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

                                   FORM 10-KSB

(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, 2004


[ ]  TRANSITION REPORT Under section 13 or 15(d) of The Securities Exchange
     Act of 1934

                          For the transition period from __________to __________

                                               Commission File Number: 000-18250


                                    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)


Issuer's telephone number  (405) 377-0880

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
                         -----------------------------
                                (Title of class)

     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 $2,927,072

     As of October 31, 2004 the  aggregate  market value of voting stock held by
nonaffiliates of such stock was  $1,713,438  (based on the average bid and asked
price of such common equity on such date).

     As of October 31, 2004 there were 13,121,659  shares of Common Stock,  $.05
par value, outstanding.

     Transitional Small Business Disclosure Format: YES ___  NO [X]
<PAGE>

Form 10-KSB
for the fiscal year ended August 31, 2004

                               TABLE OF CONTENTS
                                                                            PAGE
                                                                            ----

PART I ....................................................................

Item 1.  Description of Business ..........................................

Item 2.  Description of Property ..........................................

Item 3.  Legal Proceedings ................................................

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

PART II ...................................................................

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

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

Item 7.  Financial Statements .............................................

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

Item 8A. Controls and Procedures ..........................................

Item 8B. Other Information ................................................

PART III ..................................................................

Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a) of
the Exchange Act ..........................................................

Item 10. Executive Compensation ...........................................

Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters ...................................................................

Item 12. Certain Relationships and Related Transactions ...................

Item 13. Exhibits .........................................................

Item 14. Principal Accountant Fees and Services ...........................

Signatures ................................................................

Index to Financial Statements and
         Financial Statement Schedule .....................................

COMPANIES AND PRODUCTS NAMED IN THIS DOCUMENT MAY BE TRADEMARKS OF THE
RESPECTIVE COMPANIES WITH WHICH THEY ARE ASSOCIATED.

<PAGE>

Part I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

We have been engaged in the computer software business since 1981 and became
incorporated in 1990. We license computer software products 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 or have offered customers the following
imaging technology solutions and services:

Component Product Technologies
         Software toolkits for:
                  o   Image Viewing
                  o   Image Enhancement
                  o   Forms Processing
                  o   Color Image Processing
         Software applications for:
                  o  Web-based Image Viewing
                  o  Image Enhancement for Black and White Images
                  o  Image Enhancement for Color and Grayscale Images

         Assessment Scoring Products
                  o  Virtual Scoring Center
                  o  Digital Mark Recognition

     In October 2002, we acquired a 50% membership interest in VSC Technologies,
LLC, a new entity that we formed with Measurement Incorporated, a provider of
writing and performance assessment hand-scoring services. VSC Technologies, LLC,
was formed to further develop the Virtual Scoring Center technology and license
it to those in the education market that can benefit from using image-based
technology to score tests. We assigned all of our rights in the Virtual Scoring
Center technology upon formation of the new entity.

     On August 5, 2004, we entered into an agreement to sell substantially
all of our assets to Pegasus Imaging Corporation ("Pegasus"). The terms of the
transaction along with a plan of liquidation of TMS (the "Company"), will be
submitted to shareholders for approval at a special meeting to be held on
December 17, 2004. Our membership interest in VSC Technologies, LLC is not part
of the asset sale to Pegasus, however in September 2004, we reached an agreement
in principle to sell our 50% membership interest in the LLC to Measurement
Incorporated. Immediately upon shareholder approval, we plan to close the asset
sale to Pegasus simultaneously with the sale of our membership interest to
Measurement Incorporated and then at some future date, which is not currently
estimable, we plan to make a one-time cash distribution to shareholders and
liquidate the Company.

Component Product Technologies
------------------------------
We sell software development toolkits and applications and receive license fees
and/or royalties from the sales of these 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 the
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 our software applications.

     Some customers use our toolkit products to create custom applications to
address critical business needs not otherwise available in pre-packaged software
applications. Others use our enabling technologies to add functionality to
packaged workflow 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 and Portable Document Format (PDF) documents using optical
character recognition technology through a browser-based interface. Our
applications apply to many types of digitized images and documents 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 and
documents.

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 previously offered a
feature limited version of the ViewDirector ActiveX control to facilitate
viewing via a web server in the Microsoft Internet Explorer web browser
environment under the Prizm brand name, but discontinued support for that
product during fiscal year 2003. 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.

Image Viewing Applications
--------------------------
Prizm(R) browser-based Viewer-- The Prizm(R) browser-based Viewer is an
application that extends the capabilities of Microsoft Internet Explorer and
Netscape browsers, delivering the ability to view, manipulate, annotate and
print even the largest TIFF, JPEG and other compressed images as well as PDF
files. The Prizm Viewer allows users to view, manipulate, annotate and print PDF
files using the same interface they currently use for TIFF and other document
image types. The Viewer offers batch printing, virtual multi-page documents,
image annotation and optical character recognition for text extraction,
hyperlinking and magnifying capabilities at each user's desktop. Cache
encryption and support for secure servers allows the Prizm Viewer to support
organizations with regulatory requirements to provide secure transmission of
document images. 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.

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
(OCR) processing is required to create smaller file sizes, and higher OCR read
rates. 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 service bureaus, corporate clients, small
office/home office and individual users the functionality of the ScanFix toolkit
for black and white images. 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.

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 for black and white scanned images 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, the largest data
capture project in history, as well as the 2001 British Census. The product is
available as a C library with an optional Visual Basic wrapper. 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 Toolkits
-------------------------------
Prizm(R) Image Processing toolkit-- The Prizm IP developer tools are available
as either a C/C++ toolkit or a COM/ActiveX control and are employed by
independent software vendors and service bureaus to deskew, crop, drop and
extract colors from continuous tone (color and grayscale) document images. The
Prizm color IP toolkit also includes a module specifically designed for bitonal,
color and grayscale forms processing which extends the feature set available in
our current FormFix product to include color and grayscale form identification,
registration and removal, as well as a method of quickly adding new form
templates improving accuracy and speed.

     The Prizm color IP toolkit allows users to take advantage of the additional
information available in continuous tone 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.

Grayscale Image Processing Application
--------------------------------------
Prizm(R) Gray-- We launched the Prizm(R) Gray application in November 2002,
targeting service bureaus who convert microfilm and microfiche to digital
images. The Prizm Gray application is an integrated system, built on the Prizm
IP toolkit, that provides the ability to efficiently manipulate and process
continuous tone (grayscale and color) images, with a feature set targeted at
users converting microfiche and microfilm to image. The Prizm Gray application
is designed to replace on-scanner enhancement processes that slow microfilm and
microfiche scanners down, reducing throughput. We sell the Prizm Gray
application through a direct sales channel and we also bundle and co-market this
product with original equipment manufacturers and scanner distributors.

COMPONENT PRODUCT TECHNOLOGIES MARKETS

The primary markets for our component products are financial institutions, law
firms, pharmaceutical companies, transportation, energy, engineering and
aerospace companies, insurance companies, software companies, private and public
utilities, manufacturers, defense agencies, and state and county governments.
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,
distributors, 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 three people in the marketing and sale of our component
products. Since the announcement of the pending asset sale to Pegasus, 2
full-time salaried marketing and sales employees have resigned from the Company.
Therefore, on October 16, 2004, we secured a management consulting contract with
Pegasus, whereby Pegasus is providing marketing and sales personnel to
supplement our existing personnel in an effort to operate our business in the
ordinary course, at least through December17, 2004, which is the date at which
the TMS' shareholders will vote at a special meeting to approve or disapprove
the sale of substantially all of our assets to Pegasus (see "Proposed Sale of
Assets to Pegasus and Plan of Liquidation" in "Management's Discussion and
Analysis or Plan of Operation" below).


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.

     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., Cartesian, Inc., Accordex,
Pixel Translations, Snowbound Software, Swiftview Inc., Kofax Image Products,
Lead Technologies, Spicer, Seaport Imaging, Black Ice and Visionshape, sell
products aimed at our customer base in the black and white image enhancement and
forms processing, Internet/intranet image viewing and toolkit markets. In
addition, many companies are choosing to convert TIFF images to PDF file format,
so Adobe's viewing products also provide competition to our web-based viewing
software. 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.

Web-based Scoring
-----------------
VSC(R) Virtual Scoring Center--The VSC system, which we partly own through our
50% equity interest in VSC Technologies, LLC, (see "Note 10" to the Financial
Statements) is an integrated system that provides the ability to efficiently
score large-scale student assessments using imaging technology. Designed to
replace traditional paper-based scoring processes, the VSC system consists of
two primary modules: a workstation-based system for scanning documents and
capturing student demographic information and selected response (i.e. multiple
choice, true/false) test items, and a web-based system for scoring handwritten
student responses (i.e. essay, short answer, proofs and diagrams for mathematics
and science, etc.). Imaging technology is used throughout the system to
efficiently process student assessment documents.

Digital Mark Recognition
------------------------
DMR(R) engine-- The Digital Mark Recognition(TM) ("DMR") engine is patented
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 produce
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. DMR technology offers a viable alternative to
hardware based scoring systems that cannot take advantage of imaging technology.

ASSESSMENT SCORING PRODUCT MARKETS

The Virtual Scoring Center product is currently being used by Measurement
Incorporated ("MI"), our 50% partner in VSC Technologies, LLC. MI typically
contracts with state departments of education, other educational agencies, and
private businesses to develop and score educational tests. MI specializes in the
development and hand scoring of essay exams and open-ended performance test
items for students in kindergarten through college and at the professional
level. VSC Technologies, LLC licenses the Virtual Scoring Center product to MI
for its own internal use and MI remits royalties to the newly formed company
based on that use. Additionally, the LLC eventually plans to market the Virtual
Scoring Center product in the education market to educational testing companies,
private and governmental departments of education, colleges, universities and
other similar educational institutions which conduct testing, surveys or
otherwise collect and/or archive information in or for education systems or
institutions. This market appears poised for growth based on the passage of the
"No Child Left Behind" Act of 2001 which requires America's schools to describe
their success in terms of what each student accomplishes. Under the No Child
Left Behind Act, accomplishments will predominantly be measured using
standardized testing in almost every grade. This is expected to cause a
significant increase in the volume of test items scored over the next several
years and we believe may potentially create additional opportunities for scoring
and scoring related technologies in this market.

ASSESSMENT SCORING PRODUCT COMPETITION

The education assessment field is highly competitive and includes many scoring
vendors with an already established presence in providing services, equipment
and/or tools for scoring tests. Those vendors include entities such as Harcourt
Educational Measurement, Educational Testing Services, NCS Pearson, CTB-McGraw
Hill, Measured Progress, Riverside Publishing 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 their own computerized assessment scoring systems to facilitate their
scoring services.

     We believe that the Virtual Scoring Center and the DMR 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.

Backlog
-------
As of October 31, 2004, we had a backlog of component product and assessment
scoring product and software maintenance and custom software development revenue
of approximately $327,000.

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, in May 2004, we were awarded a patent from 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 are party to a lawsuit involving the Virtual Scoring Center technology
in which counterclaims have been filed against us, Measurement Incorporated and
VSC Technologies, LLC, which assert infringement of thirteen patents held by NCS
Pearson. We do not believe that the Virtual Scoring Center technology infringes
the NCS Pearson patents and we designed that technology to carefully avoid
infringement, but we cannot assure you that we will be successful in our defense
against NCS Pearson's counterclaims. See "Legal Proceedings" for further
information about this lawsuit.

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

     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 annual support at an additional 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.
Near-term plans include:

o    developing a schema to better control and deliver our products via the
     Internet;

o    completing the incorporation of all ScanFix and FormFix bitonal technology
     into our Prizm IP toolkit and adding confidence values to further automate
     image processing;

o    reducing the number of options and installs built with each product by
     developing an upgrade path for our products with scheduled service packs;

o    expanding our products to support the .NET platform

o    continuing development of the Virtual Scoring Center product through our
     investment in VSC Technologies, LLC, which will include developing
     additional enhancements to our DMR technology.

     In fiscal years 2004 and 2003, we spent approximately $545,000 and
$601,000, respectively, in research and development costs. Additionally, in
those years, we capitalized software development costs of $232,000 and $325,000,
respectively, related to new products and existing product enhancements. In
fiscal years 2004 and 2003, we received funded development of $44,000 and
$169,000 from certain customers to add and enhance features to the Prizm
web-based Viewer product. In fiscal year 2003 prior to the October 2002
formation of VSC Technologies, LLC, we also received $23,000 in funded
development from Measurement Incorporated to further develop the Virtual Scoring
Center technology. The funded development dollars received in both years were
either applied against research and development costs or capitalized software as
appropriate.

Employees
---------
At August 31, 2004, we had 21 full-time salaried employees and 5 part-time
hourly employees for a total of 26 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. Since the announcement of the pending asset sale to
Pegasus, 3 full-time salaried employees have resigned from the Company and we
terminated two part-time hourly employees.

     In October 2004, we secured a management consulting contract with Pegasus,
whereby Pegasus is providing marketing, sales and technical personnel to
supplement our existing personnel in an effort to operate our business in the
ordinary course, at least through December 17, 2004, which is the date at which
the TMS' shareholders will vote at a special meeting to approve or disapprove
the sale of substantially all of our assets to Pegasus (see "Proposed Sale of
Assets to Pegasus and Plan of Liquidation" in "Management's Discussion and
Analysis or Plan of Operation" below).

Customers
---------
In fiscal 2004 and 2003, a single customer accounted for 17% and 15%,
respectively, of our total revenue.

Sales to Foreign Customers
--------------------------
Approximately 13% and 19% of total revenues for fiscal years 2004 and 2003,
respectively, are attributable to sales to foreign customers.

ITEM 2. DESCRIPTION OF PROPERTY

In December 2003, we sold our corporate headquarters' building located at 206
West Sixth Avenue in Stillwater, Oklahoma. We are now a tenant in the building
and have leased approximately 5,500 square feet of space for a minimum of two
years at a monthly cost of approximately $4,800. The contracted purchase price
of the building was $460,000. The net proceeds from the sale, after closing
costs, were $431,226 and were used to pay off a $191,800 mortgage. We also have
approximately 3,100 square feet of office space located at 5801 East 41st
Street, Suite 600 in Tulsa, Oklahoma with a monthly rental of approximately
$3,800.

ITEM 3. LEGAL PROCEEDINGS

We are a party to a lawsuit involving the Virtual Scoring Center technology we
transferred to VSC Technologies, LLC. On October 23, 2002, we, along with VSC
Technologies, LLC and Measurement Incorporated, filed an action in the United
States District Court for the Eastern District of North Carolina against NCS
Pearson, Inc. In the complaint, we and the other plaintiffs seek a declaratory
judgment that the Virtual Scoring Center technology owned by VSC Technologies,
LLC and marketed by Measurement Incorporated and us does not infringe twenty
patents belonging to NCS Pearson. On June 3, 2003, NCS filed their answer to our
complaint, along with a set of counterclaims that assert infringement of
thirteen of their patents. Discovery is commencing in this case and the parties
have agreed on a discovery plan, which anticipates a trial date in or after
October 2005.

     We believe that the Virtual Scoring Center technology does not infringe the
NCS Pearson patents and we designed that technology to carefully avoid
infringement, but we cannot assure you that we will be successful in our claims
or our defense against NCS Pearson's counterclaims.

     If the court rules that the Virtual Scoring Center infringes the NCS
Pearson patents and NCS Pearson prevails in their counterclaims, this could
result in a monetary judgment against us. Because this action is at an early
stage, we cannot estimate the extent of any potential damages if there is a
judgment against us.

     An injunction against us and VSC Technologies, LLC would be severely
damaging to our business growth opportunities and our plans to exploit the
Virtual Scoring Center technology. Measurement Incorporated has agreed to
indemnify us against our costs and any liability arising in connection with the
action against NCS Pearson. But that indemnification responsibility currently
has certain dollar limitations and other conditions. Consequently, we may have
financial exposure if we do not prevail in this action and the conditions for
indemnification are not met or our costs and liability exceed the
indemnification coverage. However, if we sell our membership interest in VSC
Technologies, LLC to Measurement Incorporated as part of our plan of
liquidation, which is currently pending shareholder approval, Measurement
Incorporated has agreed to provide complete indemnification against our costs
and any liability arising in connection with the action against NCS Pearson (see
"Proposed Sale of Assets and Plan of Liquidation" in "Management's Discussion
and Analysis or Plan of Operation" below).

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

None.


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 Pink Sheets LLC
(formerly the National Quotation Bureau, Incorporated) quotes prices 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 2004 and 2003. 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.

                                         Bid Prices
 Fiscal 2004                         High            Low
 --------------------------------------------------------------
 First Quarter              $        0.11            0.07
 Second Quarter                      0.15            0.08
 Third Quarter                       0.10            0.09
 Fourth Quarter                      0.13            0.10


 Fiscal 2003                         High            Low
 --------------------------------------------------------------
 First Quarter              $        0.16            0.14
 Second Quarter                      0.14            0.09
 Third Quarter                       0.11            0.08
 Fourth Quarter                      0.11            0.07


Dividends
---------

We have not declared nor paid any cash dividends since our incorporation. 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.

     If our shareholders approve the sale of substantially all of our assets to
Pegasus and our plan of liquidation at the special meeting of shareholders to be
held on December 17, 2004, we currently estimate that we will distribute cash
liquidation proceeds to shareholders of $0.145 to $0.16 per share. The amount of
proceeds ultimately received, however, is dependent upon a number of conditions
and events, many of which are beyond the power of the Company to control,
including our ability to be dismissed from the litigation with NCS Pearson and
the final purchase price from Pegasus which is dependent, in part, on collection
of certain trade accounts receivable (see "Proposed Sale of Assets and Plan of
Liquidation" in "Management's Discussion and Analysis or Plan of Operation"
below).

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

As of October 22, 2004, there were 690 shareholder accounts of record according
to the records of our transfer agent. As of that date, we also had approximately
680 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.

     Except as otherwise indicated, the discussions in this section are without
regard to our "Proposed Sale of Assets to Pegasus and Plan of Liquidation" which
is described below.

Critical Accounting Policies and Estimates
------------------------------------------

Our discussion and analysis of financial condition and operations are based on
our financial statements, prepared in accordance with accounting principles
generally accepted in the United States of America and included in this report
on Form 10-KSB. Certain amounts included in or affecting our financial
statements and related disclosure must be estimated, requiring us to make
certain assumptions with respect to values or conditions which cannot be known
with certainty at the time the financial statements are prepared. Therefore, the
reported amounts of our assets and liabilities, revenues and expenses and
associated disclosures with respect to contingent assets and obligations are
necessarily affected by these estimates. We evaluate these estimates on an
ongoing basis, utilizing historical experience, consultation with experts and
other method we consider reasonable in the particular circumstances.
Nevertheless, actual results may differ significantly from our estimates. We
believe that certain accounting policies are of more significance in our
financial statement preparation process than others, as discussed below.

Computer Software Costs - we capitalize our software development product costs
after we have established technological feasibility and prior to the release of
our products for sale. Such costs are primarily based on the salaries of our
employees and contractors that contribute to the development of our products,
including a factor for related overhead. Once a product is released for sale, we
begin amortizing the capitalized costs on a straight-line basis over the
product's estimated economic life. On a periodic basis, we compare the
unamortized costs of our products to their estimated net realizable values. If
our estimates of net realizable value fall below the unamortized product costs,
the excess is charged directly to operations to reflect impairment. For our 2004
and 2003 fiscal years, we incurred approximately $4,000 and $26,000,
respectively, of charges for impairment of capitalized software development.

Revenue - our revenue is primarily derived from the license of software toolkits
and applications, royalties from customers based on those licenses, and fees for
technical support and product maintenance. We recognize license and royalty
revenue only after we have delivered the software, fulfilled all of our
significant obligations, and resolved any significant uncertainties regarding
customer acceptance. Technical support and product maintenance fees are deferred
and recognized as revenue on a straight-line basis over the applicable contract
period. Occasionally, technical support and product maintenance is bundled with
a software license fee. In such cases, we estimate the fair value of our
technical support and product maintenance obligations using the established fees
that we charge to other customers. Such revenue is deferred as a separate
element of the contract and recognized ratably over the applicable contract
period. Any remaining revenue is then recorded as the software license fee.

     Our revenue also includes amounts related to the performance of custom
software development services. Such revenue 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.
Provisions for losses, if any, are recorded at the time such losses are known.

Income Taxes - we account 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.

     Deferred tax assets are recognized when it is more likely than not that
those benefits from deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon our ability to generate
future taxable income during the periods in which the temporary differences that
create deferred tax assets become deductible. We consider the scheduled reversal
of deferred tax liabilities, projected future taxable income, past earnings
history, sales backlog and tax operating loss carryforward expiration dates when
determining the amount of deferred tax assets to recognize.

RESULTS OF OPERATIONS

     Following is selected financial information for each of our reportable
segments for the 2004 and 2003 fiscal years ended August 31.

Component Product Technologies Segment

<TABLE>
<CAPTION>
                                                     Dollar     Percent
                         2004          2003        (Decrease) (Decrease)
------------------ --------------- -------------- ----------- -----------
<S>                <C>                 <C>         <C>          <C>
Revenue            $    2,792,196      2,925,928   (133,732)     (4.6%)
------------------ --------------- -------------- ----------- -----------
Operating  income  $      645,951        781,053   (135,102)    (17.3%)
------------------ --------------- -------------- ----------- -----------
Operating income
  as % of revenue           23.1%         26.7%
------------------ --------------- -------------- ----------- -----------
</TABLE>


Revenue from the component product technologies segment is primarily derived
from licensing, royalties, custom development and customer support and
maintenance of our Prizm(R) web-based Viewer, ScanFix(R), Prizm(R) Image
Processing, Prizm(R) Gray, ViewDirector(TM) and FormFix(R) products. All revenue
is derived from external sources.

     In fiscal year 2004, one customer accounted for approximately $484,000, or
17%, of total revenue for this segment. In fiscal year 2003, that same customer
accounted for approximately $460,000, or 16%, of total revenue for this segment.
Revenue from this customer in fiscal year 2004 primarily represented custom
software development services for our Prizm web-based viewer product; whereas in
fiscal 2003 revenue from this customer was for Prizm web-based viewer license
fees. In both fiscal years, revenue for this customer also included ongoing
customer support and maintenance services under a contract that represented less
than 2% of our revenue in each year. Revenue from custom software development
services accounted for approximately $426,000, or 15%, of the total fiscal 2004
revenue for the segment. No custom software development was included in revenue
for fiscal year 2003. Increased revenue from custom software development
services was offset by lower licensing and royalty revenue in fiscal year 2004.

     We believe that the lack of widespread adoption of color and gray image
processing technologies in the document management marketplace has impacted our
ability to not only improve revenue for this segment, but also replace licensing
and royalty revenue from our more mature viewing and black and white image
processing products. Additionally, we believe that licensing and royalty revenue
from our viewing technology may continue to be impacted by increased competition
from low or no cost web-based viewing technologies and the expected increase in
demand for document images to be created or converted to Adobe's PDF file
format. The document management marketplace is also expected to continue to
migrate to more specialized technology solutions applicable to niche markets or
industries. Our products have typically been applicable across many types of
document imaging technology solutions, and although our development plans may
continue to include certain specialized applications targeted at niche markets
and developed through additional custom software development services, there can
be no assurance that we will be successful in penetrating our targeted niche
markets.

     The profitability of this segment has historically depended on our ability
to secure significant sales of multiple licenses and/or royalties to individual
customers. Except for the significant customer described above, no one customer
accounted for greater than 10% of total segment revenue for fiscal years 2004
and 2003. The lack of significant multiple license and/or royalty sales to
individual customers contributed to the decline in revenue and operating results
during the current year. In addition the increase in revenue from custom
development services also contributed to the decline in operating income for the
segment compared to last year because such revenue requires more direct labor
costs as compared to revenue from licensing and royalty sources.

     Because of the specific factors described above, our ability to predict the
timing and extent of revenue for this segment is difficult. Our inability to
secure additional significant revenue transactions with individual customers
and/or increase the volume through the release of new or enhanced products that
meet current market needs could have a material adverse affect on our business,
operating results and financial position.


Assessment Scoring Technologies Segment

<TABLE>
<CAPTION>
                            2004            2003
------------------- ----------------- ----------------
<S>                 <C>                     <C>
Revenue             $       134,876          191,483
------------------- ----------------- ----------------
Operating loss      $      (257,851)        (636,537)
------------------- ----------------- ----------------
</TABLE>

The financial results for this segment reflect operating activities associated
with the license and support of our Digital Mark Recognition(TM) ("DMR(R)")
software product and our 50% equity interest in VSC Technologies, LLC, an entity
that we formed with Measurement Incorporated in October 2002. Revenue for fiscal
years 2004 and 2003 was primarily derived from the license of DMR and the resale
of scanner equipment to Measurement Incorporated.

     We have an agreement with the LLC whereby we provide software development
services, at a fixed rate per hour. The segment's operating expenses were
reduced by approximately $320,000 and $360,000, for the fiscal years ended
August 31, 2004 and 2003, respectively, for such software development services.
Fifty percent of the software development services were billed to the LLC and
50% were recorded as an increase to our investment in the LLC. Additionally,
during the prior year first quarter and prior to the formation of the LLC we
received approximately $23,000 from Measurement Incorporated for partial funding
of the Virtual Scoring Center software product. Of that amount, $21,000 was
recorded as reduction to capitalized software development costs and the
remaining $2,000 reduced our research and development expense.

     The decrease in operating loss for fiscal year 2004 compared to last year
primarily resulted from a reduction in sales and marketing activities, lower DMR
development costs, and lower professional fees that were applicable in the prior
period for closing the LLC transaction. The operating loss for the current and
prior fiscal year included approximately $91,000 and $155,000, respectively, for
our 50% share of the LLC net loss, respectively.

     Measurement Incorporated is currently using the Virtual Scoring Center
software product on a limited basis for its own scoring operation. Based on
their use of the software, we believe that additional investment in the design
and development of the product will be required to make it more viable for both
Measurement Incorporated's and other general commercial use. Accordingly, we are
not yet actively marketing the product for license to third parties.

     Our agreement with the LLC includes a provision that allows us to receive
cash distributions at the end of each calendar year for five years beginning
December 31, 2002. Eligibility for such distributions, which are subject to
certain maximum amounts that graduate downward over the five-year period, is
based on whether our financial return from the LLC is at least equal to the
amount of software development cost that we have invested in the LLC. When and
if the LLC becomes profitable, we would be required to pay back such
distributions by foregoing a portion of future cash profits from the LLC. If we
sell our membership interest in the LLC, pursuant to our plan of liquidation
(see " Proposed Sale of Assets and Plan of Liquidation" in "Management's
Discussion and Analysis or Plan of Operation" below) we will not be required to
pay back such distributions. The funds received from the LLC pursuant to this
cash distribution arrangement and our software development services to the LLC,
described above, help mitigate the financial risk associated with the additional
development and delay in marketing the Virtual Scoring Center product to third
parties.

Total Company Operating Results

Following is a report of total company revenue and a reconciliation of
reportable segments' operating income to our total net loss for fiscal years
ending 2004 and 2003.

<TABLE>
<CAPTION>
                                        2004             2003
-----------------------------   ------------------- --------------
Total company revenue           $     2,927,072         3,117,411
-----------------------------   ------------------- --------------
<S>                             <C>                      <C>
Operating  income
  for reportable segments       $       388,100           144,516
Unallocated corporate expenses         (406,998)         (302,622)
Interest income                          16,878            19,874
Interest expense                         (4,811)          (16,013)
Loss  on  sale of property             (260,123)                -
Gain  on  sale of technology                  -           155,061
Other, net                                2,799               622
Income tax expense                       (1,415)         (484,500)
-----------------------------   ------------------- --------------
Net loss                        $      (265,570)         (483,062)
-----------------------------   ------------------- --------------
Loss per share:
  Basic                         $         (0.02)            (0.04)
  Diluted                                 (0.02)            (0.04)
-----------------------------   ------------------- --------------
</TABLE>


Lower costs from our Assessment Scoring Technologies segment was the primary
factor that contributed to the improvement in total segment operating results
for fiscal year 2004 compared to the last year. Unallocated corporate expenses
for fiscal year 2004 increased because of director's and officer's insurance,
board of directors' fees, professional fees associated with strategic planning
activities and transaction costs related to the pending asset sales to Pegasus
and Measurement Incorporated.

     The net loss for fiscal year 2004 was also impacted by a loss on the sale
of our Company's headquarters building (see "Property and Equipment" in the
Notes to the Financial Statements for further information). The net loss for
fiscal year 2003 included the $155,061 gain realized upon our transfer of the
Virtual Scoring Center technology to the LLC.

     The income tax provision for the fiscal year 2004 included the following
components: deferred tax benefit $98,863; increase in the valuation allowance
for deferred tax assets, $98,863; and expense for state income taxes, $1,415.
During the second quarter of fiscal year 2003 we made the decision to increase
our valuation allowance and reduce the carrying amount of our net deferred tax
assets because of our history of pre-tax losses and because our ability to time
the closing of significant revenue opportunities became more difficult.

Financial Condition

Working capital at August 31, 2004 was $1,375,218 with a current ratio of 3.1:1,
compared to $949,250 with a current ratio of 2.5:1 at August 31, 2003.

     Net cash provided by operations for fiscal year 2004 was approximately
$327,000 despite our net loss of approximately $266,000 for the year. Our net
loss for fiscal year 2004 included approximately $621,000 in non-cash items
related to the sale of the building and recurring depreciation and amortization
expense.

     Net cash provided by investing activities for fiscal year 2004 approximated
$145,000, which included approximately $431,000 in net proceeds from the sale of
our headquarters building, and an approximate $155,000 distribution from VSC
Technologies LLC. Pursuant to our agreement with the LLC, for the first five
years of LLC operations we are eligible to receive cash distributions at the end
of each calendar year beginning on December 31, 2002. We are eligible for such
distributions, subject to certain maximum amounts which graduate downward over
the five year period, if our financial return from the LLC is not at least equal
to the amount of software development cost that we have invested in the LLC.
When and if the LLC becomes profitable, we will be required to pay back such
distributions by foregoing a portion of future cash profits from the LLC. If we
sell our membership interest in the LLC, pursuant to our plan of liquidation
(see "Proposed Sale of Assets and Plan of Liquidation" in "Management's
Discussion and Analysis or Plan of Operation" below) we will not be required to
pay back such distributions. The $586,000 collectively received from the
building sale and the LLC cash distribution was offset by approximately $232,000
in software development costs for investment in new and enhanced software
products and the approximate $173,000 cash investment for our share of LLC
software development and other operating costs.

     Net cash flows used in financing activities for fiscal year 2004
approximated $197,000 and primarily represented the pay off of our building
mortgage upon final sale of the headquarters building.

     In January 2004 we renewed our line of credit with a bank that provides for
borrowing based on a percentage of certain eligible trade accounts receivable.
The maximum borrowing under the line of credit is $500,000. The maximum
borrowing amount was reduced to $500,000 from the $1,000,000 provided in the
prior year based on our history of eligible accounts receivable. At August 31,
2004, approximately $344,000 was available for borrowing under the line of
credit. There was no balance outstanding against our line of credit at August
31, 2004.

     We anticipate that our existing working capital, which includes the
$239,426 we received upon final sale and mortgage pay off on the headquarters
building and the annual cash distribution that we received pursuant to our
agreement with the LLC, and our line of credit will be adequate to meet our
current obligations and current operating and capital requirements.

Proposed Sale of Assets to Pegasus and Plan of Liquidation

On August 5, 2004, we entered into an agreement to sell substantially all of our
assets to Pegasus. The terms of the transaction along with a plan of liquidation
of the Company will be submitted to shareholders for approval at a special
meeting to be held on December 17, 2004. Our membership interest in VSC
Technologies, LLC is not part of the asset sale to Pegasus; however, in
September 2004 we reached an agreement in principle to sell our 50% membership
interest in the LLC to Measurement Incorporated. Immediately upon shareholder
approval, we plan to close the asset sale to Pegasus simultaneously with the
sale of our membership interest to Measurement Incorporated and then at some
future date, which is not currently estimable, we plan to make a one-time cash
distribution to shareholders and liquidate the Company.

     After considering many factors related to the historical financial
performance of the Company, the financial forecasts and future prospects for its
existing and planned new software products, the impact of the Sarbanes-Oxley Act
of 2002 and the rising costs of being publicly-held, and various strategic
alternatives potentially available to the Company, our board of directors
determined that the best and most likely means for maximizing shareholder value
and return, would be through a sale of the Company or substantially all of its
assets to a third party. We contacted, through certain of our business partners,
potential third party buyers and engaged in various negotiations prior to
recommending the proposals to sell substantially all of our assets to Pegasus
and adopt a plan of liquidation for the Company.

     The terms of the asset sale to Pegasus provide that we will sell all of our
assets associated with the Component Product Technologies business, which
represent substantially all of our assets, including cash, accounts receivable,
property and equipment, name and goodwill. Pegasus will assume all of our
ongoing obligations under existing customer agreements, as well as certain
liabilities associated with office leases, employee expenses and accounts
payable. We currently estimate that the purchase price will be $2.2 million (not
including the liabilities assumed). A portion of the purchase price
(approximately $600,000) will be payable in the form of a promissory note which
will be due on the earlier of the date that we liquidate or August 15, 2005. The
total purchase price, including the note, is subject to adjustment based on
certain elements of working capital, including collection of accounts receivable
and final acceptance of a custom software development project by a certain
customer.

     Our agreement with Measurement Incorporated provides that we will sell our
membership interest in VSC Technologies, LLC in exchange for $250,000 and
complete indemnification against the pending litigation with NCS Pearson (see
"Legal Proceedings").

     Upon approval by our shareholders, we plan to use the cash proceeds from
the asset sale to Pegasus and the sale of our membership interest in the LLC to
make a one-time cash distribution to our shareholders upon liquidation. We
currently estimate that such distribution will result in proceeds to the
shareholders of between $0.145 and $0.16 per share. In determining the estimated
range of distribution, we considered the estimated $2.2 million that we will
receive from Pegasus, the $250,000 that we will receive from Measurement
Incorporated, and the estimated costs for (i) professional fees related to
preparation of sale agreements, preparation and distribution of proxy materials,
proxy solicitation services, preparation of tax returns and similar items, (ii)
certain insurance premiums and (iii) certain taxes. Such costs are not expected
to exceed $415,000.

     The amount of the final distribution to shareholders, however, is dependent
upon a number of conditions and events, many of which are beyond our power to
control, including our ability to be dismissed from the litigation with NCS
Pearson and the impact of collection of accounts receivable and final acceptance
of a custom software development project by a certain customer on the final
purchase price from Pegasus. Accordingly, we have developed an estimated
contingency reserve of $130,000 for unknown matters in an effort to account for
such conditions and events; however, no assurance can be given as to the
accuracy of such reserve or the actual amount of liquidation proceeds that will
be available for distribution. Such reserve is not accrued in the financial
statement at August 31, 2004. The timing of the distribution to shareholders is
not currently estimable as it is primarily dependent upon our ability to be
dismissed from the litigation with NCS Pearson.

     The affirmative vote of at least two-thirds of the outstanding shares of
our common stock is required to approve the sale of assets and plan of
liquidation. We have expended considerable time, effort and expense in pursuing
opportunities related to the sale of the Company or substantially all of the
assets. If the sale of assets to Pegasus and/or the plan of liquidation are not
approved by the shareholders there can be no assurance that there will be other
opportunities that would result in the shareholders receiving more or any return
from the Company. Although we have continued to maintain our existing products
and customer base, certain of our marketing, technical and sales employees have
recently resigned from the Company and we believe that if we had to continue to
operate in the ordinary course and bear the increasing demands and rising costs
of being publicly-held, that our working capital will deteriorate which could
ultimately impact our ability to fund ongoing operations.

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 may 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
with many competing 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, Visionshape and Adobe. 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.

     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, Riverside Publishing and Scan-Optics. We believe that
the Virtual Scoring Center and the Digital Mark Recognition software products
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 are party to a lawsuit involving the Virtual Scoring Center technology
in which counterclaims have been filed against us, Measurement Incorporated and
VSC Technologies, LLC, which assert infringement of thirteen patents held by NCS
Pearson. We do not believe that the Virtual Scoring Center technology infringes
the NCS Pearson patents and we designed that technology to carefully avoid
infringement, but we cannot assure you that we will be successful in our defense
against NCS Pearson's counterclaims. See "Legal Proceedings" for further
information about this lawsuit.

     We cannot assure you that other 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.

     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.

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 years 2004 and 2003,
individual customers accounted for 15% and 13%, 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.

If our shareholders do not approve our proposed sale of assets to Pegasus and
the plan of liquidation, our working capital may continue to deteriorate, which
could ultimately impact our ability to fund ongoing operations.

On August 5, 2004, we entered into an agreement to sell substantially all of our
assets to Pegasus. The terms of the transaction along with a plan of liquidation
of the Company will be submitted to shareholders for approval at a special
meeting to be held on December 17, 2004. Our membership interest in VSC
Technologies, LLC is not part of the asset sale to Pegasus; however, in
September 2004 we reached an agreement in principle to sell our 50% membership
interest in the LLC to Measurement Incorporated. Immediately upon shareholder
approval, we plan to close the asset sale to Pegasus simultaneously with the
sale of our membership interest to Measurement Incorporated and then at some
future date, which is not currently estimable, we plan to make a one-time cash
distribution to shareholders and liquidate the Company.

     The affirmative vote of at least two-thirds of the outstanding shares of
our common stock is required to approve the sale of assets and plan of
liquidation. We have expended considerable time, effort and expense in pursuing
opportunities related to the sale of the Company or substantially all of the
assets. If the sale of assets to Pegasus and/or the plan of liquidation are not
approved by the shareholders there can be no assurance that there will be other
opportunities that would result in the shareholders receiving more or any return
from the Company. Although we have continued to maintain our existing products
and customer base, certain of our marketing, technical and sales employees have
recently resigned from the Company and we believe that if we had to continue to
operate in the ordinary course and bear the increasing demands and rising costs
of being publicly-held, that our working capital will deteriorate and ultimately
impact our ability to fund ongoing operations.

Impact of Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revised version of FASB Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". FIN 46 sets forth
guidance to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties.

     We have a 50% equity interest in VSC Technologies, LLC. The LLC qualifies
as a variable interest entity. An equity investor is required to consolidate a
variable interest entity if it is deemed the "primary beneficiary". The primary
beneficiary is defined as the investor that is expected to either absorb the
majority of the entity's expected losses, receive a majority of the entity's
expected residual returns, or both. We are in the process of evaluating whether
we qualify as the primary beneficiary of the LLC. If we are required to
consolidate the LLC in accordance with this Interpretation, the financial
effects will be implemented in our second quarter of fiscal 2005. We have also
evaluated our exposure to economic loss as a result of our involvement with the
LLC, and estimate that from the inception of the LLC in October 2002 through
December 31, 2005, that our maximum exposure to economic loss approximates
$250,000.

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.

ITEM 8A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-14 under the Securities Exchange
Act of 1934). Based upon that evaluation, the President and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.

ITEM 8B. OTHER INFORMATION.

On August 12, 2004, we filed a report on Form 8-K pursuant to Item 5. "Other
Events and Regulation FD Disclosure", to disclose that we entered into an
agreement to sell the assets of our Component Products Technology division to
Pegasus Imaging Corporation which is subject to shareholder approval.


Part III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

     Don Brown, Jr., 54, has served as a Director of the Company since June
2003. Mr. Brown has served as the managing partner of A&B Industries LLC, a
privately held company that operates construction-related companies in Cleburne,
Texas, since 1999. From 1976 to 1999, Mr. Brown was employed by The First State
Bank of Rio Vista as Senior Investments Officer. Mr. Brown graduated from Baylor
University with a Bachelor's degree in Business Administration.

     Arthur D. Crotzer, 53, was appointed to the Company's Board of Directors on
December 1, 2003. Mr. Crotzer was employed by the Company in various technical
management capacities from 1983 to 1999, and served as a Director and as the
President and Chief Executive Officer of the Company from October 1997 to
January 1999. Since October 2000, Mr. Crotzer has held a technical and business
management position with Nomadics, Inc., a national technology research and
development firm. From April 1999 to September 2000, Mr. Crotzer was Director of
e-business Consulting Services for Netplex, Inc., an information technology
services company. Mr. Crotzer earned a Bachelor of Science degree in math and
physics from Austin Peay State University and a Master of Science degree in
computer science from Oklahoma State University.

           Deborah D. Mosier, 37, has served as a Director since December 2003,
the Company's President since August 2003 and as the Principal Financial Officer
since 1996. Ms. Mosier also served as the Company President from September 1999
through June 2002. She joined TMS in 1995 as Controller of Financial Operations
and was appointed Chief Financial Officer in 1996. From 1989 to 1996, Ms. Mosier
worked in the audit practice of KPMG LLP. Ms. Mosier received her Bachelor of
Science Degree with a major in accounting from Oklahoma State University and is
a Certified Public Accountant.

     Russell W. Teubner, 49, was appointed to the Company's Board of Directors
on December 1, 2003. Mr. Teubner served as Chairman of the Board of Directors of
the Company from January 2000 through February 2002, and as a Director of the
Company from March 1999 to March 2003. Mr. Teubner has served as Founder and
Chief Executive Officer of HostBridge Technology since 1998. From 1983 to 1998,
he served as Chief Executive Officer of Teubner & Associates, a software firm
that he founded. Mr. Teubner also serves as a Director of Esker, S.A. (a
publicly held French software company) and Southwest Bancorp (NASDAQ:OKSB). Mr.
Teubner graduated from Oklahoma State University with a Bachelor of Science
degree in Management Science and Computer Systems.

     Directors are elected by the Company's shareholders at each annual meeting
of the shareholders. If the Company's shareholders approve the sale of
substantially all of the Company's assets to Pegasus and the plan of liquidation
for the Company at the special shareholder's meeting on December 17, 2004, we
expect that each of the named Directors will continue to serve as directors
through the liquidation and winding up of the Company's affairs. If the sale of
assets and plan of liquidation is not approved, each of the named directors is
expected to serve as directors until the next annual meeting of shareholders.

Audit Committee Financial Expert

     Messrs. Brown and Crotzer currently serve on the Company's audit committee,
and although each possesses extensive business and financial experience, they do
not meet the "financial expert" requirements set forth in the rules established
pursuant to the Sarbanes-Oxley Act of 2002. If the Company's shareholders
approve the sale of substantially all of the Company's assets to Pegasus and the
plan of liquidation for the Company at the special shareholder's meeting on
December 17, 2004, the Company will not seek to find a "financial expert" as
defined under the Sarbanes-Oxley Act of 2002. If the shareholders do not approve
the sale of assets and plan of liquidation for the Company, the Company
Directors plan to consider options for attracting a qualified financial expert
to serve on the audit committee.

Compliance With Section 16(a) of the Exchange Act

     Section 16(a) of the Securities Exchange Act of 1934 and the rules
promulgated thereunder require that certain officers, directors and beneficial
owners of the Company's Common Stock file various reports with the Securities
and Exchange Commission. Based solely upon a review of such reports filed with
the SEC, we believe that no late reports were filed for the fiscal year ended
August 31, 2004.

Code of Ethics

     The Company has adopted a Code of Ethics that applies to the Company's
principal executive and financial officer. A copy of the Code of Ethics was
filed as an exhibit to its Form 10-KSB for the year ended August 31, 2003. The
Code of Ethics is also available on the Company's Internet website at
www.tmsinc.com.

ITEM 10.  EXECUTIVE COMPENSATION

     The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years awarded to or earned by our Chief Executive
Officer. No executive officer, other than the Chief Executive Officer, earned
more than $100,000 total annual salary and bonus during such period.

                                                                     Long-term
                                              Annual Compensation   Compensation
                                            ----------------------- ------------
                                                                      Restricted
                                                      Other Annual      Stock
                                            Salary    Compensation    Awards (1)
   Name and Principal Position        Year    ($)         ($)           ($)
------------------------------------- ----  --------- ------------- ------------
Deborah D. Mosier - President (2)     2004  150,000       4,500              -
                                      2003   61,539       1,846              -
                                      2002  118,333       3,838          2,700

Deborah L. Klarfeld - President (3)   2003  130,848       3,750              -
                                      2002  108,333       3,375              -
_______________

(1)  On September 24, 1999, our Board of Directors approved a restricted stock
     grant in the amount of 50,000 shares of common stock. The shares were
     issued at a rate of 1,000 shares per month. The restricted stock grant
     terminated upon the resignation of Ms. Mosier as our President on July 1,
     2002. Based on the $.27 per share market price on the date of grant, the
     value of the shares issued to Ms. Mosier was $2,700.

(2)  Ms. Mosier was the President from September 1999 to July 2002, the
     Principal Financial Officer from August 2002 to July 2003 and was
     reappointed as President and Principal Financial Officer in August 2003.
     "Other Annual Compensation" includes employer matching contributions to our
     defined contribution plan.

(3)  Ms. Klarfeld was President from July 2002 to August 2003. "Other Annual
     Compensation" includes employer matching contributions to our defined
     contribution plan.


Compensation of Directors
-------------------------

Effective December 1, 2003, each non-employee director received a monthly fee
for service of $500. In addition, each non-employee director received $1,500 for
each board of directors meeting attended in person and $750 for each board of
directors meeting attended by telephone. No additional compensation was received
by any director for services related to the committees of the board of
directors. During fiscal year 2004, the total amount paid to non-employee
directors approximated $31,000.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

The following table sets forth information regarding the beneficial ownership of
shares of the Company's Common Stock as of October 22, 2004, by each shareholder
known to the Company to be a beneficial owner of more than 5% of the Company's
Common Stock. Unless otherwise indicated, the beneficial owner has sole voting
and investment power with respect to such shares of Common Stock.

Name and Address              Amount and Nature of            Percent of
of Beneficial Owner           Beneficial Ownership              Class
-------------------           --------------------              -----

John Gentile                        785,600   (1)               6.0%
6045 Southwest 58th Court
Davie, Florida  33314

Russell W. Teubner                  677,450                     5.2%
5715 Woodlake Drive
Stillwater, Oklahoma 74074
_________________

(1)  Includes 568,200 shares which are held by Mr. Gentile jointly with his
     mother, with whom he shares voting and investment power.


     The following table sets forth information regarding the beneficial
ownership of shares of the Company's Common Stock as of September 20, 2004 by
each director and executive officer individually and as a group. Unless
otherwise indicated, the beneficial owner has sole voting and investment power
with respect to such shares of Common Stock.

Name and Address                               Amount and Nature of  Percent of
of Beneficial Owner                            Beneficial Ownership  Class  (1)
-------------------                            --------------------  ----------

Directors:

Russell W. Teubner                                    677,450           5.2%
5715 Woodlake Drive
Stillwater, Oklahoma 74074

Don Brown, Jr.                                        316,333 (2)       2.4%
7715 E. Highway 4
Grandview, Texas 76050

Arthur D. Crotzer                                      80,000 (3)        .6%
1823 W. University
Stillwater, Oklahoma  74074

Director and Executive Officer:

Deborah D. Mosier                                     149,000 (4)       1.1%
5811 Trenton Ave.
Stillwater, Oklahoma 74074

All directors and executive officers as a group     1,222,783 (5)       9.3%
_______________

(1)  Shares of common stock subject to exercisable options are deemed
     outstanding for purposes of computing the percentage for such person but
     are not deemed outstanding in computing the percentage of any other person.

(2)  Includes (i) 4,200 shares held by Mr. Brown's wife, Patricia, with whom he
     shares voting and investment power; and (ii) 132,236 shares held in a
     family limited partnership, of which Mr. Brown is the sole general partner
     and for which Mr. Brown has sole voting and investment power. Also includes
     24,000 shares held by Mr. Brown's parents, for which Mr. Brown has sole
     voting and investment power, but disclaims beneficial ownership.

(3)  All shares are held jointly with Mr. Crotzer's wife, Reta, with whom he
     shares voting and investment power.

(4)  Includes 47,000 shares held by Ms. Mosier in joint tenancy with her
     husband, Gregory, with whom she shares voting and investment power and
     102,000 shares subject to currently exercisable common stock options.

(5)  Includes 131,200 shares as to which directors and executive officers share
     voting and investment power with others and 102,000 shares subject to
     currently exercisable common stock options.


Changes in Control
------------------

We are not aware of any arrangements (including any pledge by a person of our
securities) that would result in a change of control.


Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------

<TABLE>
<CAPTION>

                                       Number of securities to be   Weighted average   Number of securities
                                         issued upon exercise of    exercise price of        remaining
                                          outstanding options,    outstanding options, available for future
           Plan category                   warrants and rights     warrants and rights       issuance
------------------------------------ ---------------------------- -------------------- ---------------------

<S>                                        <C>                             <C>         <C>
Equity compensation plans
  approved by
  security holders                                     -                       -                   -

Equity compensation plans
  not approved by security
  holders <F1>                                   364,500                   $0.32                   -
                                           -------------                               -------------
Total
                                                 364,500                   $0.32                   -
                                           =============                               =============
_______________

<FN>

<F1> Pursuant to resolutions made by our board of directors, options to purchase
     common stock have been issued to certain former directors and our current
     executive officer. 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,
     have vesting periods ranging from 0 to 5 years, and expire during periods
     ranging from 5 to 10 years from the date of grant.
</FN>
</TABLE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On October 10, 2002, the Company entered into an agreement with Measurement
Incorporated to further develop certain software technology and bring it to
market through a new entity, VSC Technologies, LLC. Henry H. Scherich, Ph.D.,
who served as a director for the Company from June 2003 through July 2004, is
the President, Chief Administrative Officer and majority owner of Measurement
Incorporated.

     Under the terms of that agreement, the Company transferred is rights in the
Virtual Scoring Center(R) technology to VSC Technologies, LLC in exchange for a
one-time cash payment of $250,000 and a 50% ownership interest in the LLC.
Measurement Incorporated has the remaining 50% ownership interest in the LLC.

     No officer or director had any other direct or indirect material
transactions during the last two years, or proposed transactions for which the
Company was or is to be a party.

ITEM 13. EXHIBITS

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

EXHIBIT NO.     NAME OF EXHIBIT
-----------     ---------------

3.1          Certificate of Incorporation of the Registrant, as amended,
             incorporated by reference to Exhibit No. 3.1 to the Registrant's
             Form 10-KSB for the fiscal year ended August 31, 1995.

3.2          Bylaws of the Registrant, as amended on September 24, 1999,
             incorporated by reference to Exhibit No. 3.2 to the Registrant's
             Form 10-KSB for the fiscal year ended August 31, 2000.

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

10.3*        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.

10.4         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.

10.5         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.

10.6         Purchase Contract number W 311266 between the Registrant and the
             Boeing Company, incorporated herein by reference to Exhibit No.
             10.6 to the Registrant's Form 10-KSB for the year ended August 31,
             2004.

10.7         Real Estate Purchase Contract, incorporated herein by reference to
             Exhibit No. 10.1 on Form 8-K filed October 31, 2003.

10.8         Purchase Contract numbers 370501, 3039773, and 3045763 between the
             Registrant and the Boeing Company.

10.9         Asset Purchase Agreement between the Registrant, PIC Acquisition,
             Inc. and Pegasus Imaging Corporation, incorporated herein by
             reference to Exhibits 10.1 and 10.2 on Form 8-K filed October 29,
             2004.

14.1         TMS, Inc. Code of Ethics and Business Conduct, incorporated herein
             by reference to Exhibit No. 14.1 on Form 10-KSB for the year ended
             August 31, 2003.

23.1         Consent of KPMG LLP

31.1         Certification of Principal Executive and Financial Officer Pursuant
             to SEC Rule 13a-14

32.1         Certification of Principal Executive and Financial Officer Pursuant
             to 18 U.S.C. Section 1350


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following sets forth the fees related to the Company's independent auditors,
KPMG LLP, for the fiscal years ended August 31, 2004 and 2003.

     Audit Fees
     ----------
     Fees for the fiscal year 2004 and 2003 audit and reviews of the Forms
     10-QSB, were $72,000 and $65,725, respectively.

     Audit-Related Fees
     ------------------
     The Company incurred audit consultation fees of $1,750 and $4,000 in fiscal
     years 2004 and 2003, respectively, for research of certain accounting and
     disclosure matters related to FIN 46 in 2004, and the formation of VSC
     Technologies, LLC in 2003.

     Tax Fees
     --------
     The Company incurred tax fees of $8,500 and $8,000 during fiscal years 2004
     and 2003, respectively, related to the preparation of our state and federal
     income tax returns. The Company also incurred tax consultation fees of
     $2,725 for matters related to the sale and liquidation of the Company
     during fiscal year 2004.

     All Other Fees
     --------------
     The Company incurred no fees other than what is disclosed above with
     respect to its independent auditors, KPMG LLP, for fiscal years 2004 and
     2003.


Audit Committee
---------------

The Company's Board of Directors established an audit committee on September 2,
2003. The audit committee charter requires that the audit committee review and
approve, in advance of any audit or allowable nonaudit engagement, the nature
and fees associated with such services.

     Pursuant to rules established by the Securities Exchange Commission,
certain nonaudit services are prohibited from being performed by independent
auditors engaged to prepare or issue an audit report or perform other audit,
review or attest services for the Company. Accordingly, the audit committee is
not permitted to approve any prohibited nonauditing services.

     For fiscal year 2004 the Company's audit committee approved all fees for
services by the Company's independent auditors. In fiscal year 2003, the Company
did not have an audit committee and the board of directors did not approve any
of the fees for services performed by the Company's independent auditors.
<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                 REGISTRANT: TMS, INC.

Date:    11/10/04                BY:  /s/ Deborah D. Mosier
                                          Deborah D. Mosier, President and
                                            Chief Financial Officer
                                          Principal Executive and Financial
                                            Officer


In accordance with the Exchange Act, 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:    11/10/04           BY: /s/ Don Brown, Jr.
                                    Don Brown, Jr., Director

Date:    11/10/04           BY: /s/ Arthur D. Crotzer
                                    Arthur D. Crotzer, Director

Date:    11/10/04           BY: /s/ Deborah D. Mosier
                                    Deborah D. Mosier, President and
                                      Chief Financial Officer
                                    Principal Executive and Financial
                                      Officer, Director

Date:    11/10/04           BY: /s/ Russell W. Teubner
                                    Russell W. Teubner, Director
<PAGE>

                                INDEX TO EXHIBITS

Exhibit
  No.         Description                        Method of Filing
  ---         -----------                        ----------------

3.1  Certificate of Incorporation of the       Incorporated herein by reference
     Registrant, as amended

3.2  Bylaws of the Registrant, as amended on   Incorporated herein by reference
     September 24, 1999

10.1 Employee Stock Option Plan                Incorporated herein by reference

10.2 Employee Incentive Stock Option Plan      Incorporated herein by reference

10.3 TMS, Inc. Employee Stock Purchase Plan    Incorporated herein by reference

10.4 Corporate Software License Agreement      Incorporated herein by reference
     between the Registrant and The Boeing
     Company

10.5 Development Agreement between the         Incorporated herein by reference
     Registrant and The Boeing Company

10.6 Purchase Contract number W 311266 between Incorporated herein by reference
     the Registrant and the Boeing Company

10.7 Real Estate Purchase Contract             Incorporated herein by reference

10.8 Purchase Contract numbers 370501,         Filed herewith electronically
     3039773, and 3045763 between the
     Registrant and the Boeing Company

10.9 Asset Purchase Agreement between the      Incorporated herein by reference
     Registrant, PIC Acquisition, Inc. and
     Pegasus Imaging Corporation

14.1 TMS, Inc. Code of Ethics and Business     Incorporated herein by reference
     Conduct

23.1 Consent of KPMG LLP                       Filed herewith electronically

31.1 Certification of Principal Executive and  Filed herewith electronically
     Financial Officer Pursuant to SEC Rule
     13a-14

32.1 Certification of Principal Executive and  Filed herewith electronically
     Financial Officer Pursuant to 18 U.S.C.
     Section 1350
<PAGE>


INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE                                    PAGE
                                                                -----

Report of Independent Registered Public Accounting Firm ......    F1

Financial Statements

     Balance Sheets: August 31, 2004 and 2003 ................    F2 and F3

     Statements of Operations: Years Ended
         August 31, 2004 and 2003 ............................    F4

     Statements of Shareholders' Equity:
         Years Ended August 31, 2004 and 2003 ................    F5

     Statements of Cash Flows: Years Ended
         August 31, 2004 and 2003 ............................    F6

     Notes to Financial Statements:
         August 31, 2004 and 2003 ............................    F7 through F19

Financial Statement Schedule:
         Schedule II -- Valuation and Qualifying Accounts:
         Years Ended August 31, 2004 and 2003 ................    F20

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 THE
FINANCIAL STATEMENTS.

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit 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, 2004 and 2003 and the results of its operations and its cash flows
for the years then ended in conformity with United States generally accepted
accounting principles. 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
November 8, 2004
<PAGE>

<TABLE>
BALANCE SHEETS
AUGUST 31, 2004 AND 2003
<CAPTION>
TMS, Inc. (dba TMSSequoia)                                         2004          2003
------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
Assets

Current assets:
  Cash and cash equivalents                                    $ 1,404,542      1,129,470
  Trade accounts receivable, net of allowance for doubtful
    accounts of $4,786 in 2004 and $10,879 in 2003                 334,377        387,802
  Due from related parties                                          42,835         29,779
  Custom development work in process                               201,981              -
  Prepaid expenses and other current assets                         29,028         33,295
  Deferred income taxes                                              5,192          8,431
                                                               -----------    -----------
  Total current assets                                           2,017,955      1,588,777
                                                               -----------    -----------
Property and equipment:
  Land                                                                   -        111,000
  Building                                                               -        744,372
  Computer equipment                                               287,057      1,252,472
  Furniture and fixtures                                           279,247        341,723
                                                               -----------    -----------
                                                                   566,304      2,449,567
  Less accumulated depreciation and amortization                  (470,130)    (1,639,414)
                                                               -----------    -----------
  Net property and equipment                                        96,174        810,153
                                                               -----------    -----------
Other assets:
  Capitalized software development costs, net of accumulated
    amortization of $1,238,091 in 2004 and $932,524 in 2003        391,496        469,319
  Other assets                                                      46,510         42,863
                                                               -----------    -----------
  Total other assets                                               438,006        512,182
                                                               -----------    -----------
Total assets                                                   $ 2,552,135      2,911,112
                                                               ===========    ===========


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                                                   2004          2003
------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity

Current liabilities:
  Current installments of long-term debt                       $         -        31,320
  Accounts payable                                                 139,980       109,204
  Accrued payroll expenses                                         140,127       197,423
  Deferred revenue                                                 362,630       301,580
                                                               -----------    -----------
  Total current liabilities                                        642,737       639,527
Long-term debt, net of current installments                              -       166,950
Investment in limited liability company                            110,839        38,392
Deferred income taxes                                                5,192         8,431
                                                               -----------    -----------
  Total liabilities                                                758,768        853,300
                                                               -----------    -----------
Shareholders' equity:
  Preferred stock, $.01 par value.  Authorized 1,000,000
    shares; none issued                                                  -              -
  Common stock, $.05 par value.  Authorized - 50,000,000
    shares; issued and outstanding -  13,121,659 shares in
    2004 and 13,112,659 shares in 2003                             656,083        655,633
  Additional paid-in capital                                    11,349,558     11,348,883
  Accumulated deficit                                          (10,212,274)    (9,946,704)
                                                               -----------    -----------
  Total shareholders' equity                                     1,793,367      2,057,812
                                                               -----------    -----------
Commitments and Contingencies (Notes 8 and 10)
                                                               -----------    -----------
Total liabilities and shareholders' equity                     $ 2,552,135      2,911,112
                                                               ===========    ===========
</TABLE>
<PAGE>

<TABLE>
STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2004 AND 2003
<CAPTION>
TMS, Inc. (dba TMSSequoia)                           2004            2003
------------------------------------------------------------------------------
<S>                                              <C>             <C>
   Licensing and royalties                       $  1,768,323       2,383,153
   Custom software development services               426,471               -
   Customer support and maintenance                   654,066         599,548
   Other                                               78,212         134,710
                                                 ------------    ------------
         Total revenue                              2,927,072       3,117,411
   Cost of revenue                                    677,400         630,186
   Selling, general and administrative expense      1,632,550       1,888,827
   Research and development expense                   545,457         601,246
   Loss in limited liability company                  (90,563)       (155,258)
                                                 ------------    ------------
        Operating loss                                (18,898)       (158,106)
  Other income (expense):
     Interest income                                   16,878          19,874
     Interest expense                                  (4,811)        (16,013)

     Loss on sale of property                        (260,123)              -
     Gain on sale of technology                             -         155,061
     Other, net                                         2,799             622
                                                 ------------    ------------
         Loss (income) before income taxes           (264,155)          1,438
  Income tax expense                                    1,415         484,500
                                                 ------------    ------------
         Net loss                                $   (265,570)       (483,062)
                                                 ------------    ------------
Net loss per share:
   Basic                                         $      (0.02)          (0.04)
   Diluted                                              (0.02)          (0.04)
                                                 ------------    ------------
Weighted average shares:
   Basic                                           13,113,026      13,112,659
   Diluted                                         13,113,026      13,112,659
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

<PAGE>

<TABLE>
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, 2004 AND 2003
<CAPTION>
                                       Common Stock
                                       ------------             Additional    Accumulated    Total Shareholders'
TMS, Inc. (dba TMSSequoia)         Shares         Amount     Paid-in Capital   Deficit            Equity
----------------------------------------------------------------------------------------------------------------

<S>                              <C>           <C>             <C>          <C>                 <C>
Balance at August 31, 2002       13,112,659    $   655,633     11,348,883    (9,463,642)        $  2,540,874
Net loss                                                                       (483,062)            (483,062)
Balance at August 31, 2003       13,112,659        655,633     11,348,883    (9,946,704)           2,057,812
Issuance of common stock upon
  exercise of options                 9,000            450            675             -                1,125

Net loss                                  -              -              -      (265,570)            (265,570)
                                 ----------    -----------     ----------    ----------         ------------
Balance at August 31, 2004       13,121,659    $   656,083     11,349,558   (10,212,274)        $  1,793,367
                                 ==========    ===========     ==========   ===========         ============
</TABLE>


SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>

<TABLE>
STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 2004 and 2003
<CAPTION>
TMS, Inc. (dba TMSSequoia)                                                                  2004         2003
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>           <C>
Cash flows from operating activities:
     Net loss                                                                          $  (265,570)     (483,062)
     Adjustments to reconcile net loss to net cash provided by operating activities:
          Depreciation and amortization                                                    361,350       436,980
          Deferred income tax expense                                                            -       484,500
         (Gain) Loss on disposal of equipment                                                 (695)        1,274
          Loss on sale of property                                                         260,123             -
          Gain on sale of technology                                                             -      (155,061)
          Loss in limited liability company                                                 90,563       155,258
          Loss on write-off of software development                                          4,083        26,525
          Provision for returns and doubtful accounts                                      (15,129)       (5,326)
          Net change in:
             Trade accounts receivable                                                      68,554       212,023
             Due from related parties                                                      (13,056)        3,964
             Custom development work in process                                           (201,981)            -
             Prepaid expenses and other assets                                               4,267         7,639
             Accounts payable                                                               30,776       (19,298)
             Accrued payroll expenses                                                      (57,296)      (26,365)
             Deferred revenue                                                               61,050      (130,324)
                                                                                       -----------   -----------
     Net cash provided by operating activities                                             327,039       508,728
                                                                                       -----------   -----------
Cash flows from investing activities:
     Purchases of property and equipment                                                   (34,992)      (38,068)
     Proceeds from sale of property                                                        431,226             -
     Proceeds for the sale of technology                                                         -       250,000
     Capitalized software development costs                                               (231,823)     (325,247)
     Investment in limited liability company                                              (173,038)     (221,928)
     Distribution from limited liability company                                           154,922       200,000
     Other, net                                                                             (1,117)        1,541
                                                                                       -----------   -----------
     Net cash provided by (used in) investing activities                                   145,178      (133,703)
                                                                                       -----------   -----------
Cash flows from financing activities:
     Repayment of long-term debt                                                          (198,270)      (29,105)
     Proceeds from exercise of common stock options                                          1,125             -
                                                                                       -----------   -----------
     Net cash used in financing activities                                                (197,145)      (29,105)
                                                                                       -----------   -----------
Net increase in cash and cash equivalents                                                  275,072       345,920
Cash and cash equivalents at beginning of year                                           1,129,470       783,550
                                                                                       -----------   -----------
Cash and cash equivalents at end of year                                               $ 1,404,542     1,129,470
                                                                                       -----------   -----------
Noncash investing activity:
     Investment in limited liability company through contribution of technology        $         -        94,939
                                                                                       -----------   -----------
     Cash paid for interest                                                            $     4,811        16,013
                                                                                       -----------   -----------
     Cash paid for income taxes                                                        $     1,415             -
                                                                                       ===========   ===========
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>

NOTES TO FINANCIAL
STATEMENTS AUGUST 31,
2004 AND 2003

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 and forms processing. The Company is also developing technologies to
improve the overall process of scoring standardized tests in the educational
marketplace. In October 2002, the Company and Measurement Incorporated, a
leading provider of educational scoring services, formed VSC Technologies, LLC
to continue to develop and market certain scoring-related technologies (See
"Note 10").

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 and certificates of deposit with an original maturity of six 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 $231,823 and
$325,248 of software development costs, which primarily includes personnel
costs, in 2004 and 2003, 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. The Company applied approximately $44,000 and $169,000 of
customer funding against capitalized software costs in fiscal year 2004 and
2003, respectively. Prior to the formation of VSC Technologies, LLC, in fiscal
2003, the Company also received approximately $23,000 in funding from
Measurement Incorporated of which $21,000 was applied against capitalized
software and $2,000 was credited against research and development expense.

     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 using a straight-line rate over the product's remaining
estimated economic life. The Company amortized $305,563 and $354,892 of software
development costs in 2004 and 2003, 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. During fiscal years 2004 and 2003, the Company charged
$4,083 and $26,525 to research and development expense to write down unamortized
software development costs, respectively.

Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation on the building was
calculated using the straight-line method over thirty-nine years. Depreciation
on equipment and furniture is calculated using the straight-line method over
periods ranging from three to ten years, but not more than the estimated useful
life of the property. Depreciation expense was $52,995 and $79,556 for 2004 and
2003, respectively.

     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.

     During fiscal year 2004, the Company sold its corporate headquarters'
building located in Stillwater, Oklahoma. The new owner of the building is an
individual, Jevon Nasalroad, who purchased the property for investment purposes.
The Company is now a tenant in the building and has leased approximately 5,500
square feet of space for a minimum of two years at an annual cost of
approximately $56,000. The contracted purchase price of the building was
$460,000. The net proceeds from the sale, after closing costs, were $431,226 and
were used to pay off a $191,800 mortgage.

     During the first quarter ended November 30, 2003, the Company's net loss
included a $266,537 write-down to reflect an impairment of the value of the
property sold. The amount of the impairment was based on the amount that the net
book value of the property exceeded the contracted purchase price plus estimated
costs incurred for the final sale. During the second quarter ended February 29,
2004, the Company adjusted the impairment cost from $266,537 to $260,123 to
reflect the actual final loss on the building sale.

Patent Costs
------------
Included in other assets at August 31, 2004 and 2003, is the following
associated with obtaining patent rights for certain software products:

<TABLE>
<CAPTION>
                                August 31,  August 31,
                                  2004        2003
                                ----------  ----------
<S>                             <C>         <C>
Software patents - approved     $ 65,042     43,154
Less accumulated amortization    (20,518)   (17,726)
                                --------     ------
                                  44,524     25,428

Software patent - pending              -     15,449
                                --------     ------
   Total patent costs, net      $ 44,524     40,877
                                ========     ======
</TABLE>


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 May 2004, the United States Patent and
Trademark Office approved the Company's patent related to its DMR(R) technology.
Costs associated with the DMR(R) patent are being amortized using the
straight-line method over the ten-year life. Amortization expense was $2,792 and
$2,531 in fiscal 2004 and 2003, respectively. In fiscal 2004, the Company
incurred and capitalized $6,439 related to the maintenance or acquisition of new
patents.

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, 2004 and 2003,
deferred technical support and product maintenance revenue was $362,630 and
$301,580, 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, 2004 and 2003, there was no deferred revenue
attributable to software products and/or enhancements expected to be delivered
or accepted in the future.

     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 2004 and
2003, the Company recognized revenue of approximately $44,000 and $437,000,
respectively, which represented the excess of customer funding over the cost of
the product development.

     Revenue also includes amounts related to the performance of custom software
development services. Such revenue is recognized as the services are performed
using the percentage-of-completion method, based on hours of work, and is
deferred to the extent that customer billings or payments exceed the percentage
complete. Provisions for losses, if any, are recorded at the time such losses
are known. At August 31, 2004, the Company had recorded revenue of approximately
$202,000 for work in process related to a custom development project. There were
no amounts for billings or payments in excess of the percentage complete for
such project at August 31, 2004. The Company had no custom development projects
in process at August 31, 2003.

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
------------------------
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure," (SFAS No. 148) which amends Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirement of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements of the effects of stock-based compensation.
The company adopted the disclosure provisions of SFAS No. 148 on August 31, 2003
and continues 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. No expense was recognized in 2004 or 2003 related to
employee stock-based awards. Had compensation cost for the Company's stock
option grants and Employee Stock Purchase Plan in fiscal years 2004 and 2003
been based on the fair value method prescribed by SFAS No. 123, there would have
been no effect on net loss for fiscal 2004 because there were no grants.
Compensation cost is not required to be recorded for the employee stock purchase
plan because there was no stock purchased or sold in fiscal years 2004 and 2003.

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 Receivable
----------------------------
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. The Company generally writes
off accounts deemed uncollectible after they become ninety days past due.

     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.

Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and cash equivalents, trade accounts receivable,
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 2003 amounts have been reclassified to conform to the 2004 financial
statement presentation.

Note 2: Note Payable and Long-Term Debt

At August 31, 2004 the Company had an operating line of credit with a bank for
which borrowing is secured by and based on a percentage of certain eligible
trade accounts receivable. The maximum borrowing under the line of credit is
$500,000 of which approximately $340,000 was available at August 31, 2004.
Borrowings under the line of credit bear interest at 1% above prime (4.50% at
August 31, 2004). No balance was outstanding against the line of credit at
August 31, 2004 or 2003. The line of credit expires in January of 2005.

     The Company had $198,270 outstanding under a long-term note payable to a
bank, at August 31, 2003. In December 2003, the Company used proceeds received
from the sale of property to pay off the long-term note payable (see "Property
and Equipment" under Note 1 to the financial statements above). The Company had
no long-term debt outstanding at August 31, 2004.

Note 3: Income Taxes

The income tax provision for fiscal 2004 included the following components:
deferred tax benefit $98,863; increase in the valuation allowance for deferred
tax assets, $98,863; and expense for state income taxes, $1,415. The components
of the 2003 income tax provision include: deferred tax expense, $17,702;
increase in the valuation allowance for deferred tax assets, $463,688; and
expense for adjustment of prior year estimates, $3,110. Income tax expense for
2004 and 2003 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 information presented in Table 3a:

-----------
Table 3a
<TABLE>
<CAPTION>
                                     2004       2003
------------------------------------------------------
<S>                               <C>         <C>
Computed "expected" tax
   (benefit) expense              $(90,294)       489
Change in the deferred tax
   assets valuation allowance       98,863    463,688
Loss in limited liability
   company                               -     12,916
State income tax, net of
   Federal income tax (benefit)
   expense                          (9,208)        58

Other, net                           2,054      7,349
                                  --------    -------
Actual income tax expense         $  1,415    484,500
                                  ========    =======
</TABLE>


The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at August 31, 2004 and 2003 are
presented in Table 3b.

-----------
Table 3b
<TABLE>
<CAPTION>
                                         2004         2003
-------------------------------------------------------------
<S>                                  <C>            <C>
Deferred tax assets:
  Tax operating loss carryforwards   $ 1,024,911     911,691
  Limited liability company                5,943      47,389
  Other                                   32,857      34,731
                                     -----------    --------
Total gross deferred tax assets        1,063,711     993,811
Less valuation allowance                 898,893     800,030
                                     -----------    --------
Net deferred tax assets                  164,818     193,781
Deferred tax liabilities:
  Property and equipment                 (16,206)    (15,628)
  Capitalized software costs            (148,612)   (178,153)
                                     -----------    --------
Net deferred tax                     $         -           -
                                     ===========    ========
</TABLE>

     Deferred tax assets are recognized when it is more likely than not that the
benefits from deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon our ability to generate future taxable
income during the periods in which the temporary differences that create
deferred tax assets become deductible. Company management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
past earnings history, sales backlog and tax operating loss carryforward
expiration dates when determining the amount of deferred tax assets to
recognize.

     During fiscal 2004, the Company increased its valuation allowance for
deferred tax assets and reduced the deferred tax asset, net of valuation
allowance, from $229,754 at August 31, 2003 to $164,818 at August 31, 2004. In
order to fully realize the net deferred tax asset prior to the expiration of tax
operating loss carryforwards, the Company will have to generate approximately
$436,000 in taxable income through increased income from operations, the
reversal of deferred tax liabilities, or both. The Company utilized
approximately $336,000 of tax operating loss carryforwards to offset fiscal 2003
taxable income. Taxable loss for the year ended August 31, 2004 approximated
$314,000 compared to a pre-tax financial loss of approximately $264,000. Taxable
income at August 31, 2003 approximated $119,000 compared to a pre-tax financial
loss of approximately $19,000. In fiscal 2004 and 2003, the differences in
taxable income or loss and pre-tax financial loss primarily resulted from timing
differences associated with the deductibility of capitalized software. At August
31, 2004, the Company had approximately $2.7 million of tax operating loss
carryforwards, of which approximately 78% do not begin to expire until the
Company's fiscal year 2019.

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. At August
31, 2004, there were no remaining options available for issuance or exercise
under the 1985 Plan.

     In 1989, the Company adopted an employee stock option plan ("1989 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. The options become
exercisable over a five-year period, beginning one year after the grant date. At
August 31, 2004 there were no remaining options available for issuance or
exercise under the 1989 Plan.

     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. Table 4b
summarizes information about stock options outstanding pursuant to such
resolutions at August 31, 2004.

Employee Stock Purchase Plan
----------------------------
On January 21, 2000, the shareholders approved the TMS, Inc. Employee Stock
Purchase Plan. The Employee Stock Purchase Plan allows eligible employees 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. There were no
common shares issued or available for purchase during fiscal years 2004 or 2003.

Fair Value Disclosures
----------------------
The Company has adopted the disclosure only provisions of SFAS No. 148, which
amends the disclosure only provisions of SFAS No. 123 to provide more prominent
and frequent disclosures of the effects of stock-based compensation.
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 Employee Stock Purchase Plan in fiscal
years 2004 and 2003 been based on the fair value method prescribed by SFAS No.
123, as amended by SFAS No. 148, there would have been no effect on net loss for
either year because there were no grants. The fair values at the time 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 ranging from 84.22% to 95.96%, depending on the year of grant,
risk-free interest rate of 4.5% and 1.3% for the stock option grants and the
Employee Stock Purchase Plan, respectively; expected lives of approximately 6 to
8 years for the stock option grants; and expected lives for the Employee Stock
Purchase Plan of approximately .25 years.

     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 are not considered.

-----------
Table 4a
<TABLE>
<CAPTION>
                                          Weighted Average    Option Price
                               Shares      Exercise Price         Range
------------------------------------------------------------------------------
<S>                           <C>               <C>            <C>
Shares under option:
At August 31, 2002             588,974          $0.31          $0.13-$0.40
        Options cancelled      (50,000)         $0.31              $.31
------------------------------------------------------------------------------
At August 31, 2003             538,974          $0.31          $0.13-$0.40
        Options exercised       (9,000)         $0.13             $0.13
        Options cancelled     (165,474)         $0.31          $0.29-$0.38
------------------------------------------------------------------------------
At August 31, 2004             364,500          $0.32          $0.27-$0.40
------------------------------------------------------------------------------
</TABLE>


-----------
Table 4b
<TABLE>
<CAPTION>
                         Options
                    Outstanding and     Weighted Average        Weighted
  Range of             Exercisable         Remaining            Average
Option Prices          at 8/31/04        Contract Life      Exercise Price
-------------------------------------------------------------------------------
<S>                       <C>               <C>                  <C>
$0.27 - $0.31             264,500           2.9 Years            $0.30
    $0.40                 100,000           1.4 Years            $0.40
-------------------------------------------------------------------------------

$0.27 - $0.40             364,500           2.5 Years            $0.32
-------------------------------------------------------------------------------
</TABLE>


Note 5: Earnings Per Share

Options to purchase 364,500 shares of common stock at prices ranging from $.27
and $.40 per share and 538,974 shares of common stock at prices ranging from
$.13 to $.40 per share were outstanding at August 31, 2004 and 2003,
respectively, but were not included in the computation of EPS because the
options' exercise price was greater than the average market price of common
shares. All options expire during periods through the year 2008.


Note 6: Reportable Segments

The Company's reportable segments are determined by its products and services
and include: Component Product Technologies and Assessment Scoring Technologies.
The Component Product Technology segment develops the Company's core product
technologies. These products include core image viewing, image enhancement and
image and forms processing software toolkits that are used to develop new
software applications or enhance existing software applications. In addition,
the Component Product Technology segment develops software 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 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 Assessment Scoring Technology segment was created during fiscal 2000 to
focus on developing technologies to improve the overall process of scoring
standardized tests in the educational marketplace. The technologies being
developed in this segment leverage the Company's existing core competencies in
forms recognition, image processing, viewing and enhancement. The Assessment
Scoring Technology segment created a Digital Mark Recognition (DMR) software
product designed to replace the need for hardware based Optical Mark
Recognition. The Assessment Scoring Technology segment also developed a new
product called the Virtual Scoring Center ("VSC"). The VSC uses imaging-based
technology to facilitate the process of scoring student responses to open-ended
test questions in a web-enabled environment. In October 2002, the Company
transferred the VSC technology to VSC Technologies, LLC, which is jointly owned
by the Company and Measurement Incorporated, a leading provider of educational
scoring services (See "Note 10").

     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 6a for the results of operations for each reportable segment for
fiscal years ending 2004 and 2003. In 2004 and 2003, revenue for the Assessment
Scoring Technologies segment included approximately $127,000 and $180,000,
respectively, from Measurement Incorporated for the resale of document image
scanners along with licenses to the Company's DMR software and related technical
support and maintenance. All other segment revenue was from nonaffiliated
sources.

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

<TABLE>
<CAPTION>
                                                                    COMPONENT       ASSESSMENT
                                                                     PRODUCT          SCORING
     2004                                                         TECHNOLOGIES     TECHNOLOGIES       TOTAL
----------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                  <C>          <C>
Revenue                                                        $    2,792,196        134,876     $    2,927,072
Depreciation and amortization                                  $       21,688          7,155     $       28,843
Loss in limited liability company                              $            -        (90,563)    $      (90,563)
Operating income (loss)                                        $      645,951       (257,851)    $      388,100
Other significant noncash items:
   Amortization of capitalized software development costs      $      282,943         22,620     $      305,563
Identifiable segment assets:
   Capitalized software development costs, net                 $      371,805         19,691     $      391,496
Expenditures for capitalized software development costs        $      231,823              -     $      231,823
</TABLE>


<TABLE>
<CAPTION>
                                                                    COMPONENT       ASSESSMENT
                                                                     PRODUCT          SCORING
     2003                                                         TECHNOLOGIES     TECHNOLOGIES       TOTAL
----------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                  <C>          <C>
Revenue                                                        $    2,925,928        191,483     $    3,117,411
Depreciation and amortization                                  $       24,815         12,727     $       37,542
Loss in limited liability company                              $            -       (155,259)    $     (155,258)
Operating income (loss)                                        $      781,053       (636,537)    $      144,516
Other significant noncash items:
   Amortization of capitalized software development costs      $      332,124         22,768     $      354,892
Identifiable segment assets:
   Capitalized software development costs, net                 $      427,004         42,315     $      469,319
Expenditures for capitalized software development costs        $      304,796         20,452     $      325,248
</TABLE>


Table 6b is a reconciliation of the segment operating income to the total
Company net loss for fiscal 2004 and 2003.

-----------
Table 6b

<TABLE>
<CAPTION>

                                             2004          2003
-----------------------------------------------------------------
<S>                                        <C>         <C>
Operating income for reportable segments   $ 388,100     144,516
Unallocated corporate expenses              (406,998)   (302,622)
Interest income                               16,878      19,874
Interest expense                              (4,811)    (16,013)
Loss on sale of property                    (260,123)          -
Gain on sale of technology                         -     155,061
Other, net                                     2,799         622
Income tax expense                            (1,415)   (484,500)
                                           ---------   ---------
Net loss                                   $(265,570)   (483,062)
                                           =========   =========
</TABLE>

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 $35,000 and $47,000 in 2004 and 2003, respectively. Employees vest
in employer matching contributions at a rate of 20% per year after two years of
service.

Note 8: Commitments and Contingencies

Operating Leases
----------------
The Company leases office space under operating leases. Rent expense was
approximately $80,000 and $46,000 for 2004 and 2003, respectively. The Company
had non-cancelable future minimum lease obligations of $209,668 at August 31,
2004, as follows: $104,253 in fiscal year 2005, $68,047 in fiscal year 2006, and
$37,368 in fiscal year 2007.


Guarantees
----------
On June 11, 2003, the Financial Accounting Standards Board issued a Staff
Position about Accounting for Intellectual Property Infringement
Indemnifications under FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. As an element of the standard commercial terms, the
Company's software license agreements include indemnification clauses that
indemnify licensees against liability and damages (including legal defense
costs) arising from claims of patent, copyright, trademark or trade secret
infringement by the Company's software. Such indemnification clauses constitute
a guarantee subject to the scope of Interpretation No. 45.

     As discussed in the "Legal Proceedings" section below, the Company is party
to a patent infringement lawsuit involving the Virtual Scoring Center technology
transferred to VSC Technologies, LLC (See "Note 10"). Subject to certain dollar
limitations and other conditions, the Company is indemnified for costs and any
liability associated with such lawsuit. In addition to financial exposure that
may result if the conditions for indemnification provided to the Company are not
met, if the Virtual Scoring Center technology is found to be infringing, the
Company may also incur financial exposure under indemnification clauses that
have been provided to certain licensees of the Virtual Scoring Center
technology. Because this action is in an early stage, the Company cannot
estimate the extent of any potential damages if there is an adverse judgment. If
the Company sells its membership interest in VSC Technologies, LLC to
Measurement Incorporated as part of its plan of liquidation, which is currently
pending shareholder approval, Measurement Incorporated has agreed to provide
complete indemnification against the Company's costs and any liability arising
in connection with the action against NCS Pearson (see "Note 12"). In addition,
the Company intends to seek court approval for dismissal from the lawsuit

     At present, there are no other claims of infringement against any of the
Company's software products that would require the fulfillment of guarantees
associated with indemnification clauses in the Company's standard commercial
software license agreements.

Legal Proceedings
-----------------
The Company is a party to a lawsuit involving the Virtual Scoring Center
technology transferred to VSC Technologies, LLC. On October 23, 2002, the
Company, along with VSC Technologies, LLC and Measurement Incorporated, filed an
action in the United States District Court for the Eastern District of North
Carolina against NCS Pearson, Inc. In the complaint, the Company and the other
plaintiffs seek a declaratory judgment that the Virtual Scoring Center
technology owned by VSC Technologies, LLC and marketed by Measurement
Incorporated and the Company does not infringe twenty patents belonging to NCS
Pearson. On June 3, 2003, NCS filed their answer to the complaint, along with a
set of counterclaims that assert infringement of thirteen of their patents.
Discovery is commencing in this case and the parties have agreed on a discovery
plan, which anticipates a trial date in or after October 2005.

     The Company believes that the Virtual Scoring Center technology does not
infringe the NCS Pearson patents and it designed that technology to carefully
avoid infringement, but the Company cannot assure you that it will be successful
in its claims or defense against NCS Pearson's counterclaims.

     If the court rules that the Virtual Scoring Center infringes the NCS
Pearson patents and NCS Pearson prevails in their counterclaims, this could
result in a monetary judgment against the Company. Because this action is at an
early stage, the Company cannot estimate the extent of any potential damages if
there is a judgment against it.

     An injunction against the Company and VSC Technologies, LLC would be
severely damaging to business growth opportunities and plans to exploit the
Virtual Scoring Center technology. Measurement Incorporated has agreed to
indemnify the Company against its costs and any liability arising in connection
with the action against NCS Pearson. But that indemnification responsibility
currently has certain dollar limitations and other conditions. Consequently, the
Company may have financial exposure if it does not prevail in this action and
the conditions for indemnification are not met or its costs and liability exceed
the indemnification coverage. However, if the Company sells its membership
interest in VSC Technologies, LLC to Measurement Incorporated as part of the
plan of liquidation, which is currently pending shareholder approval (see "Note
12"), Measurement Incorporated has agreed to provide complete indemnification
against our costs and any liability arising in connection with the action
against NCS Pearson.

Note 9: Business and Credit Concentrations

In fiscal year 2004 and 2003, one customer accounted for 17% and 15% of total
revenue. At August 31, 2003, two customers accounted for 38% of total trade
accounts receivable. No one customer accounted for more than 10% of trade
accounts receivable at August 31, 2004. Revenue and trade accounts receivable
for the Company by geographic area as of and for the years ended August 31, 2004
and 2003, follows:

<TABLE>
<CAPTION>

REVENUE:                                      2004                2003
-----------------------------------------------------------------------------
<S>                                     <C>                     <C>
United States                           $   2,536,118           2,525,233
Europe (export sales)                         226,846             338,330
Asia (export sales)                            76,837             209,348
Australia (export sales)                       16,891              19,195
Canada (export sales)                          20,753              10,807
Other (export sales)                           49,627              14,498
-----------------------------------------------------------------------------
                                        $   2,927,072           3,117,411
-----------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE (GROSS):                  2004                2003
-----------------------------------------------------------------------------
<S>                                     <C>                       <C>
United States                           $     282,727             326,399
Europe                                         50,632              40,497
Asia                                            5,804              10,940

Australia                                           -              19,520

Other                                               -               1,325
-----------------------------------------------------------------------------
                                        $     339,163             398,681
-----------------------------------------------------------------------------
</TABLE>

Note 10:  Long-term Investment

On October 10, 2002, the Company entered into an agreement with Measurement
Incorporated, one of the nation's leading providers of writing and performance
assessment hand-scoring services, to further develop the Virtual Scoring Center
technology and bring it to market through a new entity, VSC Technologies, LLC.
The Company transferred its rights in the Virtual Scoring Center technology to
the LLC in exchange for one-time cash payment of $250,000 and a 50% ownership
interest. Measurement Incorporated holds the remaining 50% ownership interest. A
gain on the sale of the Virtual Scoring Center of $155,061 is included in the
Statement of Operations for the year ended August 31, 2003. The Company accounts
for its investment in the LLC using the equity method.

     The Company's fiscal 2004 and 2003 Statement of Operations includes $90,563
and $155,528 for its 50% share of the LLC's net loss. The net loss for the LLC
primarily includes direct costs associated with software development in both
fiscal year 2004 and 2003 and legal costs associated with filing a patent
application on the Virtual Scoring Center software in fiscal year 2003. At
August 31, 2004 and 2003, the Company also had liabilities of $110,839 and
$38,392 representing its negative equity interest in the LLC. Pursuant to the
agreement with the LLC, for the first five years of LLC operations the Company
is eligible to receive cash distributions at the end of each calendar year
beginning on December 31, 2002. The Company is eligible for such distributions,
subject to certain maximum amounts which graduate downward over the five year
period, if the financial return from the LLC is not at least equal to the amount
of software development cost that the Company has invested in the LLC. When and
if the LLC becomes profitable, the Company will be required to pay back such
distributions by foregoing a portion of future cash profits from the LLC. The
Company received a cash distribution of $150,000 and $200,000 in fiscal years
2004 and 2003 related to such agreement. The distribution was applied as a
reduction to the Company's investment in the LLC. The cash distribution and the
net loss from the LLC are the primary factors that resulted in the negative
investment balances at August 31, 2004 and 2003.

     In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51". FIN 46 sets forth guidance to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties.

     The Company has a 50% equity interest in VSC Technologies, LLC. The LLC
qualifies as a variable interest entity. An equity investor is required to
consolidate a variable interest entity if it is deemed the "primary
beneficiary". The primary beneficiary is defined as the investor that is
expected to either absorb the majority of the entity's expected losses, receive
a majority of the entity's expected residual returns, or both. Company
management is in the process of evaluating whether the Company qualifies as the
primary beneficiary of the LLC. If the Company is required to consolidate the
LLC in accordance with this Interpretation, the financial effects will be
implemented in the Company's second quarter of fiscal 2005. Company management
has also evaluated its exposure to economic loss and estimates that from the
inception of the LLC in October 2002 through December 31, 2005, that its maximum
exposure to economic loss approximates $250,000.

Note 11:  Related Party Transactions

The Company currently has an agreement with the LLC whereby its employees
provide software development services at a fixed rate per hour. In fiscal years
2004 and 2003, the Company billed the LLC for approximately $320,000 and
$359,000 of software development services, respectively, of which $160,000 and
$179,500 was related to Measurement Incorporated's obligation to fund LLC
software development in 2004 and 2003, respectively, and the remaining $160,000
and $179,500 increased the Company's investment in the LLC in those years. At
August 31, 2004 and 2003, "Due from related parties" included approximately
$41,000 and $26,000, respectively, from the LLC for software development
services.

     The Company also has an agreement with the LLC to perform accounting and
certain other administrative services at a fixed rate of $1,000 per month.
Included in "Due from related parties" at August 31, 2004 and 2003 was $2,000
and $1,000 from the LLC for such fees.

Note 12: Subsequent Event - Proposed Sale of Assets to Pegasus and Plan of
         Liquidation (Unaudited)

On August 5, 2004, the Company entered into an agreement to sell substantially
all of its assets to Pegasus Imaging Corporation ("Pegasus"). The terms of the
transaction along with a plan of liquidation of the Company will be submitted to
shareholders for approval at a special meeting to be held on December 17, 2004.
The Company's membership interest in VSC Technologies, LLC is not part of the
asset sale to Pegasus; however, in September 2004 the Company reached an
agreement in principle to sell its 50% membership interest in the LLC to
Measurement Incorporated. Immediately upon shareholder approval, the Company
plans to close the asset sale to Pegasus simultaneously with the sale of its
membership interest to Measurement Incorporated and then at some future date,
which is not currently estimable, the Company plans to make a one-time cash
distribution to shareholders and liquidate the Company.

     After considering many factors related to the historical financial
performance of the Company, the financial forecasts and future prospects for its
existing and planned new software products, the impact of the Sarbanes-Oxley Act
of 2002 and the rising costs of being publicly-held, and various strategic
alternatives potentially available to the Company, the board of directors
determined that the best and most likely means for maximizing shareholder value
and return, would be through a sale of the Company or substantially all of its
assets to a third party. The Company contacted, through certain of its business
partners, potential third party buyers and engaged in various negotiations prior
to recommending the proposals to sell substantially all of its assets to Pegasus
and adopt a plan of liquidation for the Company.

     The terms of the asset sale to Pegasus provide that the Company will sell
all of its assets associated with the Component Product Technologies business,
which represent substantially all of its assets, including cash, accounts
receivable, property and equipment, name and goodwill. Pegasus will assume all
of the Company's ongoing obligations under existing customer agreements, as well
as certain liabilities associated with office leases, employee expenses and
accounts payable. We currently estimate that the purchase price will be $2.2
million (not including the liabilities assumed). A portion of the purchase price
(approximately $600,000) will be payable in the form of a promissory note which
will be due on the earlier of the date that we liquidate or August 15, 2005. The
total purchase price, including the note, is subject to adjustment based on
certain elements of working capital, including collection of accounts receivable
and final acceptance of a custom software development project by a certain
customer.

     The Company's agreement with Measurement Incorporated provides that it will
sell its membership interest in VSC Technologies, LLC in exchange for $250,000
and complete indemnification against the pending litigation with NCS Pearson
(see "Legal Proceedings").

     Upon approval by its shareholders, the Company plans to use the cash
proceeds from the asset sale to Pegasus and the sale of its membership interest
in the LLC to make a one-time cash distribution to its shareholders upon
liquidation. The Company currently estimates that such distribution will result
in proceeds to the shareholders of between $0.145 and $0.16 per share. In
determining the estimated range of distribution, the Company considered the
estimated $2.2 million that it will receive from Pegasus, the $250,000 that it
will receive from Measurement Incorporated, and the estimated costs for (i)
professional fees related to preparation of sale agreements, preparation and
distribution of proxy materials, proxy solicitation services, preparation of tax
returns and similar items, (ii) certain insurance premiums and (iii) certain
taxes. Such costs are not expected to exceed $415,000.

     The amount of the final distribution to shareholders, however, is dependent
upon a number of conditions and events, many of which are beyond the Company's
power to control, including its ability to be dismissed from the litigation with
NCS Pearson and the impact of collection of accounts receivable and final
acceptance of a custom software development project by a certain customer on the
final purchase price from Pegasus. Accordingly, the Company has developed an
estimated contingency reserve of $130,000 in the estimated future costs for
unknown matters in an effort to account for such conditions and events; however,
no assurance can be given as to the accuracy of such reserve or the actual
amount of liquidation proceeds that will be available for distribution. The
timing of the distribution to shareholders is not currently estimable as it is
primarily dependent upon the Company's ability to be dismissed from the
litigation with NCS Pearson.

     The affirmative vote of at least two-thirds of the outstanding shares of
the Company's common stock is required to approve the sale of assets and plan of
liquidation. The Company has expended considerable time, effort and expense in
pursuing opportunities related to the sale of the Company or substantially all
of the assets. If the sale of assets to Pegasus and/or the plan of liquidation
are not approved by the shareholders there can be no assurance that there will
be other opportunities that would result in the shareholders receiving more or
any return from the Company. Although the Company has continued to maintain its
existing products and customer base, certain of our marketing, technical and
sales employees have recently resigned from the Company and management believes
that if the Company has to continue to operate in the ordinary course and bear
the increasing demands and rising costs of being publicly-held, that its working
capital will deteriorate which could ultimately impact its ability to fund
ongoing operations.


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

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
TMS, Inc. (dba TMSSequoia)
<CAPTION>
                                              BALANCE AT       ADDITIONS/REDUCTIONS     DEDUCTIONS-RECOVERY/    BALANCE AT END
CLASSIFICATION                            BEGINNING OF PERIOD  TO COSTS AND EXPENSES    WRITE-OFF OF ACCOUNTS     OF PERIOD
------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                      <C>                        <C>               <C>
Year ended August 31, 2004:
     Allowance for doubtful accounts      $      10,879            (15,129)                    9,036            $    4,786
------------------------------------------------------------------------------------------------------------------------------
Year ended August 31, 2003:
     Allowance for doubtful accounts      $      16,204              7,600                    12,925            $   10,879
------------------------------------------------------------------------------------------------------------------------------
</TABLE>