculated using the straight-line method over thirty-nine years. Depreciation
on equipment and furniture, which includes amortization for equipment held under
capital leases, is calculated using the straight-line method over periods
ranging from three to ten years, but not less than the estimated useful life of
the leased property.

     The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

Patent Costs

Included in other assets at August 31, 2001 and 2000, are $45,442 and $33,020,
respectively, of unamortized capitalized costs associated with obtaining patent
rights for certain software products. Various patents were approved during
fiscal 1996 through 1998 and the capitalized costs are amortized using the
straight-line method over the seventeen-year life of the patents. In fiscal
2001, $14,952 was incurred and capitalized related to the acquisition of new
patents.  Such costs will be amortized over the lives of the patents, once the
patents have been approved.


<PAGE> F8

Revenue

Statement of Position (SOP) 97-2 "Software Revenue Recognition" requires
software licensing and royalties revenue to be recognized only after the
software is delivered, all significant obligations of the Company are fulfilled,
and all significant uncertainties regarding customer acceptance have expired.
SOP 97-2 also requires the unbundling of multiple elements in software
transactions and the allocation of pricing to each element based upon vendor
specific objective evidence of fair values. The Company offers multiple element
arrangements to its customers, mostly in the form of technical phone support and
product maintenance, for fees that are deferred and recognized in income ratably
over the applicable technical support period. At August 31, 2001 and 2000,
deferred technical support and product maintenance revenue was $277,655 and
$173,268, respectively. The Company also, on occasion and as part of the initial
contract price, offers delivery of enhanced versions of future products to
customers on a when-and-if-available basis. SOP 97-2 generally requires that the
promise for future product deliveries be treated as separate elements and
deferred from revenue recognition until produced, delivered and accepted by the
customer. At August 31, 2001 and 2000, there was no deferred revenue
attributable to software products and/or enhancements expected to be delivered
in the future.  The Company also deferred $3,340 and $49,936 of software product
revenue at August 31, 2001 and 2000, respectively, because of uncertainties
surrounding customer payment.

     Funding received from customers for the development of products is first
applied against the capitalized software development costs and any remaining
funding is recognized as revenue upon product acceptance.  In fiscal 2001 and
2000, the Company recognized revenue of approximately $71,000 and $23,000,
respectively, that represented the excess of customer funding over the cost of
the product development.

     Revenue for assessment scoring consulting services, software development
services and document conversion services is recognized as the services are
performed using the percentage-of-completion method and is deferred to the
extent that customer billings or payments exceed the percentage complete.
Deferred revenue under service contracts was $64,307 at August 31, 2000.
Contract service work in process of $6,300 and $146,848 at August 31, 2001 and
2000, respectively, represented costs and related profits recognized on a
percentage-of-completion basis in excess of customer billings. Contract costs
primarily include direct labor. Provisions for losses on contracts are recorded
at the time such losses are known. Amounts for contracts in process at August
31, 2001, will be billed pursuant to contractual terms and are expected to be
collected during fiscal 2002.

<PAGE> F9

Net Loss Per Share

Basic EPS is computed by dividing net income available to common shareholders by
the weighted-average number of shares of common stock outstanding during the
period. Diluted EPS recognizes the potential dilutive effects of the future
exercise of common stock options.

Stock-based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25), and related Interpretations. Accordingly, compensation cost for stock-
based awards is expensed in an amount equal to the excess of the quoted market
price on the grant date over the exercise price. Such expense is recognized at
the grant date for awards fully vested. For awards with a vesting period, the
expense is deferred and recognized over the vesting period. The amount of
expense recognized in 2001 and 2000 related to employee stock-based awards was
$7,982 and $10,591, respectively. Compensation cost is not required to be
recorded for the employee stock purchase plan (see Note 4), as it is non-
compensatory under the provisions of APB No. 25.

Income Taxes

The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized at the enacted tax rates for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Allowance for Doubtful Trade Accounts Receivables

The Company extends credit to customers in accordance with normal industry
standards and terms. Credit risk arises as customers default on trade accounts
receivable owed to the Company. The Company has established an allowance for
doubtful accounts based on known factors surrounding the credit risk of specific
customers, historical trends and other information.

     Under certain circumstances, the Company requires that a portion of the
estimated billings be paid prior to delivering products or performing services.
In addition, the Company may revoke customer contracts if outstanding amounts
are not paid.

<PAGE> F10

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, trade accounts receivable,
contract service work in process, accounts payable, accrued expenses and other
liabilities approximate fair value because of the short maturity of these
financial instruments. The carrying value of notes payable and long-term debt
approximates fair value because the current rates approximate market rates
available on similar instruments.

Comprehensive Income

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130), establishes standards for reporting and display of
"comprehensive income" and its components in a set of financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed at the same prominence as other financial
statements. The Company currently does not have any components of comprehensive
income that are not included in net loss.

Reclassifications

Certain 2000 amounts have been reclassified to conform to the 2001 financial
statement presentation.

Note 2: Note Payable and Long-Term Debt

The Company had $254,392 and $281,399 outstanding under a long-term note payable
to a bank, at August 31, 2001 and 2000, respectively. The note bore interest at
7.38% and 5.57% at August 31, 2001 and 2000, respectively, and is due January 1,
2009. The interest rate at August 31, 2000, was based on a reduced rate made
available through an Oklahoma small business program. This program was not
renewed in fiscal 2001.  The aggregate maturities of long-term debt for each of
the five years subsequent to August 31, 2001, and thereafter, are as follows:
2002, $27,016; 2003, $29,107; 2004, $31,321; 2005, $33,781; 2006, $36,399;
thereafter, $96,768. The long-term note is secured by all accounts receivable,
equipment, furniture and fixtures, and real property of the Company.

<PAGE> F11

Note 3: Income Taxes

No income tax expense was incurred in fiscal 2001. The significant components of
the 2001 expense include: deferred tax benefit, $34,813; increase in the
valuation allowance for deferred tax assets, $33,869; and benefit for correction
of prior year estimates, $944. Income tax expense for fiscal 2000 was $800. The
significant components of the 2000 expense include: deferred tax benefit,
$146,404; increase in the valuation allowance for deferred tax assets, $147,567;
state income tax paid, $800; and benefit for correction of prior year estimates,
$1,163. Income tax expense for 2001 and 2000 differed from the amounts computed
by applying the U.S. Federal income tax rate of 34% to pretax income from
operations as a result of the following:

                                                       2001          2000
----------------------------------------------------------------------------
Computed "expected" tax benefit                       (34.0%)       (34.0%)

Change in the deferred tax assets valuation allowance  32.0%         37.0%

State income tax, net of Federal income tax benefit    (4.0%)        (4.0%)

Other                                                   5.0%          1.0%
----------------------------------------------------------------------------
Effective income tax expense                            0.0%          0.0%
--------------------------------------------------------------------------

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at August 31, 2001 and 2000
are presented in Table 3a.

----------------
Table 3a
                                                         2001         2000
------------------------------------------------------------------------------
Deferred tax assets:
     Tax operating loss carryforwards                $   985,392   $1,636,823
     Tax credit carryforwards                                  -       79,152
     Accounts receivable                                  13,937       20,511
     Other                                                47,599       44,246
------------------------------------------------------------------------------
Total gross deferred tax assets                        1,046,928    1,780,732
Less valuation allowance                                 271,153    1,130,030
------------------------------------------------------------------------------
Net deferred tax assets                                  775,775      650,702
------------------------------------------------------------------------------
Deferred tax liabilities:
     Property and equipment                              (21,993)     (18,819)
     Capitalized software costs                         (269,282)    (147,383)
------------------------------------------------------------------------------
     Net deferred tax assets                         $   484,500      484,500
------------------------------------------------------------------------------

<PAGE> F12


     Deferred tax assets are recognized when it is more likely than not that
benefits from deferred tax assets will be realized. The Company had recognized a
net deferred tax asset of $484,500 at August 31, 2001. The ultimate realization
of this deferred tax asset is dependent upon the Company's ability to generate
future taxable income during the periods in which those temporary differences
become deductible. Management considered the scheduled reversal of deferred tax
liabilities, projected future taxable income, past earnings history, sales
backlog, and net operating loss carryforward expiration dates in determining the
amount of deferred tax asset to recognize. In order to fully realize the
deferred tax asset, the Company will be required to generate future taxable
income of approximately $1,275,000 prior to the expiration of the net operating
loss carryforwards. Taxable loss for the year ended August 31, 2001 approximated
$428,000 compared to a financial loss of approximately $104,000. Taxable loss
for the year ended August 31, 2000 approximated $552,000 compared to a financial
loss of approximately $397,000. In fiscal 2001 and 2000, the differences in the
tax and financial losses primarily resulted from timing differences associated
with the deductibility of capitalized software and bad debt estimates compared
to the recognition of related expenses in accordance with generally accepted
accounting principles ("GAAP").

    The $271,153 valuation allowance provides for net operating loss
carryforwards that, as of August 31, 2001, are not expected to be realized prior
to expiration. At August 31, 2001 the Company's tax net operating loss
carryforwards approximated $2,596,000. These carryforwards expire during the
years 2002 through 2016. Approximately $613,000, or 24%, of the net operating
loss carryforwards expire by the end of fiscal year 2003. The benefits from
these carryforwards could also be limited under Internal Revenue Service Code
Section 382 due to changes in ownership.

Note 4: Stock-Based Compensation

Stock Options

In 1985, the Company's board of directors approved an employee incentive stock
option plan ("1985 Plan"). Options to purchase 1,000,000 shares of the Company's
common stock at a price of $.125 per share were granted under this plan. The
options are exercisable after one year of continued employment with the Company
following the grant date, and expire ten years after the grant date.

<PAGE> F13

    In 1989, the Company adopted an employee stock option plan and a senior
employee stock option plan. Options to purchase 1,150,000 shares of the
Company's common stock at $.125 per share were granted under the employee stock
option plan and options to purchase 850,000 shares of the Company's common stock
at $.125 per share were granted under the senior employee stock option plan. The
options become exercisable over a five-year period, beginning one year after the
grant date. No options were outstanding at August 31, 2001 and 2000 under the
senior employee stock option plan.
----------------
Table 4a

<TABLE>
<CAPTION>

                                             WEIGHTED                             WEIGHTED
                                             AVERAGE              OPTION          AVERAGE
                               SHARES     EXERCISE PRICE         PRICE RANGE      FAIR VALUE
<S>                            <C>           <C>               <C>                <C>
-----------------------------------------------------------------------------------------------
Shares under option:
-----------------------------------------------------------------------------------------------
At August 31, 1999             748,714        $ 0.41           $ 0.13-$0.75
     Options granted           275,000        $ 0.28           $ 0.27-$0.29       $ 0.23
     Options exercised         (16,000)       $ 0.13                 $ 0.13
     Options cancelled        (266,740)       $ 0.58           $ 0.13-$0.75
-----------------------------------------------------------------------------------------------
At August 31, 2000             740,974        $ 0.30           $ 0.13-$0.40
-----------------------------------------------------------------------------------------------
     Options cancelled          (4,000)       $ 0.13                 $ 0.13
-----------------------------------------------------------------------------------------------
At August 31, 2001             736,974        $ 0.30           $ 0.13-$0.40
-----------------------------------------------------------------------------------------------

</TABLE>

_________________
Table 4b

<TABLE>
<CAPTION>

                              OPTIONS        WEIGHTED AVERAGE       WEIGHTED            OPTIONS         WEIGHTED
       RANGE OF             OUTSTANDING        REMAINING            AVERAGE          EXERCISABLE        AVERAGE
     OPTION PRICES          AT 8/31/01       CONTRACT LIFE      EXERCISE PRICE       AT 8/31/01     EXERCISE PRICE
     <S>                    <C>              <C>                <C>                  <C>            <C>
-----------------------------------------------------------------------------------------------------------------------
      $ 0.13-$ 0.31           596,500           3.4 Years           $ 0.28              440,500        $ 0.29
-----------------------------------------------------------------------------------------------------------------------
      $ 0.38-$ 0.75           140,474           3.6 Years           $ 0.39              140,474        $ 0.39

      $ 0.13-$ 0.75           736,974           3.4 Years           $ 0.30              440,874        $ 0.31
-----------------------------------------------------------------------------------------------------------------------

</TABLE>

<PAGE> F14

     Pursuant to resolutions by the board of directors, options to purchase
the Company's common stock have been issued to certain directors and key
employees of the Company. Such options are generally exercisable at a price
equal to or greater than the market price of the stock at the date of the grant.
See Table 4a for a summary of stock option transactions. Table 4b summarizes
information about stock options outstanding at August 31, 2001.

Employee Stock Purchase Plan

     On January 21, 2000, the shareholders approved the TMS, Inc. Employee
Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to
purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each three-month offering period. Employee
contributions to the ESPP were approximately $31,500 and $19,300 for the years
ended August 31, 2001 and 2000, respectively. Pursuant to the ESPP, 167,643 and
52,031 shares were issued in fiscal 2001 and 2000, respectively, from common
shares held in treasury by the Company. As of August 31, 2001, 30,328 shares are
available for future issuances under the plan.

Fair Value Disclosures

     The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, compensation cost has been recognized using the intrinsic value
method prescribed in APB No. 25, and related Interpretations. Had compensation
cost for the Company's stock option grants and ESPP in fiscal years 2001 and
2000 been based on the fair value method prescribed by SFAS No. 123, net loss
would have been increased by $21,286 and $31,096 in 2001 and 2000, respectively,
with no effect on loss per share. The fair values of each option grant was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%; expected volatility of
100.36% and 95.96% in 2001 and 2000, respectively; risk-free interest rate of
4.5% and 1.3% for the stock option grants and the ESPP, respectively; expected
lives of approximately 5 to 7 years in 2001 and 6 to 8 years in 2000 for the
stock option grants; and expected lives for the ESPP of approximately .25 years
in fiscal 2001 and 2000.

     Pro forma net earnings reflects only options granted after September 1,
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to September 1,
1995 is not considered.

<PAGE> F15

Note 5: Earnings Per Share

Table 5a is a reconciliation of the numerators and the denominators of the basic
and diluted per-share computations for income available to common shareholders.

     Options to purchase approximately 678,000 and 182,000 shares of common
stock at prices ranging from $.27-$.75 per share were outstanding at August 31,
2001 and 2000, but were not included in the computation of EPS because the
options' exercise price was greater than the average market price of common
shares. Additionally, approximately 59,000 options to purchase 16,000
incremental shares of common stock at prices ranging from $.125-$.188 were
excluded from the per share computation for fiscal 2001, because of their anti-
dilutive effect. All options expire during periods through the year 2008.


----------------
Table 5a

<TABLE>
<CAPTION>

                                                  FISCAL YEAR 2001                             FISCAL YEAR 2000
                                   ----------------------------------------------------------------------------------------------
                                      INCOME           SHARES      PER-SHARE        INCOME          SHARES      PER-SHARE
                                   (NUMERATOR)      (DENOMINATOR)    AMOUNT       (NUMERATOR)    (DENOMINATOR)    AMOUNT
<S>                                <C>              <C>           <C>             <C>           <C>             <C>
-----------------------------------------------------------------------------------------------------------------------------------
Basic EPS:                         $(104,302)       13,080,624     $ (0.01)       $(396,558)     13,364,352     $ (0.03)

Effect of Dilutive Securities:
Common stock options                                --                                           --
-----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS:                       $(104,302)       13,080,624     $ (0.01)       $(396,558)     13,364,352     $ (0.03)
-----------------------------------------------------------------------------------------------------------------------------------


</TABLE>

<PAGE> F16

Note 6: Reportable Segments

The Company's reportable segments are determined by its products and services
and include: Component Product Technologies ("CPT"), Assessment Scoring
Technologies ("AST"), Professional Services ("PS") and Document Conversion
("DC") Services. The CPT segment develops the Company's core product
technologies. These products include core image viewing, image enhancement and
forms processing software products (toolkits) that are necessary for developing
new software applications or enhancing existing software applications. In
addition, the CPT segment develops software products (applications) that may
function independently from any other software package or may be closely
associated with other software packages. The toolkits are primarily licensed to
developers, system integrators, value added resellers ("VARs") and/or companies
who use the software internally. The Company generally receives royalties for
each workstation/system that utilizes the product. The applications install
directly on a user's system or on a server in a client/server environment. The
applications are primarily licensed to entities that require the capability to
view and manipulate images through their Internet or intranet web browsers. The
AST segment was created during fiscal 2000 to focus on developing technologies
to improve the overall process of scoring large-scale assessments ("tests") for
grades K-12 in the educational marketplace. The technologies being developed
within this segment leverage the Company's existing core competencies in forms
recognition, image processing, viewing and enhancement. The AST segment created
a Digital Mark Recognition ("DMR") software product designed to replace the need
for hardware based Optical Mark Recognition ("OMR"). The AST segment also
developed a new product called Virtual Scoring Center ("VSC"). The VSC provides
the ability for qualified raters to score student responses to open-ended test
questions in a web-enabled environment. In fiscal 2000 the Company decided to
transition out of its existing professional service business model. The PS
segment offered a variety of consulting and integration services for business
and information management processes. In general, the professional service
projects focused on an entity's need for document imaging solutions. The Company
charged for projects on a time and materials or fixed fee basis. In fiscal 2001
the Company decided to discontinue providing document conversion services.  All
document conversion contracts were complete at August 31, 2001. The DC segment
primarily offered services for electronic publishing of documents. These
services included indexing - for large volume searching of on-line information;
hyperlinking - for navigating through complex sets of on-line information; and
document markup - for electronic publishing of documents on CD-Rom and the
Internet/intranet. Document conversion also participated in a limited amount of
data capture activities - converting paper documents to electronic forms.

     Direct costs are charged to the segments and certain selling, general and
administrative expenses for corporate services (i.e. marketing, accounting,
information systems, facilities administration et. al.) are allocated to the
segments based on various factors such as segment full-time equivalent
employees, segment revenue or segment costs. Financial results are measured in
accordance with the manner in which management assesses segment performance and
allocates resources. Except for capitalized software development costs,
financial results do not include separately identifiable balance sheet assets
for each segment, as this is not a common measure that management uses to assess
segment performance or allocate resources. In the software development business,
the most important assets are the employees. Performance measures of the
employees are included in the derivation of operating income and loss. See Table
9a for the results of operations for each reportable segment for fiscal years
ending 2001 and 2000. All revenue and expenses are from unaffiliated sources.

<PAGE> F17

----------------
Table 6a

<TABLE>
<CAPTION>


                                                  COMPONENT       ASSESSMENT
                                                    PRODUCT         SCORING       PROFESSIONAL      DOCUMENT
     2001                                         TECHNOLOGIES   TECHNOLOGIES       SERVICES       CONVERSION      TOTALS
     <S>                                          <C>            <C>              <C>             <C>              <C>
-----------------------------------------------------------------------------------------------------------------------------
Revenue from external customers                   $3,159,529       $221,180         $56,720         $204,173      $3,641,602
-----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization                         74,415         31,340              --           31,053         136,808
-----------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                              767,850       (705,244)         35,537           74,254         172,397
-----------------------------------------------------------------------------------------------------------------------------
Other significant noncash items:
     Amortization of capitalized software
     development costs                               158,167         15,218               --              --         173,385
-----------------------------------------------------------------------------------------------------------------------------
Identifiable segment assets:
     Capitalized software development costs, net     556,367        153,017               --              --         709,384
-----------------------------------------------------------------------------------------------------------------------------
Expenditures for capitalized software
     development costs                               326,276        168,235               --              --         494,511
-----------------------------------------------------------------------------------------------------------------------------



                                                  COMPONENT       ASSESSMENT
                                                    PRODUCT         SCORING       PROFESSIONAL      DOCUMENT
     2000                                         TECHNOLOGIES   TECHNOLOGIES       SERVICES       CONVERSION      TOTALS
-----------------------------------------------------------------------------------------------------------------------------
Revenue from external customers                   $2,982,195       $3,000          $360,615         $259,439      $3,605,249
-----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization                         86,853       11,132            31,937           81,418         211,340
-----------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                              649,007     (420,978)         (318,092)            (906)        (90,969)
-----------------------------------------------------------------------------------------------------------------------------
Other significant noncash items:
     Amortization of capitalized software
     development costs                               232,420           --                 --               --        232,420

     Write-off of capitalized software
     development costs                               192,681           --                 --               --        192,681
-----------------------------------------------------------------------------------------------------------------------------
Identifiable segment assets:
     Capitalized software development costs, net     388,258           --                 --               --        388,258
-----------------------------------------------------------------------------------------------------------------------------
Expenditures for capitalized software
     development costs                               332,190           --                 --               --        332,190
-----------------------------------------------------------------------------------------------------------------------------

</TABLE>



Table 6b is a reconciliation of segment operating loss to the total company
fiscal 2001 and 2000 net loss.

---------------
Table 6b
                                    2001          2000
---------------------------------------------------------------
Operating income (loss) for
   reportable segments          $ 172,397        (90,969)
Unallocated corporate
   expenses                      (310,804)      (350,016)
Interest income                    51,206         60,531
Interest expense                  (17,733)       (21,161)
Other, net                            632          5,857
Income tax expense                     --           (800)
---------------------------------------------------------------
Net loss                        $(104,302)      (396,558)
---------------------------------------------------------------


<PAGE> F18

Note 7: Employee Benefit Plan

     The Company sponsors a defined contribution benefit plan for
substantially all employees for the purpose of accumulating funds for
retirement. Participation in the plan is based on six months of service and a
minimum of 1,000 hours of annual service. The Company matches 50% of employee
contributions in an amount up to 6% of employees' total compensation. The cost
of employer matching approximated $22,000 and $48,000 in 2001 and 2000,
respectively.  Employees vest in employer matching contributions at a rate of
20% per year after two years of service.

Note 8: Leases

     The Company leases office space and equipment under operating leases.
Rent expense was approximately $36,000 and $51,000 for 2001 and 2000,
respectively. The Company has non-cancelable future minimum lease obligations of
$263,790 in fiscal 2001. In November 1997, the Company entered into two capital
lease agreements for scanning equipment and related software. The leases ended
in the first quarter of fiscal 2001 and the leased equipment was purchased and
resold at fair market value. The leases had a three-year term and provided for
the Company to either relinquish the equipment and software to the leasing
company at the end of the lease or purchase the equipment and software at fair
market value. Assets under capital leases are included in the Company's balance
sheet as follows:


                                            2001              2000
-----------------------------------------------------------------------
Computer equipment                        $       -       $  165,003
Less: accumulated amortization                    -         (154,043)
-----------------------------------------------------------------------
                                          $       -       $   10,960


<PAGE> F19

     During fiscal 2001 and 2000, depreciation expense included $10,960 and
$51,474, respectively, for amortization of assets held under capital lease. In
fiscal 1999, the Company entered into an operating sublease for certain computer
equipment and software held under capital lease. The sublease ended in the first
quarter of 2001 and the lessee purchased the leased equipment at fair market
value.  The Company received approximately $3,000 and $29,000 in rental payments
under the sublease in fiscal 2001 and 2000, respectively.

Note 9: Business and Credit Concentrations

     In 2001, no individual customer accounted for greater than 10% of total
revenue.  At August 31, 2001, two customers accounted for 44% of total trade
accounts receivable.  In 2000, one customer accounted for 12% and 38% of the
Company's total revenue and trade accounts receivable, respectively. Information
regarding the Company's operations by geographic area as of and for the years
ended August 31, 2001 and 2000, follows:

Revenue:                           2001                 2000
------------------------------------------------------------------
United States                 $2,969,037             3,053,608

Europe (export sales)            389,700               359,684

Asia (export sales)              192,296                89,096

Australia (export sales)          27,518                28,238

Canada (export sales)             18,324                20,606

Other (export sales)              44,727                54,017
------------------------------------------------------------------
                              $3,641,602             3,605,249
------------------------------------------------------------------

Accounts receivable (gross):       2001                 2000
------------------------------------------------------------------
United States                 $1,024,372               525,001

Europe                            20,589                52,951

Asia                              (1,147)               (2,273)

Australia                            537                17,308

Canada                               203
------------------------------------------------------------------
                              $1,044,554               592,987


<PAGE> F20

Note 10: Contingencies

On September 12, 2000 the Company filed an arbitration with the American
Arbitration Association against Hummingbird USA, Inc. for failing to comply with
royalty reporting and payment obligations as outlined in our value added
reseller agreement. The Company was seeking a one-time royalty payment of
$440,000 plus interest and legal fees. On August 31, 2001, the American
Arbitration Association awarded the Company $525,800 in actual damages, $41,702
in transactional costs, and $525,800 for Hummingbird's unfair and deceptive acts
and practices.  Hummingbird filed a "Motion to Vacate the Arbitration Award" in
the federal court system on October 2, 2001.  The Company anticipates resolution
of the matter in six to eight months.  Due to the appeal of the award, no
revenue has been reported in the fiscal year 2001 operating results related to
the arbitrator's award.


---------------
Schedule II

Valuation and Qualifying Accounts

TMS, Inc. (dba TMSSequoia)


<TABLE>

                                     BALANCE AT        ADDITIONS/REDUCTIONS        DEDUCTIONS--           BALANCE AT
                                     BEGINNING            TO COSTS &              RECOVERY/WRITE-OFF          END
Classification                       OF PERIOD              EXPENSES                OF ACCOUNTS           OF PERIOD
<S>                                  <C>             <C>                        <C>                       <C>
--------------------------------------------------------------------------------------------------------------------------------
Year ended August 31, 2001:
   Allowance for doubtful accounts   $   54,032             (5,000)                   12,317              $   36,715

Year ended August 31, 2000:
   Allowance for doubtful accounts   $  395,069             66,178                   407,215              $   54,032
--------------------------------------------------------------------------------------------------------------------------------


</TABLE>

<PAGE> F21