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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, 2001.

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934 FOR THE TRANSITION PERIOD FROM                   TO
                        .

                        COMMISSION FILE NUMBER: 0-22994

                          GUNTHER INTERNATIONAL, LTD.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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

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

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

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

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<CAPTION>
              TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
              -------------------                   -----------------------------------------
<S>                                              <C>
                      None
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             SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

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

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The Registrant's revenues for the most recent fiscal year were $24.4 million.

The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the average of the reported closing bid and asked prices
of such stock on June 2, 2001, as reported by the OTC Bulletin Board, was $1.7
million. The number of shares of the Registrant's Common Stock outstanding as of
June 8, 2001 was 4,291,769.

  DOCUMENTS INCORPORATED BY REFERENCE.  The information required by Part III of
this Annual Report on Form 10-KSB is incorporated by reference to the
Registrant's definitive proxy statement to be distributed to stockholders in
connection with the 2001 Annual Meeting of Stockholders. Such proxy statement is
expected to be filed with the Commission within one hundred and twenty (120)
days of the close of the fiscal year.

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

                                     PART I

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<S>       <C>                                                           <C>
Item 1.   Description of Business.....................................    1
            General...................................................    1
            Development of the Business...............................    1
            Finishing Systems.........................................    2
            Strategy..................................................    3
            Systems...................................................    3
            Inc.jet...................................................    6
          Marketing and Sales.........................................    7
          Customers...................................................    7
          Manufacturing...............................................    8
          Installation and Customer Service...........................    8
          Research and Development....................................    9
          Competition.................................................    9
          Patents and Proprietary Rights..............................    9
          Employees...................................................   10
Item 2.   Description of Property.....................................   10
Item 3.   Legal Proceedings...........................................   10
Item 4.   Submission of Matters to a Vote of Security Holders.........   11
                                  PART II
Item 5.   Market for Common Equity and Related Stockholder Matters....   12
Item 6.   Management's Discussion and Analysis or Plan of Operation...   13
            Summary Financial Data....................................   13
            Results of Operations.....................................   14
            Liquidity and Capital Resources...........................   15
            Inflation.................................................   16
            Forward Looking Statements................................   16
Item 7.   Financial Statements........................................   16
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.......................................................   17
Item 10.  Executive Compensation......................................   17
Item 11.  Security Ownership of Certain Beneficial Owners and
            Management................................................   17
Item 12.  Certain Relationships and Related Transactions..............   17
                                  PART IV
Item 13.  Exhibits and Reports on Form 8-K............................   18
Signatures............................................................   22
Index to Financial statements.........................................  F-1
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                                       (i)
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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 software.

     The Company also designs, manufactures and markets high-speed ink-jet
printers to original equipment manufacturers (OEM), who incorporate the printers
into tabletop inserters and folders, copiers, stand alone printers and other
applications. In connection with these sales, the Company sells ink to the
end-users of the printers.

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 1992, the Company completed a restructuring that resulted in the
infusion of 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, which was
completed during December 1993 and January 1994. The initial public offering
generated net proceeds of $4.6 million.

     In fiscal 1999, the Company entered into a $5.7 million comprehensive
financing transaction with its then-existing senior lender (the "Bank"), the
Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC, the proceeds
of which were utilized to restructure and replace the Company's then-existing
senior line of credit, fund a full settlement with the Company's third-party
service provider and provide additional working capital to fund the Company's
ongoing business operations. Under the terms of the transaction, Gunther
Partners LLC loaned an aggregate of $4 million to the Company. At the same time,
the Bank reached an agreement with the Estate, which had guaranteed a portion of
the Company's senior line of credit, whereby the Estate consented to the
liquidation of approximately $1.7 million of collateral and the application of
the proceeds of such collateral to satisfy and repay in full a like amount of
indebtedness outstanding under the senior credit facility. The balance of the
indebtedness outstanding under the senior credit facility, approximately
$350,000, was repaid in full from the proceeds of the new financing. The Company
executed a new promissory note, bearing interest at 5.44% per annum, in favor of
the Estate evidencing the Company's obligation to repay the amount of the
collateral that was liquidated by the Bank.

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

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

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     Through June 30, 1999, the Company had made principal payments to Gunther
Partners LLC aggregating $800,000, plus interest. In September 1999, the Company
experienced a deficiency in operating cash flow and Gunther Partners LLC agreed
to lend the Company an additional $800,000 and to otherwise restructure the
payment terms of the note. As amended, the outstanding balance due Gunther
Partners LLC is due in principal installments of $200,000 commencing on October
1, 2001 through April 1, 2002; $100,000 on May 1, 2002; and $2,500,000 on
October 1, 2003. If, at any time prior to October 1, 2001, the accumulated
deficit of the Company improves by $1.0 million or more compared to the amount
at June 30, 1999 of $14.4 million (a "Triggering Event"), then the principal
payments otherwise due from October 1, 2001 through May 1, 2002 shall be become
due in consecutive monthly installments beginning on the first day of the second
month following the Triggering Event. On April 4, 2000, the Company borrowed an
additional $500,000 from Gunther Partners LLC.

     In June 2001, the Company entered into a recapitalization agreement (the
"Recapitalization Agreement") with the Estate, Gunther Partners LLC and certain
other stockholders. The Recapitalization Agreement provides that the Company
will effectuate a registered public offering ("Rights Offering") of up to
16,000,000 shares of its Common Stock (the "Offered Shares") to its existing
stockholders by subscription right on a pro-rata basis at a subscription price
of $0.50 per share. The rights to subscribe to the Offered Shares will be
granted at a ratio to be determined by the Board of Directors of the Company
(the "Basic Subscription Right"). In addition, the Company's stockholders will
be granted the right to "oversubscribe" for additional shares not purchased by
other stockholders, up to the total amount of the Offered Shares (the
"Oversubscription Right"). In the event that the Company's stockholders, other
than Gunther Partners LLC, do not subscribe for and purchase all 16,000,000 of
the Offered Shares, Gunther Partners LLC will subscribe for and purchase from
the Company in the Rights Offering a number of shares equal to 16,000,000 less
the number of shares subscribed for stockholders other than Gunther Partners
LLC, up to a maximum of 14,000,000 shares. The net proceeds of the Rights
Offering (a minimum of $7 million less offering expenses), will be used to repay
in full the notes payable to Gunther Partners LLC ($4.5 million) and a
stockholder and director ($500,000), to purchase all notes payable to the Estate
for a total of $500,000 and to purchase 919,568 shares of the Company's Common
Stock held by the Estate for $137,935 (or $0.15 per share). The balance of the
net proceeds from the Rights Offering will be used for general working capital
purposes.

FINISHING SYSTEMS

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

     Computer-directed printers are employed, in conjunction with mainframe or
personal computers, to produce documents. The largest printers most often are
placed in centralized print centers that are near mainframe computers. More
recently developed non-impact laser printers that print five to 25 sheets per
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. There is a large concentration of non-impact laser printers in
the insurance, finance, and banking industries, and government.

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

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without stopping the assembly process and without incurring the expense of
designing special mainframe computer programs.

STRATEGY

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

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

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

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

     Focus on Customer Productivity and Costs.  The Company focuses its product
development efforts on further increasing customer productivity and the
reduction of system costs while maintaining the document integrity customers
require.

     Collaborative Development.  The Company will continue to collaborate with
customers (including organizing and conducting user seminars) in order to
develop a better understanding of customer needs and to offer comprehensive
solutions. The Company's newest product, the inc.jet imager, was developed as a
result of this collaborative effort.

SYSTEMS

     The Company's current principal products are the Series III Billing System,
the EP-4000 Electronic Publishing System and the MS-6000 Mailing System.

     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.

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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
eight 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.

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

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

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

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

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

     F-300 Feeder.  The F-300 is a high speed, vacuum fed system. The first
stage of the feeder "shingle-feeds" the sheets from the bottom of the bin to the
second stage of the feeder. Optimum stack height in the second stage is
maintained by microprocessor control of the first stage. A Laser Reader or CCD
Linear Image Reader is located in the second stage, where the sheets are read
and fed individually at rates of up to 30,000

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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.

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

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

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

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

     Flat 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.

     Flat Metering.  This module provides a means for automatically applying
postage to flat envelopes of varying thickness up to 180 sheets, thereby
avoiding the 0.25" thickness limitation of a standard postage meter. The module
applies postage to a self-stick label using a standard postage meter, after
which the label is fed to a transfer station and applied to the envelope. System
software calculates the weight of each package and automatically applies the
correct postage. The postage label can be applied in any corner of the envelope,
in either portrait or landscape orientation.

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

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

     Convertible Systems.  EP and MS systems can be configured to work in both
flat and folded modes, using a quick-connect and disconnect 10 x 13 flat
enveloper or folded mail enveloper. This feature allows a

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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.

INC.JET(TM)

     inc.jet, Inc. is a wholly owned subsidiary of Gunther International, Ltd.
that produces an exclusive, environmentally safe letter quality (600
dot-per-inch, or dpi) ink jet printer (Imager) that is designed specifically for
high resolution, high speed, low cost industrial printing applications.
Initially targeted as an envelope printer to complement the Company's line of
intelligent document automation and mail processing systems, the inc.jet(TM)
Imager provides a solution to problems that were voiced by current and
prospective customers -- high quality personalized printing on envelopes at
document automation speeds for a low cost.

     Secondary concerns were ease of use and maintenance, as well as the size
and packaging. The inc.jet(TM) Imager can be integrated into mail processing
systems or other Original Equipment Manufacturer (OEM's) devices for
applications such as envelope printing, web printing, carton marking, etc.

     The inc.jet technology is the result of a strategic partnership between the
Company and the Hewlett-Packard Company's (HP) Specialty Printing Systems
Operation (SPS). The agreement allows for cross licensing and marketing of HP's
thermal ink jet technology and the Company's inc.jet Imagers, providing
customers with a printing process that is cleaner and more reliable than current
methods, at significant cost savings.

     SPS was formed to develop industrial printing markets for its 45 Series
Thermal Ink Jet Printing Cartridges (cartridges). As part of this initiative SPS
initially licensed a select group of companies to use their technology to
develop printers specifically for industrial printing applications. The primary
development task was to create the technology to fire the cartridges in such a
way that they could remain stationary, while the product passed by at a high
rate of speed. This was in contrast to the HP desktop printers, which move the
cartridge back and forth across the page to print.

     The inc.jet Imager is a compact modular printer that fits in the palm of a
hand (5.5" x 3.5" x 4.5") and weighs under 2 pounds. The print drivers and
electronics all reside in the Imager. Commands to control the Imager are
communicated via a standard personal computer. These features are very important
in that they make for a printer that lends itself to integration into a wide
range of OEM products, such as small tabletop envelope-addressing machines.
Although the Imager originally started as peripheral device for the Company's
finishing systems, the vast majority of inc.jet's revenue stream is now derived
from non-Company applications and customers (i.e., OEMs and end-user ink
customers). It was decided early on that inc.jet would be the print engine
supplier, while OEMs would be responsible for building complete systems for the
end user. This would allow inc.jet to exploit its high-margin Imager product
without the additional overhead required to service thousands of end users.

     In addition to the mail addressing market, inc.jet sells its Imager to OEM
customers in the commercial printing and packaging markets. The inc.jet Imager
markets include:

     - Postage printing

     - Envelop printing and address labeling

     - Box and carton labeling

     - Printing of variable data on commercial web press applications

     - Tag printing

     - Spot color and anti-fraud marking of originals

     In addition to Imagers, inc.jet(TM) is a reseller of the consumables
(cartridges) that are manufactured for industrial printing applications by SPS.
The inc.jet business model is based, in part, on creating a significant

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revenue stream from annuity ink sales. In theory, ink revenues should continue
to increase monthly with the installed base of Imagers, eventually outpacing
Imager revenue. The consumables that inc.jet sells to the commercial and
industrial printing market include the following:

     - Bulk Ink Supplies (cartridges with a high capacity ink reservoir)

     - Fast-Dry-Black cartridges

     - Spot Color (red, blue, green, & yellow)

     - Versatile Black (specifically formulated for coated stocks)

MARKETING AND SALES

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

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

CUSTOMERS

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

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

     As of March 31, 2001, the Company has a backlog of high-speed assembly
systems aggregating approximately $1.3 million. Backlog consists of total
contract price less revenue recognized to date for all signed orders on hand.
Typically, approximately 50% of the purchase price of each system is received by
the Company at the time an order is placed by a customer and machine
specifications are completed, 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.

                                        7
<PAGE>   10

MANUFACTURING

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

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

INSTALLATION AND CUSTOMER SERVICE

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

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

     Historically, the Company had contracted with a third-party service
provider to perform the Company's service obligations under the maintenance
agreements with its customers. During the third quarter of fiscal 1999, the
Company made a strategic decision to assume the maintenance services on
predominantly all current and future maintenance contracts. By assuming the
maintenance services, management believes that, once an appropriate
infrastructure has been developed, gross profit as a percentage of maintenance
sales will increase by eliminating certain duplicate costs inherent in a
third-party servicing relationship. The transition of maintenance services was
completed during the year ended March 31, 2000.

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

     The typical cost to a customer of an annual maintenance contract is equal
to approximately 10% of the cost of the customer's system. For the fiscal year
ended March 31, 2001, revenues from customer maintenance agreements represented
approximately 41.6% of the Company's net sales. The Company believes that, as it
places more systems in service, maintenance revenues will represent an
increasing percentage of its net sales.
                                        8
<PAGE>   11

RESEARCH AND DEVELOPMENT

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

     For the fiscal years ended March 31, 2001 and 2000, the Company incurred
expenses of $1.6 million and $1.2 million, respectively, for research and
development activities.

COMPETITION

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

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

PATENTS AND PROPRIETARY RIGHTS

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

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

     In connection with 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 under the development agreement. Title to
the patents will be transferred back to the Company upon the fulfillment of its
obligations under the development agreement. The Company has also granted
certain additional security interests in its patents in connection with the
financing transactions consummated on October 2, 1998.

     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
                                        9
<PAGE>   12

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 infringments.

     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, 2001, the Company had 181 (178 at March 31, 2000) full-time
employees, consisting of 65 (62 at March 31, 2000) engaged in engineering,
development and manufacturing, 15 (16 at March 31, 2000) in marketing and sales
activities, 100 (91 at March 31, 2000) in customer services and 12 (9 at March
31, 2000) 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 lease requires payment of monthly rent in the amount of
$23,917 through April 30, 2006. Of the Company's space in Norwich, approximately
15,000 square feet is devoted to office and administrative uses, approximately
55,000 square feet to engineering, development and assembly activities, and
approximately 5,000 square feet to marketing, sales and customer service
functions. The Company believes that its facilities are adequately equipped and
maintained for present and planned operations.

ITEM 3.  LEGAL PROCEEDINGS.

     As previously reported, a purported class action lawsuit was filed against
the Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities laws. The action
was filed in the United States District Court for the District of Connecticut.
Among other things, the complaint alleged that the Company's financial
statements for the first three quarters of fiscal 1998 were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and Rule 10b-5 promulgated thereunder, and Section 20(a) of
the Exchange Act. The plaintiffs were seeking compensatory damages and
reimbursement for the reasonable costs and expenses, including attorney's fees'
incurred in connection with the action. In February 2001, the Company reached an
out-of-court settlement, which the Court approved in May 2001. Under the terms
of the settlement, the Company and the other defendants agreed to pay $595,000
to the plaintiffs, $380,000 of which was paid by the Company's directors' and
officers' liability insurance carrier and $215,000 of which was paid by the
Company.

                                        10
<PAGE>   13

     In a related matter, the Company announced that it has reached an agreement
in principle to conclude a nonpublic, informal investigation conducted by the
Division of Enforcement (the "SEC Staff") of the Securities and Exchange
Commission ("Commission") with regard to the circumstances surrounding the
Company's restatement of its fiscal year 1998 and 1997 financial statements.
Under the Company's offer of settlement, the Company will consent to the entry
by the Commission of an Order Instituting Public Administrative Proceedings
Pursuant to Section 21C of the Exchange Act. Making Findings and Imposing a
Cease and Desist Order (the "Order").

     In the proposed Order, the Company will agree, without admitting or denying
the Commission's findings, to cease and desist from committing or causing
violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act
pertaining generally to the preparation and filing of accurate financial
reports, the maintenance of adequate books and records and the maintenance of
adequate internal accounting controls. The Order will find that the Company
improperly recognized revenue for service contracts that should have been
deferred, improperly included accounts receivables in the Company's assets when
contracts for the sale of systems had not been signed by the end of the fiscal
year, failed to record a significant invoice from its largest vendor at year-end
and improperly reversed a liability. The Order will note that the Company
cooperated fully with the investigation and will impose no monetary penalties or
fines against the Company.

     Although the SEC Staff has recommended that the Commission accept the
Company's offer of settlement, the proposed Order has not yet been formally
approved by the Commission. SEC Staff recommendations to the Commission
customarily undergo review by the various Commission divisions and are subject
to the Commission's final approval.

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

     None.

                                        11
<PAGE>   14

                                    PART II

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

     The Common Stock of the Company is traded on the OTC Bulletin Board. The
Company had previously traded in the NASDAQ SmallCap market under the symbol
"SORT" until it was delisted on August 17, 1998 due to the Company's failure to
maintain capital and surplus of at least $1,000,000.

     The following table sets forth the high and low bid prices of the Company's
Common Stock for each quarter of fiscal 2000 and fiscal 2001, as reported by the
OTC Bulletin Board. These quotations represent prices between dealers and do not
include retail mark-ups, mark-downs or other fees or commissions and may not
represent actual transactions.

<TABLE>
<CAPTION>
                                                               BID PRICES
                                                           ------------------
FISCAL QUARTER                                              HIGH        LOW
--------------                                              ----        ---
<S>                                                        <C>        <C>
First Fiscal Quarter - 2000..............................  $3 3/4     $2 1/32
(April 1 - June 30, 1999)

Second Fiscal Quarter - 2000.............................  2 15/16    2 7/16
(July 1 - September 30, 1999)

Third Fiscal Quarter - 2000..............................  2 5/8      1 7/8
(October 1 - December 31, 1999)

Fourth Fiscal Quarter - 2000.............................  3          2 3/8
(January 1 - March 31, 2000)

First Fiscal Quarter - 2001..............................  2.5625     2.1875
(April 1 - June 30, 2000)

Second Fiscal Quarter - 2001.............................  2.625      2.25
(July 1 - September 30, 2000)

Third Fiscal Quarter - 2001..............................  2.25       0.5625
(October 1 - December 31, 2000)

Fourth Fiscal Quarter - 2001.............................  0.8125     0.4375
(January 1 - March 31, 2001)
</TABLE>

     On June 18, 2001, the high and low bid prices for the Company's Common
Stock were $0.93, as reported.

     As of June 10, 2001, there were approximately 74 record owners of the
Company's Common Stock. The Company believes there are approximately 900
beneficial owners of Common Stock. The Company has not paid dividends on its
Common Stock and intends for the foreseeable future to retain earnings, if any,
to finance the expansion and development of its business.

SALES OF UNREGISTERED SECURITIES

     During fiscal 2001, the Company granted two key employees stock options
covering an aggregate of 9,000 shares of Common Stock at exercise prices ranging
from $0.875 to $2.25 per share. The options vest ratably over a five-year period
and have a maximum duration of ten years.

     During fiscal 2001 the Company also credited an aggregate of 48,758 shares
of Common Stock to the accounts of five directors who were participating in the
Gunther International, Ltd. Directors' Equity Plan (the "Plan"). In accordance
with the terms of the Plan, each participating director is entitled to receive
grants of Common Stock in lieu of a quarterly cash retainer. The number of
shares which each director is entitled to receive each fiscal quarter is equal
to (a) $2,500, divided by (b) the fair market value of a share of Common Stock
as of the last business day of the quarter. Based upon this formula, 4,878
shares of Common Stock were credited in respect of the fiscal quarter ended June
30, 2000 (the fair market value of the Common Stock on the last business day of
the quarter being $2.5625 per share), 5,882 shares of Common Stock were credited
in respect of the fiscal quarter ended September 30, 2000 (the fair market value
of the Common Stock on the last business day of the quarter being $2.125 per
share), 16,667 shares of Common Stock were credited in

                                        12
<PAGE>   15

respect of the fiscal quarter ended December 31, 2000 (the fair market value of
the Common Stock on the last business day of the quarter being $0.75 per share)
and 21,331 shares of Common Stock were credited in respect of the fiscal quarter
ended March 31, 2001 (the fair market value of the Common Stock on the last
business day of the quarter being $0.4688 per share). Each director elected to
defer receipt of the shares credited to his account.

     No underwriters were used in connection with any of the foregoing
transactions and, accordingly, there were no underwriting discounts or
commissions. The issuance of these securities was exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) thereof and the rules
and regulations promulgated thereunder.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

SUMMARY FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                      YEAR ENDED     YEAR ENDED     YEAR ENDED
                                                       MARCH 31,      MARCH 31,      MARCH 31,
                                                         2001           2000           1999
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Sales:
  Systems...........................................  $14,250,642    $12,052,692    $11,896,553
  Maintenance.......................................   10,161,333      9,533,778      8,847,082
                                                      -----------    -----------    -----------
          Total sales...............................   24,411,975     21,586,470     20,743,635
                                                      -----------    -----------    -----------
Cost of sales:
  Systems...........................................    9,537,248      8,094,029      8,521,585
  Maintenance.......................................    8,105,760      8,289,268      6,684,135
                                                      -----------    -----------    -----------
          Total cost of sales.......................   17,643,008     16,383,297     15,205,720
                                                      -----------    -----------    -----------
Gross profit........................................    6,768,967      5,203,173      5,537,915
                                                      -----------    -----------    -----------
Operating expenses:
  Selling and administrative........................    4,555,441      4,143,774      4,581,853
  Research and development..........................    1,639,385      1,227,626      1,046,569
                                                      -----------    -----------    -----------
          Total operating expenses..................    6,194,826      5,371,400      5,628,422
                                                      -----------    -----------    -----------
Operating income (loss).............................      574,141       (168,227)       (90,507)
Interest expense, net...............................     (679,717)      (554,156)      (466,653)
Litigation expense..................................     (178,500)       (36,500)            --
                                                      -----------    -----------    -----------
Loss before cumulative effect of change in
  accounting principle..............................     (284,076)      (758,883)      (557,160)
Cumulative effect of change in accounting
  principle.........................................           --             --       (622,953)
                                                      -----------    -----------    -----------
Net loss............................................  $  (284,076)   $  (758,883)   $(1,180,113)
                                                      ===========    ===========    ===========
Per share:
Operating income (loss).............................  $      0.13    $     (0.04)   $     (0.02)
Interest expense, net...............................        (0.16)         (0.13)         (0.11)
Litigation expense..................................        (0.04)         (0.01)            --
                                                      -----------    -----------    -----------
Loss before cumulative effect of change in
  accounting principle..............................        (0.07)         (0.18)         (0.13)
Cumulative effect of change in accounting
  principle.........................................           --             --          (0.14)
                                                      -----------    -----------    -----------
Net loss............................................  $     (0.07)   $     (0.18)   $     (0.27)
                                                      ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                         2001           2000
                                                      -----------    -----------
<S>                                                   <C>            <C>            <C>
Current assets......................................  $ 5,553,949    $ 5,682,690
Total assets........................................    9,554,164      9,616,566
Current liabilities.................................    6,072,998      7,310,139
Long-term debt, less current maturities.............    6,735,993      5,277,178
Stockholders' equity (deficit)......................   (3,254,827)    (2,970,751)
</TABLE>

                                        13
<PAGE>   16

RESULTS OF OPERATIONS

  Fiscal Year ended March 31, 2001
  Compared to Fiscal Year ended March 31, 2000

     The net loss for fiscal year 2001 was $(284,000), or $(0.07) per share,
compared to $(759,000), or $(0.18) per share, for fiscal year 2000. Operating
income for fiscal year 2001 was $574,000, or $0.13 per share, compared to an
operating loss of $(168,000), or $(0.04) per share for fiscal year 2000.

     Systems sales include sales of high-speed assembly systems, upgrades to
previously sold systems and inc.jet imager systems, ink and ancillary products.

     Systems sales for fiscal year 2001 increased $2.2 million, or 18.2%, to
$14.3 million from $12.1 million in fiscal year 2000. The increase in systems
sales was due to an increase in both high-speed assembly systems and inc.jet
imager sales. Sales of high speed assembly systems for fiscal year 2001
increased to $11.9 million, or 16.5%, from $10.2 million in fiscal year 2000.
Backlog consists of total contract price less revenue recognized to date for all
signed orders on hand. A summary of orders, sales and backlog for the each of
the last four fiscal quarters for the high speed assembly systems and related
upgrades is as follows:

<TABLE>
<CAPTION>
                                        MARCH 31,    DECEMBER 31,    SEPTEMBER 30,    JUNE 30,
                                          2001           2000            2000           2000
                                        ---------    ------------    -------------    --------
                                                            (IN MILLIONS)
<S>                                     <C>          <C>             <C>              <C>
Backlog, beginning of period..........    $ 3.7         $ 5.6            $ 3.4         $ 4.2
Orders................................      1.3            .9              4.9           1.9
Sales.................................     (3.7)         (2.8)            (2.7)         (2.7)
                                          -----         -----            -----         -----
Backlog, end of period................    $ 1.3         $ 3.7            $ 5.6         $ 3.4
                                          =====         =====            =====         =====
</TABLE>

     Inc.jet sales in fiscal year 2001 increased to $2.4 million, or 27.6%, from
$1.9 million in fiscal year 2000. Inc.jet sales comprised 16.6% of total systems
sales in fiscal year 2001 compared to 15.4% in fiscal year 2000. The increase in
sales is primarily due to an increased market acceptance for the imager and an
increase in ink sales to end users.

     Maintenance sales increased $628,000, or 6.6%, to $10.2 million in fiscal
year 2001 from $9.5 million in fiscal year 2000 as a result of a larger number
of systems under service contract from shipments during the year and
inflationary price increases in service contracts between the periods.

     Gross profit increased by $1.6 million, or 30.1%, to $6.8 million in fiscal
year 2001 from $5.2 million in fiscal year 2000. The gross margin on systems
sales increased to 33.1% in fiscal year 2001 from 32.8% in fiscal year 2000. The
gross margin as a percentage of sales of systems remained relatively stable at
28%. The gross margin on maintenance sales increased to 20.2% in fiscal year
2001 from 13.1% in fiscal year 2000. The increase in the gross margin on
maintenance sales is primarily attributable to a decrease in overall maintenance
costs of 2.2% while revenues increased by 6.6%. During fiscal year 2000, the
Company was transitioning from using a third party service provider to providing
maintenance services with Company employees. During the transition, the Company
incurred certain costs necessary to build a service department infrastructure,
including the hiring of additional support personnel, while still incurring
costs from the third party service provider. The Company's transition expenses
were higher than expected because the number of customer service engineers
transitioning from the third party service provider were less than anticipated.
This resulted in the Company having to recruit and train more personnel than
anticipated and to incur additional expenses to provide customer support from
the Connecticut location to customer sites. The Company also incurred an
increase in service parts costs during the transition period. These increased
costs followed preventive maintenance reviews by Company personnel at various
sites. The Company found that in certain sites a substantial amount of time and
materials were required to bring the systems to a higher level of operation the
Company considers appropriate for those sites. All sites were transitioned as of
March 31, 2000.

     Selling and administrative expenses increased $411,000, or 10%, to $4.6
million in fiscal year 2001 from $4.1 million in fiscal year 2000. Selling and
administrative expenses, as a percentage of total revenues, for fiscal years
2001 and 2000 were 18.7% and 19.2%, respectively. The increase in selling and
administrative

                                        14
<PAGE>   17

expenses is primarily attributable to an increase in commissions and royalties,
both of which are based on revenues, an increase in costs associated with the
Company's Quality Initiative Program and the Company's biennial Users'
Conference.

     Research and development expenses increased $412,000, or 33.5%, to $1.6
million in fiscal year 2001 from $1.2 million in fiscal year 2000. The increase
in the research and development expenses was primarily attributable the new
Series W system introduced at the industry trade show during the third fiscal
quarter.

     Interest expense increased $126,000 to $680,000 in fiscal year 2001 from
$554,000 in fiscal year 2000. The increase was due to an increase in debt.

LIQUIDITY AND CAPITAL RESOURCES

     For fiscal 2001 and 2000, the Company incurred net losses of $(284,076) and
$(758,883), respectively. For fiscal year 2001, cash of $744,304 was provided by
operations while in fiscal year 2000 cash used for operations was $1,083,901. At
March 31, 2001, the Company has a deficiency in working capital of $519,049 and
a stockholders' deficit of $3,254,827. At March 31, 2001, backlog for high-speed
assembly system and upgrade orders, consisting of total contract price less
revenue recognized to date for all signed orders on hand, was $1.3 million as
compared to $4.2 million at March 31, 2000.

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

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

     As noted above, in June 2001, the Company entered into the Recapitalization
Agreement. The Recapitalization Agreement provides that the Company will
effectuate a registered public offering ("Rights Offering") of up to 16,000,000
shares of its Common Stock (the "Offered Shares") to its existing stockholders
by subscription right on a pro-rata basis at a subscription price of $0.50 per
share. The net proceeds of the Rights Offering (a minimum of $7 million less
offering expenses), will be used to repay in full the notes payable to Gunther
Partners LLC ($4.5 million) and to the Stockholder and Director ($500,000), to
purchase all notes payable to the Estate for a total of $500,000 and to purchase
919,568 shares of the Company's Common Stock held by the Estate for $137,935 (or
$0.15 per share). The balance of the net proceeds from the Rights Offering will
be used for general working capital purposes.

     In connection with the Recapitalization Agreement, the Company will
recognize an extraordinary gain of $1.3 million on the purchase of the notes
payable to the Estate. If the Recapitalization Agreement were fully

                                        15
<PAGE>   18

implemented at March 31, 2001 and the minimum proceeds of $6.8 million, net of
expenses, were received, the pro forma capitalization would be as follows:

<TABLE>
<CAPTION>
                                                           RECAPITALIZATION
                                           AS REPORTED       ADJUSTMENTS        PRO FORMA
                                           ------------    ----------------    ------------
<S>                                        <C>             <C>                 <C>
Long-term debt, including current
  maturities.............................  $  6,753,038       $6,676,593       $     76,445
                                           ------------       ----------       ------------
Stockholders' equity (deficit):
Common Stock.............................         4,292           14,000             18,292
Treasury Stock...........................            --         (137,935)          (137,935)
Additional paid-in capital...............    12,188,556        6,613,500         18,802,056
Accumulated Deficit......................   (15,447,675)       1,349,093        (14,098,582)
                                           ------------       ----------       ------------
                                             (3,254,827)       7,838,658          4,583,831
                                           ------------       ----------       ------------
Total capitalization.....................  $  3,498,211       $1,162,065       $  4,660,276
                                           ============       ==========       ============
</TABLE>

     The proceeds from the Rights Offering will eliminate principal payments of
$1.7 million and interest payments of $400,000 that would have been due in the
next twelve months on existing debt.

     On a going forward basis, management believes that the working capital
provided by the Rights Offering and cash generated from operations will be
sufficient to meet the Company's cash flow needs for the next fiscal year. The
Company's cash needs may be affected by a number of factors, however, many of
which are beyond the control of management. See "Forward Looking Statements,"
below. Thus, there can be no assurance that the Company will not need
significantly more cash than is presently forecasted by management or that the
Company's current and expected sources of cash will be sufficient to fund the
Company's ongoing operations.

INFLATION

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

FORWARD-LOOKING STATEMENTS

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

ITEM 7.  FINANCIAL STATEMENTS.

     The financial statements required by this item are presented on pages F-1
through F-14 immediately after the signature page of this report.

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

     None.
                                        16
<PAGE>   19

                                    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
2001 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2001. 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
2001 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2001. 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
2001 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2001. 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
2001 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2001. 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.

                                        17
<PAGE>   20

                                    PART IV

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

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

<TABLE>
<C>    <S>
 3.1   Restated Certificate of Incorporation of the Company (filed
       as Exhibit 3(i) to the Company's Quarterly Report on Form
       10-QSB for the fiscal quarter ended December 31, 1998,
       Commission File No. 33-70052-B, and incorporated herein by
       reference).
 3.2   By-Laws of the Company, as amended (filed as Exhibit 3(iv)
       to the Company's Quarterly Report on Form 10-QSB for the
       fiscal quarter ended December 31, 1998, Commission File No.
       33-70052-B, and incorporated herein by reference).
10.1   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).
10.2   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).
10.3   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).
10.4   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).
10.5   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).
10.6   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).
10.7   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).
10.8   Warrant, dated October 20, 1993, to purchase 40,000 shares
       of Common Stock issued to Mark Fisher (filed as Exhibit
       10(vvv) to the Company's Registration Statement on Form
       SB-2, Commission File No. 33-70052-B, and incorporated
       herein by reference).
10.9   Warrant, dated January 9, 1995, to purchase 13,333 shares of
       Common Stock issued to Mark Fisher (filed as Exhibit 10.49
       to the Company's Annual Report on Form 10-KSB/A dated June
       26, 1995, and incorporated herein by reference).
10.10  Warrant, dated January 12, 1995, to purchase 10,000 shares
       of Common Stock issued to Michael Jesselson and Linda
       Jesselson Trustees UIT 3/27/84 FOB Samuel Joseph Jesselson
       (filed as Exhibit 10.51 to the Company's Annual Report on
       Form 10-KSB/A dated June 26, 1995, and incorporated herein
       by reference).
</TABLE>

                                        18
<PAGE>   21

<TABLE>
<S>        <C>
    10.11  Warrant, dated January 12, 1995, to purchase 10,000 shares of Common Stock issued to
           Michael Jesselson and Linda Jesselson Trustees UIT 3/27/84 FOB Roni Aron Jesselson
           (filed as Exhibit 10.52 to the Company's Annual Report on Form 10-KSB/A dated June 26,
           1995, and incorporated herein by reference).
    10.12  Warrant, dated January 12, 1995, to purchase 10,000 shares of Common Stock issued to
           Michael Jesselson and Linda Jesselson Trustees UIT 3/27/84 FOB Jonathan Judah
           Jesselson (filed as Exhibit 10.53 to the Company's Annual Report on Form 10-KSB/A
           dated June 26, 1995, and incorporated herein by reference).
    10.13  Warrant, dated January 12, 1995, to purchase 10,000 shares of Common Stock issued to
           Michael Jesselson and Linda Jesselson Trustees UIT 3/27/84 FOB Maya Ariel Ruth
           Jesselson (filed as Exhibit 10.54 to the Company's Annual Report on Form 10-KSB/A
           dated June 26, 1995, and incorporated herein by reference).
    10.14  Warrant, dated January 12, 1995, to purchase 13,333 shares of Common Stock issued to
           Michael Jesselson and Linda Jesselson Trustees UIT 3/27/84 FOB Maya Ariel Ruth
           Jesselson (filed as Exhibit 10.55 to the Company's Annual Report on Form 10-KSB/A
           dated June 26, 1995, and incorporated herein by reference).
    10.15  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).
    10.16  Xerox Worldwide Printing Systems Partners Program Partnership Guide dated August 1990
           (filed as Exhibit 10.64 to the Company's Annual Report on Form 10-KSB/A dated June 26,
           1995, and incorporated herein by reference).
    10.17  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).
    10.18  Building lease between the Company and UNC Incorporated, dated July 31, 1996 (filed as
           Exhibit 10.3 to the Company's Quarterly Report on Form 10-QSB dated November 12, 1996
           and incorporated herein by reference).
    10.19  Non-exclusive License Agreement By and Between the Hewlett-Packard Company and Gunther
           International Incorporated for Envelope Printing Technology dated May 6, 1997 (filed
           as Exhibit 10.38 to the Company's Annual Report on Form 10-KSB dated July 14, 1998 and
           incorporated herein by reference).
    10.20  Agreement, dated October 2, 1998, by and among the registrant, June H. Geneen, Phil E.
           Gilbert, Jr., Thomas W. Keesee and the United States Trust Company Of New York, as
           Co-Executors of the Estate of Harold S. Geneen, Late of New York, New York (the
           "Estate"), BankBoston, N.A. (successor by merger to Bank of Boston Connecticut ("BOB")
           and Gunther Partners, LLC (the "Lender") (filed as Exhibit 99.2 to the registrant's
           Current Report on Form 8-K dated October 7, 1998 and incorporated herein by this
           reference).
    10.21  Promissory Note, dated October 2, 1998, made by the registrant to the order of the
           Estate (filed as Exhibit 99.3 to the registrant's Current Report on Form 8-K dated
           October 7, 1998 and incorporated herein by this reference).
    10.22  Security Agreement, dated October 2, 1998, by and between the registrant and the
           Estate (filed as Exhibit 99.4 to the registrant's Current Report on Form 8-K dated
           October 7, 1998 and incorporated herein by this reference).
    10.23  Loan and Security Agreement, dated October 2, 1998, by and between the registrant and
           Gunther Partners LLC (filed as Exhibit 99.5 to the registrant's Current Report on Form
           8-K dated October 7, 1998 and incorporated herein by this reference).
</TABLE>

                                        19
<PAGE>   22
<TABLE>
<C>    <S>
10.24  $4,000,000 Term Note, dated October 2, 1998, made by the
       registrant to the order of the Lender (filed as Exhibit 99.6
       to the registrant's Current Report on Form 8-K dated October
       7, 1998 and incorporated herein by this reference).
10.25  Subordination Agreement dated as of October 2, 1998, between
       the Lender and Connecticut Innovations, Inc. ("CII") (filed
       as Exhibit 99.7 to the registrant's Current Report on Form
       8-K dated October 7, 1998 and incorporated herein by this
       reference).
10.26  Subordination Agreement, dated as of October 2, 1998,
       between the Estate and CII (filed as Exhibit 99.8 to the
       registrant's Current Report on Form 8-K dated October 7,
       1998 and incorporated herein by this reference).
10.27  Subordination and Intercreditor Agreement, dated October 2,
       1998, between the Lender and the Estate (filed as Exhibit
       99.9 to the registrant's Current Report on Form 8-K dated
       October 7, 1998 and incorporated herein by this reference).
10.28  Warrant Agreement, dated October 2, 1998, by and between the
       Lender and the registrant (filed as Exhibit 99.10 to the
       registrant's Current Report on Form 8-K dated October 7,
       1998 and incorporated herein by this reference).
10.29  Registration Rights Agreement, dated October 2, 1998, by and
       between the registrant and the Lender (filed as Exhibit
       99.11 to the registrant's Current Report on Form 8-K dated
       October 7, 1998 and incorporated herein by this reference).
10.30  Voting Agreement, dated October 2, 1998, by and among the
       Estate, Gerald H. Newman, Park Investment Partners, Inc.,
       the Lender, Robert Spiegel, Four Partners and the registrant
       (filed as Exhibit 99.12 to the registrant's Current Report
       on Form 8-K dated October 7, 1998 and incorporated herein by
       this reference).
10.31  Non-Qualified Stock Option Agreement, dated as of October 5,
       1998, between Marc I. Perkins and the registrant (filed as
       Exhibit 10.14 to the registrant's Quarterly Report on Form
       10-QSB dated February 12, 1999 and incorporated herein by
       this reference).
10.32  Employment Agreement, dated as of October 7, 1998, between
       the registrant and Michael M. Vehlies (filed as Exhibit
       10.15 to the registrant's Quarterly Report on Form 10-QSB
       dated February 12, 1999 and incorporated herein by this
       reference).
10.33  Non-Qualified Stock Option Agreement, dated as of October
       29, 1998, between Michael M. Vehlies and the registrant
       (filed as Exhibit 10.16 to the registrant's Quarterly Report
       on Form 10-QSB dated February 12, 1999 and incorporated
       herein by this reference).
10.34  Employment Agreement, dated October 3, 1999, between the
       Registrant and Marc I. Perkins (filed as Exhibit 10.9 to the
       registrant's Quarterly Report on Form 10-QSB dated February
       22, 2000, and incorporated herein by this reference).
10.35  Promissory Note, dated April 4, 2000, between the Registrant
       and Gunther Partners, LLC. (filed as Exhibit 10.46 to the
       registrant's Annual Report on Form 10-KSB dated June 29,
       2000 and incorporated herein by reference).
10.36  Funding Letter, dated June 19, 2000 from Gunther Partners,
       LLC to the Registrant. (filed as Exhibit 10.47 to the
       registrant's Annual Report on Form 10-KSB dated June 29,
       2000 and incorporated herein by reference).
10.37  Promissory Note Agreement dated November 30, 2000 between
       Robert Spiegel and the Registrant (filed as Exhibit 10.1 to
       the registrant's Quarterly Report on Form 10-QSB dated
       February 14, 2001, and incorporated by reference).
</TABLE>

                                        20
<PAGE>   23

<TABLE>
<S>        <C>
    10.38  Recapitalization Agreement, dated June 25, 2001, by and among the registrant, June H.
           Geneen, Phil E. Gilbert, Jr. and the United States Trust Company of New York, as
           Co-executors of Estate of Harold S. Geneen, late of New York, New York (the "Estate"),
           Gunther Partners LLC, Park Investment Partners ("Park") and Gerald H. Newman
           ("Newman").
    21.1   List of Subsidiaries.
    24.1   Power of Attorney pursuant to which this Annual Report on Form 10-KSB dated June 29,
           2001 was executed.
</TABLE>

     B.  Reports on Form 8-K.

        None.

                                        21
<PAGE>   24

                                   SIGNATURES

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

                                          GUNTHER INTERNATIONAL, LTD.

                                          By:    /s/ MICHAEL M. VEHLIES
                                            ------------------------------------

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

Date: June 29, 2001

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

<TABLE>
<CAPTION>
                    SIGNATURE:                                     TITLE:                     DATE:
                    ----------                                     ------                     -----
<C>                                                    <S>                                <C>
                /s/ MARC I. PERKINS                    President and Chief Executive      June 29, 2001
---------------------------------------------------      Officer (Principal Executive
                  Marc I. Perkins                        Officer) and Director
     Individually and as Attorney-in-Fact for:

               James A. Cotter, Jr.                    Director                           June 29, 2001

                J. Kenneth Hickman                     Director                           June 29, 2001

               Steven S. Kirkpatrick                   Director                           June 29, 2001

                 Gerald H. Newman                      Director                           June 29, 2001

                  Robert Spiegel                       Director                           June 29, 2001

                Thomas M. Steinberg                    Director                           June 29, 2001
</TABLE>

                                        22
<PAGE>   25

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                                NO.
                                                              --------
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........    F-2

Consolidated Balance Sheets as of March 31, 2001 and 2000...    F-3

Consolidated Statements of Operations for the Years Ended
 March 31, 2001 and 2000....................................    F-4

Consolidated Statements of Stockholders' Equity (Deficit)
 for the Years Ended March 31, 2001 and 2000................    F-5

Consolidated Statements of Cash Flows for the Years Ended
 March 31, 2001 and 2000....................................    F-6

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

                                       F-1
<PAGE>   26

                         REPORT OF INDEPENDENT AUDITORS

Stockholders of Gunther International, Ltd.

     We have audited the accompanying consolidated balance sheets of Gunther
International, Ltd. and its subsidiary as of March 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gunther
International, Ltd. and its subsidiary at March 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.

                                                  ERNST & YOUNG LLP

Hartford, Connecticut
June 25, 2001

                                       F-2
<PAGE>   27

                          GUNTHER INTERNATIONAL, LTD.

                          CONSOLIDATED BALANCE SHEETS
                            MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                  2001            2000
                                                              ------------    ------------
<S>                                                           <C>             <C>
Assets
Current Assets:
  Cash......................................................  $    759,393    $     87,136
  Accounts receivable, less allowance.......................     2,002,398       3,315,783
  Costs and estimated earnings in excess of billings on
    uncompleted contracts...................................       601,068         200,691
  Inventories...............................................     1,936,538       1,798,206
  Prepaid expenses..........................................       254,552         280,874
                                                              ------------    ------------
    Total current assets....................................     5,553,949       5,682,690
                                                              ------------    ------------
Equipment and Leasehold Improvements:
  Machinery and equipment...................................     1,811,895       1,485,369
  Furniture and fixtures....................................       469,737         378,852
  Leasehold improvements....................................       128,377          38,589
                                                              ------------    ------------
                                                                 2,410,009       1,902,810
  Accumulated depreciation and amortization.................    (1,006,350)       (808,354)
                                                              ------------    ------------
                                                                 1,403,659       1,094,456
                                                              ------------    ------------
Other Assets:
  Excess of costs over fair value of net assets acquired,
    net.....................................................     2,551,429       2,774,893
  Other.....................................................        45,127          64,527
                                                              ------------    ------------
                                                                 2,596,556       2,839,420
                                                              ------------    ------------
                                                              $  9,554,164    $  9,616,566
                                                              ============    ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
  Current maturities of long-term debt -- other.............  $     17,045    $     13,134
  Note payable to related party.............................            --         150,000
  Note payable to bank......................................            --         350,000
  Accounts payable..........................................     2,440,437       2,502,231
  Accrued expenses..........................................     1,507,965       1,385,066
  Billings in excess of costs and estimated earnings on
    uncompleted contracts...................................       325,085       1,052,734
  Deferred service contract revenue.........................     1,782,466       1,856,974
                                                              ------------    ------------
    Total current liabilities...............................     6,072,998       7,310,139
                                                              ------------    ------------
Long-term debt, less current maturities:
  Related parties...........................................     6,676,593       5,261,446
  Other.....................................................        59,400          15,732
                                                              ------------    ------------
         Total long-term debt...............................     6,735,993       5,277,178
                                                              ------------    ------------
    Total liabilities.......................................    12,808,991      12,587,317
                                                              ------------    ------------
Commitments and contingencies (Note 8)
Stockholders' Equity (Deficit):
  Common Stock, $.001 par value; 16,000,000 shares
    authorized; 4,291,769 shares issued and outstanding.....         4,292           4,292
  Additional paid-in capital................................    12,188,556      12,188,556
  Accumulated deficit.......................................   (15,447,675)    (15,163,599)
                                                              ------------    ------------
    Total Stockholders' Equity (Deficit)....................    (3,254,827)     (2,970,751)
                                                              ------------    ------------
                                                              $  9,554,164    $  9,616,566
                                                              ============    ============
</TABLE>

                            See accompanying notes.
                                       F-3
<PAGE>   28

                          GUNTHER INTERNATIONAL, LTD.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  FOR THE YEARS ENDED MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                 2001          2000
                                                              -----------   -----------
<S>                                                           <C>           <C>
Sales:
  Systems...................................................  $14,250,642   $12,052,692
  Maintenance...............................................   10,161,333     9,533,778
                                                              -----------   -----------
     Total sales............................................   24,411,975    21,586,470
                                                              -----------   -----------
Cost of sales:
  Systems...................................................    9,537,248     8,094,029
  Maintenance...............................................    8,105,760     8,289,268
                                                              -----------   -----------
     Total cost of sales....................................   17,643,008    16,383,297
                                                              -----------   -----------
       Gross profit.........................................    6,768,967     5,203,173
                                                              -----------   -----------
Operating expenses:
  Selling and administrative................................    4,555,441     4,143,774
  Research and development..................................    1,639,385     1,227,626
                                                              -----------   -----------
     Total operating expenses...............................    6,194,826     5,371,400
                                                              -----------   -----------
       Operating income (loss)..............................      574,141      (168,227)
Interest expense, net.......................................     (679,717)     (554,156)
Litigation expense..........................................     (178,500)      (36,500)
                                                              -----------   -----------
       Net loss.............................................  $  (284,076)  $  (758,883)
                                                              ===========   ===========
       Loss per share.......................................  $     (0.07)  $     (0.18)
                                                              ===========   ===========
Weighted average number of common shares outstanding........    4,291,769     4,291,769
                                                              ===========   ===========
</TABLE>

                            See accompanying notes.
                                       F-4
<PAGE>   29

                          GUNTHER INTERNATIONAL, LTD.

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE YEARS ENDED MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                       COMMON STOCK
                                      $.001 PAR VALUE      ADDITIONAL
                                    -------------------      PAID-IN      ACCUMULATED
                                     SHARES      AMOUNT      CAPITAL        DEFICIT          TOTAL
                                    ---------    ------    -----------    ------------    -----------
<S>                                 <C>          <C>       <C>            <C>             <C>
Balance, March 31, 1999...........  4,291,769    $4,292    $12,188,556    $(14,404,716)   $(2,211,868)
Net loss..........................         --        --             --        (758,883)      (758,883)
                                    ---------    ------    -----------    ------------    -----------
Balance, March 31, 2000...........  4,291,769     4,292     12,188,556     (15,163,599)    (2,970,751)
Net loss..........................         --        --             --        (284,076)      (284,076)
                                    ---------    ------    -----------    ------------    -----------
Balance, March 31, 2001...........  4,291,769    $4,292    $12,188,556    $(15,447,675)   $(3,254,827)
                                    =========    ======    ===========    ============    ===========
</TABLE>

                            See accompanying notes.
                                       F-5
<PAGE>   30

                          GUNTHER INTERNATIONAL, LTD.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED MARCH 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                 2001           2000
                                                              -----------    -----------
<S>                                                           <C>            <C>
Operating activities:
  Net loss..................................................  $  (284,076)   $  (758,883)
     Adjustments to reconcile net loss to net cash provided
      by (used for) operating activities:
     Depreciation and amortization..........................      693,043        568,295
     Provision for doubtful accounts........................       53,000         63,530
     Interest accrued on related party note payable.........      265,144        239,518
     Loss on disposal of equipment..........................       10,248             --
     Changes in operating assets and liabilities:
       Accounts receivable..................................    1,260,385     (1,859,112)
       Inventories..........................................     (138,332)      (291,652)
       Prepaid expenses.....................................       26,322       (185,611)
       Accounts payable.....................................      (61,794)        65,801
       Accrued expenses.....................................      122,899        233,548
       Deferred service contract revenue....................      (74,508)       335,770
       Billings, costs and estimated earnings on uncompleted
        contracts, net......................................   (1,128,026)       504,895
                                                              -----------    -----------
          Net cash provided by (used for) operating
             activities.....................................      744,305     (1,083,901)
                                                              -----------    -----------
Investing activities:
  Acquisitions of equipment and leasehold improvements......     (698,890)      (564,009)
                                                              -----------    -----------
          Net cash used for investing activities............     (698,890)      (564,009)
                                                              -----------    -----------
Financing activities:
  Repayment of notes payable and long-term debt.............     (673,158)      (515,111)
  Proceeds from notes payable and long-term debt............    1,300,000      1,368,214
  Transfer from restricted cash.............................           --        150,000
                                                              -----------    -----------
          Net cash provided by financing activities.........      626,842      1,003,103
                                                              -----------    -----------
Change in cash..............................................      672,257       (644,807)
Cash, beginning of year.....................................       87,136        731,943
                                                              -----------    -----------
Cash, end of year...........................................  $   759,393    $    87,136
                                                              ===========    ===========
Supplemental Cash Flow Information:
  Cash paid for interest....................................  $   436,771    $   326,687
  Cash paid for income taxes................................       13,531          7,561
</TABLE>

                            See accompanying notes.
                                       F-6
<PAGE>   31

                          GUNTHER INTERNATIONAL, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            MARCH 31, 2001 AND 2000

1.  BUSINESS:

     Gunther International, Ltd. and its subsidiary (the "Company") operates as
a single business segment. 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. These products are dependent upon
proprietary technology and require specially skilled engineers and technicians
to design, enhance and produce them to meet customer needs. The Company was
incorporated in Delaware in 1978 and currently operates from leased facilities
located in Norwich, Connecticut.

2.  ACCOUNTING POLICIES:

  Principles of consolidation -

     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, inc.jet, Inc. All intercompany
activity has been eliminated from the consolidated financial statements.

  Revenue recognition -

     The Company recognizes revenues under sales contracts for its high-speed
assembly equipment using the percentage of completion method based on the ratio
of incurred costs to total estimated costs. Changes in estimated earnings
thereon are recognized in the period determined. Sales of inc.jet imagers and
related consumables are recognized when the products are delivered. Service
contract revenue is recognized over the term of the contract; amounts applicable
to future periods are deferred.

  Allowance for doubtful accounts -

     The Company evaluates the collectibility of accounts receivable on an
ongoing basis and makes allowances for credit losses ($58,500 at March 31, 2001
and $86,900 at March 31, 2000).

  Inventories -

     Inventories, consisting primarily of purchased parts used in the assembly
and repair of the Company's products, are stated at the lower of cost,
determined by the first-in, first-out method, or market.

  Equipment and leasehold improvements -

     Depreciation of equipment is computed using the straight-line method over
the estimated useful lives of the respective assets as follows: machinery and
equipment -- 3 - 7 years; and furniture and fixtures -- 7 years. Amortization of
leasehold improvements is computed over the useful life of the improvement or
lease term, whichever is shorter. Depreciation expense was $455,000 and $330,000
for fiscal 2001 and 2000, respectively.

  Excess of cost over fair value of net assets acquired -

     The excess of cost over the fair value of net assets acquired ("goodwill"),
which resulted from a business acquisition, is being amortized over its
estimated life of 20 years. As of March 31, 2001 and 2000, accumulated
amortization thereon was $1,918,140 and $1,694,676, respectively. The
realization of the carrying value of the Company's assets, including goodwill,
is dependent on the Company's ability to sustain profitable operations in the
future. If objective evidence becomes known indicating the carrying value of the
goodwill has been impaired, the Company will evaluate the carrying value based
on undiscounted cash flows.

                                       F-7
<PAGE>   32

  Shipping and handling costs -

     Expenses associated with shipping and handling are included in cost of
sales in the accompanying statements of operations.

  Research and development -

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

  Product warranties -

     The Company provides a warranty on each high-speed system for a period of
90 days after installation. Warranty expense for fiscal 2001 and 2000, was
approximately $297,000 and $255,000, respectively.

  Deferred income taxes -

     Deferred income taxes are provided on temporary differences between the
financial statement and tax basis of assets and liabilities and on operating
loss carryovers using enacted tax rates in effect in the years in which
differences are expected to reverse. A valuation allowance is recorded for the
amount of deferred income tax assets for which realization is uncertain (See
Note 6.)

  Royalty expense -

     The Company has royalty agreements with Connecticut Innovations, Inc. and
with certain stockholders (see Note 8). Royalties due under these agreements are
expensed as incurred.

  Loss per share -

     The denominators used for purposes of computing the loss per share consist
of the weighted average number of common shares outstanding of 4,291,769 for
both fiscal 2001 and 2000. Common stock equivalents were not used because their
effect would have been anti-dilutive. There were no common stock equivalents
outstanding at March 31, 2001 and there were 1,178,071 common stock equivalents
outstanding at March 31, 2000. Options and warrants are included as common stock
equivalents if the fair market value of the underlying stock is greater than the
exercise price of the related option or warrant.

  Use of estimates -

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.

3.  INVENTORIES:

     Inventories consist of:

<TABLE>
<CAPTION>
                                                                     2001          2000
                                                                  ----------    ----------
    <S>                                                           <C>           <C>
    Raw materials...............................................  $1,820,402    $1,532,703

    Work-in-process.............................................     374,666       625,719
                                                                  ----------    ----------

                                                                   2,195,068     2,158,422

    Valuation allowance.........................................    (258,530)     (360,216)
                                                                  ----------    ----------

                                                                  $1,936,538    $1,798,206
                                                                  ==========    ==========
</TABLE>

                                       F-8
<PAGE>   33

4.  COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:

     The following schedule reflects the costs incurred, estimated earnings and
billings to date on uncompleted contracts:

<TABLE>
<CAPTION>
                                                               2001           2000
                                                            -----------    -----------
<S>                                                         <C>            <C>
Costs incurred............................................  $ 1,831,150    $ 2,537,418
Estimated earnings........................................      532,887      1,305,603
                                                            -----------    -----------
                                                              2,364,037      3,843,021
Billings to date..........................................   (2,088,054)    (4,695,068)
                                                            -----------    -----------
                                                            $   275,983    $  (852,043)
                                                            ===========    ===========
</TABLE>

     Included in the accompanying balance sheets under the following captions:

<TABLE>
<S>                                                         <C>            <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts...................................  $   601,068    $   200,691
Billings in excess of costs and estimated earnings on
  uncompleted contracts...................................     (325,085)    (1,052,734)
                                                            -----------    -----------
                                                            $   275,983    $  (852,043)
                                                            ===========    ===========
</TABLE>

5.  LONG-TERM DEBT AND RECAPITALIZATION:

     Long-term debt consists of:

<TABLE>
<CAPTION>
                                                                     2001          2000
                                                                  ----------    ----------
    <S>                                                           <C>           <C>
    Notes payable to related parties (stockholders):

      Gunther Partners LLC, less unamortized debt discount of
         $172,500 and $241,500 at March 31, 2001 and 2000,
         respectively, at an effective interest rate of 9.8% due
         in various installments through October 2003...........  $4,327,500    $3,758,500

      Estate of Harold S. Geneen, less unamortized debt discount
         of $264,097 and $339,195 at March 31, 2001 and 2000,
         respectively, at an effective interest rate of 10.5%
         due in October 2004....................................   1,678,637     1,502,946

      Stockholder and Director, due and payable by November 2001
         with interest payable quarterly at 8.5%................     500,000            --

      Estate of Harold S. Geneen, including accrued interest of
         $20,456, at an effective interest rate of 5.44% due in
         October 2004...........................................     170,456       150,000
                                                                  ----------    ----------

                                                                   6,676,593     5,411,446

    Other.......................................................      76,445        28,866
                                                                  ----------    ----------

                                                                   6,753,038     5,440,312

    Current maturities of long-term debt -- other...............     (17,045)     (163,134)
                                                                  ----------    ----------

                                                                  $6,735,993    $5,277,178
                                                                  ==========    ==========
</TABLE>

     In June 2001, the Company entered into a recapitalization agreement (the
"Recapitalization Agreement") with and among the Estate of Harold S. Geneen (the
"Estate"), Gunther Partners LLC and two other stockholders. The Recapitalization
Agreement provides that the Company will effectuate a registered public offering
("Rights Offering") of up to 16,000,000 shares of its Common Stock (the "Offered
Shares") to its existing stockholders by subscription right on a pro-rata basis
at a price of $0.50 per share. The rights to subscribe to the Offered Shares
will be granted at a ratio to be determined by the Board of Directors of the
Company (the "Basic Subscription Right"). In addition, the Company's
stockholders will be granted the right to "oversubscribe" for additional shares
not purchased by other stockholders, up to the total amount of the Offered
Shares (the "Oversubscription Right"). In the event that the Company's
stockholders, other than Gunther Partners LLC, do not subscribe for and purchase
all 16,000,000 of the Offered Shares, Gunther

                                       F-9
<PAGE>   34

Partners LLC will subscribe for and purchase from the Company in the Rights
Offering a number of shares equal to 16,000,000 less the number of shares
subscribed for stockholders other than Gunther Partners LLC, up to a maximum of
14,000,000 shares. The net proceeds of the Rights Offering (a minimum of $7
million less offering expenses), will be used to repay in full the notes payable
to Gunther Partners LLC ($4.5 million)and the Stockholder and Director
($500,000), to purchase all notes payable to the Estate for a total of $500,000
and to purchase 919,568 shares of the Company's Common Stock held by the Estate
for $137,935 (or $0.15 per share). The balance of the net proceeds from the
Rights Offering will be used for general working capital purposes.

     To facilitate the timely purchase of the notes payable and shares held by
the Estate, Gunther Partners LLC has agreed to make the purchase for the benefit
of the Company on or before July 25, 2001 on the terms and conditions set forth
in the preceding paragraph. Following the consummation of the Rights Offering,
Gunther Partners LLC has agreed to sell to the Company all the notes payable and
shares of Common Stock
of the Company formerly held by the Estate for the exact amount paid therefor by
Gunther Partners LLC without interest, or a total purchase price of $637,935.

     As of March 31, 2001, aggregate annual maturities of long-term debt which
retroactively reflect the Recapitalization Agreement for the next five fiscal
years are:

<TABLE>
<CAPTION>
FISCAL YEAR
ENDING MARCH 31,                                               AMOUNT
----------------                                               -------
<S>                                                            <C>
2002........................................................   $17,045
2003........................................................    17,493
2004........................................................    19,476
2005........................................................    16,146
2006........................................................     1,507
</TABLE>

     In connection with the Recapitalization Agreement, the Company will
recognize an extraordinary gain of $1.3 million on the purchase of the notes
payable to the Estate. If the Recapitalization Agreement were fully implemented
at March 31, 2001 and the minimum proceeds of $6.8 million, net of expenses,
were received, the pro forma capitalization would be as follows:

<TABLE>
<CAPTION>
                                                           RECAPITALIZATION
                                           AS REPORTED       ADJUSTMENTS        PRO FORMA
                                           ------------    ----------------    ------------
<S>                                        <C>             <C>                 <C>
Long-term debt, including current
  maturities.............................  $  6,753,038       $6,676,593       $     76,445
                                           ------------       ----------       ------------
Stockholders' equity (deficit):
Common Stock.............................         4,292           14,000             18,292
Treasury Stock...........................            --         (137,935)
Additional paid-in capital...............    12,188,556        6,613,500         18,802,056
Accumulated Deficit......................   (15,447,675)       1,349,093        (14,098,582)
                                           ------------       ----------       ------------
                                             (3,254,827)       7,838,658          4,583,831
                                           ------------       ----------       ------------
Total capitalization.....................  $  3,498,211       $1,162,065       $  4,660,276
                                           ============       ==========       ============
</TABLE>

     Management believes that the working capital provided (a minimum of
approximately $1.1 million) by the Recapitalization Agreement and cash generated
from operations will be sufficient to meet the Company's cash flow needs for the
next year.

                                       F-10
<PAGE>   35

6.  DEFERRED INCOME TAXES:

     Significant components of the Company's deferred income tax assets
(liabilities) are:

<TABLE>
<CAPTION>
                                                               2001           2000
                                                            -----------    -----------
<S>                                                         <C>            <C>
Equipment and leasehold improvements......................  $   (76,853)   $  (102,212)
Accrued expenses..........................................      226,116        222,301
Inventories...............................................      143,630        182,574
Allowance for doubtful accounts...........................       22,823         33,903
Research and development..................................       97,181        204,226
Net operating loss carryforwards..........................    3,995,100      4,158,792
                                                            -----------    -----------
Net total deferred income tax asset.......................    4,407,998      4,699,584
Valuation allowance.......................................   (4,407,998)    (4,699,584)
                                                            -----------    -----------
Net deferred income tax asset.............................  $        --    $        --
                                                            ===========    ===========
</TABLE>

     At March 31, 2001, the Company has federal and state net operating loss
carryforwards of $11.2 million and $3.5 million, respectively, which are
scheduled to expire in varying amounts from 2002 to 2021. The Company has
entered into a Recapitalization Agreement, as more fully described in Note 5,
which may limit the amount of federal net operating loss carryforwards that can
be utilized in any given year to approximately $100,000 until 2021. As such, the
Company may be unable to utilize up to $8 million of federal net operating loss
carryforwards.

7.  WARRANTS, COMMON STOCK PURCHASE OPTIONS AND CAPITAL STOCK:

     In October 1998, in connection with the Gunther Partners LLC debt, the
Company granted Gunther Partners LLC a warrant to purchase up to 35% of the pro
forma, fully diluted number of shares of the Company's Common Stock, determined
as of the date of exercise, at any time through November 2003 at an exercise
price of $1.50 a share, The Rights Offering will have no effect on the number of
shares of the Company's Common Stock into which the Warrants are exercisable. In
November 2000, the Company agreed to extend the expiration date of the warrant
by one calendar day for each calendar day from and after April 1, 2001 that any
principal or interest owed under the Stockholder and Director debt remains
unpaid. In addition, at March 31, 2001, warrants were outstanding to purchase
106,666 shares of the Company's Common Stock for $4.00 a share. These warrants
expire in October 2003.

     The Company has a stock option plan. The Executive Compensation/Stock
Option Committee of the Board of Directors determines the prices and terms at
which options may be granted. Options vest over periods ranging from three to
five years and may be exercisable up to ten years from the date of grant.

     A summary of stock option activity follows:

<TABLE>
<CAPTION>
                                               2001                          2000
                                    --------------------------    ---------------------------
                                                   WEIGHTED                       WEIGHTED
                                                   AVERAGE                        AVERAGE
                                     SHARES     EXERCISE PRICE     SHARES      EXERCISE PRICE
                                    --------    --------------    ---------    --------------
<S>                                 <C>         <C>               <C>          <C>
Outstanding, beginning of year....   345,000        $ 2.13          400,000        $ 1.98
Granted...........................     9,000          1.49           45,000          2.91
Cancelled.........................   (31,500)        (5.37)        (100,000)        (1.88)
                                    --------        ------        ---------        ------
Outstanding, end of year..........   322,500        $ 1.79           45,000        $ 2.13
                                    ========        ======        =========        ======
Exercisable, end of year..........   224,333        $ 1.65          193,999        $ 2.00
                                    ========        ======        =========        ======
Weighted average fair value of
  options granted.................     $1.55                          $2.24
                                    ========                      =========
</TABLE>

                                       F-11
<PAGE>   36

     At March 31, 2001, exercise prices ranged from $0.88 to $3.22 and the
weighted average remaining contractual life was 8 years.

     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations to recognize
compensation expense under its stock option plan. As such, no expense is
recognized if, at the date of grant, the exercise price of the option is at
least equal to the fair market value of the Company's Common Stock. No
compensation expense was recognized in fiscal 2001 or 2000.

     If compensation expense for the Company's stock option plan had been
determined using the fair value method under SFAS 123, "Accounting for Stock
Based Compensation", the Company would have reported a net loss of $430,000
($.10 per share) in fiscal 2001 and $825,000 ($.19 per share) in fiscal 2000. In
connection therewith, the Company used the Black-Scholes option pricing model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                                             2001      2000
                                                            ------    ------
<S>                                                         <C>       <C>
Risk free interest rate...................................    5.00%     5.00%
Expected dividend yield...................................    None      None
Expected lives............................................       5         5
                                                             Years     years
Expected volatility.......................................  95-160%   68-199%
</TABLE>

     In conjunction with the Recapitalization Agreement, the Company will
increase its authorized shares to 32,500,000 shares of capital stock consisting
of 32,000,000 shares of Common Stock and 500,000 shares of Preferred Stock, all
with a par value of $.001 a share. The Board of Directors is authorized to
determine the powers, preferences, rights and restrictions of the Preferred
Stock. At March 31, 2001 and 2000, there were no issued and outstanding shares
of Preferred Stock. At March 31, 2001, 3,068,803 shares of the Company's Common
Stock were reserved for issuance.

8.  COMMITMENTS AND CONTINGENCIES:

  Development Agreement -

     The Company has a development agreement with Connecticut Innovations, Inc.
("CII"), which requires the Company to pay CII a royalty equal to .67%
(sixty-seven hundredths of a percent) of all systems sales and provides for
minimum payments of $137,500 for fiscal 2002 and $131,250 for fiscal 2003.

     If, during any quarter, the royalty computation does not exceed the minimum
payment referred to above, the minimum payment would be made instead of the
actual computed royalty amount. Total royalty expense was $125,000 and $106,250
for fiscal 2001 and 2000, respectively. CII has 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. Until the transactions contemplated by the Recapitalization Agreement is
effectuated, CII has subordinated its security interest in all tangible and
intangible personal property to Gunther Partners LLC.

  Contingencies -

     In fiscal 1999, two purported class action lawsuits were filed against the
Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities law. In February
2001, the Company reached an out-of-court settlement, agreeing to pay $215,000
towards the settlement. Of this amount, $178,500 was expensed in the first
quarter of fiscal 2001 and $36,5000 was expensed in the fourth quarter of fiscal
2000. The Court approved the settlement in May 2001. Legal fees associated with
the claim were expensed as incurred, net of insurance proceeds. No additional
expenses are anticipated with respect to this matter.

                                       F-12
<PAGE>   37

     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, operating results or cash flows.

  Other commitments -

     The Company has a royalty agreement with certain founding stockholders
whereby the Company pays an amount equal to 1% of all the Company's sales (as
defined). 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 fiscal 2001 and 2000, royalties expensed under this agreement
were $242,000 and $204,000, respectively. Total royalties expensed under this
agreement were $1,160,000 through March 31, 2001.

     The Company has an agreement related to the development and use of certain
inkjet technology. This agreement requires the Company to pay royalties of 1% of
inkjet sales up to a maximum of $5,000,000 through fiscal 2008. For fiscal 2001
and 2000, royalties expensed under this agreement were approximately $24,000 and
$22,000, respectively. Total royalties expensed under this agreement were
$46,000 through March 31, 2001.

  Leases -

     The Company leases its office and manufacturing facility under an operating
lease that provides for monthly rental of $23,917 through April 2006. Under this
agreement, the Company is responsible for all operating costs, real estate taxes
and maintenance. The Company also leases certain office equipment under
operating lease agreements. Lease expense for fiscal 2001 and 2000, was
approximately $435,000 and $380,000, respectively.

     Future minimum payments for non-cancelable operating leases follow:

<TABLE>
<CAPTION>
FISCAL YEAR
ENDING MARCH 31,                                                AMOUNT
----------------                                              ----------
<S>                                                           <C>
2002........................................................  $  339,707
2003........................................................     323,314
2004........................................................     296,199
2005........................................................     290,244
2006........................................................     287,274
2007........................................................      23,917
                                                              ----------
                                                              $1,560,655
                                                              ==========
</TABLE>

9.  EMPLOYEE BENEFIT PLANS:

     The Company has a defined contribution benefit plan (the "Plan") covering
substantially all employees. 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.

10.  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 is generally derived from a few customers. The
majority of the Company's customers are property and casualty insurance
companies. During fiscal 2001, sales to two customers were 31% of sales and
during fiscal 2000, sales to one customer were 16% of sales. No other customers
accounted for more than 10% of sales in either year.

                                       F-13
<PAGE>   38

11.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

     The fair value of long-term debt payable to related parties as of March 31,
2001 is $5,500,000 based on the Recapitalization Agreement; its carrying value
is $6,676,593. Otherwise, the carrying value of financial instruments (accounts
receivable, accounts payable and debt) as of March 31, 2001 and 2000
approximates fair value. Fair value was based on cash flows and current market
conditions.

                                       F-14