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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB
(MARK ONE)
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended March 31, 1999.

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) of the Securities Exchange Act
      of 1934 for the transition period from                  to
                        .

                        Commission file number: 0-22994

                          GUNTHER INTERNATIONAL, LTD.
                 (Name of small business issuer in its charter)

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<S>                                              <C>
                    DELAWARE                                        51-0223195
(STATE OR OTHER JURISDICTION OF INCORPORATION OR       (I.R.S. EMPLOYER IDENTIFICATION NO.)
                 ORGANIZATION)
</TABLE>

<TABLE>
<S>                                              <C>
               ONE WINNENDEN ROAD                                     06360
              NORWICH, CONNECTICUT                                  (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

                   ISSUER'S TELEPHONE NUMBER: (860) 823-1427

             SECURITIES REGISTERED UNDER SECTION 12(b) of the Act:

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<CAPTION>
              TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
              -------------------                   -----------------------------------------
<S>                                              <C>
                      None
</TABLE>

             SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

                         COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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. [ ]

The Registrant's revenues for the most recent fiscal year were $20,743,635.

The aggregate market value of voting stock held by non-affiliates of the
Registrant as of May 28, 1999, based upon the average of the reported closing
bid and asked prices of such stock on that date as reported by the OTC Bulletin
Board, was $6,648,086. The number of shares of the Registrant's Common Stock
outstanding as of May 28, 1999 was 4,291,769.

     DOCUMENTS INCORPORATED BY REFERENCE.  The information required by Part III
of this Annual Report on Form 10-KSB is incorporated by reference to the
Registrant's definitive proxy statement to be distributed to stockholders in
connection with the 1999 Annual Meeting of Stockholders. Such proxy statement is
expected to be filed with the Commission within one hundred and twenty (120)
days of the close of the fiscal year.

Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X]
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                               TABLE OF CONTENTS

                                     PART I

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<S>       <C>                                                           <C>
Item 1.   Description of Business.....................................    1
            General...................................................    1
            Development of the Business...............................    1
            Finishing Systems.........................................    2
            Strategy..................................................    3
            Systems...................................................    4
          Marketing and Sales.........................................    6
          Customers...................................................    6
          New Products................................................    7
          Manufacturing...............................................    8
          Installation and Customer Service...........................    8
          Research and Development....................................    9
          Competition.................................................    9
          Patents and Proprietary Rights..............................    9
          Employees...................................................   10
Item 2.   Description of Property.....................................   10
Item 3.   Legal Proceedings...........................................   11
Item 4.   Submission of Matters to a Vote of Security Holders.........   11
                                  PART II
Item 5.   Market for Common Equity and Related Stockholder Matters....   12
Item 6.   Management's Discussion and Analysis or Plan of Operation
            Summary of Recent Events..................................   13
            Summary Financial Data....................................   14
            Results of Operations.....................................   15
            Liquidity and Capital Resources...........................   16
            Inflation.................................................   17
            Forward Looking Statements................................   17
            Year 2000.................................................   18
Item 7.   Financial Statements........................................   19
Item 8.   Changes in and Disagreements with Accountants on Accounting
            and Financial
            Disclosure................................................   19
                                 PART III
Item 9.   Directors, Executive Officers, Promoters and Control
            Persons; Compliance with Section 16(a) of the Exchange
            Act.......................................................   20
Item 10.  Executive Compensation......................................   20
Item 11.  Security Ownership of Certain Beneficial Owners and
            Management................................................   20
Item 12.  Certain Relationships and Related Transactions..............   20
</TABLE>

                                       (i)
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<TABLE>
<S>       <C>                                                           <C>
                                  PART IV
Item 13.  Exhibits and Reports on Form 8-K............................   21
Signatures............................................................   25
Index to Financial statements.........................................  F-1
</TABLE>

                                      (ii)
<PAGE>   4

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

     The Company designs, develops, assembles, markets and services high-speed
systems that automatically assemble printed documents, fold, staple or bind the
documents, as required, and insert completed documents into appropriate
envelopes for mailing or other distribution. The Company's systems are modular,
and may be reconfigured in accordance with customer specifications, and are
controlled by Company developed software.

DEVELOPMENT OF THE BUSINESS

     The Company was incorporated under the laws of the State of Delaware on
March 22, 1978. After an initial period of inactivity, the Company engaged,
between 1981 and 1985, with a joint venture partner, in a program to develop an
automated system for packaging for distribution of Federal food stamps. Although
the Company was unsuccessful in its efforts to obtain a Federal Government
contract, the technology it developed was applicable to other uses. In 1985,
Aetna Life and Casualty Company requested the Company to develop finishing
systems for use in the insurance business and purchased the first systems
produced by the Company in 1986.

     In October 1989, the Company entered into a Development Agreement (the
"Development Agreement") with Connecticut Innovations, Inc. ("CII") (then known
as the Connecticut Product Development Corporation), pursuant to which CII
agreed to reimburse the Company for 60% of the development costs of certain
sponsored products. The Development Agreement contemplated that the Company
would repay the reimbursements received from CII, plus interest, and pay certain
additional royalties to CII based upon future sales or licenses of the sponsored
products.

     In August 1992, the Development Agreement was modified and amended to
convert the unpaid reimbursements and royalties due and owing to CII
(approximately $500,000) into 500 shares of Class B Preferred Stock and
restructure the Company's future royalty obligations.

     In September 1992, the Company completed a restructuring that resulted in
the infusion of additional capital and the assumption of control by a group of
new investors, including Park Investment Partners, Inc. ("Park"), a corporation
of which the late Harold S. Geneen and Gerald H. Newman were the sole
stockholders. Pursuant to the restructuring, the Company received approximately
$2,257,500 in equity financing in exchange for shares of common stock, warrants
to purchase common stock and convertible preferred stock. The convertible
preferred stock was fully converted into common stock upon completion of the
initial public offering of the Company.

     In September 1993, the Development Agreement was further modified and
amended to restructure the Company's royalty obligations arising under the
Development Agreement and modify the redemption terms of the Class B Preferred
Stock then held by CII.

     On December 29, 1993, the Company completed its initial public offering of
1,000,000 units of its securities (each unit consisting of one share of the
Company's Common Stock, par value $.001 per share, and one callable Common Stock
Purchase Warrant). The net proceeds to the Company from the public offering were
$3,975,000. The underwriters elected to exercise their over-allotment option in
January 1994, which generated additional net proceeds of $615,000. The Company
used the proceeds from the offering to reduce its accounts payable, pay down
outstanding debt, increase research and development efforts and for general
working capital purposes.

     Effective December 31, 1995, the Company and CII entered into a new
agreement (the "Amended and Restated Development Agreement") completely amending
and restating the Company's obligations under the Development Agreement. Under
the Amended and Restated Development Agreement, CII agreed to surrender the 500
shares of Class B Preferred Stock then held by CII and waive all royalty
payments then due and owing under the Development Agreement, as well as any
other defaults of the Company, and the

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Company agreed to make future royalty payments to CII based on a revised royalty
formula. See Note 10 to the Company's Financial Statements.

     On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction with the Bank of Boston, Connecticut, N.A. (the "Bank"),
the Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC (the "New
Lender"), the proceeds of which were utilized to restructure and replace the
Company's pre-existing senior line of credit, fund a full settlement with the
Company's third party service provider and provide additional working capital to
fund the Company's ongoing business operations. Under the terms of the
transaction, the New Lender loaned an aggregate of $4 million to the Company. At
the same time, the Bank reached an agreement with the Estate, which had
guaranteed a portion of the Company's senior line of credit, whereby the Estate
consented to the liquidation of approximately $1.7 million of collateral and the
application of the proceeds of such collateral to satisfy and repay in full a
like amount of indebtedness outstanding under the senior credit facility. The
balance of the indebtedness outstanding under the senior credit facility,
approximately $350,000, was repaid in full from the proceeds of the new
financing. The Company executed a new promissory note in favor of the Estate
evidencing the Company's obligation to repay the amount of the collateral that
was liquidated by the Bank. The Company's obligations to the Estate are
subordinated to the Company's obligations to the New Lender.

     The principal balance of the $4.0 million term note payable to the New
Lender is to be repaid in monthly installments of $100,000 from November 1, 1998
and continuing to and including September 1, 1999, a single installment of
$400,000 on October 1, 1999 and a final installment representing the balance
($2.5 million plus all accrued and unpaid interest) shall be due on October 1,
2003. Interest shall be paid quarterly, at the rate of 8% per annum, beginning
January 1, 1999 and continuing until the principal and interest due is paid in
full. The debt is secured by a first priority interest in all tangible and
intangible personal property and a secondary interest in patents and trademarks.

     To induce the New Lender to enter into the financing transaction, the
Company granted the New Lender a stock purchase warrant entitling the New
Lender, at any time during the period commencing on January 1, 1999 and ending
on the fifth anniversary of the transaction, to purchase up to 35% of the pro
forma, fully diluted number of shares of the Common Stock of the Company,
determined as of the date of exercise. The exercise price of the warrant is
$1.50 per share.

     In addition, the Company, the New Lender, the Estate and certain
shareholders (Park, Gerald H. Newman, Four Partners and Robert Spiegel) entered
into a separate voting agreement, pursuant to which they each agreed to vote all
shares of Gunther stock held by them in favor of (i) that number of persons
nominated by the New Lender constituting a majority of the Board of Directors,
(ii) one person nominated by the Estate and (iii) one person nominated by Park.

     The promissory note in favor of the Estate for approximately $1.7 million
is to be repaid at the earlier of one year after the Company's obligations to
the New Lender are paid in full or on October 2, 2004. Interest, at 5.44% per
annum, shall accrue on principal and unpaid interest, which is added to the
outstanding balance and is due at the time of principal payments. The
indebtedness is secured by a second priority interest in all tangible and
intangible personal property of the Company (excluding patents and trademarks)
and a third party interest in patents and trademarks. CII has a first priority
security interest in certain specified patents and trademarks of the Company
dating back to the Development Agreement.

FINISHING SYSTEMS

     Recent advances in computer technology have produced alternatives to the
traditional offset printing presses for printing of large quantities of
documents. Laser printers take data from computers and transfer the data onto a
print drum with a laser beam. Non-impact laser printing allows for variations in
the text of each document to be printed. The documents can be personalized and
modified as desired.

     Computer-directed printers are employed, in conjunction with mainframe or
personal computers, to produce documents. The largest printers most often are
placed in centralized print centers that are near mainframe computers. More
recently developed non-impact laser printers that print five to 25 sheets per

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minute can be placed in any location within offices where personal computers are
concentrated. The availability of non-impact laser printers has enabled many
businesses that generate large quantities of documents to create "in-house"
printing centers. The heaviest concentration of non-impact laser printers is in
the insurance, finance, and banking industries, and government.

     The ability to generate large quantities of documents has created a new
need to automate the assembly, sorting, and distribution of documents, a process
referred to as "finishing". Most of these functions have been performed "off
line", that is, without intelligent or computer directed machines. This requires
substantial labor, and documents cannot be assembled with the same degree of
accuracy, completeness, and speed as allowed by intelligent machines. The
output, or finishing of documents, is referred to as post processing and
includes such functions as folding, stapling, binding, booklet making and
packaging assembled documents for mailing and other distribution. Automated
processing systems also permit quicker turnaround of documents, improve the
accuracy and completeness of assembled documents, facilitate the elimination of
large inventories of pre-printed forms and enable the operator to make changes
in the type of documents being assembled without stopping the assembly process
and without incurring the expense of designing special mainframe computer
programs.

STRATEGY

     The Company's objective is to capitalize on its position as a pioneer and
technology leader in the design and sale of intelligent document mailing and
finishing systems and leading edge, high quality, low cost ink jet solutions for
end user and OEM applications. The Company's goal is to broaden the range of
markets, applications, and customers utilizing these unique technologies while
continuing to increase its leadership position in insurance and financial
markets. Further, it is the Company's objective to leverage both its well known
customer base and the strength of its relationships/alliances with partners like
Hewlett-Packard into a dominant position in the growing marketplaces, both end
user and OEM, for low cost, high resolution ink jet printing at document
processing speeds. The Company has also targeted aggressive expansion of its
system service and consumables/supplies businesses.

     Expanded Marketing Efforts.  The Company initially relied principally on
contacts within the insurance industry, particularly among large property and
casualty insurers, and on the growing reputation of its products to generate
sales. More recently, the Company's sales and marketing efforts have actively
targeted a far broader range of applications and industries including other
types of insurance companies and customers in the banking, finance and health
care industries. The Company has continued to experience success in expanding
into other markets including government, retail distribution, outsourcing,
service bureaus, and others. The Company also continues to generate additional
sales to its existing customer base. As much as 50% of the Company's system
sales in a given year have been to previous purchasers of the Company's systems
and the Company believes that repeat sales and upgrades of existing systems will
continue to be an important source of revenue. The Company organizes user group
seminars to allow customers to discuss their system requirements with each other
and the Company and to collaborate on system design.

     System Flexibility.  The Company remains committed to the objective of
providing modular systems to meet customer needs. The Company's systems'
modularity offers customers the ability to have a custom designed system
assembled from standard components using software written for specific
requirements. Such systems are highly flexible and easily upgraded.

     Focus on Accuracy of Document Assembly.  The swift, accurate assembly of
documents is critical to customer satisfaction. The Company's systems
incorporate technology, including the ability to read various methods of coding
on each sheet included in documents, that check for proper page sequence, detect
duplicate or missing pages and verify recipients as each document moves down a
conveyor. Systems can verify that a given document has been processed properly
and maintain a record of the document. The Company continues to emphasize
document integrity in all its research, development, and marketing efforts.

     Focus on Customer Productivity and Costs.  The Company focuses its product
development efforts on further increasing customer productivity and the
reduction of system costs while maintaining the document integrity customers
require.
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     Collaborative Development.  The Company will continue to collaborate with
customers (including organizing and conducting user seminars) in order to
develop a better understanding of customer needs and to offer comprehensive
solutions. The Company's newest product, the inc.jet imager, was developed as a
result of this collaborative effort.

SYSTEMS

     The Company's current principal products are the Series III Billing System,
the EP-4000 Electronic Publishing System, the MS-6000 Mailing System, the
FM-1000 Flat Mailer and DM-2000 Dual Mailer.

     The Series III is a high-speed statement and billing system. Up to nine
inserts may be added to the primary document prior to envelope insertion. The
system features a high-speed primary document feeder/accumulator and an
up-stream folder.

     The EP-4000 processes flat mail and allows documents to be processed in a
series of individually processed subgroups. These subgroups can be stapled,
bound, matched with other documents and combined for insertion into a large,
flat envelope by the EP-4000.

     The MS-6000 processes folded documents. The MS-6000 can tri-fold up to ten
sheets and insert the documents into a No. 10 envelope, and can half-fold up to
fifteen sheets and insert the documents into a 6-by-9-inch envelope. Postage is
then automatically applied.

     The FM-1000 processes flat documents that do not need stapling or binding.
The FM-1000 can either envelope or shrink-wrap flat documents.

     The DM-2000 is designed to process both flat and folded mail from the same
print stream, and eliminates the need to separate print runs by page count, a
costly and time consuming process. The DM-2000 can process documents from one
page to 180 pages in length.

     These systems are typically comprised of some or all of the following
component modules:

     System Control Module, Operator Console and Reading Technology.  The System
Control Module incorporates an IBM-compatible Pentium CPU with a 2 Gigabyte hard
drive, and a ZIP drive for back-up. It performs the system's control functions
and operates the system as defined by the customized application program created
by the Company after consultations with the customer. The System Control Module
communicates with microprocessors located in each module in the system,
monitoring all system functions. Upon initiation of operation, the System
Control Module triggers the operation of a Laser Reader or a CCD (Charged
Coupled Device) Image Reader. After the resulting information is checked against
parameters contained in the system's software, a signal is sent to the Feed
Module so that the sheet can be fed into the finishing system.

     A laser reader is a scanning device which uses a laser light source to read
bar-code or OMR (Optical Mark Recognition) information. A CCD Image Reader is a
scanning device which is used to read bar-code or two dimensional information.
In the CCD Image Reader, the code being read is illuminated with ambient light
rather than a laser light source. OMR is a paper marking technology used with
mailing systems to indicate to the main system how to process the sheets that
are assembled into an envelope. The Company was the first to develop processing
systems utilizing Laser Readers to scan a bar code to identify each sheet of
paper processed. Reading the bar code at over 200 times per second, the System
Control Module requires three consecutive identical reads from the Laser Reader
before the sheets are fed into the system. Each document set is given a sequence
and completeness check from the information in the bar code prior to feeding
("read before feed"). Corrective action, if needed, is taken prior to the
assembly or packaging of the document. Systems also may incorporate CCD two
dimensional (2D) Image Readers. This reading technology returns a very precise
copy of the bar code or 2D image being scanned. The CCD Linear Image Reader
transmits the image to be processed by the System Control Module approximately
25 times a second. With this reading technology, large amounts of data can be
stored on the page, with reading accuracy and speed the equal of laser reading
technology.

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     Microprocessors monitor the sensors in each module and carry out the
instructions from the System Control Module, validating that each action
initiated has been completed. If an error occurs, i.e., an operation is not
completed, a message is sent back to the Operator Console for operator action.
The Operator Console communicates all messages from the system's modules to the
operator through the use of a CRT (Cathode Ray Tube). Bar code or OMR
information, scanned by the Laser Reader or CCD Image Reader, is stored on the
System Control Module's hard disk for retrieval and auditing with the system's
performance information for reporting purposes. A printer is included with each
system to provide a hard copy audit trail and postage reports. Communications
software and a modem are provided with each system to permit remote system
diagnosis and software updates.

     2-D Code.  2-D is an improved method of coding documents, replacing more
traditional means such as bar-code or OMR. Unlike linear or one-dimensional bar
codes, 2-D code has the ability to represent large amounts of information in a
small area, thereby making the code less obtrusive and more aesthetic. Data
integrity is maintained through the use of 16 or 32 bit Cyclic Redundancy Check
(CRC), which is far more powerful than the self-checking within traditional bar
codes.

     F-300 Feeder.  The F-300 is a high speed, vacuum fed system. The first
stage of the feeder "shingle-feeds" the sheets from the bottom of the bin to the
second stage of the feeder. Optimum stack height in the second stage is
maintained by microprocessor control of the first stage. A Laser Reader or CCD
Linear Image Reader is located in the second stage, where the sheets are read
and fed individually at rates of up to 30,000 sheets per hour. In the final
stage, the sheets are collected on a conveyor and document set accumulator,
which is connected to the next module. Through the use of a diverter, the F-300
can separate particular sheets, such as banners or trailers, from the document
prior to collection on the conveyor.

     Two-Way Conveyor Module.  In a dual mailer system, each sheet of a document
is fed, face down, onto the Two-Way Conveyor until the document set is complete.
When the number of sheets in a document set is ten or less, they are moved in
the direction of the Folded Mail Inserter. When the number of sheets in the
document set is greater than ten, but less than 200, the document set is moved
in the opposite direction towards a 10 x 13 Enveloper.

     Binding Methods.  The systems can utilize a variety of binding options,
including stitching, stapling, VeloBind and Slip & Grip. Stitching and stapling
offer the most inexpensive way to fasten from 2 to 100 sheets of paper. VeloBind
and Slip & Grip provide the recipient with a recloseable binding and a
professional look. Gunther system configurations commonly feature both
stitching/stapling and binding modules and make the type of binding decision
based on preset application parameters, such as document size or recipient.

     Folder.  This module may be placed up-stream, mid-stream, or down-stream in
the conveyor path, depending on the application. The folder may be adjusted to
produce C-folds, half-folds, or Z-folds and will dynamically handle 1-15 sheets
of paper.

     Friction Feeder.  The Friction Feeder is a versatile feeder which separates
and feeds material from the bottom of a stack of up to 24 inches. It efficiently
feeds a wide range of material from 20 lb. sheets up to 1/2 inch thick booklets.
The single knob separator gate adjustment allows for quick and easy set up and
material change over.

     Inc.jet(TM) Printing.  The Series III, EP-4000 and MS-6000 may be
configured with multi-head ink jet printing capability to dynamically print
envelope addresses, return addresses and bar codes in a variety of font styles
and sizes.

     10 x 13 Enveloper Module.  The 10 x 13 Enveloper places the document sets
in flat pocket envelopes (flap along short side). The envelopes can range in
size from 8 to 10 inches wide to 11 1/4 inches to 13 inches long. The pre-glued,
self-sealing envelopes are placed on their short ends, open side up. They are
fed one at a time to the insertion station. The envelope is opened, and a
receiving shoe is slid into the envelope to form an easy entry for the material.
After insertion, the envelope is moved to the sealing station where the flap is
sealed. The completed package is then placed onto a conveyor. This module is
also capable of exception and oversize document processing. Exception documents
can be inserted into the envelope without sealing the flap. Oversize documents
can be accumulated and placed directly onto the output conveyor.
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     Flat Metering.  This module provides a means for automatically applying
postage to flat envelopes of varying thickness up to 180 sheets, thereby
avoiding the 0.25" thickness limitation of a standard postage meter. The module
applies postage to a self-stick label using a standard postage meter, after
which the label is fed to a transfer station and applied to the envelope. System
software calculates the weight of each package and automatically applies the
correct postage. The postage label can be applied in any corner of the envelope,
in either portrait or landscape orientation.

     Dual Postage Software, Interface, and Meter with Divert.  This system
component provides two postage meters for intermixed document weight groups. The
System Control Modules calculates the amount of postage for each document set
using a formula based on sheet count and insert weight previously supplied to
the system. The System Control Module transmits directions to the meters for
controlling which meter is to be used. If the postage amount is different than
the amount set on either meter, the product is deflected into the divert bin.

     Manifest Mail Software.  The most common technique used by the Company
systems to meet current United States Postal Service requirements requires the
manifest identification and postal zone information to be passed to the system
in the bar code. In addition, the customer application prints the manifest
identification on the address page, above the first line of the address, so that
it is visible through the envelope window. The manifest mail software processes
the information stored in single or multiple log files and generates reports
required by the United States Postal Service. Other alternatives are available
to print a manifest identification on the envelopes if the customer cannot print
the identification in the envelope window.

     Convertible Systems.  EP and MS systems can be configured to work in both
flat and folded modes, using a quick-connect and disconnect 10 x 13 flat
inserter or folded mail inserter. This feature allows a user to specify either
an EP or MS system, depending on the dominant applications, but still retain the
ability to run in both flat and folded mode.

MARKETING AND SALES

     The Company initially relied principally on contacts within the insurance
industry, particularly among large property and casualty insurers, and on the
growing reputation of its products to generate sales. More recently the
Company's sales and marketing efforts have actively targeted a far broader range
of applications and industries including other types of insurance companies and
customers in the banking, finance and healthcare industries. The Company has
continued to experience success in expanding into other markets including
government, retail distribution, outsourcing, service bureaus, and others. The
Company also continues to generate additional sales to its existing customer
base. As much as 50% of the Company's system sales in a given year have been to
previous purchasers of the Company's system and the Company believes that repeat
sales and upgrades of existing systems will continue to be an important source
of revenue. The Company organizes user group seminars to allow customers to
discuss their system requirements with each other and the Company, and to
collaborate on system design.

     The Company is an approved Marketing Partner with each of the major
printing systems vendors (Xerox, Oce, and IBM). Gunther products offer a
significant portion of the total solution required by the customer base of these
vendors and as such Gunther products are often included in their sales
presentations and there is a growing amount of joint sales and marketing
activity with these vendors. In addition, the Company has other informal
marketing arrangements with other manufacturers and suppliers of related
hardware and software products.

CUSTOMERS

     To date, the Company's principal customers have been property and casualty
insurance companies, which require accurate, high-speed preparation and
distribution of personalized policies and insurance certificates. The Company's
customers include many of the top insurance companies in the United States
including Allstate Insurance Co., Chubb & Son Insurance, Fireman's Fund, GEICO,
The Hartford, Metropolitan Life, Mutual of Omaha, SAFECO and The Travelers. In
addition, the Company's systems have been purchased by Gartner Group, Moore
Business Communication Systems, Nike, Public Schools Employees Retirement
                                        6
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System, USAA, U.S. Census Bureau, U.S. Department of the Treasury, and Nippon
Telephone & Telegraph in Japan.

     The Company has expanded into the mutual fund and pharmaceutical markets
with sales to customers in each of these industries. Despite reliance on sales
in the insurance industry, the development of the business has not been
dependent upon any single or few customers. Due to the relatively high sales
price of the Company's systems, customers who place multiple machine orders
within a single year may account for more than 10% of the Company's revenues for
that year. However, the Company has not relied on any one of these customers to
maintain its level of sales from year to year.

     As of March 31, 1999, the Company has a backlog aggregating approximately
$4,300,000. The Company calculates its backlog by subtracting revenues
recognized to date from the total contract price of systems under contract. At
the time the Company receives an order from a customer, the customer typically
pays 50% of the purchase price, 40% of the purchase price is paid when the
system is approved for shipment and the last installment (typically 10% of the
purchase price) is paid within 30 days of installation. The Company recognizes
revenues on the percentage of completion method over the production period of
the system.

NEW PRODUCTS

INC.JET(TM)

     The Company's new inc.jet printing division now offers a compact,
high-speed, high resolution inc.jet printer that can be used inline on the
Company's finishing systems for flat or folded mail. The inc.jet imager prints
information on envelopes such as the return address, recipient address,
graphics, messages and postal indicia. The new technology offers print quality
resolution of 600 x 600 dpi (depending on application) at extraordinary high
speed -- up to 12,000 pieces per hour. The inc.jet imager is environmentally
safe and efficient, with a low net cost-per-image. The inc.jet imager was
initially targeted as an envelope printer to complement Gunther's complete line
of intelligent document automation and mailing systems. The inc.jet imager
provides a solution to a problem that was voiced by Gunther customers and
prospects: low-cost, high quality personalized printing on envelopes at document
automation speeds. Secondary concerns were ease of use and maintenance, as well
as the size of the unit.

     The inc.jet imager is also available for OEM licensing to printing and
postage system manufacturers for incorporation into desk and tabletop inserters
and folders, copiers, address printers, postage meters, standalone printers and
other applications. Potential markets include:

        Postage/ESTAMP applications
        Envelop printing and addressing labeling
        Point of sales printing
        Box and carton labeling
        Tag printing
        Spot color and anti-fraud marking of originals

     The inc.jet imager is a rugged, compact design that fits in the palm of
your hand (5.5" x 3.5" x 4.5") and weighs under 2 pounds. The bulk ink supply
consists of three 1  3/4" x 3  3/4" bladders attached to the unit. The print
drivers and electronics are all resident in the imager. Commands to control the
imager are communicated via the computer that comes with the Gunther system, or
any standard PC.

SPECIAL INC.JET POSTAL APPLICATIONS

     The Information Based Indicia Program (IBIP) is an initiative by the United
States Postal Service (USPS) to move to a new method of applying postage
information on mail pieces. The plan involves getting away from the mechanical
postage meter as we know it and replace it with a combination of regulated
"black box" technology and open architecture, computer/printer technology. This
arrangement will allow users to print a newly designed indicia that includes
some readable information, as well as some encoded data, using most standard,
office type printers. The advantages to the user of this proposed method include
better control of postage funds and less costly, more efficient printing of
postage information on the mail piece. The

                                        7
<PAGE>   11

Company's inc.jet imager is capable of printing the new indicia, including the
encoded information. The Company's experience with high-speed reading of 2-D
codes is also an important part of the overall application.

MANUFACTURING

     The Company does not fabricate most of the hardware components of its
finishing systems and is largely dependent upon third party suppliers to
fabricate and, in some cases, assemble components and/or sub-assemblies of a
typical system. Although the Company believes that other suppliers are available
to perform the services provided by the current suppliers, the termination of
the Company's relationship with one or more of these companies may result in a
temporary interruption in the supply, and potentially the manufacture and
shipment, of the Company's systems. While several of the Company's suppliers
require cash on delivery, the Company is not aware of any material change in the
relationships with its suppliers during the past year, nor have any suppliers
indicated an intent to materially modify the terms on which they supply
materials to the Company. In the past, the Company has replaced certain
suppliers who have been unable to meet the Company's requirements with respect
to quality, delivery or pricing, and the Company in the future may replace
certain other suppliers for similar reasons.

     The Company manufactures, assembles and tests each system at its facilities
in Norwich, Connecticut. Each system is further tested for hardware and software
compliance with each customer's unique application and media requirements, using
customer supplied materials. Upon satisfactory completion of such tests and
customer acceptance of the system, each system is disassembled for shipment and
reassembled at customer facilities, which is followed by less stringent site
acceptance testing and operator training.

INSTALLATION AND CUSTOMER SERVICE

     The Company's systems usually can be installed at a customer's facilities
in one day. The Company typically uses a systems engineer, who plans and carries
out the installation and programming of the systems. A Company employee will
remain at the customer's facilities for approximately two weeks to monitor the
initial operation of the system. As part of the installation, the Company trains
two operators for one week at either the Company's or the customer's facilities
in the operation and maintenance of the system. The Company has monthly meetings
with customers to evaluate the performance of systems. All systems are now
installed with a modem and diagnostic software that enable the Company to
monitor system performance off-site. As part of each installation, the Company
includes a supply of spare parts which can be resupplied on short notice. Each
system has been designed to facilitate parts replacements. The Company typically
warrants each system for a period of 90 days after installation.

     All Gunther customers have some form of maintenance contract with the
Company. Typically, this would take the form of on-call service, although in
larger installations on-site service is required. Basic on-call coverage comes
with a four hour response time guarantee; two hour response time is available to
customers for an additional charge.

     Historically, the Company has contracted with a third-party service
provider to perform the Company's service obligations under the maintenance
agreements with its customers. Because of persistent cash flow problems, the
Company fell behind in its payments to the third party service provider and, on
August 14, 1998, they commenced a suit against the Company to recover payment.
As of October 1, 1998, the cumulative trade and note payable balance due and
owing from the Company to the third party service provider, including interest
through September 30, 1998 was approximately $1,421,000 (excluding amounts
billed in September 1998 but not due as of October 1).

     In connection with the new financing agreement entered into on October 2,
1998, more fully described in the Liquidity and Capital Resources section of
Management's Discussion and Analysis, all outstanding claims with the third
party service provider were settled. In connection with this settlement, the
Company will be assuming the maintenance services on predominantly all current
and future maintenance contracts. By assuming the maintenance services,
management believes gross profit as a percentage of maintenance sales will
increase by eliminating certain duplicate costs inherent in a third-party
servicing relationship. Due to the
                                        8
<PAGE>   12

existence of certain start-up costs, however, management believes an increase in
the maintenance gross profit margin from the transition of maintenance services
will not be reflected in operations until the first quarter of fiscal 2000. The
transition of maintenance services began on April 1, 1999 and is to be completed
by March 31, 2000. As of June 30, 1999, third party service provider engineers
currently perform remedial and preventive maintenance on approximately 25% of
the Company's systems across the country.

     Alternatively, customers can elect to have the Company train its personnel
to maintain their systems. Such training is provided for up to three qualified
technicians for three weeks at the Company's facility prior to delivery of the
system. Under this program, a spare parts kit is purchased, and as parts are
used, they are replaced at a charge to the customer. Along with the maintenance
program, the Company also provides maintenance support of the system's software,
monthly performance meetings and telephone support for a monthly charge.

     The typical cost to a customer of an annual maintenance contract is equal
to approximately 10% of the cost of the customer's system. For the fiscal year
ended March 31, 1999, revenues from customer maintenance agreements represented
approximately 43% of the Company's net sales. The Company believes that, as it
places more systems in service, maintenance revenues will represent an
increasing component of its net sales.

RESEARCH AND DEVELOPMENT

     The Company's principal research and development efforts have been
conducted through software and hardware development groups located at its
facility in Norwich, Connecticut. These groups focus on improving upon and
creating new applications of the Company's technology. The Company's engineering
staff also generates the functional specifications and development schedules for
each of the Company's customers. The Company performs all material development
and engineering functions internally. The Company from time to time engages
third parties to design hardware and software components based upon
specifications developed by the Company.

     For the fiscal years ended March 31, 1999 and 1998, the Company incurred
expenses of $1,046,569 and $618,735, respectively, for research and development
activities.

COMPETITION

     The Company's principal competitors are Pitney-Bowes and Bell & Howell.
Although the Company's total revenue is small relative to these large
competitors, the Company is nonetheless successful in many situations, primarily
due to the unique capabilities of Gunther equipment to handle effectively more
complex mailing system applications. The principal competitive factors in the
Company's business are product functionality, price/performance and reliability.
The Company believes that it competes favorably on the basis of each of these
factors. The Company also believes that it competes effectively in sales to its
existing customer base because of, among other things, its emphasis on document
integrity, its focus on customer needs and the flexibility of its systems
resulting from the application of its proprietary technology.

     Gunther's inc.jet products include several important features that set them
apart from other products that may be considered competitive. The inc.jet
accomplishes the high-speed printing of data (50 inches per second) at very high
resolution (up to 600 x 600 dots per inch). The compact modular construction
combined with injection molded plastic enable this product to be produced at low
cost with a low level of maintenance.

PATENTS AND PROPRIETARY RIGHTS

     The Company has pursued an intellectual property rights strategy to protect
its proprietary product developments. The Company's policy is to file patent
applications to protect its technology, and the inventions and improvements that
may be important to the development of its business. As a further precaution,
the Company licenses, rather than sells, its proprietary system software to
customers. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to protect its intellectual
property rights. However, the Company does not consider its patent and other
intellectual property rights as material to its competitive position, which, it
believes, depends on the ability to adapt technology to

                                        9
<PAGE>   13

customer needs and in particular to modify software that controls system
functions, and, to a lesser extent, to combine modules.

     The Company has been issued eleven patents in the United States, has two
pending patent applications in the United States, and intends to continue to
file patent applications on its products and systems. All patent applications
filed by the Company are directed to salient features of the Company's systems.
The Company regards certain computer software and service applications as
proprietary. The Company relies on nondisclosure agreements with its employees
and, where the Company regards it as necessary, with customers.

     In connection with the Development Agreement with CII and as partial
consideration for loans made in connection therewith, the Company has assigned
all existing, and future patents to CII as security for the Company's
performance. Title to the patents will be transferred back to the Company upon
the fulfillment of its obligations under the Development Agreement. The Company
has also granted certain additional security interests in its patents to the New
Lender in connection with the financing transactions consummated on October 2,
1998. See "Development of the Business" above.

     Although the Company believes that patents and other intellectual property
rights may be important to its business, there can be no assurance that patents
will issue from any applications thereof, or if patents issue, that the claims
allowed will be of adequate scope to protect the Company's technology or the
issued patents or other technology rights will not be challenged or invalidated.
The Company's business could be adversely affected by increased competition in
the event that any patent granted to it is adjudicated to be invalid or is
inadequate in scope to protect the Company's operations, or if any of the
Company's other arrangements related to technology are breached or violated.
Although the Company believes that its products and technology do not infringe
the proprietary rights of others, there can be no assurance that third parties
will not assert infringement claims in the future or that such claims will not
be successful. Furthermore, the Company could incur substantial costs in
defending itself in patent infringement suits brought by others and in
prosecuting suits against patent infringements.

     In connection with the restructuring completed by the Company in September
1992, the Company granted to Bell & Howell a nonexclusive license for read and
feed technology developed and patented by the Company. The technology previously
had been licensed by the Company to one of its component suppliers, Ascom
Holding, Inc. ("Ascom"), but was not transferable by Ascom. The license granted
to Bell & Howell was in consideration for the forgiveness of indebtedness of the
Company to Ascom and the payment by Ascom of $250,000 to CII on behalf of the
Company. The Company believes that Bell & Howell purchased the business and
assets of Ascom in 1992. The license granted to Bell & Howell is royalty-free
and coterminous with the patents with respect to the licensed technology. The
Company does not believe that the license granted to Bell & Howell has affected
the Company's competitive position. The Company does not regard the technology
itself as material to its competitive position, which depends on the Company's
ability to adapt technology to customer needs and, in particular, to modify
software that controls system functions and, to a lesser extent, to combine
modules. However, the development by Bell & Howell of a software driven system
based in part on the technology could adversely affect the Company's competitive
position.

EMPLOYEES

     At March 31, 1999, the Company had 121 full-time employees, consisting of
68 engaged in engineering, development and manufacturing, 14 in marketing and
sales activities, 30 in customer services and 9 in general administrative and
executive functions. The Company does not have a collective bargaining agreement
with any of its employees and considers its relationship with its employees to
be good.

ITEM 2.  DESCRIPTION OF PROPERTY.

     The Company's principal facilities are located at One Winnenden Road,
Norwich, Connecticut, where the Company leases approximately 75,000 square feet
of space. The Company leases its facility on a 3 year basis which requires
payment of monthly rent in the amount of $30,000 through September 30, 1999. The
Company is currently engaged in discussions with the landlord with respect to
the possible extension of the lease. The Company currently believes it will be
able to negotiate an acceptable extension of the lease, but
                                       10
<PAGE>   14

there can be no assurance that it will be able to do so. Of the Company's space
in Norwich, approximately 15,000 square feet is devoted to office and
administrative uses, approximately 55,000 square feet to engineering,
development and assembly activities, and approximately 5,000 square feet to
marketing, sales and customer service functions. The Company believes that its
facilities are adequately equipped and maintained for present and planned
operations.

ITEM 3.  LEGAL PROCEEDINGS.

     On July 9, 1998, a purported class action lawsuit was filed against the
Company, James H. Whitney and Frederick W. Kolling III, former officers,
asserting claims under the federal securities laws. The action was filed in the
United States District Court for the District of Connecticut and purports to be
brought on behalf of the named plaintiff, Ms. Arlene Greenberg, and all other
persons and entities who purchased shares of Company Common Stock during the
period from August 14, 1997 through June 23, 1998.

     On August 12, 1998, a second purported class action was filed against the
Company, James H. Whitney and Frederick W. Kolling, III asserting similar claims
under the federal securities laws. The second action also was filed in the
United States District Court for the District of Connecticut and purports to be
brought on behalf of the named plaintiff Mr. Mark Abrams for the same class
period.

     On January 4, 1999, the Court consolidated the two actions into one. The
plaintiffs filed an amended consolidated complaint on May 28, 1999. The
defendants, including the Company, have been given 45 days after the filing of
the amended complaint in which to file a response.

     The amended and consolidated complaint alleges that the Company's financial
statements for the first three quarters of fiscal 1998 were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and SEC Rule 10b-5 promulgated thereunder, and Section
20(a) of the Exchange Act. The prayers for relief request compensatory damages
and reimbursement for the reasonable costs and expenses, including attorney's
fees and expert fees, incurred in connection with the action.

     Although the Company believes the complaint is without merit and will
vigorously defend the action, it is not possible to predict with certainty the
final outcome of this proceeding.

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

     None.

                                       11
<PAGE>   15

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     During fiscal 1998, the Company's Common Stock was traded in the NASDAQ
SmallCap Market under the symbol "SORT". On August 17, 1998, the National
Association of Securities Dealers ("NASD") delisted the Common Stock from the
NASDAQ SmallCap Market due to the Company's failure to maintain capital and
surplus of at least $1,000,000. Thereafter, the Common Stock was traded in the
"pink sheets" until January 1999, when it was approved for trading on the OTC
Bulletin Board.

     The following table sets forth the high and low sales prices of the
Company's Common Stock for each quarter of fiscal 1998 and fiscal 1999, as
reported by NASDAQ and the OTC Bulletin Board. These quotations represent prices
between dealers and do not include retail mark-ups, mark-downs or other fees or
commissions and may not represent actual transactions.

<TABLE>
<CAPTION>
                                                               Sales Price
                                                              -------------
                       Fiscal Quarter                         High      Low
                       --------------                         ----      ---
<S>                                                           <C>       <C>
First Fiscal Quarter - 1998                                   $6 7/8    5 3/8
(April 1 - June 30, 1997)

Second Fiscal Quarter - 1998                                   7 13/16  6
(July 1 - September 30, 1997)

Third Fiscal Quarter - 1998                                    8 7/8    5 1/4
(October 1 - December 31, 1997)

Fourth Fiscal Quarter - 1998                                   7 1/16   3 7/8
(January 1 - March 31, 1998)

First Fiscal Quarter - 1999                                    4 3/4    3/4
(April 1 - June 30, 1998)

Second Fiscal Quarter - 1999                                   3 1/16   3/8
(July 1 - September 30, 1998)

Third Fiscal Quarter - 1999                                    2 3/4    1/2
(October 1 - December 31, 1998)

Fourth Fiscal Quarter - 1999                                   2 3/4    3/4
(January 1 - March 31, 1999)
</TABLE>

     On May 28, 1999, the high and low sales prices for the Company's Common
Stock was $3.00, as reported.

     As of May 28, 1999 there were approximately 92 record owners of the
Company's Common Stock. The Company believes there are 1,077 beneficial owners
of Common Stock. The Company has not paid dividends of its Common Stock and
intends for the foreseeable future to retain earnings, if any, to finance the
expansion and development of its business.

SALES OF UNREGISTERED SECURITIES

     In fiscal 1998, the Company sold 8,000 shares to an accredited investor for
aggregate proceeds of $15,000 in connection with the exercise of outstanding
warrants. In addition, in connection with the comprehensive financing
transaction consummated on October 2, 1998, the Company granted the New Lender a
stock purchase warrant entitling the New Lender, at any time during the period
commencing as of January 1, 1999 and ending on October 2, 2004, to purchase up
to 35% of the proforma, fully diluted number of shares of Common Stock of the
company, determined as of the date of exercise. The exercise price of the
warrant is $1.50 per share. See "Item 1. Description of the
Business -- Development of the Business."

     No underwriters were used in connection with either of these private
placements, and accordingly, there were no underwriting discounts or
commissions. The issuance of these securities were exempt from

                                       12
<PAGE>   16

registration under the Securities Act of 1933 in reliance on Section 4(2) of the
Securities Act of 1933 and the rules and regulations promulgated thereunder as
transactions by an issuer not involving any public offering.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

SUMMARY OF RECENT EVENTS

     On June 23, 1998, the Company announced that certain errors had been
discovered in the way in which the Company accounted for the accumulation of
contract costs during fiscal 1998. In addition, certain items of expense were
not properly accounted for. As a result, the Company announced that the
previously issued interim financial statements for the fiscal year ended March
31, 1998 should not be relied upon. The Company subsequently announced that
similar deficiencies were discovered during the course of preparing its accounts
for the first quarter of fiscal 1999 and that, as a result, the financial
statements and corresponding audit report for the fiscal year ended March 31,
1998 also should not be relied upon. At that time, the Audit Committee initiated
a review into the accuracy of prior financial statements. Upon completion of the
Audit Committee's review, it was determined that accounts receivable were
overstated and accounts payable and deferred service revenues were understated
at March 31, 1997 and costs and estimated earnings in excess of billings on
uncompleted contracts were overstated at March 31, 1998. As a result, the
Company's financial statements as of and for the years ended March 31, 1997 and
1998 have been restated. Also, in connection with the restatement, certain
amounts were reclassified between selling and administrative, cost of sales, and
research and development expenses to more appropriately reflect the results of
operations. The effect of the restatement for the year ended March 31, 1997 was
to reduce operating results to a net loss of $(1,334,690), or $(0.32) per share,
from net income of $258,889, or $0.06 per share. The effect of the restatement
for the year ended March 31, 1998 was to decrease the net loss to $(2,632,115),
or $(0.61) per share, from a net loss of $(2,701,819), or $(0.63) per share.

                                       13
<PAGE>   17

SUMMARY FINANCIAL DATA

     The summary financial data presented below should be read in conjunction
with the information set forth in the financial statements and notes thereto
included elsewhere herein.

<TABLE>
<CAPTION>
                                                      YEAR ENDED      YEAR ENDED       YEAR ENDED
                                                       MARCH 31,       MARCH 31,        MARCH 31,
                                                         1999            1998             1997
                                                      -----------    -------------    -------------
                                                                     (AS RESTATED)    (AS RESTATED)
<S>                                                   <C>            <C>              <C>
Sales:
  Systems...........................................  $11,896,553     $ 8,630,103      $ 8,716,473
  Maintenance.......................................    8,847,082       6,454,716        4,911,794
                                                      -----------     -----------      -----------
          Total sales...............................   20,743,635      15,084,819       13,628,267
                                                      -----------     -----------      -----------
Cost of Sales:
  Systems...........................................    8,521,585       7,030,092        5,573,323
  Maintenance.......................................    6,684,135       4,771,692        4,088,858
                                                      -----------     -----------      -----------
          Total cost of sales.......................   15,205,720      11,801,784        9,662,181
                                                      -----------     -----------      -----------
Gross profit........................................    5,537,915       3,283,035        3,966,086
                                                      -----------     -----------      -----------
Operating expenses:
  Selling and administrative........................    4,581,853       5,050,863        4,680,946
  Research and development..........................    1,046,569         618,735          435,404
                                                      -----------     -----------      -----------
          Total operating expenses..................    5,628,422       5,669,598        5,116,350
                                                      -----------     -----------      -----------
Operating loss......................................      (90,507)     (2,386,563)      (1,150,264)
Other expenses:
  Interest expense, net.............................     (466,653)       (245,552)        (184,426)
                                                      -----------     -----------      -----------
Loss before cumulative effect of change in
  accounting principle..............................     (557,160)     (2,632,115)      (1,334,690)
Cumulative effect of accounting change..............     (622,953              --               --
                                                      -----------     -----------      -----------
Net loss............................................  $(1,180,113)    $(2,632,115)     $(1,334,690)
                                                      ===========     ===========      ===========
Loss before cumulative effect of change in
  accounting principle..............................       $(0.13)          $(0.61)          $(0.32)
Cumulative effect of accounting change..............        (0.14)             --               --
                                                      -----------     -----------      -----------
Loss per share......................................        $(.27)          $(0.61)          $(0.32)
                                                      ===========     ===========      ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                 1999            1998
                                                              -----------    -------------
                                                                             (AS RESTATED)
<S>                                                           <C>            <C>
Current assets..............................................  $ 4,868,486     $3,118,386
Total assets................................................    8,806,647      8,036,929
Current liabilities.........................................    7,484,265      7,981,871
Long-term debt, less current maturities.....................    3,534,250      1,884,551
Stockholders' equity (deficit)..............................   (2,211,868)    (1,829,493)
</TABLE>

                                       14
<PAGE>   18

RESULTS OF OPERATIONS

  Fiscal Year ended March 31, 1999
  Compared to Fiscal Year ended March 31, 1998

     Systems sales for fiscal 1999 included sales from the high-speed assembly
systems, upgrades to previously sold systems and the inc.jet imager systems.
Sales for the high-speed assembly systems and upgrades are recorded on the
percentage of completion basis. Sales for the inc.jet imager systems are
recorded as systems are shipped. Systems sales for fiscal year 1998 included
sales from the high-speed assembly systems and upgrades to previously sold
systems. Systems sales for fiscal year 1999 increased $3.3 million, or 38%, to
$11.9 million from $8.6 million in fiscal year 1998. The increase in revenues
was primarily due to an increase in systems assembled during fiscal year 1999
and to an increase in the average selling price per system. At March 31, 1999
and 1998, backlog for high-speed assembly system and upgrade orders, consisting
of total contract price less revenue recognized to date for all signed orders on
hand, was $4.3 million and $4.4 million, respectively.

     Maintenance sales increased $2.3 million, or 37%, to $8.8 million in fiscal
year 1999 from $6.5 million in fiscal year 1998 as a result of a larger number
of systems under service contract from shipments during the year and
inflationary price increases in service contracts between the periods.

     Gross profit increased to $5.5 million in fiscal year 1999 from $3.3
million in fiscal year 1998. The gross margin on systems sales increased to 28%
in fiscal year 1999 from 19% in fiscal year 1998. The increase in gross margin
on system sales is attributable to manufacturing efficiencies created by an
increase in the number of systems assembled. The gross margin on maintenance
sales remained relatively stable, decreasing to 24% in fiscal year 1999 from 26%
in fiscal year 1998. The Company will be assuming the maintenance services on
predominantly all current and future maintenance contracts. By assuming the
maintenance services, management believes gross profit as a percentage of
maintenance sales will increase over time by eliminating certain duplicate costs
associated with the Company and the third party service provider. The transition
of maintenance services began on April 1, 1999 and will be completed by March
31, 2000. During the fourth quarter of fiscal 1999, the Company incurred certain
costs necessary to build a service department infrastructure, including the
hiring of additional support personnel, while still incurring costs from the
third party service provider. The Company will need to staff the service
locations as the transition date for each location approaches. To the extent
that the Company cannot hire personnel with Gunther system experience at a
service location, the Company will have to hire personnel prior to the
transition date to provide time for training. The Company's third party service
provider is making available certain personnel, which the Company has permission
to offer employment to, if it so desires. The Company believes the availability
of those individuals will allow the Company to meet the transition dates with a
full complement of service personnel.

     Selling and administrative expenses decreased $500,000, or 9%, to $4.6
million in fiscal year 1999 from $5.1 million in fiscal year 1998. The decrease
in selling and administrative expenses is primarily attributable to a decrease
in employee related expenses, trade show expenses and amortization expense for
deferred preproduction costs and an increase in administrative expenses
allocated to overhead in cost of goods sold. In the first quarter of fiscal
1999, the Company changed its method of accounting for deferred preproduction
costs, in accordance with AICPA Statement of Position No. 98-5, "Reporting on
the Costs of Start-up Activities", which requires costs of start-up activities
to be expensed as incurred, rather than capitalizing and subsequently amortizing
such costs. The Company recognized charges of $623,000 relating to the remaining
balance of deferred preproduction costs as of April 1, 1998 so there will be no
future amortization expense associated with the deferred preproduction costs.

     Research and development expenses increased $400,000, or 69%, to $1.0
million in fiscal year 1999 from $600,000 in fiscal year 1998. The increase in
the research and development expenses was primarily attributable to the
increased focus on completing the inc.jet imager and the development of product
enhancements to the current product line of high-speed assembly systems. As
stated above, the Company is no longer capitalizing preproduction costs.
Preproduction costs that were capitalized in prior years were expensed as
research and development expenses in fiscal 1999.

                                       15
<PAGE>   19

     Interest expense increased $221,000 to $467,000 in fiscal year 1999 from
$246,000 in fiscal year 1998. The increase was due to an increased amount of
debt the Company was carrying during fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and achieve consistent profitability. Historically,
the Company has derived liquidity through systems and maintenance sales
(including customer deposits), bank borrowings, financing arrangements with
third parties and, from time to time, sales of its equity securities.

     During the fiscal year ended March 31, 1999, the Company had a negative
cash flow from operations of $2.3 million, compared to a positive cash flow from
operations of $894,000 for the fiscal year ended March 31, 1998. The negative
cash flow recorded during fiscal 1999 resulted primarily from a $1.2 million
increase in accounts receivable, a $333,000 decrease in accounts payable and
accrued expenses and a $389,000 decrease in billings in excess of costs and
estimated earnings on uncompleted contracts. The decrease in cash flow from
operations primarily relates to payments for overdue accounts payable due to the
Company's prior cash shortages. By reducing overdue accounts payable, the
Company was able to complete systems in process, thereby increasing the accounts
receivable and decreasing the billings in excess of costs and estimated earnings
on uncompleted contracts.

     As previously reported, the Company completed a $5.7 million comprehensive
financing transaction on October 2, 1998, the proceeds of which have been
utilized to restructure and replace the Company's then-existing senior line of
credit, fund a full settlement with the Company's third-party service provider
and provide additional working capital to fund the Company's ongoing business
operations.

     Under the terms of the transaction, a newly formed limited liability
company, Gunther Partners LLC (the "New Lender"), loaned an aggregate of $4.0
million to the Company. At the same time, the Company's then senior lender, the
Bank of Boston, Connecticut, N.A. (the "Bank"), reached an agreement with the
Estate of Harold S. Geneen (the "Estate") (which had guaranteed a portion of the
Company's senior line of credit) whereby the Estate consented to the liquidation
of approximately $1.7 million of collateral and the application of the proceeds
of such collateral to satisfy and repay in full a like amount of indebtedness
outstanding under the senior credit facility. The balance of the indebtedness
outstanding under the then-existing senior credit facility, approximately
$350,000, was repaid in full from the proceeds of the new financing. The Company
executed a new promissory note in favor of the Estate evidencing the Company's
obligation to repay the amount of the collateral that was liquidated by the
Bank. The Company's obligations to the Estate are subordinated to the Company's
obligations to the New Lender.

     The principal balance of the $4.0 million debt is to be repaid in monthly
installments of $100,000 from November 1, 1998 and continuing to and including
September 1, 1999, $400,000 on October 1, 1999 and the balance shall be due on
October 1, 2003. Interest shall be paid quarterly, at the rate of 8% per annum
beginning January 1, 1999 and continuing until the principal and interest due is
paid in full. The Company did not make its required payments on their respective
due dates and certain other information required by the loan agreement was not
provided to the New Lender. The New Lender waived these deficiencies. As of
March 31, 1999, all amounts due on the debt had been paid. The debt is secured
by a first priority interest in all tangible and intangible (excluding patents
and trademarks) personal property and a secondary interest in patents and
trademarks.

     The promissory note in favor of the Estate for approximately $1.7 million
is to be repaid at the earlier of one year after the Company's obligations to
the New Lender are paid in full or on October 2, 2004. Interest, at 5.44% per
annum, shall accrue on principal and unpaid interest, which is added to the
outstanding balance and is due at the time of principal payments. The
indebtedness is secured by a second priority interest in all tangible and
intangible personal property of the Company (excluding patents and trademarks)
and a third priority interest in patents and trademarks. Another entity,
Connecticut Innovations, Inc. ("CII"), has a first priority security interest in
certain specified patents and trademarks of the Company dating back to an
earlier financing transaction. The security interests of both the New Lender and
the Estate in the Company's patents

                                       16
<PAGE>   20

and trademarks are subordinate to the security interest of CII in this specified
collateral. The security interest of the Estate is subordinate to all rights of
the New Lender.

     Except for the financing transaction with the New Lender described above,
the Company does not have commitments for outside funding of any kind. In
addition, the Loan and Security Agreement entered into between the Company and
the New Lender expressly prohibits the Company from incurring any additional
indebtedness from any person or entity other than the New Lender. The Company
must depend, therefore, on current cash balances and the generation of
sufficient internally generated funds to finance its operations during the
balance of fiscal 2000 and thereafter. At March 31, 1999, the Company had cash
and cash equivalents of approximately $732,000, as well as approximately $1.5
million of accounts receivable. The Company's accounts receivable have increased
by approximately $1.2 million since the end of the prior fiscal year. The
increase was primarily attributable to billings on recent system deliveries, an
increase in inc.jet sales and an increase in maintenance receivables.

     Under the Company's normal pricing policy, approximately 50% of the
purchase price of each system is received by the Company at the time an order is
placed by a customer, approximately 40% of the purchase price is received at the
time the system is shipped to the customer and the remaining 10% of the purchase
price is received approximately 30 days after delivery of the system. As a
result, the Company receives a significant cash flow benefit from the receipt of
new orders.

     On a going forward basis, management believes that the Company has
sufficient cash and cash equivalents, together with the cash expected to be
derived from additional sales and maintenance revenues, to meet the Company's
cash needs for the next the fiscal year. In the event the Company is unable to
meet its payment obligations through April 1, 2000, in accordance with the Note
Loan and Security Agreement, the New Lender will be willing to renegotiate the
payment terms based upon available cash flow such that the payment terms would
be acceptable to both the Company and the Lender. The Company's cash needs may
be affected by a number of factors, however, many of which are beyond the
control of management. See "Forward Looking Statements," below. Thus, there can
be no assurance that the Company will not need significantly more cash than is
presently forecasted by management or that the Company's current and expected
sources of cash will be sufficient to fund the Company's ongoing operations.

INFLATION

     The effect of inflation on the Company has not been significant during the
last two fiscal years.

FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements within the meaning of Section
21E. Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other similar expressions are intended to
identify forward-looking statements. Investors should be aware that such
forward-looking statements are based on the current expectations of management
and are inherently subject to a number of risks and uncertainties that could
cause the actual results of the Company to differ materially from those
reflected in the forward-looking statements. Some of the important factors which
could cause actual results to differ materially from those projected include,
but are not limited to, the following: general economic conditions and growth
rates in the finishing and related industries; competitive factors and pricing
pressures; changes in the Company's product mix; technological obsolescence of
existing products and the timely development and acceptance of new products;
inventory risks due to shifts in market demands; component constraints and
shortages; the ramp-up and expansion of manufacturing capacity; the continued
availability of financing; and the expenses associated with Year 2000
compliance. The Company does not undertake to update any forward-looking
statement made in this report or that may from time-to-time be made by or on
behalf of the Company.

                                       17
<PAGE>   21

YEAR 2000

     The Company is continuing to assess the potential impact of the Year 2000
on its internal business systems, products and operations. The Company's Year
2000 initiatives include (i) testing and upgrading internal business systems and
facilities; (ii) testing and developing necessary upgrades for the Company's
products; (iii) contacting key suppliers, vendors and customers to determine
their year 2000 compliance status; and (iv) developing contingency plans.

     The Company's State of Readiness. The Company is in the process of testing
and evaluating its critical information-technology systems for year 2000
compliance, including its significant computer systems, software applications
and related equipment. Important computer systems used by the Company include
those used in developing products and in communicating and servicing customers.
Important computer systems used in financial and administrative management
include the general ledger, inventory control and purchasing. As of the date of
this report, the Company believes that substantially all of its internal
operating systems are year 2000 compliant. The remaining noncompliant systems
are expected to be upgraded or replaced by the end of the fiscal quarter ended
September 30, 1999, at which time the Company expects that all of its material
information-technology systems will be year 2000 compliant.

     None of the Company's products have time sensitive applications. Thus, the
Company believes that all of the material products that it currently sells are
year 2000 compliant. However, as many of the Company's products are complex,
interact with third-party products, and operate on computer systems that are not
under the Company's direction and control, there can be no assurance that the
Company has identified all of the year 2000 problems with its current products.

     The Company is in the process of identifying and contacting suppliers,
vendors and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed a questionnaire relating to year 2000
compliance and is distributing the questionnaire to its significant suppliers,
vendors and customers. The Company also intends to follow-up and monitor the
year 2000 compliance progress of significant suppliers, vendors and customers
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires.

     The Company is currently in the process of evaluating the potential year
2000 impact on its facilities, including its building and utility systems. Any
problems that are identified will be prioritized and remediated based on their
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues.

     Estimated Costs to Address the Company's Year 2000 Issues. To date, the
costs incurred by the Company in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. The Company does
not track internal costs incurred in its year 2000 compliance project. Such
costs are principally for related payroll costs for information systems
employees.

     Contingency Plans. The Company intends to develop a contingency plan that
will allow its primary business operations to continue despite potential
disruptions due to year 2000 issues. These plans may include identifying and
securing other suppliers, increasing inventories and modifying production
facilities and schedules. As the Company continues to evaluate year 2000
readiness of its business systems and facilities, products, and significant
suppliers, vendors and customers, it will modify and adjust its contingency plan
as may be required.

     Risks of the Company's Year 2000 Issues. While the Company is attempting to
minimize any negative consequences arising from the year 2000 issue, there can
be no assurance that year 2000 issues will not have a material adverse impact on
the Company's business, operations or financial condition. While the Company
expects that the remaining upgrades to its internal business systems will be
completed in a timely fashion, there can be no assurance that the Company will
not encounter unexpected costs or delays. Despite the Company's efforts to
ensure that its material current products are year 2000 compliant, the Company
may see an increase in warranty and other claims, especially those related to
company products that incorporate, or
                                       18
<PAGE>   22

operate using, third-party hardware or software. If any of the Company's
significant suppliers, vendors or customers experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected.
The Company's research and development, production, distribution, financial,
administrative and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. Any unexpected costs or delays arising
from the year 2000 issue could have a significant adverse impact on the
Company's business operations and financial condition.

ITEM 7.  FINANCIAL STATEMENTS.

     The financial statements required by this item are presented on pages F-1
through F-16 immediately after the signature page of this report.

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

     None.

                                       19
<PAGE>   23

                                    PART III

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

     The information required by Item 9 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
1999 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1999. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

ITEM 10.  EXECUTIVE COMPENSATION.

     The information required by Item 10 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
1999 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1999. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by Item 11 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
1999 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1999. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by Item 12 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
1999 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1999. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

                                       20
<PAGE>   24

                                    PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

     A.  Exhibits required by Item 601 of Regulation S-B:

<TABLE>
<S>    <C>
 3.1   Restated Certificate of Incorporation of the Company (filed
       as Exhibit 3(i) to the Company's Quarterly Report on Form
       10-QSB for the fiscal quarter ended December 31, 1998,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
 3.2   By-Laws of the Company, as amended (filed as Exhibit 3(iv)
       to the Company's Quarterly Report on Form 10-QSB for the
       fiscal quarter ended December 31, 1998, Commission File No.
       33-70052-B, and incorporated herein by reference).
10.1   Recapitalization Agreement dated September 4, 1992 (filed as
       Exhibit 10(a) to the Company's Registration Statement on
       Form SB-2, Commission File No. 33-70052-B, and incorporated
       herein by reference).
10.2   Underwriting Agreement, dated December 20, 1993, by and
       among the Company, JW Charles Securities, Inc. and Corporate
       Securities Group, Inc. (the form of which was filed as
       Exhibit 1 to the Company's Registration Statement on Form
       SB-2, Commission File No. 33-70052-B, and is incorporated
       herein by reference).
10.3   Royalty Agreement, dated September 3, 1992, between the
       Company and William H. Gunther, Jr. (filed as Exhibit 10(s)
       to the Company's Registration Statement on Form SB-2,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
10.4   Royalty Agreement, dated September 3, 1992, between the
       Company and William H. Gunther III (filed as Exhibit 10(t)
       to the Company's Registration Statement on Form SB-2,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
10.5   Royalty Agreement, dated September 3, 1992, between the
       Company and Joseph E. Lamborghini (filed as Exhibit 10(u) to
       the Company's Registration Statement on Form SB-2,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
10.6   Royalty Agreement, dated September 3, 1992, between the
       Company and Rufus V. Smith (filed as Exhibit 10(v) to the
       Company's Registration Statement on Form SB-2, Commission
       File No. 33-70052-B, and incorporated herein by reference).
10.7   Royalty Agreement, dated September 3, 1992, between the
       Company and Christine E. Gunther (filed as Exhibit 10(w) to
       the Company's Registration Statement on Form SB-2,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
10.8   Royalty Agreement, dated September 3, 1992, between the
       Company and Susan G. Hotkowski (filed as Exhibit 10(x) to
       the Company's Registration Statement on Form SB-2,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
10.9   Third Party Product Service Agreement, dated October 13,
       1992, between the Company and DataCard (filed as Exhibit
       10(gg) to the Company's Registration Statement on Form SB-2,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
10.10  First Amendment to the Third Party Product Service
       Agreement, dated July 2, 1993, between the Company and
       DataCard. (Filed as Exhibit 10.31 to the Company's Annual
       Report on Form 10-KSB/A dated June 26, 1995, and
       incorporated herein by reference).
</TABLE>

                                       21
<PAGE>   25
<TABLE>
<S>    <C>
10.11  Second Amendment to the Third Party Product Service
       Agreement, dated February 17, 1994, between the Company and
       DataCard (filed as Exhibit 10.32 to the Company's Annual
       Report on Form 10-KSB/A dated June 26, 1995, and
       incorporated herein by reference).
10.12  Form of Employee Stock Option Plan and Founders Option Plan
       (filed as Exhibit 10(kkk) to the Company's Registration
       Statement on Form SB-2, Commission File No. 33-70052-B, and
       incorporated herein by reference).
10.13  Warrant, dated October 20, 1993, to purchase 40,000 shares
       of Common Stock issued to Mark Fisher (filed as Exhibit
       10(vvv) to the Company's Registration Statement on Form
       SB-2, Commission File No. 33-70052-B, and incorporated
       herein by reference).
10.14  Warrant, dated January 9, 1995, to purchase 13,333 shares of
       Common Stock issued to Mark Fisher (filed as Exhibit 10.49
       to the Company's Annual Report on Form 10-KSB/A dated June
       26, 1995, and incorporated herein by reference).
10.15  Warrant, dated January 12, 1995, to purchase 10,000 shares
       of Common Stock issued to Michael Jesselson and Linda
       Jesselson Trustees UIT 3/27/84 FOB Samuel Joseph Jesselson
       (filed as Exhibit 10.51 to the Company's Annual Report on
       Form 10-KSB/A dated June 26, 1995, and incorporated herein
       by reference).
10.16  Warrant, dated January 12, 1995, to purchase 10,000 shares
       of Common Stock issued to Michael Jesselson and Linda
       Jesselson Trustees UIT 3/27/84 FOB Roni Aron Jesselson
       (filed as Exhibit 10.52 to the Company's Annual Report on
       Form 10-KSB/A dated June 26, 1995, and incorporated herein
       by reference).
10.17  Warrant, dated January 12, 1995, to purchase 10,000 shares
       of Common Stock issued to Michael Jesselson and Linda
       Jesselson Trustees UIT 3/27/84 FOB Jonathan Judah Jesselson
       (filed as Exhibit 10.53 to the Company's Annual Report on
       Form 10-KSB/A dated June 26, 1995, and incorporated herein
       by reference).
10.18  Warrant, dated January 12, 1995, to purchase 10,000 shares
       of Common Stock issued to Michael Jesselson and Linda
       Jesselson Trustees UIT 3/27/84 FOB Maya Ariel Ruth Jesselson
       (filed as Exhibit 10.54 to the Company's Annual Report on
       Form 10-KSB/A dated June 26, 1995, and incorporated herein
       by reference).
10.19  Warrant, dated January 12, 1995, to purchase 13,333 shares
       of Common Stock issued to Michael Jesselson and Linda
       Jesselson Trustees UIT 3/27/84 FOB Maya Ariel Ruth Jesselson
       (filed as Exhibit 10.55 to the Company's Annual Report on
       Form 10-KSB/A dated June 26, 1995, and incorporated herein
       by reference).
10.20  Non-exclusive License Agreement between the Company and Bell
       & Howell (filed as Exhibit 10(qaii) to the Company's
       Registration Statement on Form SB-2, Commission File No.
       33-70052-B, and incorporated herein by reference).
10.21  Xerox Worldwide Printing Systems Partners Program
       Partnership Guide dated August 1990 (filed as Exhibit 10.64
       to the Company's Annual Report on Form 10-KSB/A dated June
       26, 1995, and incorporated herein by reference).
10.22  Amendment and Restatement of Development Agreement made as
       of December 31, 1995 between the Company and CII (filed as
       Exhibit 10.2 to the Company's Quarterly Report on Form
       10-QSB dated February 12, 1996 and incorporated herein by
       reference).
10.23  Building lease between the Company and UNC Incorporated,
       dated July 31, 1996 (filed as Exhibit 10.3 to the Company's
       Quarterly Report on Form 10-QSB dated November 12, 1996 and
       incorporated herein by reference).
10.24  Promissory Note dated September 9, 1996 between James H.
       Whitney, CEO, Gunther International, Ltd. and the Company
       (filed as Exhibit 10.4 to the Company's Quarterly Report on
       Form 10-QSB dated November 12, 1996 and incorporated herein
       by reference).
</TABLE>

                                       22
<PAGE>   26
<TABLE>
<S>    <C>
10.25  Non-exclusive License Agreement By and Between the
       Hewlett-Packard Company and Gunther International
       Incorporated for Envelope Printing Technology dated May 6,
       1997.
10.26  Agreement, dated October 2, 1998, by and among the
       registrant, June H. Geneen, Phil E. Gilbert, Jr., Thomas W.
       Keesee and the United States Trust Company Of New York, as
       Co-Executors of the Estate of Harold S. Geneen, Late of New
       York, New York (the "Estate"), BankBoston, N.A. (successor
       by merger to Bank of Boston Connecticut ("BOB") and Gunther
       Partners, LLC (the "Lender") (filed as Exhibit 99.2 to the
       registrant's Current Report on Form 8-K dated October 7,
       1998 and incorporated herein by this reference).
10.27  Promissory Note, dated October 2, 1998, made by the
       registrant to the order of the Estate (filed as Exhibit 99.3
       to the registrant's Current Report on Form 8-K dated October
       7, 1998 and incorporated herein by this reference).
10.28  Security Agreement, dated October 2, 1998, by and between
       the registrant and the Estate (filed as Exhibit 99.4 to the
       registrant's Current Report on Form 8-K dated October 7,
       1998 and incorporated herein by this reference).
10.29  Loan and Security Agreement, dated October 2, 1998, by and
       between the registrant and the Lender (filed as Exhibit 99.5
       to the registrant's Current Report on Form 8-K dated October
       7, 1998 and incorporated herein by this reference).
10.30  $4,000,000 Term Note, dated October 2, 1998, made by the
       registrant to the order of the Lender (filed as Exhibit 99.6
       to the registrant's Current Report on Form 8-K dated October
       7, 1998 and incorporated herein by this reference).
10.31  Subordination Agreement dated as of October 2, 1998, between
       the Lender and Connecticut Innovations, Inc. ("CII") (filed
       as Exhibit 99.7 to the registrant's Current Report on Form
       8-K dated October 7, 1998 and incorporated herein by this
       reference).
10.32  Subordination Agreement, dated as of October 2, 1998,
       between the Estate and CII (filed as Exhibit 99.8 to the
       registrant's Current Report on Form 8-K dated October 7,
       1998 and incorporated herein by this reference).
10.33  Subordination and Intercreditor Agreement, dated October 2,
       1998, between the Lender and the Estate (filed as Exhibit
       99.9 to the registrant's Current Report on Form 8-K dated
       October 7, 1998 and incorporated herein by this reference).
10.34  Warrant Agreement, dated October 2, 1998, by and between the
       Lender and the registrant (filed as Exhibit 99.10 to the
       registrant's Current Report on Form 8-K dated October 7,
       1998 and incorporated herein by this reference).
10.35  Registration Rights Agreement, dated October 2, 1998, by and
       between the registrant and the Lender (filed as Exhibit
       99.11 to the registrant's Current Report on Form 8-K dated
       October 7, 1998 and incorporated herein by this reference).
10.36  Voting Agreement, dated October 2, 1998, by and among the
       Estate, Gerald H. Newman, Park Investment Partners, Inc.,
       the Lender, Robert Spiegel, Four Partners and the registrant
       (filed as Exhibit 99.12 to the registrant's Current Report
       on Form 8-K dated October 7, 1998 and incorporated herein by
       this reference).
10.37  Settlement Agreement, dated September 30, 1998, between the
       registrant and DataCard Corporation (filed as Exhibit 99.13
       to the registrant's Current Report on Form 8-K dated October
       7, 1998 and incorporated herein by this reference).
10.38  Employment Agreement, dated as of October 5, 1998, between
       the registrant and Marc I. Perkins (filed as Exhibit 10.13
       to the registrant's Quarterly Report on Form 10-QSB dated
       February 12, 1999 and incorporated herein by this
       reference).
10.39  Non-Qualified Stock Option Agreement, dated as of October 5,
       1998, between Marc I. Perkins and the registrant (filed as
       Exhibit 10.14 to the registrant's Quarterly Report on Form
       10-QSB dated February 12, 1999 and incorporated herein by
       this reference).
</TABLE>

                                       23
<PAGE>   27
<TABLE>
<S>    <C>
10.40  Employment Agreement, dated as of October 7, 1998, between
       the registrant and Michael M. Vehlies (filed as Exhibit
       10.15 to the registrant's Quarterly Report on Form 10-QSB
       dated February 12, 1999 and incorporated herein by this
       reference).
10.41  Non-Qualified Stock Option Agreement, dated as of October
       29, 1998, between Michael M. Vehlies and the registrant
       (filed as Exhibit 10.16 to the registrant's Quarterly Report
       on Form 10-QSB dated February 12, 1999 and incorporated
       herein by this reference).
10.17  Severance Agreement, dated as of October 8, 1998, between
       the registrant and Alan W. Morton (filed as Exhibit 10.17 to
       the registrant's Quarterly Report on Form 10-QSB dated
       February 12, 1999 and incorporated herein by this
       reference).
24.1   Power of Attorney pursuant to which this Annual Report on
       Form 10-KSB dated June 29, 1999 was executed.
27.1   Financial Data Schedule
</TABLE>

     B.  Reports on Form 8-K.

        None.

                                       24
<PAGE>   28

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                          GUNTHER INTERNATIONAL, LTD.

                                          By:    /s/ MICHAEL M. VEHLIES

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

                                                     Michael M. Vehlies
                                                Chief Financial Officer and
                                                          Treasurer
                                            (On Behalf of the Registrant and as
                                                          Principal
                                             Financial and Accounting Officer)

Date: June 29, 1999

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

<TABLE>
<CAPTION>
                 SIGNATURE:                                     TITLE:                       DATE:
                 ----------                                     ------                       -----
<C>                                              <S>                                     <C>
           /s/ MICHAEL M. VEHLIES                                                        June 29, 1999
---------------------------------------------
             Michael M. Vehlies
            Attorney-in-Fact for:

          Marc I. Perkins                        President and Chief Executive           June 29, 1999
                                                   Officer (Principal Executive
                                                   Officer)

          J. Kenneth Hickman                     Director                                June 29, 1999

          Steven S. Kirkpatrick                  Director                                June 29, 1999

          Gerald H. Newman                       Director                                June 29, 1999

          George A. Snelling                     Director                                June 29, 1999

          Robert Spiegel                         Director                                June 29, 1999

          Thomas M. Steinberg                    Director                                June 29, 1999
</TABLE>

                                       25
<PAGE>   29

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                                NO.
                                                              --------
<S>                                                           <C>
Report of Independent Public Accountants....................    F-2

Balance Sheets as of March 31, 1999 and 1998................    F-3

Statements of Operations for the Years Ended March 31, 1999
 and 1998...................................................    F-4

Statements of Stockholders' Equity (Deficit) for the Years
 Ended March 31, 1999 and 1998..............................    F-5

Statements of Cash Flows for the Years Ended March 31, 1999,
 and 1998...................................................    F-6

Notes to Financial Statements...............................    F-7
</TABLE>

                                       F-1
<PAGE>   30

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Gunther International, Ltd.:

     We have audited the accompanying balance sheets of Gunther International,
Ltd. (the Company) (a Delaware corporation) as of March 31, 1999 and 1998, and
the related statements of operations, stockholders' equity (deficit) and cash
flows for the years ended March 31, 1999 and 1998 (restated -- See Note 2).
These 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March 31,
1999 and 1998, and the results of its operations and its cash flows for the
years ended March 31, 1999 and 1998 in conformity with generally accepted
accounting principles.

     As explained in Note 3 to the financial statements, effective April 1,
1998, the Company changed its method of accounting for deferred preproduction
costs.

                                                  ARTHUR ANDERSEN LLP

Hartford, Connecticut
June 7, 1999

                                       F-2
<PAGE>   31

                          GUNTHER INTERNATIONAL, LTD.

                                 BALANCE SHEETS
                            MARCH 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                  1999            1998
                                                              ------------    ------------
                                                                              (AS RESTATED
                                                                              SEE NOTE 2)
<S>                                                           <C>             <C>
Assets
Current Assets:
  Cash......................................................  $    731,943    $    572,368
  Restricted cash...........................................       150,000               -
  Accounts receivable, net..................................     1,520,201         326,128
  Costs and estimated earnings in excess of billings on
    uncompleted contracts...................................       864,525         861,219
  Inventories...............................................     1,506,554       1,256,852
  Prepaid expenses..........................................        95,263          61,819
  Note receivable from stockholder..........................             -          40,000
                                                              ------------    ------------
    Total current assets....................................     4,868,486       3,118,386
                                                              ------------    ------------
Property and Equipment:
  Machinery and equipment...................................     1,370,552       1,224,856
  Furniture and fixtures....................................       320,262         249,581
  Leasehold improvements....................................       255,017         240,541
                                                              ------------    ------------
                                                                 1,945,831       1,714,978
  Less -- accumulated depreciation and amortization.........    (1,079,954)       (764,934)
                                                              ------------    ------------
                                                                   865,877         950,044
                                                              ------------    ------------
Other Assets:
  Excess of costs over fair value of net assets acquired,
    net.....................................................     2,998,357       3,221,821
  Deferred preproduction costs, net.........................             -         622,953
  Other.....................................................        73,927         123,725
                                                              ------------    ------------
                                                                 3,072,284       3,968,499
                                                              ------------    ------------
                                                              $  8,806,647    $  8,036,929
                                                              ============    ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
  Current maturities of long-term debt -- related parties...  $  1,000,000    $         --
  Current maturities of long-term debt -- other.............        13,440         514,554
  Accounts payable..........................................     2,436,430       2,923,468
  Accrued expenses..........................................     1,151,518         996,994
  Billings in excess of costs and estimated earnings on
    uncompleted contracts...................................     1,211,673       1,597,789
  Deferred service contract revenue.........................     1,521,204       1,799,066
  Note payable to stockholder...............................       150,000         150,000
                                                              ------------    ------------
    Total current liabilities...............................     7,484,265       7,981,871
                                                              ------------    ------------
Long-term debt, less current maturities:
  Related parties...........................................     3,521,931               -
  Other.....................................................        12,319       1,884,551
                                                              ------------    ------------
    Total long-term debt....................................     3,534,250       1,884,551
                                                              ------------    ------------
Commitments and contingencies (Note 10)
Stockholders' Equity (Deficit):
  Common stock, $.001 par value; 16,000,000 shares
    authorized; 4,291,769 and 4,291,269 shares issued and
    outstanding at March 31, 1999 and 1998, respectively....         4,292           4,291
  Series B Common stock, $.001 par value; 500 shares
    authorized, -0- and 500 shares issued and outstanding in
    1999 and 1998, respectively.............................             -               1
  Additional paid-in capital................................    12,188,556      11,390,818
  Accumulated deficit.......................................   (14,404,716)    (13,224,603)
                                                              ------------    ------------
    Total Stockholders' Equity (Deficit)....................    (2,211,868)     (1,829,493)
                                                              ------------    ------------
                                                              $  8,806,647    $  8,036,929
                                                              ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-3
<PAGE>   32

                          GUNTHER INTERNATIONAL, LTD.

                            STATEMENTS OF OPERATIONS
                  FOR THE YEARS ENDED MARCH 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                 1999           1998
                                                              -----------   ------------
                                                                            (AS RESTATED
                                                                            SEE NOTE 2)
<S>                                                           <C>           <C>
Sales:
  Systems...................................................  $11,896,553   $ 8,630,103
  Maintenance...............................................    8,847,082     6,454,716
                                                              -----------   -----------
     Total sales............................................   20,743,635    15,084,819
                                                              -----------   -----------
Cost of sales:
  Systems...................................................    8,521,585     7,030,092
  Maintenance...............................................    6,684,135     4,771,692
                                                              -----------   -----------
     Total cost of sales....................................   15,205,720    11,801,784
                                                              -----------   -----------
       Gross profit.........................................    5,537,915     3,283,035
                                                              -----------   -----------
Operating expenses:
  Selling and administrative................................    4,581,853     5,050,863
  Research and development..................................    1,046,569       618,735
                                                              -----------   -----------
     Total operating expenses...............................    5,628,422     5,669,598
                                                              -----------   -----------
       Operating loss.......................................      (90,507)   (2,386,563)
Interest expense, net.......................................     (466,653)     (245,552)
                                                              -----------   -----------
Loss before cumulative effect of change in accounting
  principle.................................................     (557,160)   (2,632,115)
Cumulative effect of accounting change......................     (622,953)           --
                                                              -----------   -----------
       Net loss.............................................  $(1,180,113)  $(2,632,115)
                                                              ===========   ===========
Basic and Diluted Loss per share:
Loss before cumulative effect of change in accounting
  principle.................................................  $     (0.13)  $     (0.61)
Cumulative effect of accounting change......................        (0.14)           --
                                                              -----------   -----------
       Loss per share.......................................  $     (0.27)  $     (0.61)
                                                              ===========   ===========
Weighted average number of common shares outstanding........    4,291,769     4,288,380
                                                              ===========   ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   33

                          GUNTHER INTERNATIONAL, LTD.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE YEARS ENDED MARCH 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                       SERIES B
                                  COMMON STOCK       COMMON STOCK
                                $.001 PAR VALUE     $.001 PAR VALUE   ADDITIONAL
                               ------------------   ---------------     PAID-IN     ACCUMULATED
                                SHARES     AMOUNT   SHARES   AMOUNT     CAPITAL       DEFICIT         TOTAL
                               ---------   ------   ------   ------   -----------   ------------   -----------
<S>                            <C>         <C>      <C>      <C>      <C>           <C>            <C>
Balance, March 31, 1997 (As
  Restated, See Note 2)......  4,283,269   $4,283     500     $ 1     $11,375,826   $(10,592,488)  $   787,622
Exercise of warrants.........      8,000        8      --      --          14,992             --        15,000
Net loss (As Restated, See
  Note 2)....................         --       --      --      --              --     (2,632,115)   (2,632,115)
                               ---------   ------    ----     ---     -----------   ------------   -----------
Balance, March 31, 1998 (As
  Restated, See Note 2)......  4,291,269    4,291     500       1      11,390,818    (13,224,603)   (1,829,493)
Conversion of Series B stock
  to common stock............        500        1    (500)     (1)             --             --            --
Issuance of warrants for
  debt.......................         --       --      --      --         345,000             --       345,000
Capitalization of below
  market interest rate loan
  from a related party.......         --       --      --      --         452,738             --       452,738
Net loss.....................         --       --      --      --              --     (1,180,113)   (1,180,113)
                               ---------   ------    ----     ---     -----------   ------------   -----------
Balance, March 31, 1999......  4,291,769   $4,292      --     $--     $12,188,556   $(14,404,716)  $(2,211,868)
                               =========   ======    ====     ===     ===========   ============   ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-5
<PAGE>   34

                          GUNTHER INTERNATIONAL, LTD.

                            STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED MARCH 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                 1999            1998
                                                              -----------    ------------
                                                                             (AS RESTATED
                                                                             SEE NOTE 2)
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net loss..................................................  $(1,180,113)   $(2,632,115)
     Adjustments to reconcile net loss to net cash provided
      by (used for) operating activities:
     Depreciation and amortization..........................      550,265        681,623
     Provision for doubtful accounts........................       40,000             --
     Related party note payable interest accrual............      118,500             --
     Cumulative effect of accounting change.................      622,953             --
     Loss on investment.....................................           --         10,000
     Changes in operating assets and liabilities:...........           --
       Decrease (increase) in accounts receivable...........   (1,194,073)       271,984
       Decrease (increase) in inventories...................     (249,702)         5,583
       Increase in prepaid expenses.........................      (33,444)       (43,350)
       Increase (decrease) in accounts payable..............     (487,037)       417,899
       Increase in accrued expenses.........................      154,524        517,951
       Increase (decrease) in deferred service contract
        revenue.............................................     (277,862)       294,760
       Increase (decrease) in billings in excess of costs
        and estimated earnings on uncompleted contracts,
        net.................................................     (389,422)     1,369,269
                                                              -----------    -----------
          Net cash provided by (used for) operating
             activities.....................................   (2,325,411)       893,604
                                                              -----------    -----------
Cash flows from investing activities:
  Acquisitions of property and equipment....................     (230,853)      (198,672)
  Preproduction costs and other assets......................       18,017       (332,885)
  Proceeds from sale of investment..........................       20,000             --
                                                              -----------    -----------
          Net cash used for investing activities............     (192,836)      (531,557)
                                                              -----------    -----------
Cash flows from financing activities:
  Repayment of notes payable and long-term debt.............   (2,873,347)      (237,894)
  Proceeds from notes payable and long-term debt............    5,701,169        171,515
  Transfer to restricted cash...............................     (150,000)            --
  Net proceeds from sale of common stock and warrants.......           --         15,000
                                                              -----------    -----------
          Net cash provided by (used for) financing
             activities.....................................    2,677,822        (51,379)
                                                              -----------    -----------
Net increase in cash........................................      159,575        310,668
Cash, beginning of year.....................................      572,368        261,700
                                                              -----------    -----------
Cash, end of year...........................................  $   731,943    $   572,368
                                                              ===========    ===========
Supplemental Disclosure of Cash Flow Information:
  Cash paid for interest....................................  $   293,105    $   220,123
  Cash paid for income taxes................................       26,311             --
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-6
<PAGE>   35

                          GUNTHER INTERNATIONAL, LTD.

                         NOTES TO FINANCIAL STATEMENTS
                            MARCH 31, 1999 AND 1998

1.  BUSINESS:

     Gunther International, Ltd. (the "Company") designs, develops, assembles,
markets and services high speed systems that automatically assemble printed
documents, fold, staple or bind the documents and insert completed documents
into appropriate envelopes for mailing or other distribution. The Company was
incorporated in Delaware in 1978 and currently operates from its facilities
located in Norwich, Connecticut.

     The Company's products were developed in the mid-1980's to meet a need for
greater reliability and integrity in document finishing systems. These products
are dependent upon proprietary technology and require specially skilled
engineers and technicians to design, enhance and produce them to meet customer
needs.

2.  RESTATEMENT:

     The accompanying financial statements as of and for the year ended March
31, 1998 were restated in the Company's amended Form 10-KSB filed with the
Securities and Exchange Commission on January 14, 1999. The Company also
restated the financial statements as of and for the year ended March 31, 1997 in
the same filing. During the course of completing the fiscal 1998 year-end audit,
certain errors were discovered. After further investigation, it was determined
that accounts receivable were overstated and accounts payable and deferred
service revenues were understated at March 31, 1997 and costs and estimated
earnings in excess of billings on uncompleted contracts were overstated at March
31, 1998. Also, in connection with the restatement, certain amounts were
reclassified between cost of sales, selling and administrative and research and
development expenses to more appropriately reflect the results of operations.
The effect of the restatement for the year ended March 31, 1997 was to reduce
operating results to a net loss of $(1,334,690), or $(0.32) per share, from net
income of $258,889, or $0.06 per share. The effect of the restatement for the
year ended March 31, 1998 was to decrease the net loss to $(2,632,115), or
$(0.61) per share, from a net loss of $(2,701,819), or $(0.63) per share.

3.  SIGNIFICANT ACCOUNTING POLICIES:

  Revenue recognition -

     The Company recognizes systems sales using the percentage of completion
method for its high-speed assembly equipment and recognizes sales as products
are delivered for its inc.jet imagers. Systems sales for its high-speed assembly
equipment include a percentage of the earnings expected to be realized based on
costs incurred compared with estimated total costs. Changes to total estimated
contract costs are recognized in the period they are determined. Revenues
recognized in excess of amounts billed are included in current assets. Amounts
billed in excess of revenues recognized to date are included in current
liabilities.

  Cash and cash equivalents -

     For purposes of cash flow information, the Company considers short-term
investments purchased with a maturity of three months or less to be cash
equivalents.

  Allowance for doubtful accounts -

     The Company evaluates the collectibility of accounts receivable on a case
by case basis and makes allowances for accounts deemed uncollectible. As of
March 31, 1999 and 1998, the Company had recorded an allowance of approximately
$23,000 for potential uncollectible accounts receivable.

                                       F-7
<PAGE>   36

  Inventories -

     Inventories consist primarily of purchased parts used in the assembly and
repair of the Company's products and are stated at the lower of cost or market
using the first-in, first-out (FIFO) method.

  Property and equipment -

     Depreciation and amortization of property and equipment is charged against
income over the estimated useful lives of the respective assets using the
straight-line method as follows:

<TABLE>
<CAPTION>
                                                             LIVES
                                                         -------------
<S>                                                      <C>
Machinery and equipment................................      3-7 years
Furniture and fixtures.................................        7 years
Leasehold improvements.................................  Life of lease
</TABLE>

  Excess of cost over fair value of net assets acquired -

     The excess of cost over the fair value of net assets acquired ("goodwill")
resulted from the acquisition of the Company by a new stockholder group in 1992
and is being amortized over its estimated life of 20 years. As of March 31, 1999
and 1998, accumulated amortization was $1,471,212 and $1,247,747, respectively.
The realization of the carrying value of the Company's assets, including the
goodwill is dependent on the Company's ability to sustain profitable operations
in the future. If objective evidence becomes known indicating the carrying value
of the goodwill has been impaired, the Company will record a charge reducing the
carrying value.

  Deferred preproduction costs -

     In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities," which requires costs of start-up activities and
organizational costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998 but
earlier application was encouraged by the AICPA. The Company elected an early
application of SOP 98-5, effective April 1, 1998, resulting in a write-off of
$622,953 of previously deferred costs. The initial application of SOP 98-5 is
reported as the cumulative effect of a change in accounting principle. Had this
SOP been applied as of April 1, 1997, the Company would have reported a loss
before the cumulative effect of this change in accounting of $2,797,879 or $0.65
per share. Accumulated amortization was $336,799 as of March 31, 1998.

  Research and development -

     Expenses associated with research and development activities are expensed
as incurred.

  Deferred service contract revenue -

     Deferred service contract revenue represents amounts received as advance
payments for maintenance service. The Company's standard payment terms require
prepayment on a quarterly or annual basis. Revenue from such contracts is
deferred and recognized on a straight-line basis over the term of the contract.

  Product warranties -

     The Company provides a warranty on each product for a period of 90 days
after installation. Warranty expense for the years ended March 31, 1999 and
1998, totaled approximately $282,550 and $215,000, respectively.

                                       F-8
<PAGE>   37

  Income taxes -

     The Company accounts for income taxes using the provisions of the Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
As of March 31, 1999 and 1998, the Company has a net deferred income tax benefit
relating to temporary differences in the recognition of items for financial
accounting and income tax reporting purposes of approximately $4.8 million and
$4.4 million, respectively, which was fully reserved. Temporary differences
relate principally to net operating loss carryforwards and financial accounting
accruals for certain expenses which will be deducted for income tax reporting
purposes upon payment. Provisions for minimum state taxes are provided through a
charge to operating expenses and are not material in all periods presented.

     At March 31, 1999, the Company has net operating loss carryforwards of
approximately $11.1 million available to be applied against both future federal
and state taxable income. The federal and state loss carryforwards expire at
various dates from 2000 through 2012. The benefits of these loss carryforwards
have not been recorded in the Company's financial statements.

     The Company's ability to utilize tax loss carryforwards is dependent upon
many factors including the ability of the Company to achieve profitability and
avoiding a fifty percent "ownership change" as defined in Section 382 of the
Internal Revenue Code. If there is an "ownership change", the tax loss
carryforwards available to the Company may be significantly reduced or
eliminated.

  Royalty expense -

     The Company has royalty agreements with Connecticut Innovations, Inc. and
with certain stockholders (see Note 10). Royalties due under these agreements
are expensed as incurred.

  Net income (loss) per share -

     For purposes of computing basic and diluted earnings per share, weighted
average common shares for fiscal 1999 and 1998 were 4,291,769 and 4,288,380,
respectively. Common stock equivalents were not used in the calculation of
diluted earnings per share as they had a antidilutive effect on earnings per
share. Common stock equivalents outstanding at March 31, 1999 and 1998 were
1,114,539 and 330,740, respectively.

  Use of estimates -

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

  Recently issued accounting standards -

     Comprehensive Income. In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements for the periods beginning after
December 15, 1997. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. Examples of items to be included
in comprehensive income which are excluded from net income include cumulative
translation adjustments resulting from consolidation of foreign subsidiaries'
financial statements and unrealized gains and losses on available-for-sale
securities. The Company has adopted SFAS 130 for the year ended March 31, 1999
and determined there was no difference between total comprehensive income and
net income. Accordingly, no change in presentation on the face of the Statement
of Operations is required.

     Segment Information. Effective March 31, 1999, the Company adopted SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS
131). This statement establishes the standards for reporting information about
segments in annual and interim financial statements. SFAS 131
                                       F-9
<PAGE>   38

introduces a new model for segment reporting, i.e. -- the "management approach."
The management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. The Company considers the sales and service of its products to be
one segment of business; therefore, no additional segment information is
required.

     In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires computer software costs associated with internal use
software to be expensed as incurred until certain capitalization criteria are
met. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company does not believe that adoption of SOP 98-1
will have a material impact on the Company's financial position or results of
operations.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The Statement is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not expect that the
adoption of this Statement will have a material impact on the Company's
financial position or results of operations.

4.  INVENTORIES:

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                     1999          1998
                                                                  ----------    ----------
    <S>                                                           <C>           <C>
    Raw materials...............................................  $1,639,625    $1,349,301
    Work-in-process.............................................     197,592        76,483
                                                                  ----------    ----------
                                                                   1,837,217     1,425,784
    Less: Valuation reserve.....................................    (330,663)     (168,932)
                                                                  ----------    ----------
                                                                  $1,506,554    $1,256,852
                                                                  ==========    ==========
</TABLE>

5.  COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:

     The following schedule reflects the costs incurred, estimated earnings and
billings to date on uncompleted contracts as of March 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                     1999          1998
                                                                  ----------    ----------
    <S>                                                           <C>           <C>
    Costs incurred on uncompleted contracts.....................  $3,544,031    $3,252,164
    Estimated earnings..........................................   1,638,821     2,381,249
                                                                  ----------    ----------
                                                                   5,182,852     5,633,413
    Less: Billings to date......................................  (5,530,000)   (6,369,983)
                                                                  ----------    ----------
                                                                  $ (347,148)   $ (736,570)
                                                                  ==========    ==========
    Included in the accompanying balance sheets under the
      following captions:
    Costs and estimated earnings in excess of billings on
      uncompleted contracts.....................................  $  864,525    $  861,219
    Billings in excess of costs and estimated earnings on
      uncompleted contracts.....................................  (1,211,673)   (1,597,789)
                                                                  ----------    ----------
                                                                  $ (347,148)   $ (736,570)
                                                                  ==========    ==========
</TABLE>

                                      F-10
<PAGE>   39

6.  FINANCING ARRANGEMENTS:

     Notes payable and long-term debt at March 31, 1999 and 1998 consisted of
the following:

<TABLE>
<CAPTION>
                                                                     1999          1998
                                                                  ----------    ----------
    <S>                                                           <C>           <C>
    Line of credit, maximum of $350,000 (see below).............  $       --    $  350,000
    Line of credit, maximum of $1,750,000 (see below)...........          --     1,701,169
    Note payable to a stockholder (see below)...................   1,332,431            --
    Note payable to a stockholder (see below)...................   3,189,500            --
    Note payable to a vendor, bearing interest at prime plus 1%,
      payable in monthly installments of interest only until
      September 30, 1995 and then equal quarterly principal
      installments of $35,541 plus interest, through June 30,
      1998, unsecured...........................................          --       284,335
    Note payable to a bank, bearing interest at 10.5%, payable
      in monthly installments of $405 of principal and interest,
      due October 1997, secured by investment...................          --        25,325
    Other.......................................................      25,759        38,276
                                                                  ----------    ----------
                                                                   4,547,690     2,399,105
    Less: Current maturities of long-term debt..................  (1,013,440)     (514,554)
                                                                  ----------    ----------
                                                                  $3,534,250    $1,884,551
                                                                  ==========    ==========
</TABLE>

As of March 31, 1999, maturities of notes payable and long-term debt, during the
next five years were as follows:

<TABLE>
<CAPTION>
  FISCAL YEAR
ENDING MARCH 31,                                          AMOUNT
----------------                                         ---------
<S>              <C>                                     <C>
2000...................................................  1,013,440
  2001.................................................     10,078
2002...................................................      2,242
2003...................................................         --
2004...................................................  2,189,500
Thereafter.............................................  1,332,430
</TABLE>

     On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction by and among the Bank of Boston, Connecticut, N.A. (the
"Bank") the Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC
(the "New Lender"), the proceeds of which have been utilized to restructure and
replace the Company's pre-existing senior line of credit, fund a full settlement
with the Company's third party service provider and provide additional working
capital to fund the Company's ongoing business operations. Under the terms of
the transaction, the New Lender loaned an aggregate of $4.0 million to the
Company. At the same time, the Bank reached an agreement with the Estate, which
guaranteed a portion of the Company's senior line of credit, whereby the Estate
consented to the liquidation of approximately $1.7 million of collateral and the
application of the proceeds of such collateral to satisfy and repay in full a
like amount of indebtedness outstanding under the senior credit facility. The
balance of the indebtedness outstanding under the senior credit facility,
approximately $350,000, was repaid in full from the proceeds of the new
financing. The Company executed a new promissory note in favor of the Estate
evidencing the Company's obligation to repay the amount of the collateral that
was liquidated by the Bank. The Company's obligations to the Estate are
completely subordinated to the Company's obligations to the New Lender. In
addition, approximately $1.4 million of the new financing was utilized to pay a
major vendor all amounts that were due for performing maintenance on Company
systems.

     The principal balance of the $4.0 million debt is to be repaid in monthly
installments of $100,000 from November 1, 1998 and continuing to and including
September 1, 1999, $400,000 on October 1, 1999 and the balance shall be due on
October 1, 2003. Interest shall be paid quarterly, at the rate of 8% per annum
beginning January 1, 1999 and continuing until the principal and interest due is
paid in full. The Company did

                                      F-11
<PAGE>   40

not make its required payments on their respective due dates and certain other
information required by the loan agreement was not provided to the New Lender.
The New Lender waived these deficiencies. As of March 31, 1999, all amounts due
on the debt had been paid. Should the Company be unable to meet the repayment
terms required in fiscal 2000, the New Lender will be willing to renegotiate the
payment terms based upon available cash flow. The debt is secured by a first
priority interest in all tangible and intangible (excluding patents and
trademarks) personal property and a secondary interest in patents and
trademarks.

     To induce the New Lender to enter into the financing transaction, the
Company granted the New Lender a stock purchase warrant entitling the New
Lender, at any time during the period commencing on January 1, 1999 and ending
on the fifth anniversary of the transaction, to purchase up to 35% of the pro
forma, fully diluted number of shares of the Common Stock of the Company,
determined as of the date of exercise. The exercise price of the warrant is
$1.50 per share. The warrant was valued at $345,000 at the time of the lending
and was included in additional paid-in capital, reducing the debt value to
$3,655,000. The effective interest rate for the loan is 9.8%. The imputed
interest between the face value of the note and the note value based on the
effective interest rate will be added to the principal loan balance until the
full face value is recorded.

     In addition, the Company, the New Lender, the Estate and other shareholders
(Park Investment Partners, Gerald H. Newman, Four Partners and Robert Spiegel)
entered into a separate voting agreement, pursuant to which they each agreed to
vote all shares of the Company's stock held by them in favor of (i) that number
of persons nominated by the New Lender constituting a majority of the Board of
Directors, (ii) one person nominated by the Estate and (iii) one person
nominated by Park Investment Partners.

     The promissory note in favor of the Estate for approximately $1.7 million
is to be repaid at the earlier of one year after the Company's obligations to
the New Lender are paid in full or on October 2, 2004. Interest, at 5.44% per
annum, shall accrue on principal and unpaid interest, which is added to the
outstanding balance and is due at the time of principal payments. The
indebtedness is secured by a security interest in all tangible and intangible
personal property and is subordinated to all rights of the New Lender. The
Company has recorded the promissory note at an effective interest rate of 10.5%,
reducing the principal balance to $1.3 million. The balance of $453,000 was
recorded as additional paid-in capital. The imputed interest between the face
value of the note and the note value based on the effective interest rate will
be added to the principal loan balance until the full face value is recorded.

7.  CAPITAL STOCK AND EQUITY:

     In 1993, the Company sold 1,000,000 units, comprised of one share of common
stock and one warrant, to purchase common stock in its initial public offering.
In addition, the underwriters exercised their option to purchase an additional
150,000 units in 1994. The warrants issued in connection with the sale of the
units originally entitled the holders to purchase one share of common stock for
$6.00 per share and may be exercised at any time between December 1994 and
December 1997. During fiscal 1998, the expiration date was extended to December
1998, at which time they expired.

     Also, in connection with the offering, the Company sold to the
underwriters, for nominal consideration, the "Underwriters' Warrants". These
warrants entitle the holders to purchase 100,000 units (one share of common
stock and one warrant to purchase one share of common stock) at an exercise
price of $7.50 per unit, subject to adjustment in certain events. The
Underwriters' Warrants were non-callable and expired in December 1998.

     As of March 31, 1998, the Company had outstanding 156,666 warrants to
purchase one share of the Company's common stock for $4.00 per share, which
expired in December 1998. During fiscal year 1996, the Company also issued
25,000 warrants to purchase one share of common stock for $4.00 per share in
connection with a note payable to a stockholder. These warrants expire in August
2000.

     In connection with the acquisition (see Note 3), the Company issued
warrants to certain individuals who provided interim financing to the Company.
Under the terms of this financing, the noteholders received Class A voting
convertible preferred stock at a price of $.75 per share and warrants to
purchase 43,067 shares of common stock at a price of $1.88 per share. These
warrants remained outstanding at March 31, 1997.

                                      F-12
<PAGE>   41

During 1998, 8,000 shares were issued in connection with the exercise of these
warrants. The remaining warrants expired on September 4, 1998.

     In connection with the October 2, 1998 $5.7 million comprehensive financing
transaction, additional warrants were issued (see Note 6).

8.  COMMON STOCK PURCHASE OPTIONS:

     The Company has adopted an option plan for certain individuals who were
founders of the Company (Founders' Stock Option Plan). Options to purchase up to
95,000 shares of common stock at an exercise price of $1.88 per share have been
granted under the plan in connection with the acquisition.

     In December 1993, the Company adopted a Stock Option Plan, which authorizes
the Executive Compensation/Stock Option Committee of the Board of Directors to
grant to key employees and directors of the Company incentive or non-qualified
stock options. Options to purchase up to 215,000 shares of common stock may be
granted under the plan. The Executive Compensation/Stock Option Committee
determines the prices and terms at which options may be granted. Options may be
exercisable in installments over the option period, but no options may be
exercised before six months or after five years from the date of grant.

     In fiscal 1999, the Company granted options under the above plan to acquire
up to an aggregate of 100,000 shares of the Company's common stock at an
exercise price of $1.88 per share, which approximated fair market value at the
date of the grants. The options vest ratably over five years and expire ten
years after the date of grant. The Company also granted 185,000 options,
exercisable at $1.50 per share which approximated fair market value at the date
of the grants, to two officers. The options vest at various times over no more
than three years and expire five years from the date of grant. No options were
granted in fiscal year 1998.

     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 requires the measurement of the fair value of
stock options or warrants to be included in the statement of operations or
disclosed in the notes to financial statements. The Company has determined that
it will continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under SFAS 123. The Company has computed the pro forma disclosures
required under SFAS 123 for options granted using the Black-Scholes option
pricing model prescribed by SFAS 123.

     The weighted average assumptions used are as follows:

<TABLE>
<CAPTION>
                                                                   1999
                                                                ----------
<S>                                                             <C>
Risk free interest rate.....................................    5.00-5.75%
Expected dividend yield.....................................       None
Expected lives..............................................     5 years
Expected volatility.........................................     176-182%
</TABLE>

     Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net loss applicable to
common stockholders and pro forma net loss per common share would have been:

<TABLE>
<CAPTION>
                                                               1999           1998
                                                            -----------    -----------
<S>                                                         <C>            <C>
Net loss earnings applicable to common stockholders:
  As reported.............................................  $(1,180,113)   $(2,632,115)
  Pro forma...............................................   (1,403,410)    (2,692,116)
Pro forma basic net loss per share:
  As reported.............................................        (0.27)         (0.61)
  Pro forma...............................................        (0.33)         (0.61)
</TABLE>

                                      F-13
<PAGE>   42

     A summary of the status of the Company's stock option grants at March 31,
1999 and 1998 and changes during the years then ended is presented in the table
below:

<TABLE>
<CAPTION>
                                           1999                    1998
                                   ---------------------    -------------------
                                                WTD AVG                WTD AVG
                                    SHARES      EX PRICE    SHARES     EX PRICE
                                   ---------    --------    -------    --------
<S>                                <C>          <C>         <C>        <C>
Outstanding at beginning of
  year...........................    275,000     $3.12      275,000     $3.12
Granted..........................    285,000      1.63           --        --
Cancelled........................   (160,000)    (3.33)          --        --
                                   ---------     -----      -------     -----
Outstanding at end of year.......    400,000     $1.98      275,000     $3.12
                                   =========     =====      =======     =====
Exercisable at end of year.......    151,666     $2.00      250,000     $2.87
                                   =========     =====      =======     =====
Weighted average fair value of
  options granted................  $    1.44                    N/A
                                   =========                =======
</TABLE>

9.  RELATED PARTY TRANSACTIONS:

     During the year ended 1997, the Company loaned $40,000 to an officer of the
Company. The note requires simple interest at 8.75% per annum and the maturity
date is September 9, 1998. The officer left the employ of the Company in
November 1998. This loan is included in accounts and notes receivable from
stockholders at March 31, 1999 and 1998 and has been fully reserved at March 31,
1999.

     During the year ended 1998, the Company borrowed $150,000 from a
stockholder. The note does not have a stated interest rate or maturity date.
This loan is included in Note Payable to Stockholder at March 31, 1999 and 1998.

     See Note 6 for related party participation in the October 2, 1998 $5.7
million comprehensive financing transaction.

10.  COMMITMENTS AND CONTINGENCIES:

  Development Agreement -

     In October 1989, the Company entered into a Development Agreement (the
Agreement) with Connecticut Innovations, Inc. (CII) (formerly the Connecticut
Product Development Corporation) to develop certain products. Under the terms of
the Agreement, CII agreed to reimburse the Company for 60% of the development
costs of sponsored products. The Company was required to repay those
reimbursements plus interest and to pay certain royalties to CII based upon
sales or licenses of the sponsored products.

     Effective December 31, 1995, the parties entered into a new agreement
completely amending and restating the Company's obligations under the
Development Agreements (the "Amended and Restated Development Agreement"). Under
the Amended and Restated Development Agreement, (i) CII agreed to surrender to
the Company the 500 shares of Class B preferred stock formerly held by CII, (ii)
the Company agreed to make royalty payments to CII based on a revised formula
calculated with respect to future systems sales of the Company, and (iii) CII
agreed to waive all prior unpaid royalties owed and any prior defaults of the
Company under the Development Agreements.

                                      F-14
<PAGE>   43

     The revised royalty formula contained in the Amended and Restated
Development Agreement requires the Company to pay CII a royalty equal to .67%
(sixty-seven hundredths of a percent) of all systems sales of the Company
cumulatively and provides for minimum payments for each fiscal year as follows:

<TABLE>
<CAPTION>
                                          TOTAL MINIMUM
FISCAL YEAR                           PAYMENTS FOR THE YEAR
-----------                           ---------------------
<S>                                   <C>
2000................................        $106,250
2001................................         125,000
2002................................         137,500
2003................................         131,250
                                            --------
                                            $500,000
                                            ========
</TABLE>

     If, during any quarter, the royalty computation does not exceed the minimum
payment derived from the foregoing table, the minimum payment would be made
instead of the actual computed royalty amount. CII continues to have a security
interest in all of the Company's patents, trademarks and other assets as
collateral for the payment of the royalty obligations, but CII has agreed to
subordinate its security interest (except for its security interest in patents
and trademarks) in the event that the Company enters into a financing
arrangement with an institutional lender. CII agreed to subordinate its security
interest in all tangible and intangible personal property to the New Lender. See
Note 6. The Company recorded $100,000 and $55,000 as royalty expense for fiscal
years 1999 and 1998, respectively.

  Contingencies -

     On July 9, 1998, a purported class action lawsuit was filed against the
Company, James H. Whitney, former chief executive officer of the Company and
Frederick W. Kolling III, former chief financial officer of the Company,
asserting claims under the federal securities laws. The action was filed in the
United States District Court for the District of Connecticut and purports to be
brought on behalf of the named plaintiff, Ms. Arlene Greenberg, and all other
persons and entities who purchased shares of Company Common Stock during the
period from August 14, 1997 through June 23, 1998.

     On August 12, 1998, a second purported class action was filed against the
Company, James H. Whitney and Frederick W. Kolling, III asserting similar claims
under the federal securities laws. The second action also was filed in the
United States District Court for the District of Connecticut and purports to be
brought on behalf of the named plaintiff Mr. Mark Abrams for the same class
period.

     On January 4, 1999, the Court consolidated the two actions into one. The
plaintiffs filed an amended consolidated complaint on May 28, 1999. The
defendants, including the Company, have been given 45 days after the filing of
the amended complaint in which to file a response.

     The amended and consolidated complaint alleges that the Company's financial
statements for the first three quarters of fiscal 1998 were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and SEC Rule 10b-5 promulgated thereunder, and Section
20(a) of the Exchange Act. The prayers for relief request compensatory damages
and reimbursement for the reasonable costs and expenses, including attorney's
fees and expert fees, incurred in connection with the action.

     Although the Company believes the claims are without merit and will
vigorously defend the action, it is not possible to predict with certainty the
final outcome of this proceeding.

     The Company is a party to various other legal proceedings arising in the
ordinary course of business which management believes, after consultation with
legal counsel, will not have a material adverse effect on the Company's
financial position or future operating results.

                                      F-15
<PAGE>   44

  Other commitments -

     The Company has a royalty agreement with certain founding stockholders
whereby the Company will pay an amount equal to 1% of all the Company's sales
(as defined) commencing on the date of a public offering of the Company's common
stock. An additional royalty of .5% will be paid on all the Company's sales
provided that the payment of additional royalties does not reduce the Company's
after-tax profits below 9% of sales for the period. The Company's obligations
under this agreement terminate upon the payment of royalties aggregating
$12,000,000. For the years ended March 31, 1999 and 1998, royalties expensed
under this agreement totaled $207,000 and $156,000, respectively. Total
royalties expensed under this agreement is $700,000 through March 31, 1999.

     During fiscal 1998, the Company entered into an agreement related to the
development and use of certain inkjet technology. This agreement will require
the Company to pay royalties of 1% of inkjet sales up to a maximum of $5,000,000
over the next ten years. For the year ended March 31, 1999, royalties expensed
under this agreement totaled approximately $5,000.

     As of March 31, 1999, the Company had a performance bond with a customer
requiring the Company to deliver its product and meet the terms of the contract.
The Company has issued a $150,000 letter of credit backing the performance bond.

  Leases -

     The Company leases its office and manufacturing facility under an operating
lease which provides for monthly rental of $27,875 through September 1998 and
$30,000 from September 1998 through September 1999. The Company is leasing the
facility on a three year agreement through September 30, 1999. Under this
agreement, the Company is responsible for paying all operating costs and
maintenance. The Company also leases certain office equipment under an operating
lease agreement which expires in fiscal year 2001. Lease expense for the years
ended March 31, 1999 and 1998, totaled approximately $380,000 and $374,000,
respectively. Future minimum rental payments for equipment total $37,000 and
$6,000 for fiscal years 2000 and 2001, respectively.

11.  EMPLOYEE BENEFIT PLANS:

     The Company has a defined contribution benefit plan (the Plan) covering
substantially all employees of the Company. The Plan is intended to comply with
Section 401(k) of the Internal Revenue Code. Each year eligible participants may
elect to make salary reduction contributions on their behalf up to a maximum of
the lesser of 15% of compensation or the annual maximum established by the
Internal Revenue Service. Participants may also make voluntary after-tax
contributions to the Plan. The Company does not make contributions to the Plan
but does pay certain expenses of the Plan.

12.  SIGNIFICANT CUSTOMERS AND BUSINESS CONCENTRATION:

     Due to the nature of the Company's products, a significant portion of the
Company's revenues in all periods are derived from a few customers. The majority
of the Company's customers are property and casualty insurance companies. During
the years ended March 31, 1999 and 1998, sales to one customer accounted for 15%
and 21% of net sales, respectively.

                                      F-16