U.S. SECURITIES AND EXCHANGE COMMISSION
                           Washington, DC 20549

                               FORM 10-KSB
(Mark One)
      [X]  Annual report pursuant to Section 13 or 15(d) of the Securities
           Exchange Act of 1934
               For the fiscal year ended October 31, 2001
      [ ]  Transition report under Section 13 or 15(d) of the Securities
           Exchange Act of 1934
               For the transition period from ________ to ________
      Commission file number            0-20303
                              --------------------------

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
         ---------------------------------------------------------
               (Name of small business issuer in its charter)

           Delaware                                      13-2846796
    ------------------------------------------------------------------------
 (State or other jurisdiction of                      (I.R.S. Employer
  incorporation or organization)                     Identification No.)



 4 Hardscrabble Heights, P.O. Box 382, Brewster, NY          10509
----------------------------------------------------------------------------
(Address of principal executive offices)                   (Zip Code)

                              (845) 277-8100
                   -------------------------------------
                       (Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act:  None.
                                                                ----
Securities registered under Section 12(g) of the Exchange Act:

                           Title of Each Class
                       ---------------------------

                      Common Stock, $.0001 par value
                  --------------------------------------

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes     X     	No
    --------    -----------

     Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of 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. [X]

     State issuer's revenues for its most recent fiscal year:  $14,400,145
for the fiscal year ended October 31, 2001.

     State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days:  $1,458,478
as of January 22, 2002.  The aggregate market value was based upon the
closing price for the Common Stock, par value $.0001 per share, as quoted
by the NASDAQ for such date.

     (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE
YEARS)Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes           	No
   ---------    ----------

               (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
     State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:  As of January 22,
2002, 2,594,453 shares of Common Stock, par value $.0001 per share.

                  DOCUMENTS INCORPORATED BY REFERENCE
     If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part
II, etc.) into which the document is incorporated:  (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of
1933 ("Securities Act").  None.

     Transitional Small Business Disclosure Format (check one):
Yes               No     X
   -----------       ---------

<PAGE>

                                 PART I

ITEM 1.     DESCRIPTION OF BUSINESS

OVERVIEW

            Touchstone Applied Science Associates, Inc. (the
"Company" or "TASA") serves the education market with assessment
and instructional products, and as of November 1998, in the
post-secondary proprietary school market.  Prior to new
executive management in 1994, the Company's primary business was
reading assessment through the publishing and sale of its
proprietary tests and related assessment tools.  Since 1994, the
Company's current management has implemented a strategy to
broaden the Company's services in the education market.  In the
Company's fiscal years ended October 31, 1997 and 1998 ("Fiscal
1997" and "Fiscal 1998", respectively) and through the beginning
of the fiscal year ended October 31, 1999 ("Fiscal 1999"), the
Company completed three acquisitions in three core segments of
the education market: assessment, instruction and educational
delivery.  The net effect of the Company's acquisition strategy
is that TASA's revenues increased from $2.5 million in the
fiscal year ended October 31,1996 ("Fiscal 1996"), the last
fiscal year prior to the acquisitions, to over $14.4 million in
the fiscal year ended October 31, 2001 ("Fiscal 2001").

            The need to develop fundamental literacy skills has
long been recognized as essential to a student's progress and
success throughout school and life.  The Company's proprietary
instructional and assessment products relate directly to the
teaching and measurement of progress of literacy skills. The
Company's language arts instructional products for grades K-4
provide students with consumable workbook series designed to
strengthen skills. The Company's other products for the grades
K-4 instructional market include consumable workbooks for the
development of other important skills, such as penmanship,
social studies, science and the teaching of English,
particularly English as a Second Language ("ESL").  The
Company's Degrees of Reading Power(R) ("DRP") tests and related
products enable a school, district or other entity to assess an
individual's reading comprehension ability.  These tests allow
an individual's reading development to be tracked over time and
are often used to audit a school's success in the teaching of
reading.  In 2001, the Company launched two new tests:
Signposts, a language arts early-childhood test, and the MAC II,
an English language proficiency test.

            The third market served, educational delivery,
positions the Company to participate in the significant growth
occurring in post-secondary education.  The Company, through its
indirect wholly owned subsidiary MESI Acquisition Corp.
("MESI"), acquired substantially all of the assets of the
Mildred Elley Schools, Inc. ("Mildred Elley"), a New York
State accredited, degree-granting school that provides post-
secondary students with a broad-based curriculum in business,
health, travel, information technology and paralegal training.
Mildred Elley's principal campus is located in Latham, New York,
with an additional branch in Pittsfield, Massachusetts.

            The Company was incorporated in the State of New York
in 1976 and, in 1991, changed its corporate domicile to
Delaware.  It became a public company in 1992.  TASA's corporate
headquarters are located at 4 Hardscrabble Heights, P.O. Box
382, Brewster, New York 10509.  The Company's telephone number
is (845) 277-8100 and its facsimile number is (845) 277-3548.
The Company maintains a website at www.tasa.com.  As used in
this Report, the terms "Company" and "TASA" refer to Touchstone
Applied Science Associates, Inc. and its subsidiaries, unless
the context otherwise indicates.

            Except for historical information, the material
contained in this Description of Business is forward-looking.
For the purposes of the safe harbor protection for forward-
looking statements provided by the Private Securities Litigation
Reform Act of 1995, readers are urged to review the list of
certain important factors set forth in "Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995" below, which may cause
actual results to differ materially from those described.

ASSESSMENT PRODUCTS AND RELATED SERVICES

            TASA designs, develops, calibrates, publishes,
markets, and sells educational reading assessment tests to
elementary and secondary schools, colleges, and universities
throughout the United States and Canada.  The Company's reading
comprehension tests are based on its proprietary Degrees of
Reading Power (DRP) assessment methodology.  DRP tests are
published in three versions: Primary, Standard, and Advanced.
The Company's products measure an individual student's reading
ability in a non-culturally biased manner and allow tracking of
an individual's reading development over time.

            DRP TESTS.  Management believes that DRP tests are
widely recognized as being advanced state-of-the-art in
educational assessment.  Based on descriptions contained in
Tests in Print published by the Buros Institute of Mental
Measurements (which endeavors to cover all tests published in
the United States), it is management's belief that:

            .  DRP tests were the first commercial standardized
tests whose results can be directly interpreted with respect to
the written materials that students can read; and

            .  DRP tests are the only existing instruments that can
measure progress toward one or more standards or requirements
that are established by examining how well prose in books or
other sources must be comprehended for particular purposes.

            Consequently, the DRP tests are especially useful in
accountability assessments of a school's teaching performance
and in measuring an individual's reading level. As a result,
management believes that DRP tests are widely recognized as
being state of the art in educational assessment.

            DRP tests measure how well students understand the
meaning of whole text.  These tests determine, as much as is
possible in a testing situation, how well a student reads under
real-life conditions, both in and out of school. Primary and
Standard DRP tests are direct measures of fundamental reading
comprehension, defined as how well students can process text as
it is being read.  Advanced DRP tests extend this definition of
reading comprehension.  Advanced DRP test items require students
to engage higher level cognitive processes needed to think
about, analyze or evaluate propositions in text.

            DRP tests consist of nonfiction paragraphs and/or
passages on a variety of topics, each written, edited, and
calibrated by the Company.  The individual test passages are
stored in the Company's "Test Passage Bank", and each test is
created by selecting the appropriate test passages from the Test
Passage Bank to satisfy the criteria set for a particular test.
Each passage undergoes a two-year process of development and
calibration and has an estimated useful life of 11 years; a
passage is introduced initially in a "secure" form of test after
which it is available in "shelf" form in the Company's test
catalogs and then in practice tests.  Management believes that
approximately four million DRP tests, for which the Company is
the sole source proprietor and publisher, were administered in
2001 in states, school districts, and college and university
testing programs.

            TYPES OF DRP TESTS.  Specially prepared "secure" forms
of the Company's DRP tests are licensed for one-time or limited
use by states while other "shelf" forms listed in the Company's
catalogs are licensed for an indefinite period of time to
schools and districts throughout the United States and Canada.
Secure test forms are composed of text and test items that have
never before been administered and are typically used in only
one test administration as a secure test.  The Company provides
secure tests annually for administration in certain grades by
the states of Connecticut, New York, and Virginia.

            THE MACULAITIS TEST.  In Fiscal 1997, TASA acquired
the Maculaitis Assessment of Competencies test (the "Maculaitis
Test"), which is a comprehensive English language assessment and
evaluation program.  It is intended for use in ESL, Bilingual
Education and Limited English Proficiency ("LEP") programs.  In
Fiscal 1998, the Company completed a series of revisions aimed
at improving the overall ease of use and marketability of the
test.  Management believes that these revisions have given the
Maculaitis Test wider appeal.  Currently, the Company is making
more substantive revisions that management believes are
necessary to further enhance the test's marketability.  The new
MAC II was launched at the end of the third quarter of Fiscal
2001.

            The MAC II is currently authorized for use in New
Jersey, Illinois, and Florida.  It is the state-selected test in
Rhode Island. While sales have historically come almost
exclusively from New Jersey, we anticipate increased volume and
greater national penetration in 2002.

            SIGNPOSTS(R) EARLY LITERACY ASSESSMENT SYSTEM.  In the
spring of 2001, the Company introduced its new Signposts(R) Early
Literacy Assessment System ("SIGNPOSTS").  Signposts is a
comprehensive system designed to provide a unique set of
assessments and integrated instructional activities for students
in grades K-3.  Signposts spans a range of literacy strands--
reading, writing, listening, and speaking--and includes a pre-DRP
reading test and measurement scale for emergent readers.
Management believes that the pre-DRP test's downward extension
of the existing Primary DRP test will help both the Signposts
and DRP programs in future adoptions.

            TEST SCORING AND RELATED REPORTING SERVICES.  The
Company provides scanning, scoring, and reporting services for
all of its tests to schools and districts.  Company-copyrighted
test answer sheets or licensed answer sheets are required for
the administration of all of the Company's tests.  Answer marks
on these sheets are machine-read by scanner-computer systems and
interpreted by Company-proprietary scoring and reporting
software.  Company-copyrighted conversion tables are used to
convert the total number of right answers into a DRP score that
indicates how well a student can comprehend text of a given
difficulty (readability), or into MAC II scores or English
Competency Levels.  The test scores also can be interpreted
normatively (i.e., in terms of national percentile norms
that indicate a student's percentile rank in relation to
students nationally in his or her grade) using the Company's
proprietary data.  All District, School and Class Level Reports
of DRP test results are copyrighted by the Company, as are
various Parent and Individual Reports that may be ordered by
school systems for inclusion in permanent records.  Third-party
firms, as well as state agencies that provide scanning and
scoring services to schools, also may be licensed to score the
Company's tests.  Further, the Company has licensed its
proprietary scanning and scoring software to several large school
systems.

            SOFTWARE PRODUCTS.  The Company designs and markets
computer software products that are sold as instructional aids
or analytical tools for reading assessment.  Among the products
are MicRA-->DRP II, which allows the user to estimate the DRP
difficulty rating of instructional materials, and DRP-->EZ
Converter(R), which permits those who score DRP tests by hand to
easily convert raw scores to criterion-referenced DRP scores and
DRP norms. Currently under development, for release anticipated
in Spring 2002, is MAC II-->EZ Converter software which will
permit those who score MAC II testS by hand to easily obtain
MAC II scores and norms. Further, the Company has sold its own
proprietary scanning and scoring software to school districts
where its installation is economically feasible due to high-
volume usage. Through the end of Fiscal 2001, we had six
districts that had purchased this software.

            The Company has also introduced DRP-->Booklink(R) which
enables teachers to find appropriate books for each student
based upon interest categories and reading ability.  The
database of books (over 17,000) increases yearly and
modifications to the software each year make it more user
friendly .  Over the past 24 months, DRP-->Booklink has received
wide acceptance.

            The Company reports revenues from proprietary test
products as Assessment Income.

CUSTOM TEST PRODUCTS AND RELATED SERVICES

            BETA provides consulting services to states, schools
and textbook publishers. BETA's business is approximately
equally divided between work for states and work for publishers.
Since its acquisition by TASA in January 1997, BETA has
concentrated on increasing its test assessment and design
services to states.  This effort has been successful, and BETA
now provides its test design and psychometric services to state
customers in Delaware, Indiana, Massachusetts, Michigan,
Minnesota, North Carolina, Ohio, Texas, and Virginia.  Most
recently, BETA was awarded a $7.5 million contract from the
State of Michigan to help develop an alternative assessment test
for special education students.  This represents the second
major state (the other state being Texas) where BETA has
alternative assessment assignments.

            BETA's custom assessment services to states are
provided either directly or indirectly, typically through two of
the largest commercial contractors in the contract/customized
assessment markets, NCS Pearson and Harcourt.  Generally, the
business strategy of BETA is to provide these specialized
services for the major state contracts as a subcontractor,
primarily for assessment or psychometric services and actual
test design and development.  The prime contractor provides for
all the printing, logistics, warehousing, scoring and reporting
services necessary to complete state contracts.

            In Fiscal 2001, BETA gained significant non-state
assessment business from agreements with publishers, such as
Harcourt.

            The Company reports revenues from BETA's operations as
Assessment Income.

INSTRUCTIONAL PRODUCTS

            Through Modern Learning Press, Inc. ("MLP"), the
Company, creates, publishes, and distributes "consumable"
student materials for grades K-5, as well as books for
elementary school teachers and parents. The series of student
publications currently offered by MLP focus on the language arts
and include spelling/vocabulary books, journals, and reading
comprehension books. The affordable pricing of these consumable
series positions MLP to take advantage of the growing pressure
for cost-effective purchasing by school districts. Thus, MLP's
growing line of student materials enables schools to purchase
effective, high-quality publications at a significantly
decreased acquisition cost per pupil.

            To complement its student materials, MLP also creates
and publishes books that provide education-related information
to teachers and parents. These professional and parent
publications are written by well-known experts and help schools
and families achieve their education objectives.

            MLP was organized by TASA in May 1997 to acquire
substantially all of the operating assets of Programs for
Education, Inc. The market served by MLP consists of an
estimated 19 million students in grades K-5, establishing an
approximate market size of $35-$40 million for each series.
Moreover, teachers generally make the purchase decisions in
these grades as opposed to school boards or agencies, which
control the purchasing decisions in higher grades.

            During Fiscal 2001, MLP published three new journals,
a reading comprehension book, and a new series of three books
that help students write about social studies topics. MLP also
expanded its product line by increasing its distribution of
reading materials published by other companies.

            Management believes that growth opportunities exist
for MLP in the elementary school market.  Many states, as well
as the Federal government, are currently discussing expansion
and changes in elementary education, either of which would have
to include additional funding for any new programs.  These
changes will provide new and expanded opportunities for the
development of new workbook and professional education book
series.  Management believes that MLP is well-positioned to
benefit from the changes expected to occur in elementary
education.

            The Company reports MLP's revenues as Instructional
Products.

EDUCATIONAL DELIVERY

            In early Fiscal 1998, as part of its strategic plan,
the Company decided that the post-secondary proprietary school
market was an area in which it wanted to compete due to
attractive characteristics including a large growing market,
countercyclical growth trends, and attractive levels of
profitability.

            In November 1998, the Company, through MESI, a wholly-
owned subsidiary of TASA Educational Services Corporation
("TESC"), which is a wholly-owned subsidiary of the Company,
purchased substantially all of the assets of Mildred Elley, as
the platform for the Company's entrance into the post-secondary
school market.  Mildred Elley is a two-year, New York State
degree-granting institution and has been in operation for over
80 years.  Mildred Elley's principal campus is located in
Latham, New York, with an additional branch in Pittsfield,
Massachusetts.

            The Mildred Elley schools offer programs in business,
paralegal, travel, information technology and health fields.
Each program is designed so that the student masters important
skills and acquires knowledge that will become critical to a
lifelong learning plan and economic success. The goal is for
students to succeed in their programs and obtain secure jobs in
their field.

            The two locations had a total enrollment of 535
students as of October 31, 2001.  The current enrollment
consists of adult students with a median age of 34 in Albany and
35 in Pittsfield.  One interesting demographic is that the
median age of our freshman students has decreased to 28 years at
our Albany campus. This is largely due to the Job Corps
students.  Many of these students have been dislocated workers
and other individuals having various levels of education who
need additional skills in order to maintain or improve their
current employment situation.  Average household income of
Mildred Elley's students is $6,000 to $15,000 (Pittsfield) and
$3,000-$15,000 (Albany). The student body is 20% male and 80%
female in Pittsfield and 30% male and 70% female in Albany.

            All of the programs are offered at both campuses. The
following table shows Mildred Elley enrollment by program by
location for the 2001 fall term:


                                                                   Total
                                         Albany    Pittsfield    Enrollment

Accounting Systems Specialist. . . . .     17          18            35

Business Management. . . . . . . . . .     64          28            92

Information Technology. . . . . . . . .    99          18           117

Medical Assistant. . . . . . . . . . .     65          47           112

Office Technologies. . . . . . . . . .     11          14            25

Paralegal. . . . . . . . . . . . . . .     74          19            93

Software Specialist. . . . . . . . . .     54         -0-            54

Travel/Tourism. . . . . . . . . . . . .     7         -0-             7

                                 Total:   391         144           535

            Revenues from the post-secondary proprietary school
division were $4,995,000 in Fiscal 2001 and are reported as
Educational Delivery revenues. During the current year, Elley
was re-admitted into the Federal student-loan program, and by
the end of the year virtually all students were funded by grants
and third-party loans. The net effect is that the school's cash
flow has improved significantly.

MARKETING

            The Company markets its assessment products and
services as follows:

            (a) Sales of secure tests to large-scale users (such
as state education departments) are conducted directly by the
Company's staff.  This includes making presentations and
negotiating contracts and license agreements.

            (b) Sales of the Company's products and services as
described in the Company's catalogs are made primarily through
direct mail campaigns to elementary school, secondary school and
college markets.  The Company also exhibits its products at
educational trade shows and advertises in trade journals.

            (c) In addition, the Company's staff and its
independent consultants provide presentations and in-service
workshops supporting the Company's products.

            (d) Sales of custom-designed testing and consulting
are accomplished via bidding processes and attendance at
professional meetings.

            The Company sells its assessment products on a
contract or purchase order basis in accordance with a published
price list.  Depending upon the contract or the purchase order,
the Company sells its products on a net 30-day or other
contractual terms.  The Company does not offer extended credit
terms to its customers.  Historically, bad debts with respect to
its assessment products have not been material.

            The Company markets its instructional products almost
exclusively through direct mail programs and independent sales
representatives.

            Currently, Mildred Elley advertises through the print
media, television and radio, and the Company anticipates that it
will continue to use such media in the future.

COMPETITION

            Success in the educational industry will be based on
scientific and technological superiority, service, product
support, the availability of patent protection, access to
adequate capital, the ability to successfully develop and market
products and processes and the ability to obtain government
approvals.  Although there is intense competition in the
industry and there are both domestic and foreign companies which
may be deemed dominant competitors, the Company believes that
the features of its products coupled with its ability to provide
quality services will permit the Company to compete successfully
in its designated marketplace.

            ASSESSMENT.  The Company is subject to competition
from various sources.  The Company's principal competition comes
from established for-profit and non-profit companies in the
testing business and testing departments within certain states
and school districts, all of which are considerably larger and
have greater financial and human resources and marketing
capabilities.  Competition may also come from education
publishers who include reading comprehension tests with their
instructional materials and companies that distribute reading
motivation programs.

            Although there are a number of for-profit firms that
develop, publish, market, and distribute educational tests, the
market is dominated by three:  CTB/McGraw-Hill, Lake Forest,
Illinois, and Monterey, California; Harcourt Educational
Measurement, San Antonio, Texas; and The Riverside Publishing
Company, Chicago, Illinois.  As large, well-established
publishers of educational tests and related products and
services, these firms are considered strong competitors of the
Company.

            There are a number of non-profit organizations that
develop, publish and distribute educational tests.  For example,
the American College Testing Program (ACT), Iowa City, Iowa;
American Council on Education (ACE), Washington, DC; and
Educational Testing Service (ETS), Princeton, New Jersey.  In
addition, there are various organizations that sponsor
educational tests even though they do not have the technical
capability to produce tests.  For example, The College Board,
New York, New York, sponsors the Scholastic Assessment Test
(SAT) which is developed for The College Board by ETS.  All of
these non-profit organizations have, or have access to, the
capability to develop, publish and distribute tests to schools.
Currently, ACT, The College Board, and ETS publish one or more
educational tests for the school market.

            There are a number of for-profit and non-profit
organizations that provide test design, production and
consulting services to states under contract.  For example,
Measured Progress, Inc., Dover, New Hampshire; National
Evaluation Systems (NES), Amherst, Massachusetts; and NCS
Pearson, Iowa City, Iowa; are among the for-profit firms that
supply test development, printing, distribution, and scoring
services to individual states under contract.  Among the non-
profit organizations, ACT and ETS have conducted such contract
work for states and ETS is the current contractor for the
National Assessment of Educational Progress.  By enabling states
to have tests developed and administered to their own
specifications, these for-profit and non-profit organizations
compete indirectly with the Company's assessment division.  In
terms of size alone, these firms have greater marketing
capability and resources than does the Company.

            The Maculaitis Test exists in a competitive market;
however, several of the non-profit and for-profit testing
companies do not have a product that is in direct competition
with the test.  The major sources of direct competition are: the
LAS (Language Assessment Scales) tests published by CTB/McGraw-
Hill, the LAB (Language Assessment Battery) developed by the New
York City Board of Education, and the IPT (Idea Language
Proficiency Test), published by Ballard and Tighe. Each of these
tests is designed to assess a student's level English language
proficiency.  In indirect competition are tests that assess a
student's language proficiency in a primary language other than
English, such as the Spanish versions of the LAS and IPT. In
addition, some states have developed their own instruments for
statewide testing of English Language Learners, such as the
MELAB (Michigan English Language Assessment Battery) and the
RPTE (Texas Reading Proficiency Tests in English).

            INSTRUCTIONAL MATERIALS.  The elementary school market
for the consumable books published by MLP is both huge and
highly competitive, with every major publisher and numerous
smaller publishers providing material.  MLP's disadvantage is
that its marketing resources are significantly smaller than
those of the major publishers.  MLP' s advantage is that, with
its smaller corporate structure, decisions can be made rapidly
so that new products can be available in a fraction of the time
required by the major publishers.  MLP's other competitive
advantage is a lower selling price than that generally
applicable to other consumable books with which MLP's products
compete.  MLP has developed a unique position through direct
mail sales.

            EDUCATIONAL DELIVERY.  The post-secondary education
market is highly competitive.  The Mildred Elley schools compete
for students and faculty with public and private two-year and
four-year colleges as well as other proprietary schools.  The
available student pool for the Mildred Elley schools is from a
limited geographic area.  Many of the colleges and other
proprietary post-secondary schools in such area have greater
resources than are currently available to the Mildred Elley
schools.  Some of these schools offer programs similar to those
of the Mildred Elley schools and some offer programs not
currently available at the Mildred Elley schools.  While there
can be no assurances, the Company believes that the Mildred
Elley schools will be able to compete successfully in these
markets because of the quality of its faculty, education
programs and job placement.

EMPLOYEES

            As of October 31, 2001, the Company employed a total
of 148 employees, 95 on a full-time basis, and 53 on a part-time
basis.  Of the 148 employees, 12 are engaged in research and/or
test development, 18 are in operations, 6 are in executive
capacities, 10 are in marketing in its assessment and
instructional divisions, and 112 are in the educational delivery
division.

GOVERNMENT REGULATIONS

            ASSESSMENT AND INSTRUCTIONAL MATERIALS.  The degree of
government regulations to be imposed upon the Company in the
assessment and instructional materials fields is uncertain at
this time. Under Title I of the 1994 Improving America's Schools
Act (IASA), schools that serve large numbers of children from
low-income families receive financial assistance from the
Federal government to expand and improve their educational
programs to meet the needs of educationally deprived students.
Title I regulations include a requirement that schools receiving
Title I funds must evaluate student growth or progress in
reading.  It is management's belief that State Education
Authorities (SEAs) find DRP test results to be in accord with
the regulations for Title I, as DRP tests are used by schools to
evaluate Federally-supported Title I programs.

            Management believes it may be necessary to obtain
other governmental approvals for its products.  If necessary, a
portion of the revenues of the Company may be directed toward
obtaining such approvals, and any such expenditures will occur
without the assurance that approvals will be achieved.
Additionally, the extent of potentially adverse government
regulations which might arise from future legislative or
administrative action cannot be predicted.

            EDUCATIONAL DELIVERY.  The post-secondary proprietary
school industry is highly regulated with respect to
accreditation and government funding issues.  The Company
acquired Mildred Elley through MESI, a wholly-owned subsidiary
of TESC, in November 1998.  As a result of the change in
ownership of Mildred Elley, the Mildred Elley schools were
required, under applicable regulation, to apply to the
accrediting agency, the U.S. Department of Education (the
"DOE"), and the applicable state department of education for
approval to operate under its new owners.  The accrediting
agency and the DOE approved the change of ownership during
Fiscal 1999. The state agency generally takes 24 to 36 months.
The New York State Education Department reaccreditation review
occurred in late spring 2000.  We received a copy of the
agency's comments and responded in a timely fashion.  We believe
that based upon the agency's comments and our responses, the
agency will grant reaccredidation, although we have no
timetable.  However, if the reaccreditation is not granted, the
Company will have to re-evaluate its degree-granting
capabilities.

            Students attending Mildred Elley schools finance their
education through a combination of individual resources and
government sponsored financial aid in the form of loans and
grants.  The Company estimates that over 70% of students
currently enrolled at the Mildred Elley schools receive some
form of government-sponsored assistance.  In the past fiscal
year, students received tuition funds under Federal and New York
State grant programs, as well from loans funded by Mildred
Elley.

            The Federal government provides a substantial part of
its support for post-secondary education in the form of grants
and loans to students attending an institution certified as
eligible by the DOE.  The Higher Education Act of 1965, as
amended (the "HEA"), and the regulations promulgated by the DOE
thereunder subject the Mildred Elley schools to significant
regulatory scrutiny on the basis of numerous standards that
schools must satisfy in order to participate in the various
Federal student financial assistance programs under Title IV of
the HEA.  Included among these standards are the following: (i)
the institution must maintain a rate of default by its students
on federally guaranteed or funded student loans that is below a
certain rate; (ii) the proportion of an institution's revenue
that may be derived from Title IV programs is limited; (iii) the
institution must adhere to certain financial responsibility and
administrative capability standards; (iv) the institution must
adhere to certain change in ownership restrictions; and (v) the
institution must achieve certain standards in program completion
and placement.

            Due to default rates on student loans prior to the
Company's acquisition of Mildred Elley, Mildred Elley students
did not qualify for loans under Title IV in Fiscal 2000.  In the
fall of 2000, the Mildred Elley schools requalified for the
Title IV program.  The first students to be able to take
advantage of the Federal loan program were those enrolled in the
January 2001 module.

PATENTS, COPYRIGHTS, TRADEMARKS, TRADE SECRETS AND ROYALTIES

            The Company regularly asserts copyrights to all of its
assessment and instructional materials.

            The following are registered trademarks and/or service
marks of the Company:  TASA, the TASA logo, DRP Program The
Readability Standard, Browzer-->BOOKLINK, DRP, DRP--> BOOKLINK,
DRP-->EZ Converter, DRP Linking Text to Ability, Booklore and
design, BookMatch, DWM, Degrees of Reading Power, Degrees of Word
Meaning, MicRA-->DRP, TextSense, TASA Literacy, Signposts and
design, We've Done the Research for You, and The MAC II Test of
English Language Proficiency and design (both pending).  Additionally,
Change-A-Print Frame is a registered trademark of MLP.

            Trade secrets are maintained by licenses for software
and certain proprietary data.  In addition, all employees
execute nondisclosure agreements as a condition of employment.

            In connection with the purchase by MLP of
substantially all the operating assets of Programs for
Education, Inc. and pursuant to a Royalty Agreement between MLP
and Bernard Shapiro, the founder of Programs for Education,
Inc., MLP agreed to pay to Mr. Shapiro a royalty on sales of
certain titles for a term of seven years following the closing
of the acquisition in Fiscal 1997 in an amount equal to a
minimum of $80,000 annually, with a maximum of $120,000 in the
first year, which increases each year to a maximum of $240,000
in the seventh year.  The Company paid Mr. Shapiro a total of
$151,279 in Fiscal 2000 and $160,667 in Fiscal 2001.

            When MESI acquired substantially all of the assets of
Mildred Elley, it also acquired the names of Mildred Elley,
including "Mildred Elley School, Inc.", "Mildred Elley Business
School" and all variations and derivatives thereof.

ITEM 2.     DESCRIPTION OF PROPERTY

            The Company owns a 30,000 square foot building in
Brewster, New York.  The building was constructed in 1987, with
the second phase completed in 1991.  In Fiscal 1997, the Company
retired the first and second mortgages on the property and
remortgaged the facility with MSB Bank, now Hudson United Bank.

            MLP rents approximately 5,000 square feet for its
service and order fulfillment centers in Rosemont, New Jersey on
a month-to-month basis.  In September 2000, it vacated its
editorial facilities in Honesdale, Pennsylvania, and
consolidated those activities into Brewster, New York.

            BETA rents a small office facility of 500 square feet
in Austin, Texas, which also affords good proximity to the Texas
Education Agency. The Company made the decision to open the
office in Texas because of the volume of business in that state.

            Mildred Elley's principal campus is located in Latham,
New York (near Albany), with an additional branch in Pittsfield,
Massachusetts.  Each campus contains teaching facilities,
administrative offices and admissions offices.  Mildred Elley
leases all of its facilities.  The leases have remaining terms
ranging from 1 to 10 years.  The Company monitors facility
capability in light of current utilization and projected
enrollment growth.  The Company believes that the facilities
occupied by the Mildred Elley schools now can accommodate
expected near-term growth.

            The Company expends its resources for capital improvements
as necessary.

ITEM 3. LEGAL PROCEEDINGS

            In January 2000, a former employee of Mildred Elley
commenced an action against the Company, MESI and an executive
officer of MESI in the Supreme Court of the State of New York in
the County of Albany.  The complaint alleges claims of wrongful
termination of employment and seeks damages as compensation.
The Company believes that the allegations are without merit and
is vigorously defending the action.  The Company maintains
directors and officers liability insurance which, subject to a
policy deductible, insures the defendant officer, but not the
Company, against such claims.

            The former owner of the Mildred Elley School, Inc.
commenced an action alleging defaults in the payment of
certain amounts under the asset purchase agreement between
the Company and Mildred Elley School, Inc. and the
accompanying promissory notes of MESI (TASA's wholly-owned
subsidiary).  The complaint also alleges certain defaults by
MESI in the employment agreement between MESI and Faith
Takes, the former owner of the Mildred Elley School, Inc.
who is currently MESI's president and chief executive
officer.  The Company has defended primarily based on
offsets related to breaches of warranties in the asset
purchase agreement.  Cross-motions for partial summary
judgment were made and the court issued a decision which
granted summary judgment to plaintiff on two demand notes in
the total principal amount of $67,000 plus attorneys fees of
$9,326.  The enforcement of the judgment is stayed pending
appeal of the court decision.  The court also recognized the
right of offset and granted summary judgment in favor of
MESI on one issue, but found a triable issue of fact on the
parties' intentions on another issue.  Cross-appeals of the
lower court's decision are pending currently in the New York
State Appellate Division.  The foregoing alleged defaults
trigger a potential cross default under the Company's
outstanding 8% Subordinated Debentures, in the outstanding
principal amount of $3,530,141 (as of October 31, 2001) held
by Cahill Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P.  The Company has not received a
notice of default from the holders of such Debentures.

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

            None.


                               PART II

ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

            (a)     The Company's common stock, par value $.0001 per
share (the "Common Stock"), was traded until July 2, 2001, in
the NASDAQ small-capitalization over-the-counter market
("Nasdaq") under the symbol TASA.  Since July 2, 2001, the
Company's Common Stock has been traded in the Nasdaq Electronic
Bulletin Board.  The approximate high and low closing prices for
each fiscal quarter in the two fiscal years ended October 31,
2000 and October 31, 2001 were as follows:

                       Common Stock Prices
                       -------------------

       Fiscal Quarter:       High           Low

       1st Qtr 00           $3.00         $0.938
       2nd Qtr 00            4.469         1.250
       3rd Qtr 00            1.938         1.000
       4th Qtr 00            1.594         0.625

       1st Qtr 01            1.156         0.406
       2nd Qtr 01            1.1875        0.62
       3rd Qtr 01            1.03          0.30
       4th Qtr 01            0.80          0.40

            During the first quarter of Fiscal 2002 (through January 22,
2002), the Company's Common Stock had a high closing price of
$0.78 and a low closing price of $0.43.

            As of the close of business on March 4, 1999, the
Company effected a one-for-four reverse stock split (the "Stock
Split") of the Company's Common Stock.  All stock prices and all
share amounts quoted in this Report have been adjusted to give
effect to the Stock Split.  These quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions.

            On January 2, 2001, the Company received a notice from
Nasdaq stating that the company had failed to meet the continued
listing requirement of the SmallCap Market because the price of
the Company's Common Stock had been less than $1.00 for 30
consecutive trading days.  The Company had 90 days to rectify
this deficiency, which required that the Company's Common Stock
close at a price of $1.00 or more for ten consecutive trading
days.  The Company was unable to satisfy this criterion, and as
a result, the Company's Common Stock was delisted from the Small
Cap Market on July 2, 2001.  Since July 2, 2001, the Company's
Common Stock has traded on the Nasdaq Electronic Bulletin Board.

            As of January 22, 2002, there were 81 holders of
record of the Company's Common Stock.  This number of holders of
record does not include beneficial owners of the Company's
Common Stock, whose shares are held in the names of various
security holders, dealers and clearing agencies.  The Company
believes that the number of beneficial owners of its Common
Stock held by others or in nominee names exceeds approximately
1,000 in number.  The Company has not paid any cash dividends,
and does not anticipate doing so in the immediate future as it
intends to invest any earnings in the development of the
Company's business.

            On November 27, 1998, pursuant to a prior transaction
with each of Cahill, Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P. (collectively, the "Cahill, Warnock
Entities") (see "Certain Relationships and Related Transactions"
in Item 12, below), the Company redeemed all of the outstanding
shares of its Series A Preferred Stock for a nominal aggregate
redemption price.  Until the shares were redeemed, there were
1,500 shares of Series A Preferred Stock outstanding.  Each
share of Series A Preferred Stock had been entitled to cast
3,000 votes per share on any matter brought before the
stockholders of the Company.  No shares of Series A Preferred
Stock are currently outstanding.

            (b) Not applicable.

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

            Except for historical information, the material
contained in this Management's Discussion and Analysis or Plan
of Operation is forward-looking.  For the purposes of the safe
harbor protection for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995, readers are
urged to review the list of certain important factors set forth
in "Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995" below, which may cause actual results to differ materially
from those described.

COMPANY BACKGROUND

            For over twenty years, TASA has served the rapidly
expanding education market, primarily through the publishing and
sale of its highly regarded proprietary reading tests.  Since
1994, new management has implemented a strategy to broaden the
Company's services within the educational marketplace.  As a
result, the Company has completed four acquisitions since the
beginning of Fiscal 1997 and now serves three educational
markets:  (1) educational assessment and evaluation, (2)
educational instruction, and (3) educational delivery.  TASA
revenues in Fiscal 1996 were $2.5 million and have increased by
acquisition and internal growth to $14.4 million in Fiscal 2001.

            Prior to 1997, the Company's revenues derived from the
publishing and distribution of its proprietary line of reading
tests.  During Fiscal 1997, the Company acquired Beck Evaluation
and Testing Associates, Inc. ("BETA"), which operates as the
Company's custom test design division.  In that same fiscal
year, the Company organized Modern Learning press, Inc. ("MLP"),
which purchased substantially all of the assets of Programs for
Education, Inc., and marked the Company's entrance into the
instructional marketplace.  MLP designs, publishes and
distributes affordable "consumable" student workbooks that
target grades K-6, and creates and publishes books and pamphlets
for elementary school teachers and parents.  Also in Fiscal
1997, the Company purchased the Maculaitis Assessment of
Competencies test (the "Maculaitis Test") which is a
comprehensive language assessment and evaluation program for
English as a second language.  In Fiscal 1998, the Company
organized a wholly-owned subsidiary, TASA Educational Services
Corp. ("TESC"), to operate and acquire post-secondary
proprietary schools.  TESC completed its first acquisition in,
the educational delivery field through its acquisition in
November 1998 of the 750-student Mildred Elley Schools
("Elley").

            Accordingly, in an effort to report revenues in a more
meaningful manner, the Company has segregated revenues into
three discrete segments:  (1) assessment products and services
revenues, (2) instructional revenues, and (3) educational
delivery revenues.  All prior periods have been recharacterized
into these three segments for comparative purposes.

            The following table sets forth the revenues in each of
the assessment, instructional and educational delivery
divisions, and the annual percentage change for each of these
divisions, for Fiscal 2001, 2000, and 1999:



            TASA Revenues Breakdown (in thousands of dollars) and % of
                           Year-To-Year Change


<TABLE>
<CAPTION>
                                             Fiscal Year Ended October 31,
                          ---------------------------------------------------------------
                           1999-
                           2001           2001             2000               1999
                           ----           ----             ----               ----

                             %                 %                  %                    %
                           Change     $     Change      $       Change      $        Change
                           ------    ---    ------     ---      ------     ---       ------

<S>                     <C>     <C>        <C>     <C>        <C>     <C>         <C>


Assessment Products
and Services Revenues..     44%    $6,594.2   35%     $4,897.9     7%    $4,591.5     11%

Educational Delivery
Revenues.............       (6%)   $4,967.0   (2%)    $5,074.7    (4%)   $5,297.1     N/A

Instructional
Revenues.............       17%    $2,839.0    2%     $2,785.5    15%    $2,427.6     11%

Total
Revenues..........          17%   $14,400.1   13%    $12,758.1     4%   $12,316.3     95%

</TABLE>

            The following are selected ratios as a percentage of
revenues based on the Company's financial statements:


                                   Fiscal Year Ended October 31,
                                   -----------------------------

                                       2001      2000     1999
                                    ----------------------------


Revenues . . . . . . . . . . . . .     100%      100%     100%


   Gross Profit margins. . . . . .      62%       61%      64%

Operating Expenses:
   Selling Expenses. . . . . . . .      19%       22%      20%
   General & Administrative. . . .      36%       43%      36%
   Write Down of Software
    Development Costs. . . . . . .     ----        1%     ----
   Impairment of Test
    Passage Bank. . . . . . . . .      ----        5%     ----
   Income (Loss) from Operations         7%      (10%)      8%
     Net Interest Inc. (Exp.). . .      (5%)      (6%)      7%
                                   ----------------------------
   Pre Tax Income (Loss). . . . .        3%      (16%)      2%

   Net Income (Loss). . . . . . .        2%       (9%)      1%
                                   ============================

FISCAL 2001 AS COMPARED TO FISCAL 2000

            REVENUES. The Company's revenues for the year ended
October 31, 2001 (the current year) were $14,400,145,
representing a 13% increase or $1,642,021 over $12,758,124 for
the year ended October 31, 2000 (the comparable year).  The
overall increase was attributable to internal growth of the
Company's assessment division.

            Revenues for assessment products and services, through
the Company's proprietary and custom test design units increased
35% or $1,696,240 to $6,594,163 in Fiscal 2001 from $4,897,923
in Fiscal 2000.  The Company's proprietary test unit revenues
increased 23%.  This growth can be attributable to the fourth
quarter Fiscal 2000 launch of a new series of DRP tests (with
new norms), the launch of our new MacII (Limited English
Proficiency/English as a Second Language-LEP/ESL) test in July
2001 as well as increased sales of our BookLink software.  BETA,
our custom testing unit, increased 52% over the same period.
This increase can be attributable to growth in BETA's state
contract business.  In Fiscal 2001, BETA obtained several
substantial contracts that accounted for these gains.

            The instructional division's revenues increased
$53,511 or 2% from $2,785,497 in Fiscal 2000 to $2,839,008 in
Fiscal 2001. For the first nine month's of Fiscal 2001, we had a
14% increase in sales.  Following the events of September 11th,
we witnessed a significant decrease in orders as a result of the
delays in receiving mail due to the anthrax problems and because
our distribution facility is serviced by the Trenton, New Jersey
postal facility.  The Company received the bulk of the delayed
mail in November and December 2001.

            The educational delivery division contributed
$4,966,974 to the Company's total revenues in Fiscal 2001. This
is a $107,730 decrease versus revenues of $5,074,704 in the
comparable year.  While parts of the country are experiencing
significant increases in unemployment, the Albany market (where
our schools are located) remains strong.  Thus, although the
school is now back in the Federal loan program, we have
witnessed decreased enrollment.

            COST OF GOODS SOLD. Cost of goods sold increased by
12% or $575,405 from $4,919,980 in Fiscal 2000 to $5,495,385 in
Fiscal 2001.  However, as a percent of revenue, cost of goods
decreased from 39% in the prior year to 38% in Fiscal 2001.
While the cost of goods remained essentially the same (as a
percent on a consolidated basis), the Company did achieve volume
economies on its assessment products offset by higher delivery
costs for our educational services division. Since our volumes
increased significantly on our proprietary test (DRP) and
because a portion of our cost of goods is fixed (amortization of
the test passage bank), the cost of goods as a percent of
revenues had a favorable variance. However, the NY State
Education Department has required that our faculty at Elley
reduce teaching hours, thereby increasing the delivery cost of
education.

            GROSS PROFIT. The Company's gross profit for Fiscal
2001 increased by $1,066,616, or 14% from $7,838,144 in the
prior year to $8,904,760 in the current year.  The gross profit
margin was 62% in Fiscal 2001 versus 61% in the prior year.

            SELLING EXPENSES. The Company's selling expenses
decreased $125,718, or 4% in Fiscal 2001, from $2,811,302 in
Fiscal 2000 to $2,685,584 in Fiscal 2001. Selling expenses were
19% of revenues versus 22% in the prior year. These decreases
were primarily due to the reorganization of the assessment and
instructional sales organizations.

            GENERAL AND ADMINISTRATIVE. The Company's general and
administrative expenses for the current year decreased $262,211,
or 5%, from $5,462,452 in the prior year to $5,200,241 in Fiscal
2001.  As a percentage of sales, G&A is now 36% versus 43% in
Fiscal 2000.  These decreases are due to cost-reduction programs
that management initiated in 2000, coupled with the allocation
of certain manpower from G&A to the direct delivery of goods and
services.

            INCOME (LOSS) FROM OPERATIONS. Income (loss) from
operations increased by $2,261,120 or from ($1,242,185) in
Fiscal 2000 to $1,018,935 in Fiscal 2001.  The increase in
income is due to increased gross profit and lower selling and
general and administrative expenses.

            EBITDA. Earnings before interest, taxes, depreciation,
and amortization increased $2,076,352, or from ($174,713) in
Fiscal 2000 to $1,901,639 in Fiscal 2001.  These increases were
a result of increased revenue coupled with decreased selling and
general and administrative expenses.

            OTHER INCOME/EXPENSES.  Net interest expense decreased
by $108,990, or from $761,178 in Fiscal 2000 to $652,188 in
Fiscal 2001.  The decrease in this expense was due to reduced
borrowing on the Company's lines of credit coupled with
reductions in long-term debt.

            NET INCOME AND INCOME PER SHARE.  Net income after
taxes was $243,576 for Fiscal 2001 versus a loss of ($1,165,638)
in Fiscal 2000.  For Fiscal 2001, earnings per share, both basic
and diluted, was $0.10 versus a loss of ($0.48) in 2000.  The
basic weighted average shares outstanding were 2,559,453 in
Fiscal 2001 versus 2,438,167 in Fiscal 2000.

FISCAL 2000 AS COMPARED TO FISCAL 1999

            REVENUES.  For Fiscal 2000, the Company's revenues
were $12,758,124, representing a 4% increase, or $441,878, over
$12,316,246 for Fiscal 1999.  The overall increase was
attributable to internal growth of the Company's assessment and
instructional divisions.

            Revenues for assessment products and services, through
the Company's proprietary test and custom test design divisions,
increased 7%, or $306,381, to $4,897,923 in Fiscal 2000, from
$4,591,542 in Fiscal 1999.  The Company's proprietary test
division featuring DRP products reflected a revenue decrease of
8% as a result of a declining volume of contractual sales
primarily in the State of New York due to the phase out of the
PEP/DRP test previously administered in the third and sixth
grades.  However, during the latter half of Fiscal 2000, the
Company secured a five-year $1.2 million contract for the
continuance of the New York State Regents Competency Test and
also launched its new series of DRP tests.  The new series of
DRP tests contributed to a 31% increase in catalog sales during
the fourth quarter of Fiscal 2000 versus the same period in
Fiscal 1999.  Management believes that by securing the New York
State Regents Competency Test contract and launching its new
series of DRP tests, the Company should continue to see revenue
growth within the proprietary test division throughout the
upcoming fiscal year. While the Company's proprietary test
division saw an overall decline in revenues during Fiscal 2000,
the custom test design division, BETA, posted a 40% increase for
the same period.  This increase is primarily attributable to
growth in BETA's contractual business.  As of October 31, 2000,
BETA had contracts with 8 states representing more than $1.0
million in contracted business for the upcoming fiscal year.

            Instructional revenues increased 15% in Fiscal 2000
from Fiscal 1999 (or $2,785,497 in Fiscal 2000 versus $2,427,577
in Fiscal 1999).  This increase is a result of the Company's
reorganization of the instructional products division, more
specifically, the addition and hiring of new executive
management, increased marketing efforts and the addition of a
new independent sales organization which now represents and
markets the Company's instructional products in approximately
50% of the United States.  In late 1998, management made the
decision to shift its marketing focus and direct sales
representation as well as to engage in cooperative marketing
efforts.  Management believes that these efforts should
contribute to increased future revenue growth for the Company's
instructional division.

            The educational delivery division contributed
$5,074,704 to the Company's total revenues for Fiscal 2000,
which amount represented a 4% decrease (or $222,423) from Fiscal
1999 revenues, for this division of $5,297,127.  This decrease
can be primarily attributed to decreased student census during
the first and fourth quarters of Fiscal 2000 and the Company's
modification to its revenue recognition policy, adopted during
the second quarter of Fiscal 1999, as it relates to the
educational delivery division's revenues.

            COST OF GOODS SOLD.  Cost of goods sold in Fiscal 2000
increased by 10%, or $450,234, from $4,469,746 in Fiscal 1999 to
$4,919,980 in Fiscal 2000.  Cost of goods sold as a percentage
of revenues also increased from 36% to 39% due to a change in
product mix.  This increase was primarily the result of
increased costs required to deliver assessment products and
services, more specifically, the Company's custom test design
division's services which are typically associated with higher
direct costs.

            GROSS PROFIT.  In Fiscal 2000, gross profit decreased
minimally (less than 17) or $8,356, from $7,846,500 in Fiscal
1999 to $7,838,149 in Fiscal 2000.  The gross profit margin
percentage also decreased in Fiscal 2000 to approximately 62%
from 64% in Fiscal 1999.  This percentage decrease can be
attributed to an increase in direct costs associated with
revenue growth contributed by the Company's custom test design
division.

            SELLING EXPENSES.  Selling expenses for Fiscal 2000
increased by 12%, or $305,368, from $2,505,934 in Fiscal 1999 to
$2,811,302 in Fiscal 2000.  As a percentage of revenues, selling
expenses increased to 22% in Fiscal 2000 versus 20% in Fiscal
1999.  These increases can be primarily attributable to overall
increased organizational marketing efforts.

            GENERAL AND ADMINISTRATIVE.  The Company's general and
administrative expenses increased 25%, or $1,075,199, from
$4,387,253 in Fiscal 1999 to $5,462,452 in Fiscal 2000.  General
and administrative expenses as a percentage of sales were 43% in
Fiscal 2000 versus 36% in Fiscal 1999.  These dollar and
percentage increases were primarily the result of management's
decision to build the infrastructure of the organization coupled
with the further establishment of adequate reserves and the
write off of due diligence expenses associated with failed
acquisitions.

            WRITE DOWN OF SOFTWARE DEVELOPMENT COSTS.  In Fiscal
2000, the Company took a one-time $120,853 charge for the write
down of software development costs associated with certain of
the Company's saleable computer software products in order to
adjust such products to their net realizable value.  This one-
time charge represented approximately 1% of the Company's
revenues for Fiscal 2000.  There was no such charge in Fiscal
1999.

            IMPAIRMENT OF TEST PASSAGE BANK.  In Fiscal 2000, the
Company took a one-time $685,722 charge for impairment of its
test passage bank after deeming certain passages within the bank
to have little or no value as of October 31, 2000.  This one-
time charge represented approximately 5% of the Company's
revenues for Fiscal 2000.  There was no such impairment in
Fiscal 1999.

            INCOME (LOSS) FROM OPERATIONS.  (Loss) from operations
for Fiscal 2000 was ($1,242,185) versus income from operations
of $953,313 in Fiscal 1999.  The loss in Fiscal 2000 was
principally due to the increase in selling and general and
administrative expenses coupled with the one-time charges
associated with the write down of software development costs and
impairment of the Company's test passage bank.

            EBITDA.  Earnings (loss) before interest, taxes,
depreciation, and amortization decreased $2,097,524 to
($174,713) in Fiscal 2000 from $1,922,811 in Fiscal 1999.  As a
percentage of revenues, EBITDA decreased to (1%) in Fiscal 2000
versus 16% in Fiscal 1999.  These dollar and percentage
decreases were essentially attributable to the increase in
general and administrative expenses which included costs
associated with the establishment of adequate reserves and the
write off of due diligence expenses associated with failed
acquisitions, coupled with a lower gross profit margin resulting
from an increase in revenues from the Company's custom test
design division.

            OTHER INCOME (EXPENSE).  Net other income (expense)
increased to ($732,423) in Fiscal 2000 versus ($695,360) in
Fiscal 1999.  This increase is primarily attributable to a
decline in income earned on temporary investments and marketable
securities as well as a decline in other income.

            INCOME (LOSS) BEFORE INCOME TAXES.  The Company had a
loss before income taxes of ($1,974,618) in Fiscal 2000 versus
income before taxes of $257,953 in Fiscal 1999 representing a
net decrease in Fiscal 2000 of ($2,232,561).  This decrease was
the result of increased overhead, one-time charges taken for the
write down of software development costs, impairment of the
Company's test passage bank and the write off of due diligence
expenses associated with failed acquisitions, and increased
costs of goods sold.

            NET INCOME (LOSS) AND BASIC INCOME (LOSS) PER SHARE.
Net loss after taxes was ($1,165,638) for Fiscal 2000 versus net
income after taxes of $180,757 for Fiscal 1999.  For Fiscal
2000, basic loss per share was ($.48) based on weighted average
shares outstanding of 2,438,167.  For Fiscal 1999, basic income
per share was $.08 based upon 2,141,801 weighted average shares
outstanding.

LIQUIDITY AND WORKING CAPITAL

            WORKING CAPITAL.  Working capital increased by
$645,096 during Fiscal 2001 from $1,053,496 at October 31, 2000,
to $1,698,592, at October 31, 2001. This increase resulted
primarily from the increase in accounts and tuition receivable
and decrease in the lines of credit offset in part by an
increase in accounts payable and accrued expenses. The ratio of
current assets to current liabilities was approximately 1.5 to
1.0 at the end of the Fiscal 2001 versus 1.3 to 1.0 at the end
of Fiscal 2000.

            CASH FLOW FROM OPERATING ACTIVITIES.  During Fiscal
2001, the Company had net cash provided by operating activities
of $1,464,963, as compared to ($360,955) used in operating
activities in Fiscal 2000. The increase in cash provided by
operating activities resulted from the net income reported in
Fiscal 2001 as well as a smaller increase in tuition receivables
and noncash deductions for depreciation, amortization, deferred
interest and deferred income taxes offset in part by an increase
in accounts receivable.

            CASH FLOW FROM INVESTING ACTIVITIES.  During Fiscal
2001, the Company had net cash used in investing activities of
($530,133), as compared to ($691,713) for the Fiscal 2000. The
decrease in cash used in investing activities resulted primarily
from reduced investments in test development due to the
completion and launch of several new test products during Fiscal
2001.

            CASH FLOW FROM FINANCING ACTIVITIES.  The Company had
net cash used in financing activities of ($1,369,953) for Fiscal
2001 as compared to $423,863 from financing activities for the
Fiscal 2000.  The increase in cash used for financing activities
resulted from the Company repaying certain debt.

SELECTED FINANCIAL DATA

            The following tables summarize certain financial data
for the Company for Fiscal 2001, 2000 and 1999, respectively.
See "Financial Statements" in Item 7 below.



                                           Fiscal Year Ended October 31,
                                    ------------------------------------------

                                        2001            2000           1999
                                    ------------------------------------------

INCOME STATEMENT DATA:

Operating revenues. . . . . . . . . $14,400,145     $12,758,124    $12,316,246

Net sales. . . . . . . . . . . . .   14,400,145      12,758,124     12,316,246

Gross profit. . . . . . . . . . . .   8,904,760       7,838,144      7,846,500

Income (loss) from operations. . .    1,018,935      (1,242,185)       953,313

Income (loss) before income taxes. .    366,747      (1,974,608)       257,953

Net income (loss). . . . . . . . . .    243,576      (1,165,638)       180,757

Earnings (loss) per share. . . . . .        .10            (.48)           .08


BALANCE SHEETS:

Current assets. . . . . . . . . . .  $4,834,932      $4,764,468     $5,479,456

Total assets. . . . . . . . . . . .  15,308,967      16,204,649     16,384,417

Long-term obligations. . . . . . .    5,521,349       6,212,302      7,134,674

Total liabilities. . . . . . . . .    8,657,689       9,923,274      9,534,557

Working capital. . . . . . . . . .    1,698,592       1,053,496      3,079,573

Stockholders' equity. . . . . . . .   6,651,278       6,281,375      6,849,860


CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

            Certain statements contained in this Report contain
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  These are statements
that do not relate strictly to historical or current facts.
Such forward-looking statements involve known and unknown risks
and uncertainties.  The Company's actual actions or results may
differ materially from those discussed in the forward-looking
statements.  These risk factors include, without limitation:

            . Rapid changes in (i) the technology used to administer
standardized tests generally or market educational
materials or (ii) in the policy considerations which
determine which test will be administered;

            . Non-renewal of the Company's annual contract with the
State of Connecticut;

            . The loss of any significant customer;

            . The ability of the Company to compete successfully
with the other providers of standardized tests (see
"Description of Business--Competition", above);

            . The ability of the Company to accommodate any changes
in government regulation which may impact the
marketability of its tests (see "Description of
Business--Government Regulation", above);

            . The loss of the eligibility of the Mildred Elley
Schools under Federal or state grant programs for
tuition assistance, or the discontinuance of Federal
or state grant programs for tuition assistance;

            . The loss of accreditation of the Mildred Elley
schools;

            . The ability of the Company to secure additional
financing as and when necessary;

            . The ability of the Company to retain the services of
its key management, and to attract new members of the
management team;

            . The ability of the Company to effect and retain
appropriate patent, copyright and trademark
protection of its products;

            . The ability of the Company to meet the continued
listing requirements of Nasdaq;

            . Any decrease in the market for educational consulting
services; and

            . Increased competition in the field of publishing.
The Company undertakes no obligation to release
publicly any revisions to the forward-looking statements or to
reflect events or circumstances after the date of this Report.

ITEM 7.     FINANCIAL STATEMENTS

            Financial information required by this item appears in
the pages marked F-1 through F-32 at the end of this Report and
are incorporated herein by reference as if fully set forth
herein.

               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                     PAGE


      Independent Auditors' Report                                    F-2


      Consolidated Financial Statements:


         Consolidated Balance Sheets                                  F-3


         Consolidated Statements of Operations and
         Comprehensive Income                                         F-5


         Consolidated Statement of Changes in
         Stockholders' Equity                                         F-6


         Consolidated Statements of Cash Flows                        F-7


         Notes to Consolidated Financial Statements                   F-9

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

            None.

<PAGE>

                               PART III

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

            As of January 22, 2002, the directors and executive
officers of the Company were as follows:



     Name                  Age         Position
     ----                  ---         --------

Michael D. Beck             55   Director; Vice President, TASA; and
                                 President, Chief Executive Officer, BETA

Steven R. Berger(1)(2)      46   Director

Peter A. Duhamel            56   Chief Operating Officer, TASA and
                                 MLP; Vice President, TASA

Joseph A. Fernandez(1)(2)   66   Director

Donald W. Hughes(1)         51   Director

Andrew L. Simon             59   Chairman of the Board of Directors;
                                 President and Chief Executive
                                 Officer, TASA

Linda G. Straley            45   Director; Vice President, and Secretary, TASA

Thomas G. Struzzieri(1)(2)  43   Director

Faith Takes                 47   Executive Vice President, TESC;
                                 President and Chief Executive Officer, MESI

David L. Warnock(2)         44   Director


________________________
(1)	Member of the Audit Committee

(2)     Member of the Compensation Committee.

            Each director shall hold office until the earlier of
the next annual meeting of the Company's stockholders or his or
her resignation and until a successor is selected and qualified.

            MICHAEL D. BECK was elected as a Director of the
Company in March 1997 and has been Vice President of the Company
since January 1997.  Mr. Beck is also a Director and President
and Chief Executive Officer of BETA and is a Director of MLP.
Since 1983, Mr. Beck has been President of BETA, which provides
consulting and contractual services to school districts, state
education departments and test and textbook publishers.  As of
January 2, 1997, BETA became a wholly-owned subsidiary of the
Company and Mr. Beck continues to serve as the President of
BETA.  See "Certain Relationships and Related Transactions" in
Item 12, below.  Mr. Beck has also provided consulting services
on matters of educational research and assessment for various
military, governmental and commercial organizations.  Mr. Beck
received an A.B. from John Carroll University and an M.A. from
Fordham University.

            STEVEN R. BERGER was elected as a Director of the
Company in March 1996 and he also serves on each of the
Company's Compensation and Audit Committees.  Mr. Berger has
been a partner in the law firm of Salans Hertzfeld Heilbronn
Christy & Viener in New York City since January 1989.  Mr.
Berger received an A.B. and a J.D. from Harvard University.
Salans Hertzfeld Heilbronn Christy & Viener has acted as special
securities counsel to the Company since January 1995.

            PETER A. DUHAMEL joined the Company as the Chief
Operating Officer of TASA and MLP and a Vice President of the
Company in January 2000.  Before joining the Company, Mr.
Duhamel was the National Sales Manager for Prentice Hall
Regents/Cambridge in Upper Saddle River, New Jersey, from July
1997 until December 1999, and as such was responsible for the
sales of all Cambridge and Prentice Hall Regents products to the
kindergarten through the adult/academic and GED markets through
all lines of distribution.  From January 1991 until June 1997,
Mr. Duhamel was the General Manager of Sales and Marketing for
the Troll School and Library in Mahwah, New Jersey, during which
time Mr. Duhamel was responsible for the sales and marketing of
Troll School and Library products to the educational market
place.  Mr. Duhamel received a B.S. from Western New England
College.

            JOSEPH A. FERNANDEZ was elected as a Director of the
Company in December 1998 and, since that date, he has also
served on each of the Company's Audit and Compensation
Committees.  Dr. Fernandez is also a director of BETA and TESC.
Dr. Fernandez is President of Joseph A. Fernandez & Associates,
Inc., an education consulting firm.  From June 1993 until June
1996, Dr. Fernandez served as President and Chief Executive
Officer of School Improvement Services, Inc., an organization in
Winter Park, Florida which provides consulting services related
to school improvement at the state, district or school level.
From June 1993 until July 1994, Dr. Fernandez also served as the
President of the Council of Great City Schools, a Washington,
D.C. based organization representing fifty of the largest urban
school districts in the United States.  Prior to assuming such
positions in 1993, Dr. Fernandez served as Chancellor of the New
York City Public Schools from 1990 to 1993 and as Superintendent
of the Dade County Public Schools in Miami, Florida from 1987 to
1990.  Dr. Fernandez served on the Board of Directors of
Children's Comprehensive Services, Inc. from 1994 through 2001,
and currently serves on the Board of Directors of Commerce Thru
Digital Technology, Inc.  Dr. Fernandez holds a B.A. from the
University of Miami, a M.A. in Education from Florida Atlantic
University and an Ed.D. from Nova University.

            DONALD W. HUGHES was elected as Director in June 2001.
Since July 2001, Mr. Hughes has served on the Company's Audit
Committee.  Mr. Hughes has served as an officer of Cahill
Warnock since February 1997 and is a General Partner and Chief
Financial Officer of Cahill Warnock.  Prior to joining Cahill
Warnock in February 1997, Mr. Hughes had served as Vice
President, Chief Financial Officer and Secretary of Capstone
Pharmacy Services, Inc. from December 1995 and as Executive Vice
President and Chief Financial Officer of Broventure Company,
Inc., a closely-held investment management company, from July
1984 to November 1995.  Mr. Hughes also serves on the boards of
Occupational Health + Rehabilitation Inc, AgilQuest, Inc. and
The School Company, Inc. Mr. Hughes received a B.A. from Lycoming
College and an M.S.F. from Loyala College in Maryland, and is a
Certified Pubic Accountant.

            ANDREW L. SIMON was elected as Director and as
President and Chief Financial Officer of the Company in March
1995.  Mr. Simon is also a Director of MLP, a Director and
President and Treasurer of TESC, a Director and Treasurer of
MESI and a Director and Secretary of BETA.  He served as Interim
President of TASA from June 1994 through March 1995.  He was a
founder of the Company and previously served as a Director from
1976 to 1991 and has acted as a financial consultant to the
Company since its inception in 1976.  From 1983 to 1986, he was
a Vice President/Marketing Division Head in the Private Clients
Group at Bankers Trust Company.  He was a Vice President at
Citibank, NA, where he held a number of senior marketing and
sales positions, from 1980 to 1983.  Prior to 1980, Mr. Simon
served as Marketing Director for several consumer package goods
companies including Norcliff-Thayer and Lederle Laboratories.
He holds an M.B.A. from Columbia University and a B.A. from
Washington University.  Mr. Simon is on The George Washington
University National Council for Education and Human Development.

            LINDA G. STRALEY was elected as a Director of the
Company and has been Vice President since June 1994.  From June
1994 through March 1995, she was Chairman of the Board of
Directors.  She has been Secretary since August 1992 and, from
1984 to 1994, she served as director of DRP Services for the
Company.  Ms. Straley is also a Director of MESI and a Director
and Secretary of TESC.  Ms. Straley received a B.A. in Education
from Bethany College and an M.S. in Educational Psychology and
Statistics from the State University of New York.

            THOMAS STRUZZIERI was elected a Director of the
Company in June 2000.  He serves on each of the Company's Audit
and Compensation Committees.  Mr. Struzzieri is the owner of
HITS, a special events production company.  HITS currently
produces major equestrian circuits in California, Florida,
Virginia, New York, Arizona, and Nevada.  He is a director of
the American Horse Shows Association and President of the
National Hunter Jumper Council.  He is on the Board of Directors
of the United Way of Dutchess County, the Rhinebeck Center for
Performing Arts, the Bardavon Opera House, the Boy Scouts of
American of Dutchess County and the Astor Home for Children.
Mr. Struzzieri is also a trustee of Vassar Hospital and a member
of the Business and Community Leaders' Advisory Committee of the
Institute of Ecosystems Studies.  He attended Vassar College.

            FAITH TAKES has been the Executive Vice President of
TASA Educational Services Corp. and President and Chief
Executive Officer of MESI since November 1998.  Ms. Takes is
also a Director of each of TESC and MESI.  From 1985 until she
joined the Company, Ms. Takes was President, Chief Executive
Officer and owner of the Mildred Elley Schools, Inc., during
which time Ms. Takes ran every aspect of the Mildred Elley
Schools.  During this time, Ms. Takes also had management
contracts with the Kelley/Kensington Business Institutes,
Worldwide Educational Services, Inc., Central City Business
Institute and Drake Business Institutes.  Ms. Takes is past
president of the New York State Registered Business School
Association.  Ms. Takes received her B.S. from the State
University of New York at Albany.

            DAVID L. WARNOCK was elected as a Director of the
Company in October 1998 and, since that time, he has also served
on the Company's Compensation Committee.  Mr. Warnock is also a
Director of TESC.  Mr. Warnock is a founding partner of Cahill,
Warnock & Company, LLC, an asset management firm established in
1995 to invest in small public companies.  From 1983 to 1995,
Mr. Warnock was with T. Rowe Price Associates in senior
management positions, including President of the corporate
general partner of T. Rowe Price Strategic Partners I and T.
Rowe Price Strategic Partners II, and as the Executive Vice
President of T. Rowe Price New Horizons fund.  Mr. Warnock also
serves on the Boards of Directors of Children's Comprehensive
Services, Inc., Concorde Career Colleges, Inc., Environmental
Safeguards, Inc., and The School Company.  Mr. Warnock received
a B.A. in History from the University of Delaware and a Masters
in Finance from the University of Wisconsin.

ITEM 10.        EXECUTIVE COMPENSATION

            The following table shows compensation for services
rendered to the Company during Fiscal 2001, 2000, and 1999,,
respectively, by the Chief Executive Officer, the President of
BETA, the Chief Operating Officer of TASA and MLP, the Chief
Financial Officer, and the Executive Vice President of TESC.
Each executive officer serves under the authority of the Board
of Directors. No other executive officer of the Company received
cash compensation that exceeded $100,000 during Fiscal 2001.
Therefore, pursuant to Item 402 of Regulation S-B, only
compensation for each of the Chief Executive Officer, the
President of BETA, the Chief Operating Officer of TASA and MLP,
the Chief Financial Officer, and the Executive Vice President of
TESC is shown in the Summary Compensation Table below.

<TABLE>
<CAPTION>

                      SUMMARY COMPENSATION TABLE



                                     Annual Compensation                       Long-Term Compensation
                                     ------------------------------------------------------------------
                                                                             Awards             Payouts
                                                                             --------------------------

                                                                                       Securities            All Other
                                                          Other Annual  Restricted      Underlying     LTIP    Compen-
 Name and Principal                                       Compensation    Stock       Options/SARs(1) Payouts  sation
     Position                Year    Salary($)   Bonus($)      ($)      Award(s)($)        (#)          ($)      ($)
----------------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>         <C>       <C>            <C>         <C>              <C>       <C>
Andrew L. Simon,             2001    $215,000    $40,000    $21,854(2)    10,000(2)         0            0        0
President, Chief             2000    $212,500        0      $35,350(2)       0           20,000/0        0        0
Executive Officer            1999    $200,000        0      $35,473(2)       0           21,875/0        0        0
--------------------------------------------------------------------------------------------------------------------
Michael D. Beck,             2001    $150,000    $47,854    $19,654(3)    10,000(3)         0            0        0
Vice President,              2000    $150,000    $20,608    $30,702(3)       0           12,000/0        0        0
TASA; President              1999    $120,000    $26,811    $32,864(3)       0           13,750/0        0        0
and Chief
Executive
Officer, BETA
--------------------------------------------------------------------------------------------------------------------
Peter A.                     2001    $122,260    $40,511    $17,848(4)    10,000(4)         0            0        0
Duhamel, Chief               2000    $122,260        0      $20,201(4)         0         40,000/0        0        0
Operating                    1999          --         --         --           --             --         --       --
Officer,
TASA/MLP
--------------------------------------------------------------------------------------------------------------------
Denise M.                    2001    $91,616         0       $9,945(5)         0            0            0        0
Stefano, Chief               2000   $110,000         0      $14,842(5)         0          5,000/0        0        0
Financial                    1999    $50,000         0       $1,341(5)         0         15,000/0        0        0
Officer
(resigned
effective July
31, 2001)
--------------------------------------------------------------------------------------------------------------------
Faith Takes,                 2001   $150,000         0       $9,945(6)         0            0            0        0
Executive Vice               2000   $150,000         0      $10,979(6)         0         10,000/0        0        0
President, TESC;             1999   $150,000     $33,990    $10,700(6)         0         37,500/0        0        0
President and
Chief Executive
Officer, MESI
--------------------------------------------------------------------------------------------------------------------

<FN>
  *(1)    To date, the Company has issued no SARs.
   (2)    Includes: contributions to the Company's qualified 401(k)
          Profit Sharing Plan (the "401(k)") and the Company's Money
          Purchase Pension Plan (the "Pension Plan") of $8,500 in Fiscal
          2001, $17,000 in Fiscal 2000 and $16,000 in Fiscal 1999; and
          $9,000, $9,882, and $10,167, for a company car in Fiscal 2001,
          2000, and 1999, respectively.  Also includes restricted shares
          issued after the end of Fiscal 2001 pursuant to the Company's
          2000 Stock Incentive Plan, as part of a bonus paid in respect
          of Fiscal 2001.
   (3)    Includes: contributions to the Company's 401(k) and Pension
          Plan of  $8,500 in Fiscal 2001; $17,000 in Fiscal 2000; and
          $12,000 in Fiscal 1999; and $7,091, $6,234, and $7,176 for a
          company car in Fiscal 2001, 2000, and 1999, respectively.
          Also includes restricted shares issued after the end of Fiscal
          2001 pursuant to the Company's 2000 Stock Incentive Plan, as
          part of a bonus paid in respect of Fiscal 2001.
   (4)    Includes: contributions to the Company's 401(k) and Pension
          Plan of $7,500 in Fiscal 2001, and  $12,226 in Fiscal 2000;
          and $5,994 and $4,995 for a company car in Fiscal 2001 and
          2000, respectively.  Also includes restricted shares issued
          after the end of Fiscal 2001 pursuant to the Company's 2000
          Stock Incentive Plan, as part of a bonus paid in respect of
          Fiscal 2001.
   (5)    Includes: contributions to the Company's 401(k) and Pension
          Plan of $4,581 in Fiscal 2001 and $11,000  in Fiscal 2000, and
          $2,541 and $840 for a company car in Fiscal 2001 and 2000,
          respectively.
   (6)    Includes: $8,556, $8,412 and $7,200 for a company car in
          Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively.

</FN>
</TABLE>

EMPLOYMENT CONTRACTS

            On March 1, 1996, the Company entered into an
employment agreement with each of Andrew L. Simon and Linda G.
Straley, pursuant to which the Company agreed to employ Mr.
Simon and Ms. Straley, and each of Mr. Simon and Ms. Straley
agreed to remain, as the Company's President and Chief Executive
Officer, and Vice President, respectively, for a term of three
years, subject to automatic yearly extensions and certain rights
of termination as provided in each such agreement.

            As of January 2, 1997, the Company entered into an
employment agreement with Michael D. Beck, pursuant to which the
Company agreed to employ Mr. Beck, and Mr. Beck agreed to
remain, as Vice President of TASA and President and Chief
Executive Officer of BETA, for a term of three years, subject to
automatic yearly extensions and certain rights of termination as
provided in such agreement.

            In the employment agreements with each of Messrs.
Simon and Beck and Ms. Straley, the Company has agreed to
provide for certain benefits and protections for such executive
officers in connection with a change of control of the Company.
Such agreements provide that upon the occurrence of a change of
control (as defined in each agreement), such executive's
employment agreement would continue until the earlier of three
years from the date of such change of control or the date all of
the Company's obligations under the employment agreement are
satisfied.  In addition, in the event of a change of control,
each executive officer would be awarded for each fiscal year
during the employment term, an annual bonus in cash at least
equal to the average annual bonus payable to such executive in
respect of two of the last three fiscal years immediately
preceding the date of the change of control in which bonuses
paid were higher.  In addition, Mr. Beck's employment agreement
provides that, in the event of a change of control, he would be
entitled to receive a bonus equal to the average annual bonus
payable to Mr. Beck from the Company in respect of two of the
last three fiscal years immediately preceding the date of any
change of control in which the bonuses paid were higher.

            In November 1998, the Company, through MESI, acquired
substantially all of the assets of Mildred Elley.  MESI entered
into an employment agreement with Faith Takes, pursuant to which
Ms. Takes agreed to remain as the President and Chief Executive
Officer of MESI and to become the Executive Vice President of
TESC, a wholly-owned subsidiary of the Company and the parent
company of MESI.  Ms. Takes' employment agreement has a term of
three years, subject to automatic yearly extensions and certain
rights of termination as provided in such agreement.  The
employment agreement contains a non-competition clause for two
years following termination of the executive's employment.

            On December 1, 1999, the Company entered into an
employment agreement with Peter Duhamel, pursuant to which,
effective as of January 10, 2000, the Company agreed to employ
Mr. Duhamel, and Mr. Duhamel agreed to remain, as the Chief
Operating Officer of TASA and MLP and as a Vice President of
TASA, for an initial term of one year, subject to automatic
yearly extensions and certain rights of termination as provided
in such agreement.  The agreement contains a non-competition
clause for one year following termination of the executive's
employment.

            Generally, each employee of the Company has agreed to
the assignment to the Company of the employee's rights to any
inventions relating to the Company's business or interest which
were conceived both prior to and during the period of employment
and, except under certain specified conditions, the Company's
employees are prohibited from competing for one year with the
Company in areas in which he or she was employed.

STOCK INCENTIVE PLANS

            The Board of Directors of the Company adopted the 1991
Stock Option Incentive Plan (the "Option Plan") on August 25,
1991 in order to attract and retain qualified personnel, which
Option Plan was approved by the stockholders on August 25, 1991.
The Board of Directors adopted the Amended and Restated 1991
Stock Option Incentive Plan (the "Amended Option Plan") in
February 1996, which Amended Option Plan amended and restated
the Option Plan and was approved by the stockholders of the
Company on March 29, 1996.  Under the Amended Option Plan,
options to purchase up to 625,000 shares of Common Stock may be
granted to employees, officers, directors and consultants of the
Company.  The Amended Option Plan terminates in 2001, after
which no further options or stock awards may be issued under the
Amended Option Plan; all options and other stock awards
outstanding under the Amended Option Plan at the termination
date shall continue to be outstanding and may be exercised in
accordance with their respective terms, until such options or
other stock awards expire by their terms.

            The Board of Directors of the Company adopted the 2000
Stock Incentive Plan (the "2000 Plan") in February, 2000. The
stockholders of the Company approved the 2000 Plan at the
Company's Annual Meeting of Stockholders held on March 31, 2000.
Under the 2000 Incentive Plan, options or other stock awards
with respect to up to 300,000 shares of the Company's Common
Stock  may be granted to employees, officers, directors and
consultants of the Company.  As of October 31, 2001, no
options or other stock awards had been issued under the 2000
Plan.  The terms of the 2000 Plan are substantially identical to
the terms of the Amended Option Plan, except for provisions with
respect to the number of shares which may be issued under the
2000 Plan and the expiration date of the Plan.

            Each of the Amended Option Plan and the 2000 Plan
(collectively, the "Option Plans") is administered by the
Compensation Committee of the Board of Directors (the
"Committee"). Subject to the terms of the Option Plans, the
Committee is authorized to select optionees and determine the
number of shares covered by each option and certain of its other
terms.  The exercise price of stock options granted under the
Option Plans may not be less than the fair market value of the
Company's Common Stock on the date of the grant.  In general,
options become exercisable after the first anniversary of the
date of grant.  The period within which any stock option may be
exercised cannot exceed ten years from the date of grant.
Options held by a terminated employee expire three months after
termination except in the event of death, disability or
termination for cause.  No one participant may receive, in any
one fiscal year, awards under the Option Plans which would
entitle the Participant to receive more than 50,000 shares.

            In Fiscal 1999, the Company granted a total of 125,625
options under the Amended Option Plan; and in Fiscal 2000, the
Company granted a total of 113,275 options under the Amended
Plan.  In Fiscal 1999, 45,500 options under the Amended Option
Plan were canceled; in Fiscal 2000, 76,350 options under the
Amended Option Plan were canceled; and in Fiscal 2001, 22,750
options were cancelled under the Amended Option Plan.  No
options were granted in Fiscal 2001 under either the Amended
Option Plan or the 2000 Plan.  As of October 31, 2001, there
were 475,288 options in the aggregate outstanding under the
Amended Option Plan and no options were outstanding under the
2000 Plan.  In January 2002, restricted stock awards aggregating
35,000 shares and 82,000 options were granted under the 2000
Plan.



<TABLE>
<CAPTION>

                AGGREGATED OPTION/SAR EXERCISES IN LAST
                FISCAL YEAR AND FY-END OPTION/SAR VALUES


                                                             Number of
                                                             Securities         Value of
                                                             Underlying      Unexercised In-
                                                            Unexercised         the-Money
                                                           Options/SARs(1)    Options/SARs(1)
                                                            at FY-End (#)      at FY-End ($)
                                                         ---------------------------------------
                            Shares
                         Acquired on     Value Realized      Exercisable/      Exercisable/
    Name                 Exercise (#)         ($)           Unexercisable     Unexercisable
------------------------------------------------------------------------------------------------

<S>                  <C>             <C>                <C>               <C>
Andrew L. Simon,             0                 0              141,875/0            (2)
President, Chief
Executive Officer
------------------------------------------------------------------------------------------------

Michael D. Beck,             0                 0               70,750/0            (2)
Vice President, TASA;
President and Chief
Executive Officer,
BETA
------------------------------------------------------------------------------------------------

Peter Duhamel, Chief         0                 0               40,000/0            (2)
Operating Officer,
TASA/MLP
------------------------------------------------------------------------------------------------

Faith Takes, Executive       0                 0               47,500/0            (2)
Vice President, TESC;
President and Chief
Executive Officer,
MESI
------------------------------------------------------------------------------------------------

<FN>
(1)	To date, the Company has issued no SARs.
(2)	Based on the closing price of the Company's Common Stock on
        NASDAQ on October 31, 2001, or $0.75, none of the options held
        by these officers was "in the money".
</FN>
</TABLE>


DIRECTORS COMPENSATION

            The Board of Directors of the Company adopted the
Directors Plan in February 1996 in order to aid the Company in
attracting, retaining and motivating independent directors,
which Directors Plan was approved by the stockholders of the
Company on March 29, 1996.  The Directors Plan initially
authorized awards up to an aggregate of 25,000 shares of Common
Stock.  In February 2000, the Board of Directors approved an
amendment to the Directors Plan increasing to 75,000 the number
of shares which may be the subject of stock options under the
Directors Plan.  The stockholders of the Company approved such
amendment at the Annual Meeting of Stockholders on March 31,
2000.  Under the Directors Plan, non-qualified stock options to
purchase up to 75,000 shares of Common Stock may be granted to
non-employee directors of the Company, which options are granted
automatically at the times and in the manner stated in the
Directors Plan.

            Subject to the terms of the Directors Plan, each non-
employee director receives 5,000 options on the day he (she)
first is elected to the Board of Directors, and 2,500 options on
the date of each annual meeting of the stockholders of the
Company, provided he (she) is re-elected to the Board of
Directors.  The exercise price of stock options granted under
the Directors Plan is the fair market value of the Company's
Common Stock on the date of grant.  The options become
exercisable after the first anniversary of the date of grant and
the term of the option cannot exceed ten years.  On March 4,
1999, the Company granted 1,875 options; on March 31, 2000, the
Company granted 7,500 options; on June 7, 2000, the Company
granted 5,000 options; on March 30, 2001, the Company granted
10,000 options, and on June 6, 2001, the Company granted 5,000
options under the Directors Plan.  As of October 31, 2001, an
aggregate of 34,375 options were outstanding under the Directors
Plan.

Directors receive no compensation, other than the
options pursuant to the Directors Plan, for services in such
capacity.

OTHER PLANS

            CONSULTANTS STOCK INCENTIVE PLAN.  In March 1997, the
Board of Directors of the Company adopted the Consultants Plan,
pursuant to which options to purchase up to 50,000 shares of
Common Stock may be granted to consultants to the Company. The
Consultants Plan is administered by the Board of Directors of
the Company.  Subject to the terms of the Consultants Plan, the
Board is authorized to select optionees and determine the number
of shares covered by each option and certain of its other terms.
In general, the exercise price of stock options granted under
the Consultants Plan is the fair market value of the Company's
Common Stock on the date of the grant, however, the Board has
the discretion to use another method of valuation if it
determines that such other valuation is warranted.  In general,
options become exercisable six months from the date of grant,
although the Board has discretion to set either longer or
shorter vesting periods.  The period within which any stock
option may be exercised cannot exceed ten years from the date of
grant.  If a consultant's association with the Company is
terminated prior to the end of its agreed term, all unexercised,
deferred and unpaid awards shall be canceled immediately, except
in the event of the Consultant's death or disability.  As of
October 31, 2001, no options were outstanding under the
Consultants Plan.

            PROFIT SHARING PLAN. The Company has a qualified
401(k) Profit Sharing Plan.  For fiscal years ended before
November 1, 2000, the 401(k) Plan allowed eligible employees to
contribute up to 15 percent (15%) of income through Company
contributions and a salary reduction mechanism.  Company
contributions to the 401(k) Plan were optional and accrued at
the discretion of the Board of Directors.  For Fiscal 2000 and
Fiscal 1999, the Board of Directors of the Company elected not
to make a contribution to the 401(k) Plan.  Effective November
1, 2000, the Company amended the 401(k) Plan to provide a
matching component under the 401(k) Plan of up to five percent
(5%) of each eligible employee's compensation.  In addition, the
eligibility requirements were amended to that an employee is not
eligible until completing twelve months or two thousand hours of
employment, and may only enter the 401(k) Plan at specified
entry dates.

            Net assets for the 401(k) Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains such
plan's records, were $1,667,686 and $1,794,313 at October 31,
2001 and 2000, respectively.

            MONEY PURCHASE PENSION PLAN.  In October 1991, the
Company adopted a Money Purchase Pension Plan, which has been
qualified by the Internal Revenue Service.  Under this Plan, for
fiscal years ended before November 1, 2000, the Company was
required to make an annual contribution to the Plan equal to ten
percent (10%) of each eligible employee's compensation.
Effective November 1, 2000, the Company amended the Plan to
exclude highly compensated employees and to reduce the
contribution to five percent (5%) of each eligible employee's
compensation.  In addition, the eligibility requirements were
amended to that an employee is not eligible until completing
twelve months or two thousand hours of employment, and may only
enter the Pension Plan at specified entry dates.

            Net assets for the Money Purchase Pension Plan, as
estimated by the Massachusetts Mutual Life Insurance Company
which maintains such plan's records, were $936,111 and $944,366
at October 31, 2001 and 2000, respectively.

            For Fiscal 2001, Fiscal 2000 and Fiscal 1999, the
Company's retirement costs aggregated $146,000, $197,500 and
$174,733, respectively.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

            Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors, executive officers and persons
who own beneficially more than ten percent of the Company's
outstanding common stock to file with the SEC initial reports of
beneficial ownership and reports of changes in beneficial
ownership of common stock and other securities of the Company on
Forms 3, 4 and 5, and to furnish the Company with copies of all
such forms they file.  Based on a review of copies of such
reports received by the Company, all of the Company's directors
and officers timely filed all reports required with respect to
Fiscal 2001.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

            The following table sets forth certain information
regarding the beneficial ownership of the Company's Common
Stock, as of January 22, 2002, by (i) each person who is known
by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's officers
and directors; and (iii) all officers and directors as a group.

            As of January 22, 2002, there were 2,594,453 shares of
Common Stock outstanding.  Each share of Common Stock is
entitled to one vote per share.

            All of the shares of Common Stock owned by Messrs.
Simon and Ms. Straley, other than shares deemed to be owned
beneficially by such officers because they may be acquired
through the exercise of currently exercisable stock options, are
held in a voting trust (the "Voting Trust"), pursuant to a
Voting Trust Agreement, dated as of August 19, 1992, as amended.
Until his death, Bertram L. Koslin had been sole Voting Trustee.
Julius Ostreicher, the attorney for the Estate of Bertram L.
Koslin, Andrew L. Simon, the Chairman of the Board of Directors
and the President of the Company, and Eileen West, a former
director of the Company, have been appointed as successor Voting
Trustees.  Because the Voting Trust has the sole and exclusive
power to exercise all voting rights with respect to the shares
of Common Stock deposited in the Voting Trust, the Voting Trust
has sole voting and dispositive power with respect to 125,932
shares of Common Stock.  Accordingly, the Voting Trust has the
power to exercise 125,932 votes, or 4.8% of all eligible votes.

<PAGE>


                                                   Shares of        Percent of
Name and Address of                              Common Stock      Common Stock
Beneficial Owners and                            Beneficially      Beneficially
Directors and Officers                              Owned             Owned
-------------------------------------------------------------------------------
5% Beneficial Owners:
--------------------
Cahill, Warnock Strategic                         720,318(1)(2)        25.3%
Partners Fund, L.P.
c/o Cahill, Warnock & Co., LLC
1 South Street, Suite 2150
Baltimore, MD 21202

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

Voting Trust, u/a dated August                    125,932              4.8%
19, 1992, as amended, Julius
Ostreicher, Andrew L. Simon
and Eileen West, Voting
Trustees
c/o Touchstone Applied Science
Associates, Inc.
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------

Officers and Directors:
-----------------------
Michael D. Beck                                   150,875(3)           5.7%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------

Steven R. Berger                                    8,800(4)             *
620 Fifth Avenue
New York, NY 10020
-------------------------------------------------------------------------------

Peter A. Duhamel                                   50,000(5)           1.9%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------

Joseph A. Fernandez                                 8,400(6)             *
4392 Live Oak Boulevard
Palm Harbor, FL 34685
-------------------------------------------------------------------------------

Donald W. Hughes                                  760,231(7)          26.7%
1 South Street, Suite 2150
Baltimore, Maryland 21202
-------------------------------------------------------------------------------

Andrew L. Simon                                   232,113(8)           8.5%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------

Linda G. Straley                                  115,494(9)           4.3%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------

Thomas Struzzieri                                  12,500(10)            *
319 Main Street
Saugerties, NY 12477
-------------------------------------------------------------------------------

Faith Takes                                        47,500(11)          1.8%
4 Hardscrabble Heights
Brewster, NY 10509
-------------------------------------------------------------------------------

David L. Warnock                                  767,731(12)         26.8%
1 South Street, Suite 2150
Baltimore, Maryland 21202
-------------------------------------------------------------------------------

Officers and Directors as a                     1,393,413(13)         42.8%
Group (10 persons)
------------------------------------------------------------------------------
________________
     * Less than 1%


<FN>
            1       Includes 258,268 shares that Cahill, Warnock
Strategic Partners Fund, L.P. (the "Fund") has the right to
acquire pursuant to currently exercisable warrants (the "Fund
Warrants").  Excludes (a) 25,602 shares, and (b) 14,311 shares
which may be acquired pursuant to currently exercisable warrants
(the "Strategic Warrants"), owned by Strategic Associates, L.P.,
an affiliate of the Fund, but as to which the Fund disclaims
beneficial ownership.  ("Strategic Associates"; together, with
the Fund, the "Cahill, Warnock Entities").  Pursuant to the
Investor Rights Agreement (the "Investor Rights Agreement")
between the Company and the Cahill, Warnock Entities, the
Company has agreed that so long as the Cahill, Warnock Entities
own at least 50% of the Fund Warrants and the Strategic Warrants
(the "Warrants") (or if the Warrants have been exercised, the
shares issuable pursuant thereto), the Cahill, Warnock Entities
have the right to nominate two directors to the Board of
Directors of the Company.  David L. Warnock and Donald W. Hughes
are the two current directors who were nominated by the Cahill,
Warnock Entities.  Pursuant to the Investor Rights Agreement,
the directors and executive officers of the Company have agreed,
at each meeting of stockholders for the purpose of electing
directors, to cast their eligible votes in favor of the nominees
of the Cahill, Warnock Entities.  In addition, for a period of
29 months from the closing date of the investment by the Cahill
Warnock Entities, at each meeting of stockholders for the
purpose of electing directors, the Cahill, Warnock Entities have
agreed to cast all of their eligible votes in favor of the
directors nominated by the Company.

            2       Edward L. Cahill, David L. Warnock and Donald
W. Hughes are general partners of Cahill, Warnock Strategic Partners,
L.P. ("Cahill, Warnock Partners"), the Fund's sole general partner,
and the sole general partner of Strategic Associates. Each of
David L. Warnock and Donald W. Hughes is also a director of the
Company (see footnotes 7 and 12 to this table).

            3       Includes (i) 42,000 shares which are owned jointly
with Mr. Beck's wife, (ii) 9,375 shares owned by Mr. Beck's
daughter, and (iii) 70,750 shares which Mr. Beck has the right
to acquire upon the exercise of currently exercisable stock
options or options that will become exercisable within 60 days.
Excludes  (i) 9,375 shares owned by Mr. Beck's wife, as to which
Mr. Beck disclaims beneficial ownership; and (ii) 12,000 shares
which Mr. Beck has the right to acquire upon the exercise of
options granted to Mr. Beck which are not currently exercisable.

            4       Includes 8,800 shares which Mr. Berger has the right
to acquire upon the exercise of currently exercisable stock
options or stock options which become exercisable within 60
days.

            5       Includes 40,000 shares which are the subject of
options granted to Mr. Duhamel which are currently exercisable
and excludes 12,000 shares which Mr. Duhamel has the right to
acquire upon the exercise of options granted to Mr. Duhamel
which are not currently exercisable.

            6       Includes 7,500 shares which Mr. Fernandez has the
right to acquire upon the exercise of currently exercisable
stock options or stock options which become exercisable within
60 days.

            7       Includes (i) 487,652 shares owned by the Cahill
Warnock Entities, (ii) 258,268 shares which the Fund has the
right to acquire pursuant to the Fund Warrant; and (iii) 14,311
shares which Strategic Associates, has the right to acquire
pursuant to the Strategic Warrant (see footnotes 1 and 2 to this
table).  Excludes 5,000 shares which Mr. Hughes has the right to
acquire upon the exercise of options granted to Mr. Hughes which
are not currently exercisable.

            8       Includes 141,875 shares which Mr. Simon has the
right to acquire upon the exercise of currently exercisable
stock options or stock options that will become exercisable
within 60 days, and which options are not included in the Voting
Trust; excludes (i) 375 shares of Common Stock owned by the
retirement account of Mr. Simon's wife, as to which Mr. Simon
disclaims beneficial ownership, (ii) the shares of Common Stock
held in the Voting Trust for the benefit of all of the members
thereof, which Voting Trust is listed separately as a 5%
stockholder in this table; and (iii) 20,000 shares which Mr.
Simon has the right to acquire upon the exercise of options
granted to Mr. Simon which are not currently exercisable.  Mr.
Simon is one of three Voting Trustees of the Voting Trust.

            9       Includes 64,800 shares which Ms. Straley has the
right to acquire upon the exercise of currently exercisable
stock options or options that will become exercisable within 60
days, and excludes 6,000 shares which Ms. Straley has the right
to acquire upon the exercise of options granted to Ms. Straley
which are not currently exercisable.

            10      Includes 7,500 shares which Mr. Struzzieri has the
right to acquire upon the exercise of currently exercisable
stock options or options which become exercisable within the
next 60 days.

            11      Includes 47,500 shares which Ms. Takes has the
right to acquire upon the exercise of currently exercisable
stock options or options which become exercisable within the
next 60 days.

            12      Includes (i) 7,500 shares which Mr. Warnock has the
right to acquire upon the exercise of currently exercisable
stock options or stock options which become exercisable within
60 days; (ii) 487,652 shares owned by the Cahill Warnock
Entities, (iii) 258,268 shares which the Fund has the right to
acquire pursuant to the Fund Warrant; and (iv) 14,311  shares
which Strategic Associates, has the right to acquire pursuant to
the Strategic Warrant (see footnotes 1 and 2 to this table).

            13      Includes shares held in the Voting Trust for the
benefit of the Estate of Bertram L. Koslin, Eileen West and
certain employees of the Company.  Andrew L. Simon, Chairman of
the Board of Directors and President of the Company, is one of
three Voting Trustees of the Voting Trust.  Includes an
aggregate of 661,304 shares which are the subject of currently
exercisable options and warrants which are held or deemed held
by officers and directors of the Company, but are not included
in the Voting Trust.
</FN>


ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The Company is authorized to issue 5,000,000 shares,
par value $.0001 per share, of preferred stock. The stock may be
issued by the Board of Directors of the Company in one or more
series and with such preferences, conversion or other rights,
voting powers and other provisions as may be fixed by the Board
of Directors in the resolution authorizing its issuance without
any further action of the stockholders.

            In November 1998, the Company, through MESI, acquired
substantially all of the assets of Mildred Elley.  The Company
financed the acquisition through the issuance of the Debentures,
with the Warrants attached, pursuant to a Securities Purchase
Agreement (the "Securities Purchase Agreement"),  with the
Cahill, Warnock Entities.  Pursuant to the Securities Purchase
Agreement, the Company:  (i) issued and sold to the Cahill,
Warnock Entities 8% Debentures due 2003 (the "Debentures"),
dated October 28, 1998 (the "Purchase Closing Date"), in the
aggregate principal amount of $4,000,000, (ii) issued and sold
to the Cahill, Warnock Entities, as additional consideration for
purchasing the Debentures, the Warrants to acquire an aggregate
of 690,229.5 shares of the Company's Common Stock, which, on the
Purchase Closing Date, constituted 20% of the Company's issued
and outstanding common stock on a fully diluted basis, after
giving effect to the transactions contemplated in the Securities
Purchase Agreement and (iii) authorized the issuance and sale in
the future to the Cahill, Warnock Entities of additional shares
of the Company's Common Stock upon the Company's exercise of a
put option, the terms and conditions of which are set forth in
the Securities Purchase Agreement.  Of the Warrants issued, 80%
are immediately exercisable, and 20% will become exercisable 18
months after the Purchase Closing Date if the Company shall not
have repaid the Debentures in full by such date or upon the
occurrence of an Event of Default (as defined in the Securities
Purchase Agreement).  The exercise price of the Warrants upon
issuance was $1.40 per share of Common Stock, subject to certain
antidilution adjustments set forth in the Warrants.  On December
3, 1999, in exchange for the Cahill, Warnock Entities' consent,
among other things, to subordinate the Debentures to certain
financing the Company is seeking to obtain in connection with
the implementation of the Company's strategic plan and pursuant
to a Consent, Agreement and Amendment, dated as of December 3,
1999, among the Company and the Cahill, Warnock Entities, the
Board of Directors of the Company approved a repricing of the
Warrants to an exercise price of $1.125 per share of Common
Stock, subject to the same antidilution adjustments referred to
above.  Pursuant to the Registration Rights Agreement between
the Company and the Cahill, Warnock Entities, the Company has
agreed to register the shares of Common Stock underlying the
Warrants with the Securities and Exchange Commission.

            Pursuant to the Investor Rights Agreement between the
Company and the Cahill, Warnock Entities, the Company has agreed
that so long as the Cahill, Warnock Entities own at least 50% of
the Warrants (or if the Warrants have been exercised, the shares
issuable pursuant thereto), the Cahill, Warnock Entities shall
have the right to nominate two directors to the Board of
Directors of the Company.  David L. Warnock and Donald Hughes
are the current directors who were nominated by the Cahill,
Warnock Entities.  Pursuant to the Investor Rights Agreement,
the directors and executive officers have agreed, at each
meeting of stockholders for the purpose of electing directors,
to cast their eligible votes in favor of the nominees of the
Cahill, Warnock Entities.  In addition, for a period of 29
months from the Purchase Closing Date, at each meeting of
stockholders for the purpose of electing directors, the Cahill,
Warnock Entities have agreed to cast all of their eligible votes
in favor of the directors nominated by the Company.

            As of January 2, 1997, the Company purchased all of
the outstanding capital stock of BETA from the holders of such
shares for a purchase price equal to (i) $130,000 in cash, (ii)
$150,000 payable in promissory notes (the "Notes"), bearing
interest at the rate of 8.25% and maturing on January 2, 1999,
and (iii) 150,000 shares of the Company's Common Stock.  The
Notes were paid in December 1998.  Michael D. Beck, Vice
President and Director of the Company and President and Chief
Executive Officer of BETA, Connie Beck, Mr. Beck's wife, and
Amanda Beck, Mr. Beck's daughter, were the shareholders of BETA
at the time of its acquisition.  Pursuant to the Stock Purchase
Agreement, Mr. Beck has the option to repurchase all of the
outstanding capital stock of BETA from the Company for a period
of six years from the Agreement Date, provided that Mr. Beck may
not exercise the option prior to the third anniversary of the
Agreement Date unless his employment with the Company and BETA
is not renewed at the expiration of the initial three-year term
or has been terminated for "cause" or "disability" or he leaves
after a change of control for "good reason" (as contemplated by
his employment agreement).  The option exercise price is subject
to a formula and varies based upon the reason for, and timing
of, exercise.

            In November 1998, the Company, through MESI, purchased
substantially all of the assets of Mildred Elley for an
aggregate purchase price of $3,000,000, paid as follows: (i)
$2,000,000 in cash at the closing and (ii) $1,000,000 by a five-
year promissory note of MESI, payable in equal quarterly
installments of principal and interest and bearing interest at a
rate equal to 8.5% per annum. In addition, MESI assumed certain
liabilities of Mildred Elley related to the acquired business
(the "Assumed Liabilities").  The aggregate amount of the
Assumed Liabilities is approximately $1,000,000.  Simultaneous
with the closing of such purchase, MESI entered into an
employment agreement with Faith Takes, pursuant to which Ms.
Takes agreed to remain as the President and Chief Executive
Officer of MESI and to become the Executive Vice President of
TESC, a wholly-owned subsidiary of the Company and the parent
company of MESI.  See Item 3, "Legal Proceedings".

            One of the Company's directors, Steven R. Berger, is a
partner in Salans Hertzfeld Heilbronn Christy & Viener, which
acts as special securities counsel to the Company.  The Company
paid legal fees of $62,217, $88,081 and $217,093 to Salans
Hertzfeld Heilbronn Christy & Viener for Fiscal 2001, 2000 and
1999, respectively.

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

            (a)  The following Exhibits are filed as part of this
Report:

                   3.1   Certificate of Incorporation, dated August 22,
                         1991 filed with the Secretary of State of the
                         State of Delaware (incorporated herein by
                         reference to the exhibit contained in the
                         Company's Quarterly Report on Form 10-QSB for
                         the fiscal quarter ended January 31, 1999)

                   3.2   Certificate of Merger dated August 26, 1992,
                         filed with the Secretary of State of the State
                         of Delaware (incorporated herein by reference
                         to the exhibit contained in the Company's
                         Registration Statement on Form SB-2 under the
                         Securities Act of 1933, as amended, filed with
                         the Securities and Exchange Commission on July
                         7, 1993)

                   3.3   Certificate of Designations for Series A
                         Preferred Stock of the Company  (incorporated
                         herein by reference to the exhibit contained
                         in the Company's Registration Statement on
                         Form SB-2 under the Securities Act of 1933, as
                         amended, filed with the Securities and
                         Exchange Commission on July 7, 1993)

                   3.4   Certificate of Amendment of Certificate of
                         Incorporation dated March 4, 1999, filed with
                         the Secretary of State of the State of
                         Delaware (incorporated herein by reference to
                         the exhibit contained in the Company's
                         Quarterly Report on Form 10-QSB for the fiscal
                         quarter ended January 31, 1999)

                   3.5   Amended and Restated By-Laws (incorporated by
                         reference to the exhibit contained in the
                         Company's Registration Statement on Form S-3
                         (File No. 333-27659) under the Securities Act
                         of 1933, as amended, filed with the Securities
                         and Exchange Commission on May 22, 1997)

                   4.1   Specimen Certificate evidencing shares of
                         Common Stock (incorporated herein by reference
                         to the exhibit contained in the Company's
                         Registration Statement on Form S-3 (File No.
                         333-75377) under the Securities Act of 1933,
                         as amended, filed with the Securities and
                         Exchange Commission on March 31, 1999)

                   4.2   Form of Warrant (incorporated by reference to
                         the exhibit contained in the Company's
                         Registration Statement on Form S-3 (File No.
                         333-27659) under the Securities Act of 1933,
                         as amended, filed with the Securities and
                         Exchange Commission on May 22, 1997)

                   4.3   Investor Rights Agreement, dated as of
                         September 4, 1998, by and among the Company,
                         Cahill Warnock Strategic Partners Fund, L.P.,
                         Strategic Associates, L.P., and the Individual
                         Shareholders Named Therein (incorporated by
                         reference to the exhibit contained in the
                         Company's Current Report on Form 8-K, which
                         was filed with the Securities and Exchange
                         Commission on November 23, 1998 (the "November
                         1998 8-K"))

                   4.4   Registration Rights Agreement, dated as of
                         September 4, 1998, by and among the Company,
                         Cahill, Warnock Strategic Partners Fund, L.P.,
                         and Strategic Associates, L.P. (incorporated
                         by reference to the exhibit contained in the
                         November 1998 8-K)

                   4.5   Form of 8% Subordinated Debenture
                         (incorporated by reference to the exhibit
                         contained in the November 1998 8-K)

                   4.6   Form of Warrant issued in connection with the
                         Securities Purchase Agreement by and between
                         the Company, Cahill, Warnock Strategic
                         Partners Fund, L.P. and Strategic Associates,
                         L.P. (incorporated by reference to the exhibit
                         contained in the November 1998 8-K)

                   4.7   Form of Warrant issued in connection with (i)
                         the Agreement, dated as of August 19, 1997,
                         among Comprehensive Capital, Theodore P.
                         Allocca, Theodore Allocca and Steven Kevorkian
                         and the Company, and (ii) the Agreement dated
                         as of August 19, 1997, between the Company and
                         Barry M. Goldstein (incorporated herein by
                         reference to the exhibit contained in the
                         Company's Registration Statement on Form S-3
                         (File No. 333-75377) under the Securities Act
                         of 1933, as amended, filed with the Securities
                         and Exchange Commission on March 31, 1999)

                   4.8   Amendment No. 1 to the Securities Purchase
                         Agreement, dated as of March 8, 1999, among
                         the Company, Cahill, Warnock Strategic
                         Partners Fund, L.P. and Strategic Associates,
                         L.P. (incorporated by reference to the exhibit
                         contained in the Company's Annual Report on
                         Form 10-KSB for the fiscal year ended October
                         31, 1999)

                   4.9   Consent, Agreement and Amendment, dated as of
                         December 3, 1999, by and among the Company,
                         Cahill, Warnock Strategic Partners Fund, L.P.
                         and Strategic Associates, L.P. (incorporated
                         by reference to the exhibit contained in the
                         Company's Annual Report on Form 10-KSB for the
                         fiscal year ended October 31, 1999).

                   9.1   Voting Trust Agreement, dated August 19, 1992
                         (incorporated herein by reference to the
                         exhibit contained in Amendment No. 1 to the
                         Company's Registration Statement on Form SB-2
                         under the Securities Act of 1933, as amended,
                         filed with the Securities and Exchange
                         Commission on March 16, 1994)

                   9.2   Amendment of Voting Trust Agreement and
                         Appointment of Successor Trustee, dated March
                         30, 1995 (incorporated herein by reference to
                         the exhibit contained in Amendment No. 1 to
                         the Company's Registration Statement on Form
                         SB-2 under the Securities Act of 1933, as
                         amended, filed with the Securities and
                         Exchange Commission on March 16, 1994)

                  10.1   Lease Agreement between the Town of Southeast
                         Industrial Development Agency/Industrial
                         Development Reserve Bonds and the Company;
                         Mortgage and Security Agreement between the
                         Company and the Town of Southeast Industrial
                         Development Agency to Barclays Bank of New
                         York, N.A., now The Bank of New York, as
                         mortgagee; Note between the Company and
                         Barclays Bank of New York, N.A., now The Bank
                         of New York; Lease Guarantee Agreement from
                         the Company as guarantor and Barclays Bank of
                         New York, N.A., now The Bank of New York, as
                         Trustee; Amendment to Lease between the Town
                         of Southeast Industrial Development Agency and
                         the Company (incorporated herein by reference
                         to the exhibit contained in the Company's
                         Registration Statement on Form SB-2 under the
                         Securities Act of 1933, as amended, filed with
                         the Securities and Exchange Commission on July
                         7, 1993)

                  10.2   Extension and Modification Agreement, dated as
                         of October 31, 1996, between the Company and
                         the Town of Southeast Industrial Development
                         Agency, and the Bank of New York (incorporated
                         herein by reference to the exhibit contained
                         in the Company's Annual Report on Form 10-KSB
                         for the fiscal year ended October 31, 1996)

                  10.3   Agreement between the Company and the State of
                         Connecticut (incorporated herein by reference
                         to the exhibit contained in the Company's
                         Registration Statement on Form SB-2 under the
                         Securities Act of 1933, as amended, filed with
                         the Securities and Exchange Commission on July
                         7, 1993)

                  10.4   401(k) Plan (incorporated herein by reference
                         to the exhibit contained in the Company's
                         Registration Statement on Form SB-2 under the
                         Securities Act of 1933, as amended, filed with
                         the Securities and Exchange Commission on July
                         7, 1993)

                  10.5   Patent Assignment by Bertram Koslin to the
                         Company (incorporated herein by reference to
                         the exhibit contained in the Company's
                         Registration Statement on Form SB-2 (File No.
                         33-65766) under the Securities Act of 1933, as
                         amended, filed with the Securities and
                         Exchange Commission on July 7, 1993)

                  10.6   Amended and Restated 1991 Stock Option
                         Incentive Plan (incorporated herein by
                         reference to the exhibit contained in the
                         Company's Quarterly Report on Form 10-QSB for
                         the fiscal quarter ended April 30, 1996)

                  10.7   Directors Stock Option Plan (incorporated
                         herein by reference to the exhibit contained
                         in the Company's Quarterly Report on Form 10-
                         QSB for the fiscal quarter ended April 30,
                         1996)

                  10.8   2000 Stock Incentive Plan (incorporated herein
                         by reference to the exhibit contained in the
                         Company's Annual Report on Form 10-KSB for the
                         fiscal year ended October 31, 2001)

                  10.9   Employment Agreement with Andrew L. Simon
                         (incorporated herein by reference to the
                         exhibit contained in the Company's Quarterly
                         Report on Form 10-QSB for the fiscal quarter
                         ended April 30, 1996)

                 10.10   Employment Agreement with Linda G. Straley
                         (incorporated herein by reference to the
                         exhibit contained in the Company's Quarterly
                         Report on Form 10-QSB for the fiscal quarter
                         ended April 30, 1996)

                 10.11   Stock Purchase Agreement, dated as of January
                         2, 1997, between Beck Evaluation & Testing
                         Associates, Inc., Connie K. Beck, Michael D.
                         Beck, Amanda P. Beck and the Company, together
                         with all schedules and exhibits thereto
                         (incorporated by reference to the exhibit
                         contained in the Company's Quarterly Report on
                         Form 10-QSB for the fiscal quarter ended
                         January 31, 1997)

                 10.12   Employment Agreement, dated as of January 2,
                         1997, between the Company and Michael D. Beck
                         (incorporated by reference to the exhibit
                         contained in the Company's Quarterly Report on
                         Form 10-QSB for the fiscal quarter ended
                         January 31, 1997)

                 10.13   Assignment, Assumption and Sale Agreement,
                         dated as of December 30, 1996, between Steck-
                         Vaughn Company and the Company (incorporated
                         by reference to the exhibit contained in the
                         Company's Quarterly Report on Form 10-QSB for
                         the fiscal quarter ended January 31, 1997)

                 10.14   Consultants Stock Incentive Plan (incorporated
                         by reference to the exhibit contained in the
                         Company's Quarterly Report on Form 10-QSB for
                         the fiscal quarter ended April 30, 1997)

                 10.15   Asset Purchase Agreement, dated as of May 30,
                         1997, by and between Programs for Education,
                         Inc., Bernard B. Shapiro, Modern Learning
                         Press, Inc. and the Company (incorporated by
                         reference to the exhibit contained in the
                         Company's Current Report on Form 8-K, which
                         was filed with the Securities and Exchange
                         Commission on June 16, 1997)

                 10.16   Secured Promissory Note, dated May 30, 1997,
                         of Modern Learning Press, Inc. (incorporated
                         by reference to the exhibit contained in the
                         Company's Current Report on Form 8-K, which
                         was filed with the Securities and Exchange
                         Commission on June 16, 1997)

                 10.17   Security Agreement, dated  May 30, 1997, by
                         and between Programs for Education, Inc.,
                         Bernard B. Shapiro and Modern Learning Press,
                         Inc. (incorporated by reference to the exhibit
                         contained in the Company's Current Report on
                         Form 8-K, which was filed with the Securities
                         and Exchange Commission on June 16, 1997)

                 10.18   Stock Pledge Agreement with Escrow Provisions,
                         dated May 30, 1997, by and among the Company,
                         Programs for Education, Inc. and Pluese,
                         Lihotz, Incollingo & Leone (incorporated by
                         reference to the exhibit contained in the
                         Company's Current Report on Form 8-K, which
                         was filed with the Securities and Exchange
                         Commission on June 16, 1997)

                 10.19   Guaranty Agreement, dated May 30, 1997, by the
                         Company in favor of Programs for Education,
                         Inc. and Bernard B. Shapiro (incorporated by
                         reference to the exhibit contained in the
                         Company's Current Report on Form 8-K, which
                         was filed with the Securities and Exchange
                         Commission on June 16, 1997)

                 10.20   Royalty Agreement, dated May 30, 1997, by and
                         between Modern Learning Press, Inc. and
                         Bernard B. Shapiro (incorporated by reference
                         to the exhibit contained in the Company's
                         Current Report on Form 8-K, which was filed
                         with the Securities and Exchange Commission on
                         June 16, 1997)

                 10.21   Mortgage Modification and Extension Agreement,
                         dated as of August 28, 1997, between MSB Bank
                         and the Company (incorporated by reference to
                         the exhibit contained in the Company's Annual
                         Report on Form 10-KSB for the fiscal year
                         ended October 31, 1997 ( the "1997 10-KSB")

                 10.22   Amended and Restated Mortgage Note, dated
                         August 28, 1997, of the Company in favor of
                         MSB Bank (incorporated by reference to the
                         exhibit contained in the 1997 10-KSB)

                 10.23   Term Loan Agreement, dated August 28, 1997,
                         between the Company and MSB Bank (incorporated
                         by reference to the exhibit contained in the
                         1997 10-KSB)

                 10.24   Note, dated August 28, 1997, of the Company in
                         favor of MSB Bank (incorporated by reference
                         to the exhibit contained in the 1997 10-KSB)

                 10.25   Security Agreement between the Company and MSB
                         Bank (incorporated by reference to the exhibit
                         contained in the 1997 10-KSB)

                 10.26   Environmental Guaranty, dated August 28, 1997,
                         of the Company (incorporated by reference to
                         the exhibit contained in the 1997 10-KSB)

                 10.27   Agreement, dated as of August 19, 1997, among
                         Comprehensive Capital, Theodore P. Allocca,
                         Theodore Allocca, Steven Kevorkian, and the
                         Company (incorporated by reference to the
                         exhibit contained in the 1997 10-KSB)

                 10.28   Asset Purchase Agreement, dated as of November
                         2, 1998, between Mildred Elley School, Inc.
                         and MESI Acquisition Corp. (incorporated by
                         reference to the exhibit contained in the
                         November 1998 8-K)

                 10.29   Promissory Note of MESI Acquisition Corp.
                         (incorporated by reference to the exhibit
                         contained in the November 1998 8-K)

                 10.30   Guaranty of TASA with respect to Promissory
                         Note of MESI Acquisition Corp. (incorporated
                         by reference to the exhibit contained in the
                         November 1998 8-K)

                 10.31   Employment Agreement, dated as of November 2,
                         1998, by and among Mildred Elley School, Inc.
                         and Faith Takes (incorporated by reference to
                         the exhibit contained in the November 1998 8-
                         K)

                 10.32   Securities Purchase Agreement, dated as of
                         September 4, 1998, by and among the Company,
                         Cahill Warnock Strategic Partners Fund, L.P.,
                         and Strategic Associates, L.P. (incorporated
                         by reference to the exhibit contained in the
                         November 1998 8-K)

                 10.33   Employment Agreement, dated December 1, 1999,
                         by and among the Company and Peter Duhamel
                         (incorporated by reference to the exhibit
                         contained in the Company's Annual Report on
                         Form 10-KSB for the fiscal year ended October
                         31, 1999)

                 11      Computation of Earnings Per Share (filed
                         herewith)

                 21      Subsidiaries of the Registrant (incorporated
                         by reference to the exhibit contained in the
                         Company's Annual Report on Form 10-KSB for the
                         fiscal year ended October 31, 1998)

                 23      Consent of Lazar, Levine & Felix LLP (filed
                         herewith)


            (b)    Reports on Form 8-K

            None.



                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                PAGE

INDEPENDENT AUDITORS' REPORT                                    F - 2

CONSOLIDATED BALANCE SHEETS                                     F - 3

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME                                            F - 5

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY       F - 6

CONSOLIDATED STATEMENTS OF CASH FLOWS                           F - 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      F - 9


<PAGE>          F-2

                 INDEPENDENT AUDITORS' REPORT


To The Board of Directors
Touchstone Applied Science Associates, Inc. and Subsidiaries



We have audited the accompanying consolidated balance sheets of
Touchstone Applied Science Associates, Inc. and Subsidiaries as of
October 31, 2001 and 2000, and the related consolidated statements
of operations and comprehensive income, changes in stockholders'
equity and cash flows for the three fiscal years ended October 31,
2001. These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Touchstone Applied Science Associates, Inc. and
Subsidiaries as of October 31, 2001 and 2000 and the results of its
operations and its cash flows for the three fiscal years ended
October 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.



Lazar, Levine & Felix LLP
Certified Public Accountants
New York, New York
December 28, 2001



                                  F - 2
<PAGE>          F-3


<TABLE>
<CAPTION>
                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES


                                                                Page 1 of 2
                            CONSOLIDATED BALANCE SHEETS
                                                                October 31,
                                                         2 0 0 1          2 0 0 0
                                                         -------          -------
<S>                                                  <C>            <C>
     ASSETS
     ------

Current assets:
 Cash and temporary investments                       $    76,965       $   512,088
 Accounts receivable, net of allowance for
 Doubtful accounts of  $70,891 and $97,545,
  respectively (Note 5)                                 1,630,432         1,294,756
 Tuition receivable, net of allowance for
  doubtful accounts of $331,689 and $436,483
  respectively (Notes 5 and 16)                         2,234,908         2,097,329
 Inventories (Note 5)                                     633,473           596,654
 Prepaid expenses and other current
  assets (Note 2)                                         259,154           263,641
                                                      -----------      ------------

     Total current assets                               4,834,932         4,764,468

Property, plant and equipment - net of
  accumulated depreciation of $1,804,880 and
  $1,628,899, respectively (Notes 3, 6, 7 and 8)        1,867,705         1,945,948

Other assets:
 Noncurrent tuition receivable, net of allowance
  for doubtful accounts of $256,495 and
  $145,494, respectively (Notes 5 and 16)                 702,409         1,106,868
 Test passage bank and test development, net of
  accumulated amortization of $1,993,978 and
  $1,668,324, respectively (Note 4)                     2,357,997         2,337,253
 Goodwill, net of accumulated amortization of
  $621,902 and $452,059, respectively                   3,649,130         3,818,974
 Deferred income taxes (Note 13)                        1,078,027         1,276,606
 Other assets (Note 2)                                    818,767           954,532
                                                      -----------       -----------

     Total assets                                     $15,308,967       $16,204,649
                                                      ===========       ===========

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE







                                  F - 3
<PAGE>          F-4


<TABLE>
<CAPTION>

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES


                                                                       Page 2 of 2
                        CONSOLIDATED BALANCE SHEETS

                                                                October 31,
                                                         2 0 0 1          2 0 0 0
                                                         -------          -------
<S>                                              <C>               <C>

     LIABILITIES AND STOCKHOLDERS' EQUITY
     ------------------------------------

Current liabilities:
 Lines of credit (Note 5)                             $   400,000       $1,097,748
 Current maturities of long-term
  debt (Notes 6, 7 and 16)                                514,265          620,479
 Current maturities of capitalized lease
  obligations (Note 8)                                     34,096           15,950
 Deferred tuition revenue                                      --           75,792
 Accounts payable and accrued
  expenses (Notes 10)                                   2,187,979        1,901,003
                                                      -----------       ----------

     Total current liabilities                          3,136,340        3,710,972

Long-term debt:
 Subordinated debt (Notes 9 and 16)                     3,530,141        3,530,141
 Long-term debt, net of current
  portion (Notes 6, 7 and 16)                           1,958,319        2,666,054
 Long-term capitalized lease obligations,
  net of current portion (Note 8)                          32,889           16,107
                                                       ----------       ----------

     Total liabilities                                  8,657,689        9,923,274
                                                       ----------       ----------

Commitments and contingencies (Notes 5,
 9, 11, 14 and 16)

Stockholders' equity (Note 12):
 Preferred stock, $.0001 par value,
  5,000,000 authorized, 0 shares issued and
   outstanding, respectively                                   --               --
 Common stock, $.0001 par value, 20,000,000
 Shares authorized, 2,559,453 shares issued
  and outstanding                                             256              256
 Additional paid-in capital                             5,522,296        5,522,296
 Deferred interest                                       (235,553)        (352,523)
 Unearned compensatory stock                               (1,251)         (10,608)
 Retained earnings                                      1,365,530        1,121,954
                                                       ----------       ----------

     Total stockholders' equity                         6,651,278        6,281,375
                                                       ----------       ----------

     Total liabilities and stockholders' equity       $15,308,967      $16,204,649
                                                      ===========      ===========

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                  F - 4

<PAGE>          F-5

<TABLE>
<CAPTION>

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF OPERATIONS
                       AND COMPREHENSIVE INCOME

                                                       Fiscal Years Ended October 31,
                                                  2 0 0 1          2 0 0 0         1 9 9 9
                                                  -------          -------         -------
<S>                                        <C>              <C>              <C>
Assessment products and services revenues      $ 6,594,163       $ 4,897,923     $ 4,591,542
Educational delivery revenues                    4,966,974         5,074,704       5,297,127
Instructional revenues                           2,839,008         2,785,497       2,427,577
                                               -----------       -----------     -----------

Total net revenue (Note 15)                     14,400,145        12,758,124      12,316,246

Cost of goods sold                               5,495,385         4,919,980       4,469,746
                                               -----------       -----------     -----------

Gross profit                                     8,904,760         7,838,144       7,846,500
                                               -----------       -----------     -----------

Operating expenses:
  Selling expenses                               2,685,584         2,811,302       2,505,934
  General and administrative expenses            5,200,241         5,462,452       4,387,253
  Write down of software development costs              --           120,853              --
  Impairment of test passage bank (Note 4)              --           685,722              --
                                               -----------       -----------     -----------

Total operating expenses                         7,885,825         9,080,329       6,893,187
                                               -----------       -----------     -----------

Income (loss) from operations                    1,018,935        (1,242,185)        953,313

Other income (expense):
  Gain (loss) on sale of assets                         --            26,241         (10,723)
  Other income                                          --             2,514           5,883
  Interest expense                                (713,136)         (817,415)       (818,710)
  Investment income                                 60,948            56,237         128,190
                                               -----------       -----------     -----------

Income (loss) before income taxes                  366,747        (1,974,608)        257,953

Income taxes (benefit) (Note 13)                   123,171          (808,970)         77,196
                                               -----------       -----------     -----------

Net income (loss)                                  243,576        (1,165,638)        180,757

Other comprehensive loss, net of tax:
  Unrealized holding loss on securities
   arising during the period                            --                --          (5,924)
                                               -----------       -----------     -----------

Total comprehensive income (loss)              $   243,576       $(1,165,638)    $   174,833
                                               ===========       ===========     ===========

Weighted average shares outstanding
  Basic                                          2,559,453         2,438,167       2,141,801
  Diluted                                        2,560,042         2,438,167       2,345,449

Earnings (loss) per share
  Basic                                        $       .10       $      (.48)    $       .08
  Diluted                                      $       .10       $      (.48)    $       .08

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                  F - 5

<PAGE>          F-6
<TABLE>
<CAPTION>

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

	CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY




                                                                                                     Accumulated
                                                  Additional              Stock         Unearned     Other
                Preferred Stock    Common  Stock    Paid-in     Deferred  Subscriptions Compensatory Comprehensive Retained
                Shares    Amount   Shares  Amount   Capital     Interest  Receivable    Stock        Income        Earnings
                ------    ------   ------  ------   -------     --------  ----------    -----        ------        --------

<S>            <C>     <C>      <C>        <C>    <C>         <C>         <C>         <C>           <C>         <C>

Balance at
 November 1,
 1998             1,500  $   --    2,141,801  $214   $5,052,479  $ (588,075) $ (14,350)  $(37,187)      $ 5,924    $2,106,835

Redemption of
 preferred
 shares          (1,500)     --           --    --           --          --         --         --            --            --
Receipt of
 stock
 subscriptions       --      --           --    --           --          --     14,350         --            --            --
Financial
 advisory
 services            --      --           --    --           --          --         --     17,222            --            --
Interest expense     --      --           --    --           --     117,615         --         --            --            --
Net unrealized
 gain (loss) on
 marketable
 securities          --      --           --    --           --          --         --         --        (5,924)           --
Net income           --      --           --    --           --          --         --         --            --       180,757
                  -----  ------    ---------  ----   ----------  ----------  ---------   --------       -------    ----------

Balance at
 October 31, 1999    --      --    2,141,801   214    5,052,479    (470,460)        --    (19,965)           --     2,287,592

Issuance on
 conversion of
 subordinated
 debentures          --      --      417,652    42      469,817          --         --         --            --            --
Financial
 advisory
 services            --      --           --    --           --          --         --      9,357            --            --
Interest expense     --      --           --    --           --     117,937         --         --            --            --
Net (loss)           --      --           --    --           --          --         --         --            --    (1,165,638)
                  -----  ------    ---------  ----   ----------  ----------  ---------   --------       -------    ----------

Balance at
 October 31, 2000    --      --    2,559,453   256    5,522,296    (352,523)        --    (10,608)           --     1,121,954

Financial
 advisory
 services            --      --           --    --           --          --         --      9,357            --            --
Interest
 expense             --      --           --    --           --     116,970         --         --            --            --
Net income           --      --           --    --           --          --         --         --            --       243,576
                  -----  ------    ---------  ----   ----------  ----------  ---------   --------       -------    ----------

Balance at
 October 31, 2001    --  $   --    2,559,453  $256   $5,522,296   $(235,553) $      --   $ (1,251)      $    --    $1,365,530
                  =====  ======    =========  ====   ==========  ==========  =========   ========       =======    ==========





<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                  F - 6

<PAGE>          F-7
<TABLE>
<CAPTION>

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                Page 1 of 2

                                                             Fiscal Years Ended October 31,
                                                        2 0 0 1         2 0 0 0        1 9 9 9
                                                        -------         -------        -------
<S>                                                 <C>           <C>             <C>
OPERATING ACTIVITIES
Net income (loss)                                     $ 243,576      $(1,165,638)    $  180,757
Adjustments to reconcile net income (loss) to net
  cash provided by (used from) operating activities:
  Depreciation and amortization                         882,704        1,067,472        969,498
  Deferred interest                                     116,970          117,937        117,615
  Deferred income taxes                                 198,579         (861,197)       (25,251)
  Financial advisory services                             9,357            9,357         17,222
  Write down of software development costs                   --          120,853             --
  Impairment of test passage bank                            --          685,722             --
  Bad debt expense                                      200,443          469,375        192,594
  Gain (loss) on sale of assets                              --          (26,241)        12,231
  Write off costs of terminated acquisition (Note 17)        --          157,493             --
Changes in operating assets and liabilities:
  Accounts receivable                                  (323,624)        (142,785)       (24,884)
  Tuition receivable                                    (52,521)      (1,027,003)      (638,318)
  Inventories                                           (36,819)        (124,313)         6,528
  Prepaid expenses                                       13,814          (61,527)       (16,671)
  Other assets                                              960          (15,173)        13,401
  Deferred tuition revenue                              (75,792)          75,792             --
  Accounts payable and accrued expenses                 287,316          358,921       (859,237)
                                                      ---------      -----------     ----------

  NET CASH FLOWS FROM OPERATING ACTIVITIES            1,464,963         (360,955)       (54,515)
                                                      ---------      -----------     ----------

INVESTING ACTIVITIES
  Test passage bank and test development               (346,398)        (564,700)      (482,799)
  Software development costs                            (20,493)         (93,529)       (52,424)
  Prepublication costs                                  (65,504)        (128,844)      (122,698)
  Purchase of marketable securities                          --               --       (175,000)
  Proceeds from sale of marketable securities                --          175,000        370,000
  Proceeds from sale of assets                           17,000           50,000         13,200
  Acquisition of subsidiaries                                --               --     (1,939,648)
  Deferred acquisition costs                                 --               --       (157,493)
  Acquisition of fixed assets                          (114,738)        (129,640)      (334,773)
                                                      ---------      -----------     ----------

  NET CASH FLOWS FROM INVESTING ACTIVITIES             (530,133)        (691,713)    (2,881,635)
                                                      =========      ===========     ==========


<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>



                                  F - 7
<PAGE>          F-8
<TABLE>
<CAPTION>
                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                                                                Page 2 of 2

                                                             Fiscal Years Ended October 31,
                                                        2 0 0 1         2 0 0 0        1 9 9 9
                                                        -------         -------        -------
<S>                                               <C>              <C>            <C>
FINANCING ACTIVITIES
  Stock subscription received                                --              --         14,350
  Repayment of capital lease obligations                (15,487)        (13,149)        (5,790)
  Net proceeds (repayments) from loan payable          (697,748)        697,748             --
  Loan from officer                                          --          60,000             --
  Repayment of long-term debt                          (656,718)       (320,736)      (911,747)
                                                    -----------      ----------     ----------

NET CASH FLOWS FROM FINANCING ACTIVITIES             (1,369,953)        423,863       (903,187)
                                                    -----------      ----------     ----------

NET CHANGE IN CASH AND TEMPORARY INVESTMENTS           (435,123)       (628,805)    (3,839,337)

CASH AND TEMPORARY INVESTMENTS
  AT BEGINNING OF PERIOD                                512,088       1,140,893      4,980,230
                                                    -----------      ----------     ----------

CASH AND TEMPORARY INVESTMENTS
  AT END OF PERIOD                                  $    76,965      $  512,088     $1,140,893
                                                    ===========      ==========     ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid during the year for:

  Interest                                          $   722,030      $  824,852     $  741,673
                                                    ===========      ==========     ==========
  Income taxes                                      $    29,700      $  102,982     $   70,786
                                                    ===========      ==========     ==========

  Noncash investing and financing activities:

  Conversion of debt to common stock                $        --      $  469,859     $       --
                                                    ===========      ==========     ==========
  Assets acquired under capital lease obligations   $    57,218      $       --     $   32,571
                                                    ===========      ==========     ==========

SUMMARY OF ACQUIRED SUBSIDIARIES:
  Assets acquired consisting primarily of goodwill  $        --      $       --     $6,916,234
  Liabilities assumed                                        --              --      3,562,828
                                                    -----------      ----------     ----------

    Net purchase price                              $        --      $       --     $3,353,406
                                                    ===========      ==========     ==========

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


                                  F - 8

<PAGE>          F-9

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------

Organization
------------

Touchstone Applied Science Associates, Inc. (the "Company") develops,
publishes and distributes a proprietary line of reading tests
specifically to meet clients' measurement specifications to
elementary and secondary schools, colleges and universities
throughout the United States.  The remainder of the Company's
assessment segment is comprised of Beck Evaluation & Testing
Associates, Inc. ("BETA"), a company which designs tests and
evaluates assessment needs for schools, school districts and test and
textbook publishers throughout the United States.  The Company's
instructional segment is comprised of Modern Learning Press, Inc.
("MLP"), a company which designs, publishes and distributes
"consumable" student workbooks for grades K-6 and creates and
publishes books and pamphlets for elementary school teachers and
parents throughout the United States.  The Company's educational
delivery segment is comprised of TASA Educational Services
Corporation ("TESC"), which was established to manage the Company's
educational delivery business and MESI Acquisition Corp. ("MESI"),
which operates a post-secondary school in two locations.

The Company was originally incorporated in the State of New York in
1976.  In August 1991, the Company changed its corporate domicile to
Delaware by merger into a Delaware corporation created exclusively
for that purpose.  In January 1997, the Company purchased the
outstanding capital stock of  BETA.  In May 1997, the Company formed
a wholly-owned subsidiary, MLP, which purchased certain assets of
Programs for Education, Inc.  In July 1998, the Company formed a
wholly-owned subsidiary, TESC.  In November 1998, TESC formed a
wholly-owned subsidiary, which purchased substantially all of the
operating assets of the Mildred Elley School, Inc. ("Former
Elley").  In June 2000, MESI changed its name to Mildred Elley
School, Inc. ("Elley").

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of the
Company and its wholly- owned subsidiaries, BETA, MLP, TESC and its
wholly-owned subsidiary Elley.  All material intercompany
transactions have been eliminated in consolidation.  In addition,
certain reclassifications have been made in the accompanying
consolidated financial statements in order to conform to the
presentation of the fiscal year ended October 31, 2001.








                                  F - 9

<PAGE>          F-10

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Goodwill
--------

Included in the purchase of the Company's subsidiaries was goodwill
totaling $374,067 for BETA, $2,490,864 for MLP and $3,408,776 for
Elley.  This goodwill is being amortized over a period of fifteen
years for BETA and MLP and thirty years for Elley.  In July 1997, the
Company deemed goodwill purchased in the MLP transaction totaling
$2,002,674 to be impaired based upon the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of".  Accordingly, goodwill was reduced to fair value.  The
Company will continue to evaluate goodwill for potential impairment
(see below regarding new accounting standards).

Cash and Temporary Investments
------------------------------

Cash and temporary investments include all cash balances on hand and
short-term, highly liquid investments with original maturities of
three months or less.  These investments historically have consisted
primarily of money market mutual funds which make monthly tax-free
dividend payments.

Inventories
-----------

Inventories, which based on the nature of the Company's operations
consist solely of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.

Marketable Securities
---------------------

The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" to account for marketable securities.  Under this
standard, certain investments in debt and equity securities are
reported at fair value. The Company's marketable securities, which
historically have consisted primarily of investment grade bonds, have
been reported as available for sale securities.

Cost of the securities used in the computation of realized gains and
losses is determined using the specific identification method.
During the fiscal year ended October 31, 1999, bonds with an
aggregate face value of $370,000 matured, resulting in a realized
gain on these securities of $1,906.  There were no proceeds from the
sale of securities or realized gains during the fiscal years ended
October 31, 2001 and 2000.






                                  F - 10

<PAGE>          F-11

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------

Accounts Receivable
-------------------

Accounts receivable have been presented net of allowance for doubtful
accounts.  Prior to Fiscal 2000, the Company had experienced
virtually no trade bad debts and, thus, no allowance has been
provided.

Tuition Receivable
------------------

Elley provides alternate financing arrangements for those students
who do not qualify for Federal and state financial aid to cover their
tuition.  Since student contracts acquired as part of the Elley
acquisition, as well as self-funded students who entered school
subsequent thereto, have varying repayment terms which extend beyond
the next twelve-month period, these receivables have been classified
as current and non-current.

Property, Plant and Equipment
-----------------------------

Property, plant and equipment are stated at cost.  The Company
provides for depreciation generally on an accelerated method (double-
declining balance) for personal property and on the straight-line
method for real property, by charges  to income at rates based upon
estimated recovery periods as follows:

         Building                            31-1/2 years
         Building improvements               15 to 31-1/2 years
         Leasehold improvements              39 years
         Furniture, fixtures and equipment   5 to 7 years
         Automobiles                         5 years

Income Taxes
------------

The Company has elected to file a consolidated Federal income tax
return with its subsidiaries. The Company's deferred income taxes
arise principally from the differences in the recording of expenses
relating to the test passage bank and test development (Note 4),
differences relating to the reporting of goodwill by the Company's
subsidiaries, and net operating losses.  Income taxes are reported
based upon Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes".








                                  F - 11

<PAGE>          F-12

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Software Development
--------------------

The Company accounts for costs associated with the development of
software products pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed".  Pursuant to
these rules for product development, the work performed prior to the
determination of technological feasibility is treated as research and
development costs and is expensed as incurred.  From the point a
project obtains technological feasibility until it is ready for sale,
the payroll and payroll-related charges and any direct material costs
are capitalized.  Capitalization of computer software costs is
discontinued when the product is available to be sold.  During Fiscal
2000, the Company, pursuant to the provisions set forth in SFAS No.
86, determined that the unamortized software development costs
associated with certain of its saleable computer software products
exceeded net realizable value by approximately $121,000.
Accordingly, the Company wrote down these costs to net realizable
value as of October 31, 2000.

During Fiscal 1999, the Company adopted Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" as issued by The American
Institute of Certified Public Accountants.  Pursuant to this
statement, costs incurred during the preliminary stage of a project
to design computer software for internal use are expensed as
incurred.  Once such a project enters its development stage, the
payroll and payroll-related charges and any direct material costs are
capitalized.  Capitalization of these computer software development
costs is discontinued when the project enters its post-
implementation/operation stage.

As of October 31, 2001, 2000 and 1999 unamortized software
development costs totaled approximately $124,000, $140,000 and
$313,000, respectively, and were included as a component of other
assets within the Company's balance sheets.

Amortization
------------

Loan origination costs and mortgage costs (see Note 9) are amortized
using the straight-line method over the term of the indebtedness.
Other capitalized costs are amortized using the straight-line method
over a period of five (5) years for software development, seven (7)
years for non-compete agreements, seven to eleven (7 - 11) years for
test passage bank and test development costs, and fifteen to thirty
(15 - 30) years for goodwill.  Amortization expense totaled $706,723,
$826,658 and $729,219 for the fiscal years ended October 31, 2001,
2000 and 1999, respectively.




                                  F - 12

<PAGE>          F-13

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Reverse Stock Split
-------------------

All common shares and per share amounts have been adjusted to give
retroactive effect to a one-for-four reverse stock split effected on
March 4, 1999.

Concentration of Credit Risk
----------------------------

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts/tuition receivable.  The Company maintains substantially all
its cash balances in a limited number of financial institutions.  The
balances are insured by the Federal Deposit Insurance Corporation up
to $100,000.  At October 31, 2000 and 1999, the Company's uninsured
cash balances totaled $280,213 and $541,721, respectively.  At
October 31, 2001, all of the Company's cash balances were insured.
The Company performs periodic reviews of the relative credit rating
of its banks to lower its risk.  The Company believes that
concentration with regards to accounts receivable is limited due to
its large customer base.

As part of the acquisition of Elley, the Company acquired unsecured
student loans which are being reflected at net realizable value.
Additionally, the Company initiated student loans during the fiscal
years ended October 31, 2000 and 1999.  The risk of loss to the
Company is the balance owed by the student at the time of default.
The Company plans to monitor these loans as closely as possible to
mitigate the potential risk.

Revenue Recognition
-------------------

Revenues from the Company's sales of its proprietary tests and other
assessment-related products, as well as from its instructional
materials, are recognized when product is shipped from the Company's
warehouse.  Assessment consulting revenues are recognized when the
consulting services are rendered.  Tuition revenues from the
Company's educational delivery division are recognized at the point
in time in which the Company has no exposure to future tuition
refunds associated with the respective academic semester.

Rights of Return
----------------

There is a right of return on test booklets, answer sheets and
certain software products. Upon return within a specified period, a
credit is issued, with certain chargeoffs, or, in the case of
software products, the item is replaced.  In the past, the Company's
returns have been insignificant.  As a result, no reserve has been
provided for.






                                  F - 13

<PAGE>          F-14

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Use of Estimates
----------------

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 make 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 results could differ from those
estimates.

Fair Value
----------

The Company has a number of financial instruments, none of which is
held for trading purposes.  The Company estimates that the fair value
of all financial instruments at October 31, 2001 and 2000, does not
differ materially from the aggregate carrying values of these
financial instruments recorded in the accompanying balance sheets.
The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation
methodologies.  Considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the
amounts that the Company could realize in a current market exchange.

Earnings (loss) per Share
-------------------------

Earnings (loss) per share for each of the fiscal years ended October
31, 2001, 2000 and 1999 was computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding and also was adjusted for the assumed conversion of
shares issuable upon the exercise of options and warrants in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share".  The Company had a net loss for the
fiscal year ended October 31, 2000 and, accordingly, common stock
equivalents are excluded from this computation as the effect would be
anti-dilutive.

Marketing and Promotional Costs
-------------------------------

Marketing and promotional costs are expensed as incurred and
aggregated approximately $1,093,000, $1,081,000 and $1,012,000 for
the fiscal years ended October 31, 2001, 2000 and 1999, respectively.

Regulatory Compliance
---------------------

As an educational institution, Elley is subject to licensure from
various accrediting and state authorities and other regulatory
requirements of the United States Department of Education.  As of
October 31, 2001 and 2000, Elley was in compliance with all such
requirements.

                                  F - 14

<PAGE>          F-15

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------

Recently Issued Accounting Pronouncements
-----------------------------------------

In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15,
2001.  Under the new rules, the pooling of interests method of
accounting for acquisitions is no longer allowed and goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in
accordance with the Statements.

The Company will apply the new rules for goodwill and other
intangible assets beginning in the first quarter of the fiscal year
ending October 31, 2003.  Application of the nonamortization
provisions of the Statement is expected to result in an increase in
net income of approximately $171,000 per year.  During the fiscal
year ending October 31, 2003, the Company will perform the first of
the required impairment tests of goodwill as of November 1, 2002
and has not yet determined what the effect of these tests will be
on the earnings and financial position of the Company.

On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001.
 The FASB's new rules on asset impairment supercede SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of", and portions of Accounting
Principles Board Opinion 30, "Reporting the Results of Operations".
 This standard provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that
would have to be met to classify an asset as held-for-sale.
Classification as held-for-sale is an important distinction since such
assets are not depreciated and are stated at the lower of fair value
and carrying amount.  This standard also requires expected future
operating losses from discontinued operations to be displayed in the
periods in which the losses are incurred, rather than as of the
measurement date as previously required.  The Company is currently
assessing the potential impact of SFAS 144 on its operating results
and financial position.

NOTE 2 - NOTES RECEIVABLE
-------------------------

As of October 31, 2001, 2000 and 1999, the Company held two notes
receivable in the aggregate amount of $159,327.  The notes receivable
include (1) a $150,000 note with interest at a rate of 6.17% per annum
secured by a mortgage on certain of the obligor's real property, with
principal due on December 31, 2003 and (2) a $9,327 note with an
annual interest rate of 8.75% requiring monthly payments of $516
consisting of principal and interest, commencing February 1, 2001.
At October 31, 2001 and 2000, the notes receivable balance has been
reflected within the Company's balance sheet as $9,327 in prepaid
expenses and other current assets and $150,000 in other assets.


                                  F - 15

<PAGE>          F-16

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------

Property, plant and equipment are summarized as follows:

                                              October 31,
                                        2 0 0 1         2 0 0 0
                                        -------         -------

Land                                  $  161,367      $  161,367
Building                               1,807,591       1,807,591
Building improvements                    533,006         522,520
Leasehold improvements                    64,467          54,457
Furniture, fixtures and equipment      1,016,147         921,905
Automobiles                               90,007         107,007
                                      ----------     -----------

                                       3,672,585       3,574,847
Less:  accumulated depreciation        1,804,880       1,628,899
                                      ----------     -----------

                                      $1,867,705      $1,945,948
                                      ==========     ===========

Depreciation expense for the fiscal years ended October 31, 2001, 2000
and 1999 was $175,981, $240,814 and $240,279, respectively.

Included in furniture, fixtures and equipment is $105,355 of equipment
under capital leases.

NOTE 4 - TEST PASSAGE BANK AND TEST DEVELOPMENT
-----------------------------------------------

The test passage bank is principally comprised of payroll and payroll-
related costs expended in the development of test passages which are
used in the creation of the Company's tests.  The process of writing
and calibrating a test passage takes approximately two years, and all
costs associated with the process are capitalized during this period.
Amortization of these costs begins once the development period has
elapsed, which in most cases, represents the point in time at which the
new test passage is placed into the test passage bank and becomes
available to be utilized within the Company's existing tests, or the
point in time at which a newly developed test becomes available for
sale.  Costs capitalized in connection with the development of passages
used in the Company's Degrees of Reading Power Test ("DRP") have been
estimated to have a useful life of eleven years and, accordingly, are
being amortized over an eleven-year period.  Costs capitalized in
connection with the development of passages used in all other of the
Company's tests have been estimated to have a useful life of seven
years and, accordingly, are being amortized over a seven-year period.

During the year ended October 31, 2000, the Company deemed certain of
its test passages, in the net aggregate amount of $685,722, to be
impaired based upon the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of".
Accordingly, the value of these passages was reduced to zero.


                                  F - 16

<PAGE>          F-17

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - LINES OF CREDIT
------------------------

As of October 31, 2001, Elley owed $200,000 to a bank, which is the
maximum available under a particular line of credit promissory note.
The note is collateralized by a second lien on all of Elley's corporate
assets as well as the guarantees of both TESC and TASA.  This note
bears interest at a rate of 1.0% above the prime lending rate and was
originally due on December 31, 1999.  The bank has extended the credit
line through January 30, 2002.

As of October 31, 2000, Elley also owed $200,000 which is the maximum
available from another line of credit promissory note with the same
bank.  This note is collateralized by a first lien on tuition
receivables as well as the guarantees of both TESC and TASA.  This note
bears interest at a rate 1.0% above the prime lending rate and was
originally due on December 31, 1999.  The bank has extended the credit
line through January 30, 2002.

In March 2000, the Company obtained an additional line of credit
totaling $750,000 from a bank.  Borrowings under the line of credit
accrue interest at the bank's prime rate plus one percent (1.0%) and
the line originally expired on April 1, 2001.  The line is
collateralized by the Company's accounts receivable (excluding those
receivables associated with the Company's wholly-owned subsidiary TESC
and its related subsidiaries) and inventory and contains various
financial covenants pertaining to the maintenance of working capital
and debt service coverage.  As of October 31, 2001, the Company was in
compliance with all such covenants.  There were no outstanding
borrowings under this line as of October 31, 2001.  The bank has
extended the credit line through March 31, 2002.

NOTE 6 - MORTGAGE PAYABLE
-------------------------

In August 1997, the Company remortgaged its facilities for $1,800,000
with Middletown Savings Bank (now Hudson United Bank).  Borrowings on
the mortgage incur interest at the rate of 8 1/8% per annum.  The
mortgage is to be repaid through equal monthly installments with a
balloon payment due in Fiscal 2007 (Note 7).  Proceeds from this
remortgaging were used to retire all prior mortgages held on the
facilities and certain short-term debt associated with the acquisition
of MLP.


                                  F - 17

<PAGE>          F-18

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - LONG-TERM DEBT
-----------------------

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                            Interest          Due           October 31,
Description                                   Rate            Date     2 0 0 1      2 0 0 0
-----------                                   ----            ----     -------      -------

<S>                                     <C>              <C>      <C>           <C>
Secured mortgage payable to bank in
  monthly installments of $15,196
  including interest (Note 6)               8 1/8%          2007     $1,635,172     $1,680,764

Secured note payable to stockholder of Programs
  for Education, Inc. in equal quarterly
  installments of $50,000                   Prime + 1%
                                            plus interest,
                                            secured by
                                            certain titles
                                            (but no less
                                            than 9%)        2002        150,000        350,000

Unsecured notes payable to stockholders
  of Former Elley in equal quarterly
  installments of $73,830 including
  interest (Note 16)                        8 1/2%          2003        139,176        829,215

Unsecured notes payable to TAP in equal
  Monthly installments of $20,791 including
  interest                                  7%              2002        201,398             --

Secured note payable to bank for working
  capital requirements in equal
  monthly principal payments
  of $3,512 plus interest, secured by
  substantially all the assets of MESI      Prime + 2%      2008        283,050        325,210

Secured notes payable for equipment
  financing in equal monthly
  installments of $2,273 and
  $1,500 including interest                 Prime + 1%      2003         63,788        101,344
                                                                     ----------     ----------

                                                                      2,472,584      3,286,533

Less:  current maturities                                               514,265        620,479
                                                                     ----------     ----------

Non-current portion                                                  $1,958,319     $2,666,054
                                                                     ==========     ==========

Long-term debt matures as follows:

Fiscal year ending October 31:
                                          2002    $  514,265
                                          2003       150,266
                                          2004       164,266
                                          2005       120,696
                                          2006       119,655
                                    Thereafter     1,403,436
                                                  ----------

                  Principal payments remaining    $2,472,584
                                                  ==========


</TABLE>

                                  F - 18

<PAGE>          F-19

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - CAPITALIZED LEASE OBLIGATIONS
--------------------------------------

The Company is obligated under capitalized leases for certain
computer and telephone equipment.

Future minimum lease payments under these capitalized lease
obligations, including interest, as of October 31, 2001 are as
follows:

Fiscal year ending October 31:
                                          2002       $41,870
                                          2003        22,706
                                          2004        13,245
                                                     -------
                                                      77,821
                       Less:  imputed interest        10,836
                                                     -------
Present value of future minimum lease payments        66,985
                     Less:  current maturities        34,096
                                                     -------

                                                     $32,889
                                                     =======

These leases have interest rates ranging from 11.6% to 14.6%.

NOTE 9- SUBORDINATED DEBENTURE AGREEMENT
----------------------------------------

In October 1998, the Company issued debentures to Cahill Warnock
Strategic Partners Fund L.P. ("CWSPF") and Strategic Associates, L.P.
("SA") for an aggregate of $4,000,000 pursuant to a Securities
Purchase Agreement entered into among the parties in September 1998.
These debentures are subordinate to certain senior indebtedness,
which as of October 31, 2000, consisted primarily of a mortgage
payable aggregating $1,680,764.  Interest pursuant to the debentures
is incurred at an annual rate of eight percent (8%) and is payable
quarterly. The debentures, which are due in October 2003, contain
provisions for the prepayment of the loan's principal.  Among other
provisions, the Company agreed to use the proceeds from the
debentures to acquire Elley and other comparable educational
institutions which are approved by CWSPF and SA.  Additionally, the
agreement contains provisions for the issuance of warrants, allowing
CWSPF and SA to acquire an aggregate of 690,230 shares of the
Company's common stock at $1.40 per share.  These warrants are
exercisable for a five-year period from designated initial dates as
set forth in the debenture agreement.  The value of the warrants,
totaling $588,075, has been reflected as a deferred interest charge
which is being amortized over the life of the agreement.  The
agreement calls for certain restrictive covenants, with which the
Company was in compliance at October 31, 2001 and 2000.




                                  F - 19

<PAGE>          F-20

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9- SUBORDINATED DEBENTURE AGREEMENT (Continued)
----------------------------------------

During the first quarter of the year ended October 31, 2000, in
consideration of CWSPF and SA's authorization to subordinate their
debentures to other indebtedness incurred by the Company during the
year ended October 31, 2000, the warrants were repriced to $1.125 per
share.  In February 2000, CWSPF and SA exercised an aggregate of
417,652 warrants for $469,859.  The proceeds from the exercise were
used to reduce the principal balance of the subordinated debentures.

NOTE 10 - RELATED PARTY TRANSACTIONS
------------------------------------

In July 2000, two officers of the Company loaned an aggregate of
$80,000 to the Company.  The loans bear interest at the prime rate
and are payable on demand. In September 2000, the Company repaid
loans to one of the officers totaling $20,000.  At October 31, 2001
and 2000, the loan payable balance has been reflected as a component
of accounts payable and accrued expenses within the Company's balance
sheet.

NOTE 11 - RETIREMENT PLANS
--------------------------

The Company has a qualified 401(k) Profit Sharing Plan under which
eligible employees who are eighteen years of age and have completed
either six months or one thousand hours of employment become
participants.  For fiscal years ended before November 1, 2000, the
Plan allowed total contributions of up to fifteen percent (15%) of
the eligible employee's salary through Company contributions and a
salary reduction mechanism.  Company contributions to the Plan were
optional and accrued at the discretion of the Board of Directors.
For the fiscal years ended October 31, 2000 and 1999, the Company did
not contribute to the profit sharing plan.  Effective November 1,
2000, the Company amended the Plan to provide a matching component
under the 401 (k) Profit Sharing Plan of up to five percent (5%) of
each eligible employee's compensation.  In addition, the eligibility
requirements were amended so that an employee is not eligible until
completing twelve months or two thousand hours of employment and may
enter the plan at specified entry dates.

Net assets for the Profit Sharing Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the
plan's records, were $1,667,686 and $1,794,313 at October 31, 2001
and 2000, respectively.

In October 1991, the Company adopted a Money Purchase Pension Plan
under which eligible employees who are eighteen years of age and have
completed either six months or one thousand hours of employment
become participants.  Under this plan, for fiscal years ended before
November 1, 2000,  the Company was required to make mandatory annual
contributions equal to ten percent (10%) of each eligible employee's
compensation for the Company and all its nonschool subsidiaries.
Effective November 1, 2000, the Company amended the Plan to exclude
highly compensated employees and to reduce the annual contribution to
five percent (5%) of each eligible employee's compensation. In
addition, the eligibility requirements were amended so that an
employee is not eligible until completing twelve months or two
thousand hours of employment and may enter the plan at specified
entry dates.


                                  F - 20


<PAGE>          F-21

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - RETIREMENT PLANS (Continued)
--------------------------

Net assets for the Money Purchase Pension Plan, as estimated by the
Massachusetts Mutual Life Insurance Company which maintains the
plan's records, were $936,111 and $944,366 at October 31, 2001 and
2000, respectively.

For the fiscal years ended October 31, 2001, 2000 and 1999,
retirement plan costs aggregated $146,000, $197,500 and $174,733,
respectively.

NOTE 12 - STOCKHOLDERS' EQUITY
------------------------------

Preferred Stock
---------------

The Company is authorized to issue 5,000,000 shares of $.0001 par
value preferred stock. The stock may be issued by the Board of
Directors of the Company in one or more series and with such
preferences, conversion or other rights, voting powers and other
provisions as may be fixed by the Board of Directors in the resolution
authorizing their issuance without any further action of the
stockholders.

On November 16, 1992, the Company issued 1,500 shares of $.0001 par
value convertible preferred shares to a voting trust, controlled by
management, dated August 1992.  The shares were entitled to 1,000
votes per share (3,000 votes per share after giving effect to the
three-for-one stock split on September 22, 1993).  The holders of the
shares were also entitled to a non-cumulative dividend of $.01 per
share.  In September 1994, the Company exchanged the 1,500 outstanding
$.0001 par value convertible preferred shares for 1,500 shares of
$.0001 par value preferred shares.  The new preferred shares possessed
all the rights of the original issue but for the conversion privilege.
 Pursuant to the Subordinated Debenture Agreement between the Company
and CWSPF and SA (Note 9), the 1,500 shares of the outstanding
preferred stock were redeemed in November 1998.

Amended and Restated 1991 Stock Option Incentive Plan
-----------------------------------------------------

The Company has adopted an Amended and Restated 1991 Stock Option
Incentive Plan (the "1991 Plan") whereby options to purchase up to
an aggregate of 625,000 shares of common stock, may be granted to
officers, key employees, directors, and consultants of the Company.
Subject to the terms of the 1991 Plan, the Board of Directors is
authorized to select optionees and determine the number of shares
covered by each option, its exercise price and certain of its other
terms.  No one participant may receive an award in excess of 50,000
shares in any one fiscal year.  All options are 100% vested after
twelve months and may be exercised for a nine-year period commencing
one year from the date of the grant.  The exercise price of an option
granted under the Plan may not be less than the fair market value of
the Company's common stock on the date of the grant.

                                  F - 21

<PAGE>          F-22

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
------------------------------

1991 Plan activity is summarized as follows:

                                                        Option Price
                                          Shares        Per Share
                                          ------        ---------

Options outstanding - November 1, 1999    461,113       $1.438 - $11.00
Granted                                   113,275       $1.688 - $2.125
Canceled                                  (76,350)      $1.668 - $11.00
Exercised                                      --           --
                                          -------

Options outstanding - October 31, 2000    498,038       $1.438 - $11.00

Granted                                        --           --
Canceled                                  (22,750)      $1.438 - $2.88
Exercised                                      --           --
                                          -------

Options outstanding - October 31, 2001	  475,288	$1.668 - $11.00
                                          =======
Options exercisable - October 31, 2001	  475,288
                                          =======

2000 Stock Incentive Plan
-------------------------

In February of Fiscal 2000, the Company adopted the 2000 Stock
Incentive Plan (the "2000 Plan") which supercedes the 1991 Plan.
Options outstanding under the 1991 Plan at October 31, 2000 will
remain effective until forfeited, cancelled, or expired without
exercise. The 2000 Plan calls for options to purchase up to an
aggregate of 300,000 shares of the Company's common stock plus such
additional shares as becomes available under the 1991 Plan by reason
of forfeiture of awards granted thereunder or cancellation or
expiration of such shares without exercise, and may be granted to
officers, key employees, directors, and consultants of the Company.
 Subject to the terms of the 2000 Plan, the Board of Directors is
authorized to select optionees and determine the number of shares
covered by each option, its exercise price and certain of its other
terms.  No one participant may receive an award in excess of 150,000
shares in any three fiscal-year period.  All options are 100% vested
after twelve months and may be exercised for a nine-year period
commencing one year from the date of grant.  The exercise price of
an option granted under the 2000 Plan may not be less than the fair
market value of the Company's common stock on the date of grant.
There were no options granted, canceled, or exercised under the 2000
Plan during Fiscal 2001 and 2000 and, accordingly, there were no
options outstanding or exercisable as of October 31, 2001 and 2000.



                                  F - 22

<PAGE>          F-23

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
------------------------------

Directors Stock Option Plan
---------------------------

In 1996, the Company adopted a Directors Stock Option Plan (the "DSO
Plan") whereby options may be granted to purchase up to an aggregate of
25,000 shares of the Company's common stock to directors of the Company
who are not officers or employees of the Company or otherwise eligible
to receive awards under the 1991 Plan.  Pursuant to the DSO Plan,
eligible directors would receive an option to purchase 1,250 shares of
the Company's common stock on the date the director first becomes
eligible.  The eligible director would subsequently receive an option
to purchase 625 shares of the Company's common stock on the date of
each succeeding annual meeting of the stockholders, unless the
director's term ends on or before that date.  Each option granted is
exercisable at the fair market value of the Company's common stock on
the date granted, and may be exercised for a nine-year period
commencing one year from the date of the grant.

In February 2000, the Company adopted an amendment to the DSO Plan
increasing the number of options, which may be granted under the DSO
Plan, to an aggregate of 75,000 shares.  The amendment also increased
the number of shares of the Company's common stock to be subject to the
automatic grants made to directors from 1,250 shares to 5,000 shares
upon first being elected to the Board of Directors of the Company and
625 shares to 2,500 shares upon each re-election to the Board of
Directors.

Directors stock option plan activity is summarized as follows:

                                                        Option Price
                                          Shares        Per Share
                                          ------        ---------

Options outstanding - October 31, 1999      6,875         $2.000 - $7.85
Granted                                    12,500         $1.50  - $3.188
Canceled                                       --             --
Exercised                                      --             --
                                          -------

Options outstanding - October 31, 2000     19,375         $1.50 - $7.85

Granted                                    15,000         $.62  - $.6875
Canceled                                       --            --
Exercised                                      --            --
                                          -------

Options outstanding - October 31, 2001     34,375         $.62 - $7.85
                                          =======
Options exercisable - October 31, 2001     19,375
                                          =======


                                  F - 23

<PAGE>          F-24

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
------------------------------

Consultants Stock Incentive Plan
--------------------------------

The Company has adopted a Consultants Stock Incentive Plan (the "CSI
Plan") whereby options to purchase up to 50,000 shares of the
Company's common stock may be granted to consultants or advisors of
the Company.  Subject to the terms of the CSI Plan, a committee of the
Board of Directors is authorized to select participants and determine
the number of shares covered by each option, its exercise price and
other terms.  The exercise price, however, may not be less than the
fair market value of the Company's common stock on the date of the
grant.


Consultants stock incentive plan activity is summarized as follows:

                                                        Option Price
                                          Shares        Per Share
                                          ------        ---------

Options outstanding - October 31, 1999      3,750        $1.752 - $1.76
Granted                                        --            --
Canceled                                       --            --
Exercised                                      --            --
                                          -------

Options outstanding - October 31, 2000      3,750        $1.752 - $1.76

Granted                                        --            --
Canceled                                    3,750        $1.752 - $1.76
Exercised                                      --            --
                                          -------

Options outstanding - October 31, 2001         --            --
                                          =======
Options exercisable - October 31, 2001         --
                                          =======










                                  F - 24

<PAGE>          F-25

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
------------------------------

Stock Based Compensation
------------------------

In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation". The Company currently
accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". As the Company is not required to
adopt the fair value based recognition provisions prescribed under
SFAS No. 123, it has elected only to comply with the disclosure
requirements set forth in the statement which includes disclosing pro
forma net income (loss) and earnings (loss) per share as if the fair
value based method of accounting had been applied.  The pro forma net
income (loss) and income (loss) per share for the fiscal years ended
October 31, 2001, 2000 and 1999 would have been $238,279 and $.09,
$(1,181,682) and $(.48), and $(26,008) and $(.01), respectively had
the new method been applied.

The fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the fiscal years ended October 31,
2001, 2000 and 1999, respectively: expected volatility of 136%, 83%
and 70% respectively; risk free interest rate of 4.66%, 6 1/2% and 6 3/4%,
respectively; and expected lives of 5 to 10 years.

The effects of applying SFAS No. 123 in the above pro forma
disclosures are not indicative of future amounts as they do not
include the effects of awards granted prior to Fiscal 1996.
Additionally, future amounts are likely to be affected by the number
of grants awarded since additional awards are generally expected to be
made at varying amounts.

Compensatory Stock
------------------

In 1996 and 1997, the Company entered into written consulting
agreements with several financial consulting firms.  The agreements
were for one to five year periods.  The consultants received an
aggregate of 75,000 shares of the Company's common stock in exchange
for consulting services.  In addition, several of the agreements
provide for the issuance of warrants to purchase an aggregate of
187,500 shares of the Company's common stock for a five year period at
exercise prices ranging from $1.876 to $2 per share.  The cost of these
services was valued at $140,626 and is being expensed over the term of
the agreements. The amount of unearned compensation related to the
shares issued under these agreements is being reflected as a reduction
of stockholders' equity.  At October 31, 2001, $1,251 of these costs
has yet to be amortized.



                                  F - 25

<PAGE>          F-26

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE  13 - INCOME TAXES
-----------------------

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes using the enacted tax rates in effect in the years in which
the differences are expected to reverse.  Deferred income tax
liabilities and assets are comprised as follows:

                                                       October 31,
                                                 2 0 0 1          2 0 0 0
                                                 -------          -------
   Deferred tax assets:
      Goodwill                                 $  481,954       $  581,168
      Net operating loss                          314,297          520,035
      Bad debt allowance                          285,188          271,401
      Other                                        30,096           37,539
                                              -----------       ----------

   Gross deferred tax assets                    1,111,535        1,410,143
                                              -----------       ----------

   Deferred tax liability:
      Test passage bank and test development      (33,508)        (133,537)
                                              -----------       ----------

   Gross deferred tax liability                   (33,508)        (133,537)
                                              -----------       ----------

   Net deferred tax assets                     $1,078,027       $1,276,606
                                              ===========       ==========

The Company believes it is more likely than not that this net deferred
tax asset will be realized in future periods and, accordingly, no
valuation allowance has been recorded.

                                  F - 26


<PAGE>          F-27

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 13 - INCOME TAXES (Continued)
----------------------

The Company's income tax expense consists of the following:


<TABLE>
<CAPTION>

                                                  Fiscal Years Ended October 31,
                                           2 0 0 1           2 0 0 0            1 9 9 9
                                           -------           -------            -------
<S>                                    <C>             <C>                 <C>
  Current:
      Federal                             $(119,521)       $  24,616          $  88,259
      State                                  44,113           27,611             14,188
                                          ---------        ---------          ---------

                                            (75,408)          52,227            102,447
                                          ---------        ---------          ---------
  Deferred:
      Federal                               154,159         (663,077)           (17,355)
      State                                  44,420         (198,120)            (7,896)
                                          ---------        ---------          ---------

                                            198,579         (861,197)           (25,251)
                                          ---------        ---------          ---------

  Provision (benefit) for income taxes    $ 123,171        $(808,970)         $  77,196
                                          =========        =========          =========


</TABLE>

A reconciliation of the difference between the expected income tax
rate using the statutory Federal tax rate and the Company's
effective rate is as follows:

                                                 Fiscal Years Ended October 31,
                                                   2 0 0 1   2 0 0 0   1 9 9 9
                                                   -------   -------   -------

U.S. Federal income tax statutory rate               34%       (34)%     34%

State income tax, net of Federal income tax benefit   7         (7)       7

Other - including tax free income, goodwill
         and net operating losses                    (7)        --      (11)
                                                     ---       ---      ---


Effective tax rate                                   34%       (41)%     30%
                                                     ===       ===      ===






                                  F - 27


<PAGE>          F-28

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14 - EMPLOYMENT AGREEMENTS
-------------------------------

The Company has employment agreements with several of its key
employees.  The agreements are for varying terms ranging from one to
three years and are automatically extended each year unless the
Company notifies the employee, in writing, ranging from at least 60
to 180 days prior to the anniversary date, that the agreement will
not be extended.

Each agreement calls for a base salary, which may be adjusted
annually at the discretion of the Company's Board of Directors, and
also provides for eligibility in the Company's benefit plans,
incentive bonuses which are payable based upon the attainment of
certain profitability goals, and key man insurance.  Among other
provisions, the agreements include a non-compete clause for varying
periods not exceeding three years following termination of
employment.

The aggregate commitment for future salaries as of October 31, 2001,
excluding bonuses, is as follows:

Fiscal year ending October 31:
                                          2002    $  986,545
                                          2003       655,326
                                          2004       137,719
                                                  ----------

                                                  $1,779,590
                                                  ==========


















                                  F - 28


<PAGE>          F-29

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15- SEGMENT INFORMATION
----------------------------

<TABLE>
<CAPTION>
                                      Assessment    Delivery    Instructional     Total
                                      ----------    --------    -------------     -----

<S>                                <C>          <C>           <C>           <C>
Fiscal Year Ended October 31, 2001:

Revenues                              $6,594,163   $4,966,974    $2,839,008    $14,400,145
Interest and dividend income               6,064       54,884            --         60,948
Interest expense                         590,358       98,910        23,868        713,136
Depreciation and amortization            562,396      154,586       165,722        882,704
Income (loss) before income taxes        726,175     (530,195)      170,767        366,747
Total segment assets                   6,929,437    6,462,084     1,917,446     15,308,967
Expenditures for segment assets          435,961       89,776        58,188        583,925

Fiscal Year Ended October 31, 2000:

Revenues                              $4,897,923   $5,074,704    $2,785,497    $12,758,124
Interest and dividend income                 962       52,191         3,084         56,237
Interest expense                         180,789      592,605        44,021        817,415
Depreciation and amortization            685,242      242,865       139,365      1,067,472
Loss before income taxes                (842,276)  (1,053,444)      (78,888)    (1,974,608)
Total segment assets                   6,759,378    6,888,414     2,556,857     16,204,649
Expenditures for segment assets          706,081       47,651       162,981        916,713

Fiscal Year Ended October 31, 1999:

Revenues                              $4,591,542   $5,297,127    $2,427,577    $12,316,246
Interest and dividend income              18,653      104,823         4,714        128,190
Interest expense                         155,938      604,653        58,119        818,710
Depreciation and amortization            652,547      198,437       118,514        969,498
Income (loss) before income taxes       (332,720)     373,258       217,415        257,953
Total segment assets                   7,391,695    6,448,113     2,544,609     16,384,417
Expenditures for segment assets          777,176       81,391       134,127        992,694

</TABLE>

Included in the assessment segment reporting are corporate overhead
expenses of approximately $467,000, $500,000 and $690,000 for the
fiscal years ended October 31, 2001, 2000 and 1999, respectively.

The Company's operations are primarily conducted in the United
States.  Information about the Company's operations in different
geographic areas for the fiscal years ended October 31, 2001, 2000
and 1999, is not considered material to the financial statements.



                                  F - 29


<PAGE>          F-30

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 - COMMITMENTS AND CONTINGENCIES
---------------------------------------

Rental Commitments
------------------

Three of the Company's subsidiaries lease office and warehouse
space under non-cancelable operating leases.  The following is a
schedule of future minimum rental commitments as of October 31,
2001:

     Fiscal Year Ending October 31,
                   2002                $  404,862
                   2003                   400,152
                   2004                   389,957
                   2005                   356,947
                   2006                   320,710
             Thereafter                   570,742
                                       ----------

                                       $2,443,370
                                       ==========

Net rental expense totaled $435,173, $481,774 and $411,523 for the
fiscal years ended October 31, 2001, 2000 and 1999, respectively.

In addition, the Company has entered into various operating leases
for equipment and automobiles which require monthly payments
aggregating $8,123. The last of these leases expires during Fiscal
2004.

Termination of Former Employee
------------------------------

In January 2000, a former employee of Elley commenced an action
against the Company, Elley and an executive officer of Elley in the
Supreme Court of the State of New York in the county of Albany.
The complaint alleges claims of wrongful termination of employment
and seeks damages in the approximate amount of $300,000 as
compensation for lost earnings under the employee's former
employment contract.  The Company believes that the allegations are
without merit and is vigorously defending the action.  The Company
maintains directors and officers liability insurance which, subject
to a policy deductible, insures the defendant officer, but not the
Company, against such claims.





                                  F - 30

<PAGE>          F-31

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - COMMITMENTS AND CONTINGENCIES (continued)
---------------------------------------

Other Contingencies
-------------------

In August 2000, the Company received a letter from Faith Takes, a
shareholder of Former Elley and, currently, the President and Chief
Executive Officer of Elley, alleging certain defaults in the
payment of amounts due and payable under the Asset Purchase
Agreement between the Company, Elley and Former Elley and the
accompanying promissory notes of Elley (Note 7).  Such demand
letter also alleges additional defaults by Elley in the employment
agreement between Elley and Ms. Takes.  The amounts demanded by Ms.
Takes aggregate approximately $985,000 plus interest, attorneys'
fees and late fees.  The Company believes that it has significant
defenses and counterclaims, as set forth in the terms of the Asset
Purchase Agreement with Former Elley, to such allegations and is
currently pursuing resolution of these issues.

The Company's financial statements include an increase to
allowance for doubtful accounts, against tuition receivable of
$506,816, which have been offset in an equal amount against the
obligation to the shareholders of the Former Elley. The reason
for the  offset was that collectibility of these receivables was
warranted by the Former Elley in connection with the acquisition
of the Mildred Elley schools. The Company believes it is entitled
to this right of offset because management feels that this amount
is uncollectible under the warranty of Former Elley. The warranty
was recognized in the Decision (see below), but a triable issue
of fact remains as to the intention of the parties concerning the
meaning of collectibility under the warranty.

The New York State Higher Education Services Corporation
("HESC") has concluded its audit relating to Elley's involvement
in the New York State Tuition Assistance Program and determined
Elley's liability to be $238,255. In August 2001, Elley entered
into a Repayment Agreement with HESC to repay the liability in
twelve monthly installments of approximately $20,000 commencing
October 1, 2001. Approximately $11,000 of the liability is
attributable to the period after the date the Company purchased
Elley, and approximately $227,000 to the period prior thereto.
The Company, for financial statement purposes, has offset the
$227,000 amount against the obligation to the shareholders of the
Former Elley in reliance on the decision of Justice Keegan of the
Supreme Court, Albany County, State of New York in the Takes
Litigation (the "Decision"), recognizing a right of offset in
favor of the Corporation for this liability once determined.


                                  F - 31


<PAGE>          F-32

                TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                             AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - COMMITMENTS AND CONTINGENCIES (continued)
---------------------------------------

Other Contingencies (continued)
-------------------

The foregoing alleged defaults trigger a potential cross default
under the Company's outstanding 8% subordinated debentures, in the
outstanding principal amount of $3,530,141 currently held by CWSPF
and SA (See Note 9).   As of October 31, 2001, the Company has not
received a notice of default from CWSPF and SA.

NOTE 17 - NASDAQ DELISTING
--------------------------

On April 5, 2001, the Company received notice that NASDAQ had
made a determination that the Company did not demonstrate an
ability to sustain compliance with the minimum bid price
applicable to the Small Cap market. The Company received a
hearing before NASDAQ on May 25, 2001.  On June 29, 2001, the
Company received notification of the NASDAQ Listing Qualification
Panel's decision to delist the Company's securities from the
NASDAQ stock market effective July 2, 2001.

NOTE 18 - TERMINATED ACQUISITIONS
---------------------------------

During the first quarter of the year ended October 31, 2000, the
Company, through its wholly-owned subsidiary, TESC, signed a letter
of intent to acquire all of the outstanding common stock of the
DuBois Business College ("DBC"), a Pennsylvania-based, two-year
degree granting business college, and substantially all of the
assets and certain liabilities of Kenawell Technologies, LLC
("KTL"), a limited liability company which holds several of the
real properties of DBC, for $3,200,000.  In March 2000, after
performing its due diligence review, the Company terminated this
letter of intent.  As a result of this terminated letter of intent
and other failed potential acquisitions during the current fiscal
year, the Company wrote off approximately $250,000 in professional
fees and other due diligence-related costs as of October 31, 2000.
These costs have been included as a component of general and
administrative expenses.














                                  F - 32









<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.

                            TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.

January 29, 2002            By:  /s/ ANDREW L. SIMON
                               ----------------------------------------
                             Andrew L. Simon
                             President and Chief Executive
                             Officer (principal executive officer and
                             principal 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.

     Signature                        Title                   Date
     ---------                        -----                   ----

/s/ ANDREW L. SIMON            Director and Chairman     January 29, 2002
-------------------------
    Andrew L. Simon                of the Board

/s/ MICHAEL D. BECK                  Director            January 29, 2002
-------------------------
    Michael D. Beck

/s/ STEVEN R. BERGER                 Director            January 29, 2002
-------------------------
    Steven R. Berger

/s/ JOSEPH A. FERNANDEZ              Director            January 29, 2002
-------------------------
    Joseph A. Fernandez

/s/ DONALD W. HUGHES                 Director            January 29, 2002
-------------------------
    Donald W. Hughes

/s/ LINDA G. STRALEY                 Director            January 29, 2002
-------------------------
    Linda G. Straley

/s/THOMAS STRUZZIERI                 Director            January 29, 2002
-------------------------
   Thomas Struzzieri

/s/ DAVID L. WARNOCK                 Director            January 29, 2002
-------------------------
    David L. Warnock