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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, 1997.
[ ]      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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                          DELAWARE                                                     51-0223195
(State or other jurisdiction of incorporation or organization)            (I.R.S. Employer Identification No.)

                           One Winnenden Road
                          Norwich, Connecticut                                             06360
                (Address of principal executive offices)                                (Zip Code)
Issuer's telephone number: (860) 823-1427
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:

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                  Title of each class                             Name of each exchange on which registered
                  -------------------                             -----------------------------------------
                  <S>                                             <C>
                           None
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

                          Common Stock, $.001 Par Value
                         Common Stock Purchase Warrants
                                (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. [X]

The Registrant's revenues for the most recent fiscal year were $14,452,703.

The aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 18, 1997, 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 $16,842,320. The number of shares of the Registrant's Common Stock
outstanding as of June 18, 1997 was 4,283,269.

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 1997 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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Item 1.           Description of Business...........................................1
                           General..................................................1
                           Development of the Business..............................1
                           Finishing Systems........................................1
                           Strategy.................................................2
                           Systems..................................................2

                  Marketing and Sales...............................................6
                  Customers.........................................................6
                  Manufacturing.....................................................7
                  Installation and Customer Service.................................7
                  Research and Development..........................................8
                  Competition.......................................................8
                  Patents and Proprietary Rights....................................9
                  Employees.........................................................9

Item 2.           Description of Property...........................................9

Item 3.           Legal Proceedings.................................................9

Item 4.           Submission of Matters to a Vote of
                           Security Holders.........................................10


                                     PART II

Item 5.           Market for Common Equity and Related
                           Stockholder Matters......................................10


Item 6.           Management's Discussion and Analysis or Plan of
                           Recent Strategic Initiatives.............................11
                           Summary Financial Data...................................12
                           Results of Operations....................................13
                           Liquidity and Capital Resources..........................14
                           Inflation................................................15
                           Factors That May Affect Future Performance...............15
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                                       (i)
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Item 7.           Financial Statements..............................................15


Item 8.           Changes in and Disagreements with Accountants
                    on Accounting and Financial Disclosure..........................16


                                    PART III

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

Item 10.          Executive Compensation............................................16

Item 11.          Security Ownership of Certain Beneficial
                                    Owners and Management...........................16

Item 12.          Certain Relationships and Related Transactions....................16

                                     PART IV

Item 13.          Exhibits and Reports on Form 8-K..................................17

Signatures..........................................................................20
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                                      (ii)
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                                     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 and owned 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 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 Harold S. Geneen and Gerald H. Newman are 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.

         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.

FINISHING SYSTEMS

         Traditionally, printing of large quantities of documents has been done
primarily by using offset printing presses. The document to be produced is
engraved onto a printing plate and multiple copies are produced rapidly and
inexpensively. Offset printing produces documents that are identical to each
other. Recent advances in computer technology have produced alternatives to
offset printing presses including non-impact laser printers. 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
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.

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         The ability to generate large quantities of documents has created a new
way 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. Rolls of feed paper allow for the
continuous use of printers without reloading for up to 15 hours, resulting in
labor savings. 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
in the design and sale of intelligent finishing systems and to expand its
customer base. To achieve these objectives, the Company believes that it must
continue to offer systems that are flexible enough to meet the varying needs of
users and to pursue a strategy that includes the following key elements:

Expanded Marketing Efforts. Until early 1993, the Company did not have a
marketing staff. To generate sales, it relied principally on contacts within the
insurance industry, particularly among large property and casualty insurers, and
the growing reputation of its products. Since hiring a new management team, the
Company has been committed to aggressively marketing its systems and expanding
its customer base to include a broader range of insurance companies and users in
the banking, finance and health care industries. The Company also plans to
increase its geographic expansion beyond its traditional North American market
territory.

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.

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.

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.

SYSTEMS

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

         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.

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         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 FM1000 can either envelope or shrink wrap flat documents.

           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.

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

         System Control Module and Operator Console. The System Control Module
incorporates an IBM-compatible Pentium 133MHZ CPU with an 850 Megabyte 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) Linear 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 Linear Image Reader is a
scanning device which is used to read bar-code or OMR information. In the CCD
Linear 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. 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 Linear 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.

         Laser Reader and CCD Linear Image Reader. 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 Linear Image Readers. This reading technology returns a very
precise image of the bar code or OMR image being scanned. The CCD Linear Image
Reader transmits the image to be processed by the System Control Module
approximately 2,000 times a second. With this reading technology, bar-code and
OMR marks can be used interchangeably, with reading accuracy and speed the equal
of laser reading technology.

         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.

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        F-2 Matched Document Feeder. The F-2 is a vacuum feeder that cycles at
more than 10,000 sheets per hour. Sheets to be processed are placed face down in
the sheet feeder input hopper. This "bottom-feed" design permits the operator to
load the hopper while the feeder is cycling. Each sheet is verified, and double
or misfeeds are instantly detected by a double feed detector and by analysis of
the bar code data by the System Control Module. After verification, each sheet
of a document is fed face-down until the document set is complete. Incomplete or
out of sequence sets stop the system, and the operator is informed of the
problem through the CRT located in the Operator Console.

         F-2 Insert/Cover Feeders. These modules are vacuum feeders capable of
feeding a wide range of paper stocks, permitting the customization of processed
documents. Controlled by the System Control Module, these feeders are capable of
feeding inserts from three and one-half to eleven inches long and eight and
one-half to nine inches wide, and covers eight and one-half inches wide by
eleven inches long. The System Control Module initiates the proper feed cycle
upon receipt of bar code information from a Laser Reader or CCD Linear Image
Reader.

         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.

         Stapler Module. The Stapler Module applies performed staples to the
left-hand edge of a document as required by the application and as instructed by
information in the bar code. Different size staples can be used to accommodate
various package thickness'. The maximum number of sheets which can be stapled is
125 for 24-pound paper and 140 for 20-pound paper. The staple position ranges
from 1/16 to 1/32 of an inch on the side edge and 1 to 2 inches from top and
bottom.

         Stitcher Module. The StitchMaster Module allows corner or booklet
stitching of 2 to 50 sheets of paper, including covers and other media. The
Stitcher is activated by the system control code on the primary documents, such
that stitching is performed dynamically throughout a run. Stitched booklets can
be intermixed with loose booklets, and those bound by other means. If the
Stitcher activates but does not deliver a stitch, the stitch detect feature will
sense a missing stitch, declare an error on the system CRT, and stop the
machine.

         Spine Tape Module. The taping module automatically applies a
water-moistened adhesive tape to the spine of the stapled document. The result
is an attractive, secure binding. The bar code controlled system automatically
selects the document to be taped. Built-in sensors detect the beginning and end
of the document. The moistened tape is applied accurately to the document and
secured by top and bottom pressure rollers.

         VeloBind Punch Module. The VeloBind Punch Module punches the paper with
the four holes required to apply the VeloBind plastic strip. Up to 20 sheets can
be punched at one time. If the package is larger than 20 sheets, the paper is
punched in groups of 20 sheets or less and accumulated prior to adding the
VeloBind strip.

         VeloBind Fastening Module. The VeloBind Fastening Module is a fully
automatic binding method that can bind from two pages to approximately one inch
of paper. This binding method is designed for documents where sheets may have to
be added or deleted by the recipient at a later time. The actual binder is made
up of two plastic strips. One strip has four flexible pins which pass through
the punched paper. The second strip with matching holes is placed over the pins
on the back of the document. The pins are bent and snapped into the grooves of
the second strip. The pins can be removed from the grooves manually to allow the
recipient to add and/or delete pages.

         Slip and Grip. Slip and Grip is a binding method that utilizes an
attractive plastic sleeve placed along the eleven inch edge of an 8-1/2 x 11
inch booklet. The sleeve has a triangular cross section and pinches the paper in
its "jaws" for a secure grip. Paper can be removed by sliding the grip off by
hand. This facilitates updating of documents. The Slip and Grip module is made
up of two sections: the grip feeder and the grip applicator. The grip feeder, is
loaded by the operator and holds up to 1200 grips. The applicator section opens
the grips and places them over the edge of the booklet. The entire system is
fully automatic and can bind up to 40 sheets of 20 lb paper.

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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.

         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 feed 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.

         Folded Mail Inserter. The inserter can be set for a variety of envelope
sizes ranging from Monarch to Bankers to 6"x9 1/2". The unusually large envelope
hopper allows for minimum operator interface. Dependent on envelope
construction, the inserter will handle up to a 0.25" thick folded package.
Provision is made for diversion of oversize packages; all others are
automatically sealed (standard envelopes can be used) prior to exiting the
module.

         Ink Jet Printing. MS and DM systems 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.

         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 for Flat Mail. The most common technique used by
the Company systems to meet current United States Postal Service requirements
for flat manifest mail 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.

         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.

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         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

         Until early 1993, the Company 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. Since 1993, the
Company's marketing staff has actively marketed Company systems and has targeted
other types of insurance companies as well as potential customers in the
banking, finance and health care industries. The Company will continue its
efforts to expand sales to its existing customer base. Based upon available
industry reports, approximately 40% of all non-impact cut sheet laser printers
are used in the insurance industry. During the fiscal year ended March 31, 1997,
approximately 55% of the Company's system sales were 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.

         In 1990, the Company was selected by Xerox Corporation to serve as a
Xerox Worldwide Printing Systems Marketing Finishing Partner. This partnership
program is a formalized approach for managing arrangements between Xerox
Worldwide Printing Systems Marketing and its partners. A Xerox Worldwide
Printing Systems marketing partner is a vendor who, with the assistance of
Xerox, develops and/or markets a high quality product which significantly
enhances or enables applications to be effectively printed and/or finished in
Xerox page printing environments. In addition, the Company has other informal
marketing arrangements with other manufacturers and suppliers of high speed,
non-impact laser printers.

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. Since 1986,
insurance companies that have purchased the Company's systems have included
Aetna, Allstate Insurance Co., Blue Cross/Blue Shield of Connecticut, Chubb &
Son Insurance, Colonial Penn, Fireman's Fund, John Hancock Mutual Life
Insurance, Metropolitan Life, St. Paul Fire & Marine Insurance, The Travelers
and many of the other major insurers in the United States. In addition, the
Company's systems have been purchased by A. C. Nielsen, Electronic Data Systems,
Nippon Telephone & Telegraph, the State of Mississippi and Automatic Data
Processing, USAA, Public Schools Employees Retirement System and the Gartner
Group.

         During fiscal 1996, the Company 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
of these customers to maintain that level of sales from year to year.

         At March 31, 1997, the Company had a backlog of orders for 16 systems
aggregating approximately $3,276,000, compared to a backlog of approximately
$1,085,000 at March 31, 1996. The Company calculates its backlog by subtracting
revenues recognized to date from the total contract price of systems in
progress. 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.

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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. 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 team of two employees, who
plan and carry 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 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 one day's notice. Each system has been designed to facilitate
parts replacements. The Company typically warrants each system for a period of
90 days after installation.

         The Company maintains a 10 person customer service group to manage the
support of systems in the field. 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.

         Since 1987, the Company has contracted with an outside maintenance
company, DataCard, to perform the Company's maintenance obligations, except in
cases where the customer specifies that maintenance be performed by Company
employees or the customer specifies that maintenance be performed by the
customer itself. DataCard, a nationally dispatched organization with over 400
technicians and regional technical support staff, is a service company which
maintains a variety of computer driven hardware and paper handling equipment.
DataCard has 87 base city service locations throughout the United States.
DataCard engineers currently perform remedial and preventive maintenance on 149
Company systems across the country. The Company entered into a contract with
DataCard on October 13, 1992 in the form of a Third Party Product Service
Agreement, which was subsequently amended on July 2, 1993 and February 17, 1994.
The Agreement, which has a term of three years, or until satisfaction by the
Company of all outstanding obligations to DataCard, specifies the terms and
rates under which maintenance service is to be provided to the Company's
customers for various levels of maintenance support. The Agreement also
specifies support to be given by the Company to DataCard, including initial
training of DataCard personnel, product documentation, all required replacement
parts and technical support.

         In September 1992, the Company issued a note in the principal amount of
$426,502 to DataCard as payment for services previously performed under the
contract with the Company. Principal is payable in quarterly installments of
$35,541 beginning in September 1995 and continuing until 1998. Payment of
principal began September 30, 1996. The outstanding balance on this note at
March 31, 1997 is $319,876. The Company owed

                                       7
<PAGE>   11
DataCard an additional $200,000 for services, which was payable beginning in
September 1995 from a percentage of revenues from maintenance contracts. The
outstanding balance on this loan as of March 31, 1997 was $41,668.

         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, 1997, revenues from customer maintenance agreements
represented approximately 39% of the Company's net sales. The Company believes
that, as it places more systems in service, maintenance revenues will continue
to account for a significant 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 components based upon specifications developed
by the Company.

         For the fiscal years ended March 31, 1997 and 1996, the Company
incurred expenses of $163,517 and $64,407, respectively, for research and
development activities.

COMPETITION

         The Company's principal competitors are Pitney-Bowes and Bell & Howell,
each of which has substantially greater resources, financial and otherwise, than
the Company. The Company is not aware of any studies concerning the size of the
market for finishing systems. However, based principally upon information from
customers, the Company believes that it has only a small share of the entire
market for finishing systems. Although the Company's market share for finishing
systems is small relative to its competition, 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, and 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.

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
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 nine 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.

                                       8
<PAGE>   12
         In connection with a development agreement with Connecticut
Innovations, Inc. (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 Agreements, as amended and restated as of December 31, 1995.

         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 infringes.

         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, 1997, the Company had 88 full-time employees, consisting
of 56 engaged in engineering and development and manufacturing support, 14 in
marketing and sales activities, 10 in customer services and 8 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 $27,500 through September 30, 1999. 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 also has sales
offices in Charleston, Rhode Island and Chicago, Illinois, that are leased on a
month-to-month basis for rent aggregating $800 per month.

ITEM 3.       LEGAL PROCEEDINGS.

         A former employee who was terminated from employment on December 3,
1993, filed an application for a prejudgment remedy in the Connecticut Superior
Court for the Judicial District of Fairfield at Bridgeport on January 28, 1994
seeking an attachment of $300,000 on Company assets. On April 16, 1997 a
settlement was reached whereby the Company paid the former employee $15,000 in
full settlement of all claims.

                                       9
<PAGE>   13
ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

              None.

                                     PART II

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

       From December 21, 1993 to April 12, 1995, the Company's Common Stock was
traded on the NASDAQ SmallCap Market under the symbol SORT. On April 12, 1995,
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. On December 20, 1996, the NASD
relisted the Company's stock on the NASDAQ SmallCap Market.

         The following table sets forth the high and low closing bid prices of
the Company's Common Stock for each quarter of fiscal 1996 and fiscal 1997, 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
commission and may not represent actual transactions.

<TABLE>
<CAPTION>
                                                               Bid Price
        Fiscal Quarter                                High                     Low
        --------------                                ----                     ---
<S>                                                  <C>                     <C>
First Fiscal Quarter - 1996                          $3                      $2 3/4
(April 1 - June 30, 1995)

Second Fiscal Quarter - 1996                          4 1/4                   3
(July 1 - September 30, 1995)

Third Fiscal Quarter - 1996                           4 7/8                   3 1/2
(October 1 - December 31, 1995)

Fourth Fiscal Quarter - 1996                          6 13/16                 3 3/4
(January 1 - March 31, 1996)

First Fiscal Quarter - 1997                           6 7/8                   4 7/8
(April 1 - June 30, 1996)

Second Fiscal Quarter - 1997                          5 3/4                   4 1/2
(July 1 - September 30, 1996)

Third Fiscal Quarter - 1997                           6 1/4                   4 1/8
(October 1 - December 31, 1996)

Fourth Fiscal Quarter - 1997                          8 3/4                   5 7/8
(January 1 - March 31, 1997)
</TABLE>

         On June 20, 1997, the high and low bid price quotations for the
Company's Common Stock were $6 5/8 and $6 17/32, respectively, as reported on
NASDAQ.

         As of June 18, 1997 there were approximately 1,170 record owners of the
Company's Common Stock. There is one record owner of the Company's Class B
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.

                                       10
<PAGE>   14
SALES OF UNREGISTERED SECURITIES

         In August 1995, the registrant issued and sold an aggregate of 333,335
shares of its Common Stock to nine accredited investors for an aggregate
offering price of $10,000,005. In September 1996, the registrant issued and sold
an aggregate of 150,000 shares of its Common Stock to ten accredited investors
for an aggregate offering price of $525,000.

         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 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 OR PLAN OF OPERATION.
RECENT STRATEGIC INITIATIVES

         Marketing Strategy. As discussed above, the Company plans aggressively
to pursue other market segments to widen the potential customer base. See
"Business - Strategy." Historically, the Company has enjoyed considerable
success in penetrating the insurance industry, where package complexity and
document integrity are well served by the Company's sophisticated finishing
systems. Although this segment will continue to be an important source of future
revenues, the Company expects to pursue previously unexplored opportunities in
the mutual fund, HMO field, and banking and brokerage industries, where the
increased complexity of mailing operations lend themselves to Company solutions.
The Company also will endeavor to increase its geographic penetration beyond its
traditional North American market territory. Management believes that
significant additional revenues can be obtained from key accounts in certain
European countries, as well as from the more developed markets in Asia-Pacific.

         In years prior to fiscal year 1996, due to the Company's financial
position and resulting cash needs, the Company was focused on consummating sales
without due regard to a coherent product pricing strategy. This practice
resulted in an erosion of gross profit margins. Similarly, the Company had
undertaken specific contracts involving significant development effort without
adequately anticipating (or being reimbursed for) such efforts. Management
believes that it is possible to establish and maintain selling prices without
losing significant volume, and had been successful in implementing such a policy
in fiscal year 1996, and continued to improve results in fiscal year 1997. The
Company intends to focus its future selling efforts primarily on standard
products, while acknowledging that some degree of customization is inherent in
the type of products the Company supplies. Management believes these actions
will enhance the Company's ability to successfully enter new markets and allow
the Company to increase gross profit margins.

         Cost Reduction. In addition to the initiatives discussed above,
Management intends to aggressively pursue product cost reduction. Management
believes that substantial cost reduction can be achieved without compromising
quality and, in some cases, while simultaneously improving system performance.
Engineering resources are currently being devoted to redesign and reduce the
cost of major components of the Company's systems. In addition, manufacturing
operations are being restructured to improve operating efficiency by assembling
commonly used modules in multiple lots, as opposed to assembling components in
response to individual orders. Similarly, component parts supplied by third
party suppliers are being ordered against blanket orders for best pricing and
improved supplier efficiency. Finally, materials ordering is being coordinated
more effectively with manufacturing schedules to assure that such materials are
available when needed. Management believes that these and other actions will
result in improved gross margins.

                                       11
<PAGE>   15
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, 1997         March 31, 1996         March 31, 1995
                                      --------------         --------------         --------------
<S>                                   <C>                    <C>                    <C>        
Sales:
   Systems                             $  8,716,473           $  8,458,700           $ 6,629,988
   Maintenance                            5,736,230              4,022,562             2,935,333
                                       ------------           ------------           -----------
          Total Sales                    14,452,703             12,481,262             9,565,321
                                       ------------           ------------           -----------
Cost of Sales:
   Systems                                4,797,526              4,895,387             4,844,531
   Maintenance                            3,166,419              2,826,853             2,306,597
                                       ------------           ------------           -----------
          Total Cost of Sales             7,963,945              7,722,240             7,151,128
                                       ------------           ------------           -----------
Gross Profit                              6,488,758              4,759,022             2,414,193

Operating Expenses:
   Selling and Administrative             5,881,926              5,330,807             5,710,062
   Research and Development                 163,517                 64,407                79,764
                                       ------------           ------------           -----------
          Total Operating
              Expenses                    6,045,443              5,395,214             5,789,826
                                       ------------           ------------           -----------
Operating Income (Loss)                     443,315               (636,192)           (3,375,633)


Other Expenses:
   Interest Expense, Net                   (184,426)              (243,363)             (176,814)
   Debt Conversion Expense                        0                      0               (99,998)
                                       ------------           ------------           -----------
Net Income (Loss)                      $    258,889           $   (879,555)          $(3,652,445)
                                       ============           ============           ===========

Net Income (Loss) Per Share            $       0.06           $      (0.23)          $     (1.08)
                                       ============           ============           ===========

<CAPTION>
                                                              1997                          1996
                                                              ----                          ----
<S>                                                         <C>                          <C>
Current Assets                                              $4,357,146                   $3,372,889
Total Assets                                                 9,363,693                    8,155,859
Current Liabilities                                          4,768,874                    4,579,364
Long-Term Debt, less current maturities                      2,213,618                    1,964,709
Stockholders' Equity                                         2,381,201                    1,611,786
</TABLE>

                                       12
<PAGE>   16
RESULTS OF OPERATIONS

         FISCAL YEAR ENDED MARCH 31, 1997
         COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996

         Systems sales for fiscal 1997 increased $257,000, or 3%, from fiscal
1996. The Company received a substantial number of orders in the fourth quarter
of the fiscal year. At March 31, 1997, the systems order backlog, consisting of
total order price less revenue recognized to date for all signed orders on hand,
was $3,276,000 (or 16 systems) as compared to $1,085,000 (or 6 systems) at March
31, 1996.

         Maintenance revenues increased $1,730,000 or 36%, as a result of the
larger number of systems in the field and inflationary price increases in
maintenance contracts between the periods.

         Gross profit increased to $6,489,000 in fiscal 1997. The gross margin
on system sales increased from 42% in fiscal 1996 to 45% in fiscal 1997. The
increase in gross margin is due to increased manufacturing and purchasing
efficiencies. The maintenance gross profit percentage increased from 30% in
fiscal 1996 to 45% in fiscal 1997, reflecting an increase in requests for
special services and multiple shift maintenance which yields a higher gross
margin than the services covered by the Company's standard maintenance contract.

        Selling and administrative expenses increased $551,000, or 10%, from
fiscal 1996 to fiscal 1997. The increased level of expenses primarily reflects
the costs associated with the increased sales staff in fiscal year 1997 over
fiscal year 1996.

         Research and development expenses increased $100,000, or 154%, from
fiscal 1996 to fiscal 1997. This increase resulted from additional efforts to
develop inkjet printing products and faster, more functional document handling
equipment.

         Interest expense for fiscal 1997 decreased $59,000, or 24%, from fiscal
1996, decreasing from $243,000 to $184,000. This decrease was directly
attributable to one time interest charges in 1996.

         As a result of the foregoing, the Company realized a net profit of
$259,000 for the fiscal year ended March 31, 1997, as compared to a net loss of
$880,000 for the fiscal year ended March 31, 1996.

         FISCAL YEAR ENDED MARCH 31, 1996
         COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995

         Systems sales for fiscal 1996 increased $1,829,000, or 28%, from fiscal
1995. Substantially all of this increase was attributable to increased unit
sales, rather than changes in the prices of the Company's systems. Approximately
29 systems were completed in fiscal 1996, compared to 16 in fiscal 1995. At
March 31, 1996, the systems order backlog, consisting of total order price less
revenue recognized to date for all signed orders on hand, was $1,085,000 (or 6
systems) as compared to $3,676,000 (or 18 systems) at March 31, 1995. The
reduction in backlog is attributable solely to the timing of order flows, which
have improved substantially since the end of fiscal 1996. Accordingly,
management does not believe the reduction in backlog between the periods
reflects any deterioration in the Company's prospects.

         Maintenance revenues increased $1,087,000 or 37%, as result of the
larger number of systems in the field and inflationary price increases in
maintenance contracts between the periods.

         Gross profit increased to $4,759,000 in fiscal 1996. The gross margin
on system sales increased significantly from 27% in fiscal 1995 to 42% in fiscal
1996 reflecting a return to the Company's historic gross profit margins. The
maintenance gross profit percentage increased from 21% in fiscal 1995 to 30% in
fiscal 1996,

                                       13
<PAGE>   17
reflecting an increase in requests for special services, which yield a higher
gross margin than the services covered by the Company's standard maintenance
contract.

         Selling and administrative expenses decreased $379,000, or 7%, from
fiscal 1995 to fiscal 1996. The decreased level of expenses reflects the efforts
of management to hold fixed costs steady during a period of growing sales
revenues.

         Research and development expenses decreased $15,000, or 19%, from
fiscal 1995 to fiscal 1996, as the Company's personnel worked to engineer the
increased number of systems sold between the periods. The increased level of
sales activity during fiscal 1996 necessitated the diversion of resources from
research and development to production and a corresponding shift of costs from
research and development to cost of sales.

         Interest expense for fiscal 1996 increased $66,000, or 38%, from fiscal
1995, increasing from $177,000 to $243,000. This increase was directly
attributable to the increase in borrowings between the periods. Debt conversion
expense for 1995 consists of a one-time charge of $100,000 for the early
conversion of $400,000 of outstanding debt into common stock.

         As a result of the foregoing, the Company incurred a net loss of
$880,000 for the fiscal year ended March 31, 1996, as compared to a net loss of
$3,652,000 for the fiscal year ended March 31, 1995.

         The Company believes that it will achieve a substantial reduction or
elimination of its operating and cash flow losses during the next year. The
Company's ability to achieve profitability will depend on its ability to
increase systems and maintenance sales and continue to improve gross margins.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and improve profitability. During the year ended
March 31, 1997, the Company had cash flow from operations of $149,000, compared
to negative cash flows of approximately $655,000 and $2,981,000 for the years
ended March 31, 1996 and 1995, respectively. These cash flow deficiencies in
prior years reflected the increased costs associated with the Company's expanded
marketing and sales efforts and the lack of additional sales sufficient to
offset the increased expenditures.

         In general, as the Company achieves higher sales volumes, a cash flow
benefit will be realized from the increasing levels of deposits received from
customers, usually 50% of the system price at the time the order is placed.
Subsequent to yearend, the Company received additional deposits on orders,
shipment payments and maintenance payments sufficient to fund ongoing business
requirements.

         Purchases of property and equipment totaled $634,000 in fiscal 1997.
The current and planned capital spending levels are not believed to be a
significant element of liquidity in fiscal 1998.

         In September 1992, the Company issued a note in the principal amount of
$426,502 to DataCard as payment for services previously performed under the
contract with the Company. Principal is payable in quarterly installments of
$35,541 beginning in September 1995 and continuing until 1998. The outstanding
balance on this note at March 31, 1997 was $319,876. The Company owed DataCard
an additional $200,000 for services, which was payable beginning in September
1995 from a percentage of revenues from maintenance contracts. The outstanding
balance on loan as of March 31, 1997 was $41,668. These loans do not have any
material restrictive covenants.

         Historically, the Company has financed its operations through cash
generated from financing arrangements with third parties, bank borrowings
secured by affiliate guarantees or cash collateral furnished by affiliates,
customer deposits, and the sale of equity interests in the Company. As of March
31, 1997, the balance of cash was $261,700.

                                       14
<PAGE>   18
         On June 4, 1996, the Company entered into a new line of credit
arrangement with a bank which was used to refinance the Company's pre-existing
line of credit. The new arrangement provides for two revolving loans totaling
$2,250,000. The available borrowing under Facility A is in the amount of
$1,750,000, and is to be fully cash collateralized by assets provided by Mr.
Harold S. Geneen, a stockholder and a Director of the Company. The funds
advanced under Facility A bear interest at the bank's base rate. The maturity
date of Facility A is July 30, 1998. The available borrowing under Facility B is
in the amount of $500,000, and is secured by all tangible and intangible
personal property of the Company. The funds advanced under Facility B bear
interest at the bank's base rate, plus 1%. The maturity date of Facility B is
July 30, 1998. As of March 31, 1997, $2,201,169 was outstanding on the line of
credit.

         Except for the financing arrangements described above, the Company does
not have any commitments for outside funding of any kind. It must depend,
therefore, upon the generation of sufficient internally generated funds and the
remaining funds available under its revolving line of credit to fund its
operations during fiscal 1998. Management believes that such internally
generated funds and available borrowings under its revolving credit facility
will be sufficient to fund its cash requirements during fiscal 1998.

INFLATION

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

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

         This report contains forward looking statements based on current
expectations that involve a number of risks and uncertainties. The factors that
could cause actual results to differ materially include 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, and the ramp-up and expansion of
manufacturing capacity.

ITEM 7.  FINANCIAL STATEMENTS.

         The financial statements required by this item are presented on pages
F-1 through F-19 immediately after the signature page of this report.

                                       15
<PAGE>   19
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

                  None.


                                    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
1997 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1997. 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
1997 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1997. 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
1997 Annual Meeting of Stockholders, which is currently scheduled to be held in
August 1997. 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
1997 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 1997. 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.

                                       16
<PAGE>   20
                                     PART IV
<TABLE>
<CAPTION>
ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.
--------          ---------------------------------
<S>      <C>                         
      a. Exhibits required by Item 601 of Regulation S-B:

         3.1      Restated Certificate of Incorporation of the Company (filed as
                  Exhibit 3(i)(a) to the Company's Registration Statement on
                  Form SB-2, Commission File No. 33-70052-B, and incorporated
                  herein by reference).
         3.2      Certificate of Amendment of Restated Certificate of
                  Incorporation of the Company (filed as Exhibit 3(i)(b) to the
                  Company's Registration Statement on Form SB-2, Commission File
                  No. 33-70052-B, and incorporated herein by reference).
         3.3      Certificate of Amendment of Restated Certificate of
                  Incorporation (the form of which was filed as Exhibit 3(i)(c)
                  to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and is incorporated herein
                  by reference).
         3.4      By-Laws of the Company, as amended (filed as Exhibit 3(ii) to
                  the Company's Registration Statement on Form SB-2, 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     Employment Agreement, dated September 4, 1992, between the
                  Company and William H. Gunther, Jr. (filed as Exhibit 10(o) to
                  the Company's Registration Statement on Form SB-2, Commission
                  File No. 33-70052-B, and incorporated herein by reference).
         10.4     Stock Subscription Warrant, issued September 4, 1992,
                  entitling Park Investment Partners, Inc. to purchase 102,000
                  shares of the Company's Common Stock at $0.375 per share (the
                  "Warrant Price") (filed as Exhibit 10(h) to the Company's
                  Registration Statement on Form SB-2, Commission File No.
                  33-70052-B, and incorporated herein by reference).
         10.5     Stock Subscription Warrant, issued September 4, 1992,
                  entitling Gerald H. Newman to purchase 13,333 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(i) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.6     Stock Subscription Warrant, issued September 4, 1992,
                  entitling Joyce D. Flaschen to purchase 13,333 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(j) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.7     Stock Subscription Warrant, issued September 4, 1992,
                  entitling Harold S. Geneento purchase 13,333 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(k) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.8     Stock Subscription Warrant, issued September 4, 1992,
                  entitling Howard Alper to purchase 26,667 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(l) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.9     Stock Subscription Warrant, issued September 4, 1992,
                  entitling Mark Fisher to purchase 6,667 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(m) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
</TABLE>

                                       17
<PAGE>   21
<TABLE>
<CAPTION>
<S>      <C>      <C>     
         10.10    Stock Subscription Warrant, issued September 4, 1992,
                  entitling Caren Barness to purchase 13,333 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(n) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.11    Stock Subscription Warrant, issued September 4, 1992,
                  entitling Guy W. Fiske to purchase 26,667 shares of the
                  Company's Common Stock at the Warrant Price (filed as Exhibit
                  10(o) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.12    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).
         10.13    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).
         10.14    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).
         10.15    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).
         10.16    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).
         10.17    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).
         10.18    Letter Agreement, dated September 1, 1992, between the Company
                  and DataCard (filed as Exhibit 10(ee) to the Company's
                  Registration Statement on Form SB-2, Commission File No.
                  33-70052-B, and incorporated herein by reference).
         10.19    Promissory Note of the Company, dated September, 1992, to
                  DataCard, in the amount of $426,501.99 (filed as Exhibit
                  10(ff) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.20    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).
         10.21    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
                  dated June 26, 1995, and incorporated herein by reference.)
         10.22    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 dated June 26, 1995, and incorporated herein by
                  reference).
         10.23    Agreement, dated August 29, 1991, between the Company and
                  Standard Duplicating Machines Corporation (filed as Exhibit
                  10(hh) to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.24    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).
         10.25    Letter Agreement, dated December 13, 1993, deferring certain
                  payments by the Company (filed as Exhibit 10(III) to the
                  Company's Registration Statement on Form SB-2, Commission File
                  No. 33-70052-B, and incorporated herein by reference).
         10.26    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).
</TABLE>

                                       18
<PAGE>   22
<TABLE>
<CAPTION>
<S>      <C>      <C>
         10.27    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 dated June 26,
                  1995, and incorporated herein by reference).
         10.28    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
                  dated June 26, 1995, and incorporated herein by reference).
         10.29    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 dated June
                  26, 1995, and incorporated herein by reference).
         10.30    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
                  dated June 26, 1995, and incorporated herein by reference).
         10.31    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
                  dated June 26, 1995, and incorporated herein by reference).
         10.32    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
                  dated June 26, 1995, and incorporated herein by reference).
         10.33    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).
         10.34    Memorandum Agreement dated as of March 30, 1992 between the
                  Company, Ascom Holding, Inc. and Ascom Auteka, AG (filed as
                  Exhibit 10(bbbb) to the Company's Registration Statement on
                  Form SB-2, Commission File No. 33-70052-B, and incorporated
                  herein by reference).
         10.35    Agreement dated as of June 25, 1992 between the Company, Ascom
                  Holding, Inc. and Ascom Auteka, AG (filed as Exhibit 10(cccc)
                  to the Company's Registration Statement on Form SB-2,
                  Commission File No. 33-70052-B, and incorporated herein by
                  reference).
         10.40    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 dated June 26, 1995,
                  and incorporated herein by reference).
         10.42    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).
         10.43    Building lease between the Company and UNC Incorporated, dated
                  July 31, 1996.
         10.44    Promissory Note dated September 9, 1996 between James H.
                  Whitney, CEO, Gunther International, Ltd. and the Company.
         10.45    Revolving Loan and Security Agreement.
         10.46    Subordination Agreement.
         24       Power of Attorney pursuant to which this report has been
                  executed.

         b.    Reports on Form 8-K.         None.
</TABLE>

                                       19
<PAGE>   23
                                   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/ Frederick W. Kolling III
                                            -----------------------------------
                                       Frederick W. Kolling III
                              VICE PRESIDENT, CHIEF FINANCIAL OFFICER
                              AND TREASURER
                              (ON BEHALF OF THE REGISTRANT AND AS
                              PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)


Date:   June 30, 1997

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:
----------                          ------                                    -----
<S>                                 <C>                                       <C>
/s/ James H. Whitney                President, Chief Executive                June 30, 1997
----------------------------        Officer (Principle Executive
James H. Whitney                    Officer)

/s/ Frederick W. Kolling III                                                  June 30, 1997
----------------------------
Frederick W. Kolling III
Attorney-in-Fact for:

Guy W. Fiske                        Director
Harold S. Geneen                    Director
J. Kenneth Hickman                  Director
Frederick W. Kolling III            Director
Alan W. Morton                      Director
Gerald H. Newman                    Director
James H. Whitney                    Director
</TABLE>
<PAGE>   24
                          INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                             Page No.
                                                                                             --------
<S>                                                                                          <C>
Report of Independent Public Accountants                                                        F-2

Balance Sheets as of March 31, 1997 and 1996                                                    F-3

Statements of Operations for the Years Ended March 31, 1997,
     1996 and 1995                                                                              F-5

Statements of Stockholders' Equity for the Years Ended
     March 31, 1997, 1996 and 1995                                                              F-6

Statements of Cash Flows for the Years Ended March 31, 1997,
   1996 and 1995                                                                                F-7

Notes to Financial Statements                                                                   F-8
</TABLE>

                                      F-1
<PAGE>   25
                    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, 1997
and 1996, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles.




                                            ARTHUR ANDERSEN LLP
Hartford, Connecticut
June 18, 1997


                                      F-2
<PAGE>   26
                           GUNTHER INTERNATIONAL, LTD.
                                 BALANCE SHEETS
                             MARCH 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                             1997                 1996
                                                             ----                 ----
<S>                                                       <C>                 <C>        
Assets
Current Assets:
   Unrestricted Cash and Short-Term Investments           $   261,700         $   127,059
   Restricted Cash and Short-Term Investments                       0             325,834
   Accounts Receivable, Net                                 1,298,765           1,187,082
   Costs and Estimated Earnings in Excess of
     Billings on Uncompleted Contracts                      1,403,715             331,644
   Inventories                                              1,262,435           1,312,407
   Prepaid Expenses                                            90,531              88,863
                                                          -----------         -----------
                  Total Current Assets                      4,317,146           3,372,889
                                                          -----------         -----------

Property and Equipment:
   Machinery and Equipment                                  1,099,208             761,700
   Furniture and Fixtures                                     187,294             113,982
   Leasehold Improvements                                     229,804              67,811
                                                          -----------         -----------
                                                            1,516,306             943,493
   Less - Accumulated Depreciation
     and Amortization                                        (483,069)           (292,099)
                                                          -----------         -----------
                                                            1,033,237             651,394
                                                          -----------         -----------
Other Assets:
   Excess of Cost Over Fair Value of Net
     Assets Acquired, Net                                   3,445,293           3,668,772
   Deferred Preproduction Costs, Net                          457,189             397,444
   Accounts and Notes Receivable From Stockholders             40,000              19,177
   Investment, at Lower of Cost or Market                      30,000              30,000
   Other                                                       40,828              16,183
                                                          -----------         -----------
                                                            4,013,310           4,131,576
                                                          -----------         -----------
                                                          $ 9,363,693         $ 8,155,859
                                                          ===========         ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>   27
                           GUNTHER INTERNATIONAL, LTD.
                           BALANCE SHEETS (CONTINUED)
                             MARCH 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                          1997                   1996
                                                          ----                   ----
<S>                                                    <C>                  <C>         
Liabilities and Stockholders' Equity
Current  Liabilities:
   Accounts Payable to Stockholder                     $          0         $    100,000
   Notes Payable and Current Maturities of
     Other Long-Term Debt                                   401,866              666,325
   Accounts Payable                                       2,059,506            1,951,551
   Accrued Expenses                                         479,043              494,089
   Billings in Excess of Costs and Estimated
     Earnings on Uncompleted Contracts                      771,016              243,371
   Deferred Service Contract Revenue                      1,057,443            1,124,028
                                                       ------------         ------------
          Total Current Liabilities                       4,768,874            4,579,364
                                                       ------------         ------------

Long-Term Debt, Less Current Maturities                   2,213,618            1,964,709
                                                       ------------         ------------

Commitments and Contingencies (Notes 2 and 13)

Stockholders' Equity:

   Common Stock, $.001 Par Value; 16,000,000
     Shares Authorized; 4,283,269 and 4,133,269
     Shares Issued and Outstanding at March 31,
     1997 and 1996, respectively                              4,283                4,133
   Series B Common Stock, $.001 Par Value; 500
     Shares Authorized, Issued and Outstanding
     at March 31, 1997 and 1996                                   1                    1
   Additional Paid-in Capital                            11,375,826           10,865,450
   Accumulated Deficit                                   (8,998,909)          (9,257,798)
                                                       ------------         ------------
          Total Stockholders' Equity                      2,381,201            1,611,786
                                                       ------------         ------------
                                                       $  9,363,693         $  8,155,859
                                                       ============         ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>   28
                           GUNTHER INTERNATIONAL, LTD.
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                           Year Ended           Year Ended           Year Ended
                                         March 31, 1997       March 31, 1996       March 31, 1995
                                         --------------       --------------       --------------
<S>                                      <C>                  <C>                  <C>
 Sales:
   Systems                                $  8,716,473         $  8,458,700         $ 6,629,988
   Maintenance                               5,736,230            4,022,562           2,935,333
                                          ------------         ------------         -----------
          Total Sales                       14,452,703           12,481,262           9,565,321
                                          ------------         ------------         -----------
Cost of Sales:
  Systems                                    4,797,526            4,895,387           4,844,531
  Maintenance                                3,166,419            2,826,853           2,306,597
                                          ------------         ------------         -----------
          Total Cost of Sales                7,963,945            7,722,240           7,151,128
                                          ------------         ------------         -----------
Gross Profit                                 6,488,758            4,759,022           2,414,193
                                          ------------         ------------         -----------

Operating Expenses:
  Selling and Administrative                 5,881,926            5,330,807           5,710,062
  Research and Development                     163,517               64,407              79,764
                                          ------------         ------------         -----------
          Total Operating Expenses           6,045,443            5,395,214           5,789,826
                                          ------------         ------------         -----------
Operating Income (Loss)                        443,315             (636,192)         (3,375,633)
                                          ------------         ------------         -----------

Other Expenses:
   Interest Expense, Net                      (184,426)            (243,363)           (176,814)
   Debt Conversion Expense                           0                    0             (99,998)
                                          ------------         ------------         -----------
                                              (184,426)            (243,363)           (276,812)
                                          ------------         ------------         -----------
Net Income (Loss)                         $    258,889         $   (879,555)        $(3,652,445)
                                          ============         ============         ===========

Net Income (Loss) Per Share:
   Primary and Fully Diluted              $       0.06         $      (0.23)        $     (1.08)
                                          ============         ============         ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>   29
                           GUNTHER INTERNATIONAL, LTD.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995


<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, April 1, 1994                  3,293,183     $3,293     500        $1      $  7,844,143      $(4,725,798)     $3,121,639
Conversion of notes payable                                                 
  to stockholders to common                                                 
  stock                                   303,092        303       0         0         1,039,867                0       1,040,170
Net loss                                        0          0       0         0                 0       (3,652,445)     (3,652,445)
                                        ---------     ------     ---        --      ------------      -----------      ----------
                                                                            
Balance, March 31, 1995                 3,596,275      3,596     500         1         8,884,010       (8,378,243)        509,364
Conversion of notes payable                                                 
  to stockholders to common                                                 
  stock                                   203,659        204       0         0           568,956                0         569,160
Private placement of common                                                 
  stock                                   333,335        333       0         0           999,667                0       1,000,000
Retirement of Class B senior                                                
  preferred stock                               0          0       0         0           412,817                0         412,817
Net loss                                        0          0       0         0                 0         (879,555)       (879,555)
                                        ---------     ------     ---        --      ------------      -----------      ----------
                                                                            
Balance, March 31, 1996                 4,133,269      4,133     500         1        10,865,450       (9,257,798)      1,611,786
Private placement of common                                                 
  stock                                   150,000        150       0         0           510,376                0         510,526
Net income                                      0          0       0         0                 0          258,889         258,889
                                        ---------     ------     ---        --      ------------      -----------      ----------
                                                                            
Balance, March 31, 1997                 4,283,269     $4,283     500        $1      $ 11,375,826      $(8,998,909)     $2,381,201
                                        =========     ======     ===        ==      ============      ===========      ==========
</TABLE>
                                                                            
   The accompanying notes are an integral part of these financial statements.

                                      F-6
<PAGE>   30
                           GUNTHER INTERNATIONAL, LTD.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Year Ended      Year Ended       Year Ended
                                                              March 31, 1997   March 31, 1996   March 31, 1995
                                                              --------------   --------------   --------------
<S>                                                           <C>              <C>              <C>
Cash Flows From Operating Activities:
  Net income (loss)                                            $   258,889      $  (879,555)     $(3,652,445)
  Adjustments to reconcile net income (loss) to
     net cash provided by (used for) operating activities:
  Depreciation and amortization                                    577,663          344,866          321,611
  Royalties forgiven                                                     0          (81,084)               0
  Loss on investment and abandonment of leasehold
     improvements                                                   39,319                0            8,167
  Debt conversion expense                                                0                0           99,998
  (Increase) decrease in accounts receivable, net                 (111,683)        (545,685)          29,943
  Decrease (increase) in inventories                                49,972          503,480         (218,013)
  (Increase) decrease in prepaid expenses and other assets         (26,313)         117,182           (6,459)
  (Increase) decrease in accounts and notes receivable
      from stockholder                                             (20,823)          73,762                0
  (Decrease) increase in accounts payable
     and accrued expenses                                           (7,091)         410,854          545,426
  (Decrease) increase in deferred service
     contract revenue                                              (66,585)         (52,777)         153,094
  Increase in billings in excess of costs and estimated
      earnings, net                                               (544,426)        (546,539)        (262,028)
                                                               -----------      -----------      -----------
              Net cash provided by (used for)
                  operating activities                             148,922         (655,496)      (2,980,706)
                                                               -----------      -----------      -----------

Cash Flows From Investing Activities:
  Purchases of property and equipment                             (633,566)        (207,179)        (105,498)
  Increase in deferred preproduction costs                        (201,525)        (280,202)        (125,977)
  Proceeds from sale of property and equipment                           0                0            1,500
                                                               -----------      -----------      -----------
              Net cash used for investing activities              (835,091)        (487,381)        (229,975)
                                                               -----------      -----------      -----------

Cash Flows From Financing Activities:
  Proceeds from notes payable and long-term debt                 2,217,729        1,030,114        1,910,844
  Repayments of notes payable and long-term debt                (2,233,279)        (813,014)        (317,325)
  Decrease (increase) in restricted cash and
     short-term investments                                        325,834          (25,834)          39,643
  Net proceeds from sale of common
     stock and warrants                                            510,526        1,000,000                0
  Closing costs in connection with conversion
     of notes payable to common stock
     and retirement of Class B preferred stock                           0         (229,926)               0
                                                               -----------      -----------      -----------
              Net cash provided by financing activities            820,810          961,340        1,633,162
                                                               -----------      -----------      -----------
Net (Decrease) Increase in Unrestricted Cash
   and Short-Term Investments                                      134,641         (181,537)      (1,577,519)
Unrestricted Cash and Short-Term
   Investments, beginning of year                                  127,059          308,596        1,886,115
                                                               -----------      -----------      -----------
Unrestricted Cash and Short-Term
  Investments, end of year                                     $   261,700      $   127,059      $   308,596
                                                               ===========      ===========      ===========

Supplemental Disclosure of Cash Flow Information:
  Cash paid for interest                                       $   280,967      $   169,223      $   102,161
  Cash paid for income taxes                                             0           12,700            9,700
  Common stock issued for notes payable and
    accrued interest                                                     0          711,903        1,040,170
  Retirement of Class B Preferred Stock                                  0          500,000                0
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-7
<PAGE>   31
                           GUNTHER INTERNATIONAL, LTD.

                          NOTES TO FINANCIAL STATEMENTS

                                 MARCH 31, 1997

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.

         On September 4, 1992, the Company and its stockholders entered into an
Acquisition Agreement (the Acquisition). Under the terms of the Acquisition, the
existing stockholders exchanged their shares of the Company's no par value
common stock for 190,000 shares of newly issued $.001 par value common stock.
Due to the substantial change in ownership of the Company and the assumption of
control of the Company's Board of Directors by the new stockholder group
resulting from the Acquisition, this transaction was accounted for as a purchase
of the Company by the new stockholder group as required by Accounting Principles
Board Opinion No. 16. In addition, under the provisions of Securities and
Exchange Commission Staff Accounting Bulletin No. 54, the purchase price has
been "pushed down" to the financial statements of the Company to reflect the new
stockholder group's investment in the Company to the extent acquired by the new
stockholder group. The Company adopted this accounting since the new stockholder
group acted as one entity in negotiating and executing the agreements to
consummate the Acquisition.


2.       Market and Operating Environment:

         From inception through fiscal 1996, the Company incurred losses from
operations. 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 customer needs.
The Company's products also face competition from other products and companies
with greater financial resources than the Company. Operating results improved
significantly during the fiscal years ended March 31, 1996 and 1997 and, the
Company achieved operating earnings in fiscal 1997 . Management believes
operating results will continue to improve and generate sufficient cash flow to
meet the Company's obligations in the normal course of business. However, the
Company may require additional financing to achieve increased levels of
operations.

         Since the Acquisition described in Note 1, the Company has been
successful in raising funds to support its operating needs through debt and
equity financing from its principal stockholders, private placements and an
initial public offering in December 1993. If it becomes necessary, the Company
would pursue additional financing through these or similar sources.


3.       Significant Accounting Policies:

Revenue recognition -

         The Company recognizes systems sales using the percentage of completion
method. Systems sales 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.
<PAGE>   32
Cash and short-term investments -

         For purposes of cash flow information, the Company considers cash and
short-term investments purchased with a maturity of three months or less to be
highly liquid investments. Amounts pledged to collateralize borrowings are
reflected as restricted cash and short-term investments in the accompanying
balance sheets.

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, 1997 and 1996, the Company had recorded an allowance of approximately
$23,000 and $9,000, respectively, for potential uncollectible accounts
receivable.

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                              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 is being
amortized over its estimated life of 20 years. As of March 31, 1997 and 1996,
accumulated amortization was $1,024,275 and $800,796, respectively. The
realization of the carrying value of the Company's assets, including the excess
of cost over fair value of net assets acquired, 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 excess of cost over fair
value of net assets acquired has been impaired, the Company will record a charge
reducing the carrying value.

Deferred preproduction costs -

         Certain preproduction costs incurred subsequent to determining the
feasibility of new product introductions are capitalized and are amortized over
a three-year period upon delivery of the first product. As of March 31, 1997 and
1996, accumulated amortization was $169,678 and $27,898, respectively.

Research and development -

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

Investment -

         The Company's investment at March 31, 1997 and 1996 represents an
ownership interest in a dockominium which was purchased in 1989 for an original
cost of approximately $80,000. This investment was written down to its estimated
net realizable value of $30,000 during 1992.
<PAGE>   33
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 ratably over the term of the contract.

Product warranties -

         The Company provides a warranty on each product for a period of 90 days
after installation and accrues the estimated cost of future warranty claims at
the time of shipment. Warranty expense for the years ended March 31, 1997, 1996
and 1995, totaled approximately $85,000, $123,000, and $95,000, respectively.

Income taxes -

         The Company accounts for income taxes using the provisions of the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". As of March 31, 1997 and 1996, 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
$3,200,000 and $3,400,000, 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, 1997, the Company has net operating loss carryforwards of
approximately $9,520,000 available to be applied against both future federal and
state taxable income. The federal and state loss carryforwards expire at various
dates from 1998 through 2012.

Royalty expense-

         The Company has royalty agreements with Connecticut Innovations, Inc.
and with certain stockholders (see Note 12). Royalties due under these
agreements are expensed as incurred.

Net income (loss) per share -

         Net income (loss) per share is computed using the weighted average
number of common shares outstanding during each period presented. For purposes
of computing primary net income (loss) per share, weighted average shares for
fiscal 1997, 1996 and 1995 were 4,220,769, 3,897,367 and 3,383,730,
respectively. For fiscal 1997, the weighted average shares for purposes of the
fully-diluted calculation was 4,587,275 and for fiscal 1996 and 1995, the effect
of conversion of the underlying securities would have been anti-dilutive.

Impairment of Long-Lived assets -

Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of the standard
did not have a material impact on the company's financial condition or results
of operations.
<PAGE>   34
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.


4.       Inventories:

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                                  1997                1996
                                                  ----                ----
         <S>                                   <C>                 <C>       
         Raw materials                         $1,261,274          $1,141,108
         Work-in-process                          101,161             202,636
                                               ----------          ----------
                                                1,362,435           1,343,744

         Less:  Valuation reserve                (100,000)            (31,337)
                                               ----------          ----------
                                               $1,262,435          $1,312,407
                                               ==========          ==========
</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, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                    1997           1996
                                                                    ----           ----
         <S>                                                    <C>             <C>        
         Costs incurred on uncompleted contracts                $2,496,666      $   684,384
         Estimated earnings                                      2,180,561          467,713
                                                                ----------      -----------
                                                                 4,677,227        1,152,097
         Less:  Billings to date                                (4,044,528)      (1,063,824)
                                                                ----------      -----------
                                                                $  632,699      $    88,273
                                                                ==========      ===========
         Included in the accompanying balance sheets 
           under the following captions:

         Costs and estimated earnings in excess of
           billings on uncompleted contracts                    $1,403,715      $   331,644

         Billings in excess of costs and estimated
           earnings on uncompleted contracts                      (771,016)        (243,371)
                                                                ----------     ------------
                                                                $  632,699      $    88,273
                                                                ==========      ===========
</TABLE>
<PAGE>   35
6.       Financing Arrangements:

         Notes payable and long-term debt at March 31, 1997 and 1996 consisted
of the following:

<TABLE>
<CAPTION>
                                                                                          1997             1996
                                                                                          ----             ----
          <S>                                                                         <C>              <C>        
          Line of credit, maximum of $500,000 (see below)                             $   500,000      $        --

          Line of credit, maximum of $1,750,000 (see below)                             1,701,169               --

          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                                              319,876          426,502

          Note payable to a vendor, non-interest bearing, payable beginning
            September 1, 1995 from revenues on maintenance contracts,
            unsecured                                                                      41,668          164,519

          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                                            27,405           28,973

          Line of credit, maximum of $300,000 available at March 31, 1996,
            bearing interest at prime (8.25% at March 31, 1996), maturing
            September 30, 1996, collateralized by restricted cash
            and short-term investments                                                         --          300,000

          Line of credit, maximum of $2,000,000 available at March 31, 1996
            bearing interest at prime, maturing October 31, 1996, secured by
            certain assets of two stockholders and directors of
            the Company                                                                        --        1,700,000

          Other                                                                            25,366           11,040
                                                                                      -----------      -----------
                                                                                        2,615,484        2,631,034
          Less: Short-term notes payable and
                current maturities of long-term debt                                     (401,866)        (666,325)
                                                                                      -----------      -----------
                                                                                      $ 2,213,618      $ 1,964,709
                                                                                      ===========      ===========
</TABLE>
<PAGE>   36
         As of March 31, 1997, maturities of notes payable and long-term debt,
were as follows:

<TABLE>
<CAPTION>
                   Fiscal year
                Ending March 31,                   Amount
                ----------------                   ------
                <S>                              <C>
                      1998                       $   401,866
                      1999                         2,198,329
                      2000                             6,056
                      2001                             5,770
                      2002                             3,463
                                                 -----------
                                                 $ 2,615,484
                                                 ===========
</TABLE>

         During the year ended March 31, 1997 the Company established a line of
credit with a bank which they used to pay off their previous line of credit. The
new line of credit agreement allows the Company to borrow $1,750,000 on facility
A and $500,000 on facility B. The Company must pay an annual commitment fee
equal to .75 percent of the average unused line of credit. Facility A bears
interest at prime (8.5% as of March 31, 1997) and the facility B bears interest
at prime plus one percent. Facility A is guaranteed and secured by a
stockholder, who is also a director. Both facilities are secured by all tangible
and intangible property of the Company and mature on July 30, 1998.


7.       Convertible Notes Payable:

         During fiscal 1994, the Company received $400,000 from two stockholders
in exchange for the Company's unsecured convertible notes payable bearing
interest at 8%. The Company also granted warrants to the noteholders to purchase
80,000 shares of the Company's common stock at $5.00 per share through December
20, 1997. These notes were convertible into common stock at a rate of $5.00 per
share.

         On May 27, 1994, the Company amended the note agreements and the notes
were converted into 106,666 shares of common stock at the rate of $3.75 per
share, which approximated fair market value at that date. The difference between
the fair market value of the shares issued and that called for under the
original conversion terms resulted in a charge of $99,998 which has been
reflected as debt conversion expense in the accompanying statement of operations
for the year ended March 31, 1995. Further, the related warrant agreements were
amended to provide for the purchase of 106,666 shares at $4.00 per share.

         On December 30, 1994, the holders of two unsecured promissory notes in
the principal amount of $550,986 agreed to exchange all claims under these notes
for unrestricted registered shares of common stock provided the Company register
such shares to be issued with the Securities and Exchange Commission by April
28, 1995. The agreement was subsequently extended until such time as the
registration of the shares was effective. In September 1995, the Company issued
178,659 shares of common stock in satisfaction of these notes payable and
related accrued interest.


8.       Capital Stock and Equity:

         In December 1993, the Company completed the sale of 1,000,000 units
(comprised of one share of common stock and one warrant to purchase common
stock) for $5,000,000. In addition, in January 1994, the underwriter exercised
its option to purchase an additional 150,000 units for $750,000. Underwriting
commissions and expenses associated with these sales of common stock and
warrants aggregated $1,159,769.
<PAGE>   37
         The warrants issued in connection with the sale of the units entitle
the holder 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. The warrants may
be redeemed by the Company for $.05 per warrant subsequent to December 20, 1994
provided that the closing bid price for the Company's common stock equals or
exceeds $8.25 per share for 20 trading days within any 30 consecutive trading
day period ending not more than 10 days prior to the notice of the call.

         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 by certain events. The
Underwriters' Warrants are non-callable and expire in December, 1998. The
Company has agreed that the warrants, if any, issued to the Underwriters, upon
exercise of the Underwriters' Warrants will not be subject to repurchase by the
Company.

         The Series B common stock was issued in connection with the Company's
public offering. The holders of Series B common stock are entitled to elect the
number of directors of the Company equal to one more than one half of the total
number of directors comprising the Company's Board of Directors through December
1998.

         The Company has outstanding 106,666 warrants to purchase one share of
the Company's common stock for $4.00 per share which are exercisable until
December 1997. These warrants were issued in connection with the Company's
convertible notes payable (see Note 7). The Company also has outstanding 50,000
warrants to purchase one share of the Company's common stock for $4.00 per share
which were issued in connection with the notes payable to two individuals and an
affiliated entity (see Note 11). These warrants expire in December 1997. 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 (see Note 11). These warrants expire in August 2000.

         In connection with the Acquisition (see Note 1), 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 remain outstanding at March 31, 1997. The warrants expire five years
from date of issuance and are exercisable any time within this term.

         Certain stockholders of the Company are required to vote their shares
of common stock until June 1, 1998 for certain individuals as directors of the
Company.


9.       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. These options are 
fully vested and will expire on December 31, 1999.

         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 connection with stock option agreements entered into in fiscal 1995,
1996 and 1997 with four employees, the Company granted options under the above
plan to acquire up to an aggregate of 125,000, 35,000 and 20,000 shares,
respectively, of the Company's common stock at exercise prices of $3.25, $3.625
and $7.38 per share, respectively, which approximated fair market value at the
dates of the grants. One third of the options
<PAGE>   38
become exercisable on each of the first, second and third anniversaries of the
grant date. The options expire February 23, 2000, July 17, 2000 and May 27,
2002, respectively.

         In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, 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 in fiscal 1996 and
1997 using the Black-Scholes option pricing model prescribed by SFAS 123. The
weighted average assumptions used are as follows:

<TABLE>
<CAPTION>
                                                   1997                  1996
                                                   ----                  ----
         <S>                                      <C>                    <C>  
         Risk free interest rate                  6.58%                  5.88%
         Expected dividend yield                  None                   None
         Expected lives                           5 years                5 years
         Expected volatility                        64%                    64%
</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 income (loss)
applicable to common stockholders and pro forma net income (loss) per common
share would have been:

<TABLE>
<CAPTION>
                                                                                    1997                  1996
                                                                                    ----                  ----
         <S>                                                                      <C>                  <C>
         Net income (loss) earnings applicable to common stockholders:
              As reported                                                         $258,889             $(879,555)
              Pro forma                                                            233,689              (879,555)
         Pro forma net income (loss) earnings per common stock:
              As reported                                                             0.06                 (0.23)
              Pro forma                                                               0.06                 (0.23)
</TABLE>
<PAGE>   39


         Because SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

         A summary of the status of the Company's two stock option plans at
March 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table below:

<TABLE>
<CAPTION>
                                                 1995                        1996                         1997
                                         ---------------------        --------------------        -----------------------
                                                       Wtd Avg                     Wtd Avg                        Wtd Avg
                                         Shares       Ex Price        Shares      Ex Price        Shares         Ex Price
                                         ------       --------        ------      --------        ------         --------
<S>                                      <C>          <C>             <C>         <C>             <C>            <C>  
Outstanding at beginning of year           95,000       $1.88         220,000       $2.66          255,000         $2.79
Granted                                   125,000        3.25          35,000        3.63           20,000          7.38
                                          -------       -----         -------       -----          -------         -----
Outstanding at end of year                220,000       $2.66         255,000       $2.79          275,000         $3.12
                                          =======       =====         =======       =====          =======         =====
Exercisable at end of year                 95,000       $1.88         136,666       $2.29          190,000         $2.59
                                          =======       =====         =======       =====          =======         =====
Weighted average fair value
     of options granted                                                 $2.16                        $4.45
                                                                         ====                         ====
</TABLE>

10.      Class B Senior, Non-Convertible, Redeemable Preferred Stock:

         The Company's certificate of incorporation authorizes the issuance of
500 shares of Class B senior, non-convertible, redeemable preferred stock. The
Class B senior, non-convertible, redeemable preferred stock (Class B preferred
stock) was issued to Connecticut Innovations, Inc. in connection with the
Development Agreement (see Note 12). The holder of Class B preferred stock was
not entitled to receive dividends nor to vote upon any matter submitted to
stockholders, except (i) as required by applicable law and (ii) the number of
authorized or terms of Class B preferred stock could not be changed without the
consent of the holders of all such shares.

         Each share of Class B preferred stock was required to be redeemed by
the Company at a redemption price of $1,000 per share ($500,000 at March 31,
1995), to the extent there are legally available funds for such purpose, upon
the first to occur of the following events: (i) September 4, 1995 (ii) a
conveyance of all or substantially all of the capital stock or assets of the
Company or (iii) a merger of the Company with or into another corporation
(unless, upon consummation thereof, the existing holders of voting securities of
the Company own directly or indirectly greater than 50% of the voting power to
elect directors of the surviving or acquiring corporation). The Company was
required to pay the redemption price in three equal installments due on the
third, sixth and ninth month following the redemption event. If sufficient funds
were not legally available to redeem all of the shares of Class B preferred
stock then due to be redeemed, any and all unredeemed shares would be carried
forward and redeemed to the full extent the Company had funds legally available
for such purpose.

         In the event of any liquidation, dissolution or winding up of the
affairs of the Company, each share of Class B preferred stock had a preference
of $1,000 per share ($500,000 at March 31, 1995) to any distribution of any of
the assets or surplus funds of the Company to the holders of any class or series
of preferred stock ranking junior to the Class B preferred stock, or the common
stock of the Company.

         Effective December 31, 1995, the Company entered into a new agreement
with the holders of the Class B preferred stock whereby the stockholder agreed
to surrender all outstanding shares of Class B preferred stock (see Note 12).
The Company recorded this surrender net of related expenses, as additional
paid-in capital.
<PAGE>   40
11.      Related Party Transactions:

         At March 31, 1996, the Company had accounts and notes receivable from
certain stockholders totaling $19,177. These receivables are non-interest
bearing and have been offset with royalties due these individuals (see Note 12).

         During the year ended March 31, 1994, the Company borrowed $855,000
from two stockholders and directors of the Company under note agreements. These
notes bear interest at 8% and were due on demand. These noteholders converted
$400,000 of these amounts due from the Company to 80,000 units in connection
with the public offering. Effective March 31, 1995, the remaining $455,000
principal plus accrued interest of $85,172, aggregating $540,172, was converted
to 196,426 shares of common stock at a conversion rate of $2.75 per share. These
individuals have also provided assets as collateral for the Company's line of
credit (see Note 6).

         During the year ended March 31, 1995, the Company borrowed $200,000
from two individuals and an affiliated entity who are stockholders of the
Company. These notes bear interest at 8.5% and were due on April 30, 1995. These
notes were convertible, at the creditors' option, at any time until the due date
into 50,000 shares of the Company's common stock at a conversion price of $4.00
per share. In connection with the borrowings, the Company granted the creditors
warrants to purchase up to an aggregate of 50,000 shares of common stock at
$4.00 per share (see Note 8). Both notes were repaid in fiscal 1996.

         During the year ended March 31, 1996, the Company borrowed $100,000
from an individual who is a stockholder of the Company. The note bears interest
at 8.5% and was due February 15, 1996. This note was convertible, at the
creditors' option, at any time until the due date into 25,000 shares of the
Company's common stock at a conversion price of $4.00 per share. In connection
with the borrowing, the Company also issued warrants to purchase up to 25,000
shares of common stock at $4.00 per share. On March 28, 1996, the Company issued
25,000 shares of common stock in satisfaction of this note.

         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 year and the
maturity date is September 9, 1998. This loan is included in accounts and notes
receivable from stockholders at March 31, 1997.


12.      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.

         In August 1992, the Agreement referred to above was modified and the
unpaid reimbursements and royalties which approximated $500,000 were converted
into Class B preferred stock of the Company.

         In September 1993, the Agreement was further modified such that a
royalty of three percent of net sales of the sponsored products would be
required for the period through March 31, 1995 with a minimum quarterly payment
of $27,000. The above royalties were to be paid until total royalties and
redemptions under the Class B senior, non-convertible, redeemable preferred
stock of $903,000 were paid.

         Effective December 31, 1995, the Company completed negotiations with
CII, and 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 
<PAGE>   41
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.

         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 up to
a maximum of $775,000 and provides for certain minimum annual royalty payments,
payable quarterly. The remaining obligation is as follows:

<TABLE>
<CAPTION>
                                              Total Minimum
            Calendar Year                 Payments for the Year
            -------------                 ---------------------
            <S>                           <C>     
               1998                             $100,000
               1999                              100,000
               2000                              125,000
               2001                              125,000
               2002                              175,000
                                                --------
                                                $625,000
                                                ========
</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.

         Total royalty expense for the year ended March 31, 1995 was $130,528.
The Company recorded a net benefit of $89,816 for the year ended March 31, 1996,
due to the forgiveness of prior royalties owed under the prior agreement and
current agreements. The Company recorded $37,500 as royalty expense for fiscal
1997.

Contingencies -

         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.

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, 1997, 1996 and 1995, royalties
expensed under this agreement totaled $147,567, $125,332 and $95,654,
respectively.

Leases -

         The Company leases its office and manufacturing facility under an
operating lease which provides for monthly rental of $27,500. 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
<PAGE>   42
2001. Lease expense for the years ended March 31, 1997, 1996 and 1995, totaled
approximately $308,000, $258,000 and $292,000, respectively. Future minimum
rental payments for equipment total $19,000 per year until fiscal year 1999.


13.      Employee Benefit Plans:

         The Company adopted 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.


14.      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, 1997 and 1996, sales to one customer
accounted for 26% and 16.7% of net sales, respectively. During the year ended
March 31, 1995, sales to two customers accounted for 10.8% and 10.4% of net
sales.


15.      Recently Issued Accounting Standards:

         In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which establishes new standards for computing and
presenting earnings per share. SFAS 128 is effective for financial statements
issued for periods ending after December 31, 1997 and earlier adoption is not
permitted. The Company has not quantified the effect of adopting the new
standard.