<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

            X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           ---   SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                    For the fiscal year ended March 31, 2000

                                       OR

              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          ---   SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

             For the transition period from __________ to __________

                         Commission file number 0-12829

                              GRADCO SYSTEMS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                 Nevada                                 95-3342977
--------------------------------------------------------------------------------
    (State or other jurisdiction of                  (I.R.S. Employer
    incorporation or organization)                 Identification No.)

3753 Howard Hughes Pkwy, Ste 200, Las Vegas, Nevada         89109
--------------------------------------------------------------------------------
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code: (702) 892-3714
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange
        Title of each class                           on which registered
          --------------                              -------------------
               None                                          None
------------------------------------        ------------------------------------

Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock, No par value
--------------------------------------------------------------------------------
                                (Title of Class )

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
                          ---        ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.

The aggregate market value of voting stock held by non-affiliates of the
Registrant (based on the closing sales price of Gradco common stock on the
NASDAQ National Market System on June 15, 2000) was $10,763,774.

The number of outstanding shares of each class of the Registrant's common stock
outstanding at June 15, 2000 was: common stock, no par value--7,175,849 shares.


<PAGE>


                                     PART I

Item 1.  BUSINESS

         Gradco Systems, Inc. ("Gradco", the "Company" or the "Registrant") was
originally incorporated in California on November 9, 1978. As previously
reported in the Registrant's Report on Form 10-K for the fiscal year ended March
31, 1992, the Registrant changed its state of incorporation to Nevada through a
merger which became effective April 3, 1992. The Registrant's principal office
is located at 3753 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada and its
telephone number is (702) 892-3714.

         (a) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

         Gradco and its subsidiaries operate primarily in one industry segment,
the design, development, production and marketing of intelligent paper handling
devices and high technology short-run products for the office automation market.
Information relating to revenues, net earnings and identifiable assets
attributable thereto for the fiscal years ended March 31, 2000, 1999 and 1998 is
set forth in response to Item 8 below.

         (b) NARRATIVE DESCRIPTION OF BUSINESS.

         Gradco is a holding company which conducts business as follows:

         (1) The various activities comprising the copier and printer product
businesses, as described below, are conducted through Gradco's majority-owned
Japanese subsidiary Gradco (Japan) Ltd. ("GJ"), and Gradco's wholly-owned
domestic subsidiary Gradco (USA) Inc. ("GU"). GU had been a wholly-owned
subsidiary of GJ until September 1997 when Gradco purchased all of the stock of
GU through a wholly-owned subsidiary of Gradco, which was formed for that
purpose and subsequently merged into GU. GJ has a domestic branch office which
performs research and development activities. GU concentrates on marketing and
sales activities.

         (2) High technology engineering and manufacturing services are
performed by Gradco's wholly-owned subsidiary, Venture Engineering, Inc., based
in Carrollton, Texas.

         Unless otherwise indicated or unless the context otherwise requires,
(1) references to Gradco in the remainder of this Item 1(b) are to the parent
company, (2) references to GJ, in the descriptive material in the remainder of
this Item 1(b) pertaining to the copier and printer products businesses, include
the activities of GJ and GU, (3) references to the Registrant, in connection
with the presentation of financial data in the remainder of this Item 1(b), and
in Item 1(c), include the consolidated financial results of Gradco and its
subsidiaries.

         Sales by GJ of sorter products to the convenience analog copier market
currently account for most of the Registrant's consolidated revenues. Growth
cannot be expected in this segment of business. It can be expected to
deteriorate further with the continuing replacement of analog products with
digital products. In addition, the Registrant derives revenues from sales of
printer products by GJ, revenues of GJ from selected technology licenses and
agreements with original equipment manufacturers and marketers ("OEMs"), and
from research and development activities conducted by GJ on behalf of its OEM
customers, and revenues of Venture Engineering from contract engineering and
manufacturing services on behalf of OEMs and other customers.

         Due to the overall transition in the office equipment industry from
analog to digital equipment, which does not require the kind of multi-bin
sorters which the Company has produced and marketed, emphasis continues to be
placed on design, development and marketing of paper handling products for the
rapidly increasing digital equipment market. In addition, GJ has formed a new
90% owned subsidiary, Gradco Technology Ltd. ("GTL") which will engage in a
variety of diversified businesses. As of March 1, 2000 it began the distribution
of Dippin' Dots ice cream in Japan. It is exploring and developing other
technical and non-technical business opportunities.


                                       1
<PAGE>


BUSINESS OF GJ

         GENERAL

         GJ designs, develops, produces (through contract manufacturers) and
markets on a worldwide basis, intelligent paper handling devices for analog
copiers, computer controlled digital copiers and printers. GJ is a leading
independent supplier of sorters (devices which collate paper sheets) to the
convenience copier market, and supplies feeders, mailboxing sorters, stackers
and finishers (devices which staple and punch sets of sheets) for the computer
controlled digital copier and printer market. GJ customizes its products for
inclusion in the copiers and printers of OEMs. Sorter products presently
constitute GJ's principal source of revenues. GJ's revenues also include
revenues from feeders, stackers, finishers and mailboxing sorters for computer
controlled digital copiers and printers, engineering and development activities
for certain OEMs and selected technology, licenses and agreements with OEMs.

         GJ's products are marketed domestically and internationally primarily
directly to OEMs for incorporation into their product lines. Principal OEM
customers include Xerox, Xerox Ltd., Fuji Xerox, Mita, Konica, Lanier,
Panasonic, Sharp, IBM, Hewlett Packard, Fujitsu, Olympus and Kyocera. Marketing
in Asia is conducted by GJ, and marketing in North America is conducted by GU.
Marketing in Europe is conducted by GJ and GU, and by Gradco Belgium, S.C., a
wholly-owned subsidiary of GJ.

         GJ produces its products at manufacturing facilities of contract
manufacturers in Japan, Korea and Canada.

         In addition to marketing intelligent paper handling devices, GJ
licenses certain OEMs to produce products using GJ technology in exchange for
license fees and/or royalties, and receives fees from OEMs for research and
development and customization contracts for its products. GJ's development
engineering activities on behalf of OEMs include engineering, development and
prototype production of various paper handling devices.

         GJ PRODUCTS

         Currently, GJ's products are primarily paper input and output devices
for copiers and printers, including sorter products for analog copiers, digital
copiers and printers and sheet feeding products for printers. GJ has development
and customization contracts with a number of OEMs for several new products for
intelligent electronic digital copiers and page printers.

         SORTER PRODUCTS. The sorters sold by GJ are designed for use with a
variety of convenience copiers and are available with either 10, 20, or 25
receiving bins. These products may be attached quickly and easily to a copier or
may be designed to be an integral part of the copier. Some of GJ's sorters are
controlled by intelligence contained within the copier, which communicates with
the sorter through a customized interface, while others contain the necessary
intelligence to stand alone and receive output from the copier or mechanically
and electronically interface with a copier.

         NEW COPIER PRODUCTS. The new products for the copier market include a
variety of 10, 15 and 20 bin sorters with a sheet capacity per bin and a copy
per minute operating speed to satisfy the need in the low through mid-range of
copiers. Some products include means for offsetting copy sets to enhance set
removal and set capacity for mid-range copier use, and some include set-aligning
sheet joggers and in-bin stapling and hole punching capabilities for finishing
or collating or stacking finished sets, particularly for use with digital
copiers.

         PRINTER PRODUCTS. GJ's products include certain additional automatic
paper and envelope feeders and specialized output print stations. These include
a sheet and envelope feeder, a variety of high capacity sheet feeders applicable
to a variety of laser printers, a specialized high capacity stacker for a high
speed laser printer, a stacker for many low speed laser printers, a sheet
invertor and a sheet decurler for laser printers and facsimile machines.


                                       2
<PAGE>


         DIVERSIFIED ACTIVITIES

         GJ has also formed a 90% owned subsidiary, Gradco Technology Ltd., to
engage in diversified activities principally not involving paper handling
devices.

         GJ MARKETING AND CUSTOMERS

         GENERAL. GJ sells its products domestically and internationally
primarily directly to OEMs. GJ (under licenses which were assigned to it by
Gradco) has licensed certain OEMs to manufacture and sell certain products for
use in conjunction with the OEMs' copiers marketed to other companies.

         GJ frequently develops a new product or a variation of an existing
product in consultation with an OEM who has agreed to pay for or share in the
cost of the development work, then submits a prototype for evaluation to the OEM
customer who may agree to purchase such product in commercial quantities and who
may share tooling and initial production costs. In other cases, an OEM will
present GJ with a copier, printer or other product in the research and
development stage and engage GJ (at the OEM's expense) to design a paper
handling device to fit the OEM's specifications. Any unique interface designed
to work only with an OEM's particular equipment may be exclusive to the OEM; GJ
retains ownership of the basic technology and any other technology developed by
GJ for use in its business. GJ also develops products at its own expense, based
on its evaluation of future market requirements.

         In fiscal 2000, Xerox, Panasonic and Xerox Ltd. accounted for 33%, 14%
and 10%, respectively, of the Registrant's consolidated revenues. In fiscal
1999, Xerox, Xerox Ltd., Panasonic and Mita accounted for 30%, 16%, 11% and 11%,
respectively, of the Registrant's consolidated revenues. In fiscal 1998, Xerox
and Xerox Ltd. accounted for 26% and 20%, respectively, of the Registrant's
consolidated revenues. A loss of any of the current principal customers could
have a negative impact on the Registrant's consolidated operations taken as a
whole (see GJ Competition).

         Based on Xerox's system for evaluation of vendors in view of
business/quality management, GJ is officially recognized by Xerox as one of its
certified suppliers.

         LICENSEES. During the period that it was directly involved in the
copier business, Gradco entered into certain agreements and granted certain
licenses to others, described below, to manufacture products using Gradco
technology. These agreements and licenses were assigned by Gradco to GJ as part
of the sale to GJ of substantially all of the assets used in Gradco's copier
business (the "Copier Assets") in fiscal 1991. Thus, the pertinent rights,
obligations and technology of Gradco, described below, have devolved upon GJ. In
certain instances, GJ and the licensee have entered directly into an amended and
restated agreement superseding the original license as assigned to GJ, but these
restatements do not modify the basic features of the arrangement, as described
below. In one instance (the license described in the next to last paragraph of
this section), the license was granted by GJ itself in fiscal 1993.

         In exchange for a lump sum payment, Gradco and a major OEM customer
entered into a paid up, royalty-free, worldwide release and agreement not to
assert against the OEM most of Gradco's then-existing patents relating to
sorters existing at the time of the agreement. This agreement is limited to
sorters made, used or sold by the OEM or its affiliates for use only with
certain products made by or for the OEM or its affiliates. In addition, this OEM
has been granted a non-exclusive worldwide license on a royalty basis limited to
certain sorter technology and patent rights for use with certain products of the
OEM or its affiliates. Gradco and the OEM amended this license to include
additional defined sorters in exchange for an additional royalty payable to
Gradco, in conjunction with the grant of royalty-free cross licenses between
Gradco and the OEM with respect to certain conflicting patent rights of Gradco
in the United States and the OEM in Japan.

         Another major OEM was granted a limited non-exclusive worldwide license
for a lump sum payment and future royalties restricted to certain sorter
technology and patent rights for use with certain products of the OEM or its
affiliates. Such sorters are limited by definition of size, capacity and copier
speed.


                                       3
<PAGE>


         Another OEM was granted a non-exclusive license in exchange for a lump
sum payment and future royalties on certain limited sorter technology for use on
copiers manufactured by the OEM. Certain sorters, as defined in the agreement,
are territorially limited.

         GJ granted a non-exclusive license to a laser printer OEM to
incorporate GJ's patented decurler structure in the OEM's printer for a royalty
of one amount if incorporated in an attachment to the printer, but a lesser
amount if incorporated directly in the printer.

         These agreements generated recurring royalty revenues of approximately
$1,153,000 during the fiscal year ended March 31, 2000, $2,213,000 during the
fiscal year ended March 31, 1999 and $2,771,000 during the fiscal year ended
March 31, 1998. These agreements allow GJ to receive additional revenues from
certain OEMs while also selling products to the OEMs, and, overall, are expected
to result in better market penetration of GJ technology. However, the licensees
are able to compete with GJ in some of GJ's customary markets to the limited
extent set forth in such agreements. No licensee has the right to sublicense the
technology to nonaffiliates.

         GJ COMPETITION

         GJ's principal competition for its sorters for convenience copiers is
from its OEM licensees. Certain licensees, because of their much larger
resources, have been able to develop new sorter products more rapidly than GJ.
GJ also experiences competition, to a more limited extent, from other OEMs, and
from other manufacturers of sorters using different technology. Copier
manufacturers or other companies, many of whom are much larger than GJ with
resources far in excess of those of GJ, could seek to enter the convenience
copier sorter market in direct competition with GJ. Certain OEMs make sorters
for use with certain of their convenience copier models using other sorter
technology such as fixed bin technology.

         In its marketing of printer products, GJ competes with manufacturers of
mechanical sheet feeding devices, continuous form paper feeding devices and
automatic paper feeding devices, as well as OEMs that build such devices for
sale with their information or word processing systems.

         GJ PATENTS AND PROPRIETARY TECHNOLOGY

         GJ has an ongoing program of seeking patent protection for its
technology. GJ holds numerous patents and patent applications (including those
acquired by assignment from Gradco as part of the sale of Copier Assets in
fiscal 1991) relating principally to its sorters in the United States, United
Kingdom, Japan, Germany, France, Switzerland and Canada. The unexpired terms of
the major U.S. sorter patents already issued range from 2 to 16 years. Patent
applications are pending on most of GJ's recently introduced new products which
address the digital copier market. Patents have been obtained or patent
applications are pending in the United States and Japan, relating to GJ's paper
stapling, punching, mailboxing and decurling technologies for digital copiers
and multi-function machines.

         GJ also has United States and foreign patents and has several
additional patent applications pending in the United States and abroad relating
to paper feeding devices for use with digital copiers and printer products.

         Gradco believes that the issued patents of GJ are material to the
consolidated operations of Gradco and its subsidiaries taken as a whole.
However, there can be no assurance that GJ's sorter patents will not be
challenged or infringed. In addition, there can be no assurance that other
parties will not develop new technology which does not violate such patents but
which is competitive with certain GJ products and patentable by such other
parties.

         GJ has a confidential information and invention assignment agreement to
protect GJ's technology with each of its key technical employees.

         GJ PRODUCTION AND ASSEMBLY

         GJ produces its products at manufacturing facilities of contract
manufacturers in Japan, Korea and Canada.

         Agreements with the manufacturers for finished products provide for
quality control and inspection by GJ and its customers. GJ seeks to control
product quality in a variety of ways. It emphasizes initial inspection and


                                       4
<PAGE>


testing of components. Each of GJ's product lines has a high commonality of
parts, enabling GJ to effect certain economies of scale. Raw materials for GJ's
products are available from a number of sources to permit timely shipment of
orders. Microprocessor programming and electronic assemblies are generally
proprietary but certain OEMs may specify electronics. Tooling for most common
parts is owned by GJ or its contract manufacturers, while a number of OEMs own
tooling for parts unique to models customized for their products.

         GU, and GJ's domestic branch office, have obtained quality systems
certification under ISO 9001 (an International Standard promulgated under the
European Economic Community Mandate).

BUSINESS OF VENTURE ENGINEERING, INC.

         The Venture Engineering, Inc. ("Venture") subsidiary performs contract
engineering and manufacturing services, relating to the customer's own products,
for OEMs and other customers. Venture offers professional turnkey services
ranging from design concepts through manufacturing production. It markets its
services independently of the engineering services performed by GJ for GJ's OEM
customers, referred to above. Venture has also obtained quality systems
certification under ISO 9001.

         Engineering services performed by Venture are principally related to
paper-handling products, semiconductor processing equipment, food handling
equipment and medical devices, including electronic motion control devices and
devices used for putting marks on paper/media. These devices and applications
include printer-plotters, peripheral media handling, specialized printing and
support, microBGA handling, dispersal and application of food ingredients and
singulation, control and assembly of medical implants. Services are also
performed for other applications such as manufacturing robotics and test and
process control equipment. Services are typically billed on a fixed price basis,
although time and material and royalty projects are also utilized. Venture
completed a development project in February 1992 which provided a royalty stream
through calendar 1998. This project generated royalty revenues of approximately
$87,000 in fiscal 1999 and $305,000 in fiscal 1998.

         Manufacturing services principally include fabrication, assembly and
testing of complex electro-mechanical assemblies for customers in such diverse
fields as computer/printer equipment, semiconductor processing, medical
equipment and currency handling equipment. A concerted effort is made to obtain
customers for manufacturing services that have or will utilize Venture's
engineering services.

         Due to the broad and diverse number of markets and customers served by
Venture, there is not one specific group of competitors. In most cases, the
principal competition is from within the prospective customers' own functional
engineering and manufacturing organizations, or from a product company offering
standard products which may be adapted to a specific unique application
requirement.

COSTS AND REVENUES OF DEVELOPMENT ENGINEERING SERVICES

         In 2000, 1999 and 1998 the Registrant, on a consolidated basis, spent
approximately $2,742,000, $3,011,000 and $4,191,000, respectively, on research
and development and development engineering activities. Costs incurred under
research and development and development engineering contracts are included in
research and development expense. Included in research and development expense
are costs related to development engineering service contracts of approximately
$1,401,000, $1,178,000 and $1,914,000, in fiscal 2000, 1999 and 1998,
respectively. The Registrant, on a consolidated basis, also received revenues
from customers under development engineering service contracts of approximately
$1,162,000, $895,000 and $1,421,000, in fiscal 2000, 1999 and 1998,
respectively.

BACKLOG

         Registrant's order backlog at March 31, 2000 from consolidated
operations was estimated at approximately $13.6 million, and was estimated at
approximately $14.3 million at March 31, 1999. Backlog includes orders accepted
for delivery to customers during the ensuing fiscal year, including purchases
committed for by certain customers in the form of purchase agreements, although
such orders are subject to cancellation by the customer (in most cases upon the
payment of a cancellation charge). Substantially all orders shown as backlog
were scheduled for delivery within approximately 6 months. Because Gradco's
operating subsidiaries generally ship products upon


                                       5
<PAGE>


specific releases from customers of previously received orders, the Registrant's
backlog as of any particular date may not be a meaningful measure of the
Registrant's actual sales for the succeeding fiscal period.

EMPLOYEES

         As of June 15, 2000, Gradco and its subsidiaries employed 125 persons.
To date, Gradco and its subsidiaries have encountered no difficulty in
attracting and retaining qualified employees. Gradco believes employee relations
to be satisfactory.

         (c) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS.

         $32,228,000 of the Registrant's consolidated revenues for the fiscal
year ended March 31, 2000 were attributed to the United States and $19,046,000
were attributed to foreign countries ($19,004,000 to Japan). $51,062,000 of the
Registrant's consolidated revenues for the fiscal year ended March 31, 1999 were
attributed to the United States and $30,755,000 were attributed to foreign
countries ($30,654,000 to Japan). $77,771,000 of the Registrant's consolidated
revenues for the fiscal year ended March 31, 1998 were attributed to the United
States and $43,228,000 were attributed to foreign countries (all to Japan). The
Registrant attributes its revenues to countries based on the location of the
subsidiary's office generating the sale. In its foreign sales, Registrant is
subject to the usual risks of international trade, including political
instability, restrictive trade policies, controls on fund transfers and foreign
currency fluctuations.

         The Registrant's sales are primarily denominated in Japanese yen and
United States dollars. In order to limit the risk of foreign currency exchange
fluctuations, the Registrant attempts to buy and sell products and services in
the same currency. However, there are foreign currency gains and losses
associated with some sales transactions. The Registrant had currency losses of
$487,000 and $482,000 in fiscal years 2000 and 1999, respectively, caused by the
weakening of the dollar versus the yen during each of those years. The
Registrant had a currency gain of $1,098,000 in fiscal year 1998 caused by the
strengthening of the dollar versus the yen during that year.

         Financial information regarding foreign and domestic operations is set
forth in Note 9 of Notes to the Registrant's Consolidated Financial Statements
filed in response to Item 8 below.

Item 2.  DESCRIPTION OF PROPERTY.

         Gradco's corporate office is located at 3753 Howard Hughes Parkway,
Suite 200, Las Vegas, Nevada 89109. The current term of the lease for this
office expires in March 2000.

         GJ's principal office is located in Tokyo, Japan. The principal office
of GU is located in Irvine, California, and GJ maintains a branch office at the
same location. The Registrant's Venture Engineering subsidiary has engineering,
development and light production facilities in Carrollton, Texas.

Item 3.  LEGAL PROCEEDINGS.

         DUBOIS V. GRADCO SYSTEMS, INC. ET AL.

         Gradco and its (now former) president, Keith Stewart, were sued in
August 1989 in the United States District Court in Bridgeport, Connecticut by R.
Clark DuBois ("DuBois"), a former employee of the Registrant. The complaint
primarily alleges misrepresentation and fraudulent concealment by the Registrant
and Mr. Stewart in connection with an agreement entered into in March 1983 which
terminated and released the Registrant from royalty obligations under a royalty
agreement entered into effective as of August 1979. Under this agreement DuBois
assigned to the Registrant his co-inventor's interest in patent rights for
improvements in certain products of the Registrant. The complaint, which has
been amended a number of times, seeks unspecified damages, and other relief. The
case has not yet been scheduled for trial.

         The DuBois suit will be tried as to liability and damages together.
There are major differences between the DuBois case and the case of Hamma v.
Gradco Systems, Inc., an earlier suit by DuBois' co-inventor. That suit was
settled, after an adverse jury verdict on liability, for $5,000,000 and warrants
to purchase 250,000 shares of Gradco Systems, Inc. common stock at $4.00 per
share. These differences favor the Company's position. The Company is


                                       6
<PAGE>


presently unable to determine the amount of damages which is likely to be
awarded if DuBois is successful in his lawsuit. Although the DuBois case will be
tried before a jury so that there are substantial elements of uncertainty, the
Company believes that the DuBois case will not have a material adverse effect on
its consolidated financial position or liquidity.

         BANKRUPTCY OF MITA INDUSTRIAL CO., LTD.

         In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest
customers, filed a petition in Japan along with five of its affiliates for the
Japanese equivalent of a Chapter XI Reorganization. The Company established an
allowance for the full amount of Mita's indebtedness (in yen) to Gradco as of
the bankruptcy date. The amount charged to expense during fiscal year 1999 was
$5,543,000. On an after-tax basis, this charge amounted to $2,803,000, or $.35
per share. Mita's reorganization plan, approved by the court in January 2000,
made Mita a wholly-owned subsidiary of Kyocera Corporation and directed Mita to
repay 18% of the unsecured creditors' debt over a period of 10 years. These
payments to the Company will total $1,306,000 based on the value of the yen at
March 31, 2000, since the yen has strengthened against the dollar since the
bankruptcy filing. The Company recorded a non-current receivable and a pre-tax
credit to income in the amount of $935,000, representing the present value of
the non-interest bearing payments to be received using an 8% discount rate.

Item 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
         MATTERS.

         (a) MARKET INFORMATION.

         Gradco common stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market System under the symbol GRCO. The following
table sets forth the quarterly high and low closing sales prices from April 1,
1998 to March 31, 2000.

<TABLE>
<CAPTION>
QUARTER ENDED                                  HIGH          LOW
<S>                                           <C>          <C>
June 30, 1998...............................  $ 7.63       $ 5.19
September 30, 1998..........................  $ 7.44       $ 1.75
December 31, 1998...........................  $ 4.00       $ 1.44
March 31, 1999..............................  $ 3.13       $ 1.31
June 30, 1999...............................  $ 3.38       $ 1.63
September 30, 1999..........................  $ 2.69       $ 0.94
December 31, 1999...........................  $ 2.19       $ 1.00
March 31, 2000..............................  $ 2.63       $ 1.06
</TABLE>


         (b) HOLDERS.

         The approximate number of holders of record of Gradco common stock, no
par value (its sole class of common equity) as of the close of business on June
15, 2000 is 671.

         (c) DIVIDENDS.

         Gradco has not declared any dividends on its common stock. The present
policy of Gradco's board of directors is to retain earnings to provide funds for
the operation and expansion of Gradco's business as well as to repurchase up to
2 million shares of its common stock in the market from time to time. Item 6.
SELECTED FINANCIAL DATA.

         The following selected financial data should be read in conjunction
with the consolidated financial statements of Gradco and the notes thereto
included elsewhere herein.


                                       7
<PAGE>


<TABLE>
<CAPTION>
                                                                  Years Ended March 31,
                                             -------------------------------------------------------------
                                                2000         1999         1998         1997         1996
                                             ---------    ---------    ---------    ---------    ---------
                                                           (In thousands, except per share amounts)
<S>                                          <C>          <C>          <C>          <C>          <C>
Statement of income data:
Operating revenues: ......................   $  51,274    $  81,817    $ 120,999    $ 100,887    $ 100,596
                                             ---------    ---------    ---------    ---------    ---------

Costs and expenses:
    Cost of sales ........................      36,715       62,362       95,019       79,271       77,497
    Other operating expenses .............      13,244       13,753       14,274       14,770       15,785
    Interest income, net .................        (394)        (262)        (160)        (183)        (226)
    Investment (gains) losses ............        --           --           --           --            (53)
    Provision for doubtful Mita receivable        (935)       5,543         --           --           --
    Hamma litigation settlement ..........        --          5,000         --           --           --
                                             ---------    ---------    ---------    ---------    ---------
                                                48,630       86,396      109,133       93,858       93,003
                                             ---------    ---------    ---------    ---------    ---------
Earnings (loss) before income taxes and
    minority interest ....................       2,644       (4,579)      11,866        7,029        7,593
Income taxes .............................       1,182       (2,317)       4,378        2,983        2,748
Minority interest ........................         (18)         (72)       1,102        1,194        1,585
                                             ---------    ---------    ---------    ---------    ---------
        Net earnings (loss) ..............   $   1,480    $  (2,190)   $   6,386    $   2,852    $   3,260
                                             =========    =========    =========    =========    =========

Basic earnings (loss) per common share ...   $     .19    $    (.28)   $     .82    $     .36    $     .42
                                             =========    =========    =========    =========    =========

Average shares outstanding, basic EPS ....       7,609        7,897        7,809        7,799        7,796
                                             =========    =========    =========    =========    =========

Diluted earnings (loss) per common share .   $     .19    $    (.28)   $     .79    $     .36    $     .42
                                             =========    =========    =========    =========    =========

Average shares outstanding, diluted EPS ..       7,616        7,897        8,051        7,832        7,813
                                             =========    =========    =========    =========    =========

Balance sheet data:
    Working capital ......................   $  18,044    $  15,388    $  17,240    $  19,418    $  18,979
    Total assets .........................      39,571       43,902       48,471       58,086       58,015
    Long-term debt .......................        --           --              2           15           25
    Shareholders' equity .................      23,467       21,030       21,473       15,339       16,201
</TABLE>


                                       8
<PAGE>


Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         IN ADDITION TO HISTORICAL INFORMATION, MANAGEMENT'S DISCUSSION AND
ANALYSIS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING THOSE RELATED TO
THE REGISTRANT'S GROWTH AND STRATEGIES, REGARDING EVENTS AND FINANCIAL TRENDS
THAT MAY AFFECT THE REGISTRANT'S FUTURE RESULTS OF OPERATIONS AND FINANCIAL
POSITION. THE REGISTRANT'S ACTUAL RESULTS AND FINANCIAL POSITION COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF COMPETITION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN TECHNOLOGY,
FLUCTUATIONS IN THE RATES OF EXCHANGE OF FOREIGN CURRENCY AND OTHER RISKS AND
UNCERTAINTIES OVER WHICH THE REGISTRANT HAS LITTLE OR NO CONTROL.

         GJ and GU operate jointly in the development and marketing of products
to their customer base, primarily OEMs. Both companies sell into the U.S.
domestic and foreign marketplace at similar profit margins, after elimination of
intercompany profits. Sales are denominated for the most part in Japanese yen
and U.S. dollars, corresponding to the currency charged for the product by the
contract manufacturer. Although the gross profit margin percentage is thus
protected from foreign currency fluctuations, translation gains and losses can
still occur when receivables and payables are denominated in other than the
local currency of each company.

REVENUES

         Revenues for the fiscal year ended March 31, 2000 decreased by
$30,543,000 (37.3%) from the prior year primarily due to a decrease of
$29,663,000 (37.7%) in net sales, from $78,622,000 to $48,959,000. Unit sales in
the office automation market decreased by 50% and Venture's sales decreased 14%.
A stronger yen, which increased by 12% against the dollar during the year,
caused an increase of $3.1 million in revenue when yen denominated sales were
translated into dollars. Revenue from development engineering services increased
by $267,000 from increased business at Venture and royalties decreased by
$1,147,000.

         Due to the overall transition in the office equipment industry from
analog to digital equipment, which does not require the kind of multi-bin
sorters which the Company has produced and marketed, emphasis continues to be
placed on design, development and marketing of paper handling products for the
rapidly increasing digital equipment market. GTL, GJ's new 90% owned subsidiary,
will also engage in a variety of diversified businesses. As of March 1, 2000 it
began the distribution of Dippin' Dots ice cream in Japan. It is exploring and
developing other technical and non-technical business opportunities.

         Revenues for the fiscal year ended March 31, 1999 decreased by
$39,182,000 (32.4%) from the prior year primarily due to a decrease of
$37,880,000 (32.5%) in net sales, from $116,502,000 to $78,622,000. Unit sales
in the copier market decreased by 34% and unit sales in the printer market
decreased 46%. Sales denominated in yen, when translated into dollars, were
approximately $2.1 million lower than they would have been had the yen not been
5% weaker against the dollar on average during the year. Revenue from
development engineering services decreased by $526,000 from reduced business at
Venture and royalties decreased by $776,000.

COSTS AND EXPENSES

         Gross margin on net sales was 25.0%, 20.7% and 18.4% in fiscal 2000,
1999 and 1998, respectively. The increase in the 1999 fiscal year is primarily
due to a change in product mix toward higher margin units in the copier and
printer business, but was tempered by a decrease in margins in Venture's
contract manufacturing business from prior year levels. The increase in the 2000
fiscal year is primarily from unit price increases resulting from lower volumes
coupled with an increase in margins in Venture's contract manufacturing
business.

         Research and development expenses ("R&D") in fiscal 2000 totaled
$2,742,000 (5.3% of revenues), compared to $3,011,000 (3.7% of revenues) in
fiscal 1999 and $4,191,000 (3.5% of revenues) in fiscal 1998. R&D expenses
incurred under development engineering service contracts in the fiscal years
ended March 31, 2000, 1999 and 1998, respectively, were $1,401,000, $1,178,000
and $1,914,000. Both the decrease from fiscal 1998 to 1999 and the increase from
fiscal 1999 to 2000 were attributable to Venture. R&D expenses incurred on
behalf of OEM customers and internal R&D expenses were $1,341,000, $1,833,000
and $2,277,000 for the same periods.

         Selling, general and administrative expenses ("SG&A") decreased by
$240,000 (2.2%) in fiscal 2000 from the prior year. Although there was a
one-time charge of $693,000 included in SG&A attributable to the termination of
the GJ retirement plan (see Note 7 of "Notes to Consolidated Financial
Statements" set forth in Item 8 below), this was more than offset by a reduction
of $250,000 in patent amortization costs and lower personnel costs at each


                                       9
<PAGE>


of the Registrant's significant subsidiaries. SG&A increased by $659,000 (6.5%)
in fiscal 1999 from the prior year. There was a foreign currency loss of
$482,000 included in SG&A in fiscal 1999 compared to a gain of $1,098,000 in the
prior year which accounted for a net increase of $1,580,000. This increase was
reduced by a favorable translation of SG&A at GJ caused by the weaker yen during
the year in the amount of approximately $300,000 and a decrease in amortization
expense of $624,000. In fiscal 1999, in addition to the normal SG&A expenses,
the Registrant took a $5,000,000 charge for the settlement of the Hamma
litigation and a $5,543,000 charge due to the bankruptcy petition filed by Mita
Industrial Co. Ltd. ("Mita"), one of GJ's largest customers. On an after-tax
basis, these charges amounted to $6,103,000, or $.77 per share, in fiscal 1999.
In fiscal 2000, Mita's reorganization plan was approved by the bankruptcy court
and Mita was directed to repay 18% of the unsecured creditors' debt over a
period of 10 years. The Registrant recorded a pre-tax credit to income in the
amount of $935,000 in the third quarter, representing the present value of the
non-interest bearing payments to be received.

PRE-TAX EARNINGS, INCOME TAXES AND MINORITY INTEREST

         As a result of the above factors, earnings (loss) before income taxes
and minority interest were $2,644,000, ($4,579,000) and $11,866,000 in fiscal
2000, 1999 and 1998, respectively. The tax provisions (benefit) of $1,182,000,
($2,317,000) and $4,378,000 in fiscal 1999, 1998 and 1997, respectively,
primarily comprise foreign taxes on the earnings (loss) of GJ and federal and
state taxes on the earnings of GU. The Registrant's consolidated effective tax
rate decreased in fiscal 2000 as domestic income, taxed at a lower rate,
represented a greater share of total pre-tax earnings and a portion of the
domestic income was sheltered from federal taxes. The tax rate increased in
fiscal 1999 from the prior year as domestic income was sheltered from federal
taxes while deferred foreign tax benefits were provided on the foreign losses.
For further discussion regarding the tax provisions, see Note 5 of "Notes to
Consolidated Financial Statements" set forth in Item 8 below.

         Minority interest decreased relative to the earnings (loss) due to the
buyback of GJ shares during fiscal 1998 which increased the Registrant's
ownership in GJ from 58.6% to 97.3%, see Note 2 of "Notes to Consolidated
Financial Statements" set forth in Item 8 below.

LITIGATION

         On December 17, 1998, following a federal District Court decision
finding that Gradco was liable to John C. Hamma, a former employee, and Tenex,
his transferee, for undetermined damages in connection with their release in
1982 of obligations of Gradco under a 1979 agreement providing royalties based
on Gradco revenue from Hamma inventions, the parties settled the matter before
completion of the damages trial and any appeals. Pursuant to such settlement,
Gradco agreed to pay $5 million and issued 250,000 five-year warrants to
purchase shares of Gradco exercisable immediately at $4.00 per share. At the
date of closing Gradco paid $3 million in cash and provided an irrevocable
letter of credit securing its obligation to pay the remaining $2 million in two
equal installments on November 15, 1999 and November 15, 2000.

         A lawsuit remains pending by R. Clark DuBois, also a former employee,
in which fraud is claimed in connection with the acquisition by Gradco of a
release from Mr. DuBois of his royalty agreement. In this case, with Gradco's
consent, the liability and damages phases have been consolidated. The facts in
the DuBois case differ from those in the Hamma case in many significant
respects. Although the case will be tried before a jury, so that there are
substantial elements of uncertainty, the Registrant continues to believe that
the case will not have a material adverse effect on its consolidated financial
position or liquidity. See Item 3 "Legal Proceedings" and Note 8 of "Notes to
Consolidated Financial Statements" set forth in Item 8 below.

EFFECTS OF INFLATION

         To date, the Registrant has not experienced significant inflationary
cost increases.

LIQUIDITY AND CAPITAL RESOURCES

         Working capital increased by $2,656,000 at March 31, 2000, to
$18,044,000, from the prior year-end amount, primarily from income from
operations and favorable currency translation adjustments. Working capital was
$15,388,000 at March 31, 1999, a decrease of $1,852,000 from March 31, 1998,
primarily as a result of the loss incurred in operations.


                                       10
<PAGE>


         Net cash of $0.7 million was used in operations in fiscal 2000 as
compared to net cash of $4.3 million and $3.4 million being provided by
operations in fiscal 1999 and 1998, respectively. Net earnings before non-cash
charges for depreciation, amortization, deferred taxes, provision for losses on
accounts receivable, stock-based compensation and minority interest provided
$2.7 million in 2000, up from $1.8 million in 1999, but was offset by $1.0
million used for the Hamma litigation installment. A decrease in accounts
receivable provided $4.3 million in 2000 compared to $6.8 million in 1999.
Changes in accounts payable, notes payable to suppliers and income taxes payable
in 2000 used $6.3 million , but in 1999 changes to these accounts used $7.7
million. Also, changes in other asset and liability accounts in 2000 used $0.5
million, but in 1999 changes to these accounts provided $3.4 million.

         The increase in 1999 from 1998 was due to a decrease in accounts
receivable which provided $6.8 million in cash as compared to an increase in
accounts receivable in 1998 which accounted for a use of $7.6 million. Net
earnings before non-cash charges for depreciation, amortization, deferred taxes,
provision for losses on accounts receivable, stock-based compensation and
minority interest provided $1.8 million in 1999, down from $9.2 million in 1998.
Changes in accounts payable, notes payable to suppliers and income taxes payable
in 1999 used $7.7 million, but in 1998 changes to these accounts used only $0.1
million. Also, changes in other asset and liability accounts in 1999 provided
$3.4 million, but in 1998 changes to these accounts provided $1.9 million.

         Net cash used in investing activities of $0.1 million, $0.2 million and
$0.3 million in fiscal 2000, 1999 and 1998, respectively, was for acquisition of
property and equipment and in fiscal 2000 $0.2 million was used to purchase a
license to sell Dippin' Dots ice cream in Japan. In fiscal 1999, $2.0 million
was used to purchase certificates of deposit, $1.0 million of which was redeemed
in fiscal 2000. In fiscal 1998, $12.7 million was used to repurchase GJ shares,
decreasing the minority interest ownership of GJ from 41.4% to 2.7%.

         Net cash used in financing activities was $1.3 million in fiscal 2000
representing the purchase of 687,075 shares of treasury stock. Net cash provided
by financing activities was $0.1 million and $0.2 million in fiscal 1999 and
1998, respectively, primarily from the exercise of stock options.

         Exchange rate changes associated with a stronger yen caused increases
of $1.1 million and $1.6 million in cash in fiscal 2000 and 1999, respectively,
and a decrease of $0.2 million in cash was caused by a weakening yen in fiscal
1998.

         At March 31, 2000, the Registrant had $12.2 million in cash and no
long-term debt. The Registrant's Japanese subsidiary has informal credit
facilities with a Japanese bank. There were no borrowings at March 31, 2000. The
Registrant believes that its cash and credit facilities are adequate for its
short and long-term needs. The Registrant does not have any material commitments
for capital expenditures.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Response to this Item is contained in Item 14(a).

Item 9.  DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE.

         Not applicable.


                                       11
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         (a) The following table sets forth the name of each director and
executive officer of the Registrant, and the nature of all positions and offices
with the Registrant held by him at present.(1) Unless otherwise indicated, the
term of office of all directors and executive officers expires at the next
annual meeting of stockholders of the Registrant, which is expected to be held
in September 2000.

Name                              Position
----                              --------
Martin E. Tash                    Chairman of the Board, President and Chief
                                  Executive Officer

Harland L. Mischler               Executive Vice President, Chief Financial
                                  Officer and Director

Bernard Bressler                  Secretary, Treasurer and Director

Robert J. Stillwell               Director

Thomas J. Burger                  Director

Masakazu (Mark) Takeuchi          Director of Registrant; President and
                                  Director of GJ*

Akira (Tony) Shinomiya            Chief Financial Officer and Director of GJ*
----------
*Term expires at ordinary general shareholders meeting of GJ for fiscal 2000, to
be held in June 2000. Messrs. Takeuchi and Shinomiya are expected to be elected
for an additional two year term at that time.

         (1) Akira (Tony) Shinomiya, who is listed in the table, is an executive
officer of Gradco (Japan) Ltd. ("GJ"), the Registrant's majority-owned Japanese
subsidiary. As described in Item 1(b) above, the Registrant's primary business
is conducted through GJ. Due to the significance of the role of Mr. Shinomiya in
managing the operations of GJ and conducting its relationship with the
Registrant, information regarding him has been included in various portions of
this part III. However, the inclusion of such information under references to
"executive officers of the Registrant" is not an acknowledgment that Mr.
Shinomiya may be so characterized, since he does not perform a policy-making
function for the Registrant.

(b) The following is a brief account of the recent business experience of each
director and executive officer and directorships held with other companies which
file reports with the Securities and Exchange Commission.

Name                        Business Experience
----                        -------------------
Martin E. Tash,             Mr. Tash has been Chairman of the Board and Chief
age 59                      Executive Officer of the Registrant since October
                            1990, and President of the Registrant since October
                            1991. Until June 1998 Mr. Tash was also Chairman of
                            the Board and President of Plenum Publishing
                            Corporation , a position he had held since July
                            1977. After the sale of Plenum to a third party, Mr.
                            Tash resigned.

Harland L. Mischler,        Mr. Mischler has been Chief Financial Officer and a
age 68                      director of the Registrant since October 1990, and
                            Executive Vice President of the Registrant since
                            October 1991. Mr. Mischler is a certified public
                            accountant. Mr. Mischler served as Vice President,
                            Controller and Treasurer of Hobart Corporation from
                            1966 to 1981. From 1981 to 1984 he was Vice
                            President of Finance of Bausch & Lomb, Inc. At that
                            time he purchased, with another, Applied Research
                            Laboratories, Inc., an analytical instrument
                            company, in a leveraged buyout from Bausch & Lomb.
                            After such company was sold profitably in 1987, Mr.
                            Mischler founded HLM Capital Resources, Inc., a
                            private investment and holding company of which he
                            is President and Chairman.

                                       12
<PAGE>


Bernard Bressler,           Mr. Bressler has been Secretary and a director of
age 72                      the Registrant since October 1990 and Treasurer of
                            the Registrant since April 1992. He has been a
                            practicing attorney since 1952, and is presently a
                            member of the firm of Bressler, Amery & Ross, P.C.,
                            counsel to the Registrant. Mr. Bressler was also a
                            director of Plenum Publishing Corporation until its
                            sale.

Robert J. Stillwell,        Mr. Stillwell has been a director of the Registrant
age 64                      since October 1991. Mr. Stillwell owns and operates
                            the Robert J. Stillwell Agency, Inc., an independent
                            life and health insurance agency which he founded
                            over 20 years ago, and he owns and operates
                            Nationwide Property Management, which handles
                            diverse real estate investments in which he is
                            involved.

Thomas J. Burger,           Mr. Burger has been a director of the Registrant
age 53                      since October 1993. He is Associate Senior Vice
                            President of NEC America, Inc. (a position he has
                            held since July 1993), and is responsible for the
                            sale and marketing of its business telephone systems
                            throughout the United States. Prior thereto, he was
                            President and a director of two wholly-owned
                            subsidiaries of NEC America Inc., which conducted
                            the sales, installation and maintenance of NEC
                            communication systems and networks throughout the
                            Central, South and Western United States. From
                            August 1988 to December 1989 Mr. Burger was
                            President and a director of Marcom Communications
                            Inc. After he reorganized its telecommunication
                            subsidiary, the subsidiary was sold to NEC America
                            and he became an employee of NEC. In July 1987 Mr.
                            Burger founded Astra Services Inc., a computer
                            company providing various software development
                            services to the communications industry. Astra
                            Services was sold profitably in 1992. From 1973 to
                            1987 Mr. Burger was employed in various capacities
                            by Telecom Plus International Inc., one of the major
                            independent interconnect companies in the U.S. He
                            became President in 1980, a position he held until
                            May 1987 when the company was sold to Siemens
                            Communications.

Masakazu (Mark)             Mr. Takeuchi has been a director of the Registrant
Takeuchi, age 63            since September 1997. He has been President and
                            Chief Executive Officer of GJ since 1989 and a
                            director of GJ since 1988. He is also President and
                            a director of GU. He was Senior Vice President of
                            Far East Operations and New Business Development of
                            the Registrant from August 1988 to October 1990, and
                            a director of the Registrant from March 1990 until
                            October 1990. Mr. Takeuchi was also Chairman of GJ
                            from August 1988 until December 1988. Previously,
                            from 1961, Mr. Takeuchi was employed by C. Itoh &
                            Co. Ltd. in various positions.

Akira (Tony)                Mr. Shinomiya has been Chief Financial Officer and a
Shinomiya, age 57           director of GJ since January 1989. From 1987 to
                            1988, he served as deputy General Manager of C. Itoh
                            Electronics Corp. and from September 1985 through
                            1986 he was Section Manager of the Electronics
                            Division of C. Itoh & Co. Ltd. From 1975 to 1985 he
                            was Vice President of C. Itoh Electronics Inc. in
                            Los Angeles, California.

Item 11.  EXECUTIVE COMPENSATION.

         (a) SUMMARY COMPENSATION TABLE.

         The following table sets forth all compensation awarded to, earned by
or paid to the following persons through June 15, 2000 for services rendered in
all capacities to the Registrant and its subsidiaries during each of the fiscal
years ended March 31, 2000, 1999 and 1998: (1) the Registrant's Chief Executive
officer, and (2) each of the other executive officers whose total compensation
for the fiscal year ended March 31, 2000 required to be disclosed below exceeded
$100,000:


                                       13
<PAGE>


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                            Securities
Name and                                            Salary and              Underlying
Principal Position                   Year       Bonus ($)(1)(2)             Options(3)
------------------                   ----       ---------------             ----------
<S>                                  <C>             <C>                       <C>
Martin E. Tash                       2000            125,000                   ---
Chairman of the Board,               1999            125,000                   ---
President and Chief                  1998            125,000                  100,000
Executive Officer

Masakazu (Mark) Takeuchi             2000            307,125                   ---
President,                           1999            267,419                   ---
Gradco (Japan) Ltd.                  1998            263,388                   60,000

Akira (Tony) Shinomiya               2000            271,024                   ---
Chief Financial Officer              1999            235,986                   ---
Gradco (Japan) Ltd.                  1998            232,358                   40,000
</TABLE>

---------------
(1) With regard to Mr. Tash, the amounts shown in this column represent
compensation for special services rendered as a director.

(2) With regard to Messrs. Takeuchi and Shinomiya, the amounts shown in this
column represent compensation paid to such individuals for services as executive
officers of GJ. See note (1) in Item 10(a). All such compensation was paid in
yen by GJ and is translated into dollars at each year's average annual exchange
rates in the above table. When measured in yen, there was a 5.8% increase in
compensation from 1998 to 1999 and no increase from 1999 to 2000.

(3) Represents the number of shares of common stock issuable upon the exercise
of options granted to the named officer pursuant to the 1997 Stock Option Plan
(see below) during each fiscal year.

         (b) STOCK OPTION PLANS.

         On September 11, 1997, the Board of Directors adopted the Registrant's
1997 Stock Option Plan (the "1997 Plan") which provides for the grant of options
which do not qualify as "incentive stock options" within the meaning of Section
422A of the Internal Revenue Code. Any officer, director, key employee or
consultant of Gradco or any of its subsidiaries, in the discretion of the Board
of Directors, may be designated to receive options under this plan. The 1997
Plan provides for the issuance of up to 400,000 shares of Gradco common stock
upon exercise of stock options (subject to adjustment in the event of a stock
split, stock dividend, consolidation, reorganization, or comparable change in
Gradco's capital structure).

         The 1997 Plan is administered by the Registrant's Board of Directors.
Subject to limitations contained in the 1997 Plan, the Board determines the
optionees, option prices, number of shares subject to such options, the duration
of each option, the dates of grant (no options may be granted after September
11, 2007), and the schedule for exercise of each option. The options are not
transferable. Currently, options for 237,000 shares are outstanding under the
1997 Plan. 136,250 shares are available for issuance under the 1997 Plan.

         Gradco also has a 1988 Stock Option Plan (the "1988 Plan") which
provides for the grant of options which either do or do not qualify as
"incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code. Any officer, director or key employee of Gradco or any of its
subsidiaries, in the discretion of the Stock Option Committee, may be designated
to receive options under this plan. The 1988 Plan, which provided for the
issuance of up to 350,000 shares of Gradco common stock upon exercise of stock
options, terminated on May 25, 1998 in accordance with its terms. Thus, no
additional options may be granted thereunder, but the termination does not
affect the validity of outstanding options. Currently, options for 209,500
shares are outstanding under the 1988 Plan.


                                       14
<PAGE>


         The Stock Option Committee, which administers the 1988 Plan, is
appointed by the Board of Directors. Bernard Bressler and Robert J. Stillwell
currently comprise the Stock Option Committee. Since no new options may be
issued under the 1988 Plan, the Committee's powers under such Plan are limited
to such administrative matters as may arise with regard to currently outstanding
options.

         During this period, no options were granted to executive officers named
in the Summary Compensation Table (above) under the 1997 Plan and no options
were exercised by said executive officers under either stock option plan.

         The following table sets forth the number of shares underlying
unexercised options held by the foregoing executive officers at March 31, 2000
together with the value of such options as of March 31, 2000.

                     UNEXERCISED OPTIONS AT FISCAL YEAR-END

<TABLE>
<CAPTION>
                              Number of Securities               Value of Unexercised
                                   Unexercised                   In-the-Money Options
                               at Fiscal Year-End                 at Fiscal Year-End
                                  Exercisable/                       Exercisable/
Name                              Unexercisable                    Unexercisable ($)
----                              -------------                    -----------------
<S>                             <C>                                      <C>
Martin E. Tash                  125,000 / 25,000                         None

Masakazu (Mark)                  63,000 / 15,000                         None
Takeuchi(1)

Akira (Tony)                     36,000 / 10,000                         None
Shinomiya(1)
</TABLE>

---------------
(1) Messrs. Takeuchi and Shinomiya are executive officers of Gradco (Japan) Ltd.
See note 1 in Item 10(a).

         (c) RETIREMENT PLAN (GJ).

         In June 1994, GJ adopted a retirement plan providing that, subject to
approval by GJ's shareholders at the time of proposed payment, a retirement
allowance be paid by GJ to a member of GJ management who retires after his term
of office or by reason of reaching his mandatory retirement age. The amount of
the retirement allowance is determined by a formula multiplying (1) the monthly
salary at the time of retirement, by (2) the number of years served, by (3) a
factor which varies depending upon the office held by the eligible individual.
Each of Messrs. Takeuchi and Shinomiya was eligible for payments under this Plan
upon his retirement. In an effort to reduce operating expenses in future years,
GJ management agreed to terminate the retirement plan at the end of fiscal year
2000. In return, the Company and GJ agreed to vest the then due amount to be
paid upon actual retirement and GJ agreed to loan to each individual an amount
equal to 80% of his vested benefit at year end. The loans, which will bear
interest at a nominal rate, must be repaid at the time of retirement when the
accrued benefit will be paid. Mr. Takeuchi's vested benefit is (Y)103,000,000
($970,000) and Mr. Shinomiya's benefit is (Y)85,000,000 ($801,000).

         (d) COMPENSATION OF DIRECTORS.

         Each director who is not also an officer receives a fee of $1,250 for
each quarter in a fiscal year during which he serves in such position.
Accordingly, Mr. Stillwell and Mr. Burger each received $5,000 for the 2000
fiscal year.

         Martin E. Tash (the Registrant's President and Chairman of the Board)
received $125,000 in cash for special services rendered to the Registrant as a
director during the fiscal year ended March 31, 2000. This amount is included in
the SUMMARY COMPENSATION TABLE in Item 11(a) above.

         HLM Capital Resources, Inc., a closely-held corporation controlled by
Harland L. Mischler (the Registrant's Executive Vice President and Chief
Financial Officer) received $70,000 in cash for providing to the Registrant
special services rendered by Mr. Mischler as a director during the fiscal year
ended March 31, 2000.


                                       15
<PAGE>


         All directors (and Messrs. Tash, Mischler and Bressler in their
capacity as officers as well) are eligible to receive options under the 1997
Stock Option Plan. See table in Item 10(b) as to options held by Messrs. Tash
and Takeuchi as of March 31, 2000. As of that date, Mr. Mischler held options
for 46,000 shares and Messrs. Stillwell and Burger each held options for 7,500
shares, all of which were issued under the 1988 Plan.

         Bernard Bressler, a practicing attorney, receives compensation based on
his usual hourly rate for attendance at Board meetings.

         (e) INDEMNIFICATION.

         The Registrant's By-Laws provide that it shall, to the fullest extent
permitted by the Nevada General Corporation Law, indemnify any person against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was a director, officer, employee or agent of
the Registrant. Accordingly, all current officers and directors of the
Registrant are entitled to indemnification by the Registrant under this
provision. In addition, James P. Owens, who served as an officer of the
Registrant from 1989 until April 1992, is entitled to indemnification under such
provision based on his activities in such capacity. Mr. Owens is Vice President,
Finance and Administration, of GU.

         (f) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

         The Registrant's Board of Directors has no compensation committee (or
other Board committee performing equivalent functions); compensation policies
applicable to executive officers are determined by the Board. During the fiscal
year ended March 31, 2000, the officers of the Registrant participating in the
Board's deliberations concerning executive compensation were Martin E.
Tash, Harland L. Mischler and Bernard Bressler (who are members of the Board).

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         (a) The following table sets forth information regarding persons known
to the Registrant to be the beneficial owners of more than 5% of the
Registrant's voting securities as of June 15, 2000 based on 7,175,849 shares of
Common Stock, no par value, outstanding as of such date.

<TABLE>
<CAPTION>
                                                               Amount and Nature
                               Name and Address of               of Beneficial                Percentage
Title of Class                   Beneficial Owner                  Ownership                   of Class
--------------        -------------------------------          -----------------              ----------
<S>                   <C>                                          <C>                          <C>
Common Stock,         Dimensional Fund Advisors, Inc.              631,674(1)                   8.8%
no par value          1299 Ocean Avenue
                      11th Floor
                      Santa Monica, CA 90401
</TABLE>

---------------
(1) As set forth in Schedule 13G, dated February 11, 2000, Dimensional Fund
Advisors Inc. ("Dimensional"), a registered investment advisor, is deemed to
have beneficial ownership of 631,674 shares as of December 31, 1999, all of
which shares are held on behalf of advisory clients of Dimensional, a registered
open-end management investment company. Dimensional disclaims beneficial
ownership of all such shares.


                                       16
<PAGE>


         (b) The following table sets forth information regarding the voting
securities of the Registrant beneficially owned by each director of the
Registrant, each of the executive officers named in the Summary Compensation
Table in Item 11(a), and all officers and directors as a group (7 persons), as
of June 15, 2000.

<TABLE>
<CAPTION>
                                                                Amount and Nature
                                                                   of Beneficial              Percentage
Title of Class                 Beneficial Owner                      Ownership               of Class (1)
--------------             -----------------------            -----------------------        ------------
<S>                        <C>                                     <C>                          <C>
Common Stock,              Martin E. Tash                          371,548 (2)                  5.1%
no par value
                           Harland L. Mischler                     115,000 (3)                  1.6%

                           Bernard Bressler                         33,786 (4)                     *

                           Robert J. Stillwell                      24,600 (5)                     *

                           Thomas J. Burger                          7,500 (6)                     *

                           Masakazu (Mark) Takeuchi                 63,000 (7)                     *

                           Akira (Tony) Shinomiya                   36,000 (7)                     *

                           All Executive Officers                  651,434 (8)                  8.7%
                           and Directors as a Group
                           (comprising the 7 persons
                           shown above)
</TABLE>
* Less than 1%
---------------

(1) In each instance where a named individual is listed as the holder of a
currently exercisable option, the shares which may be acquired upon exercise
thereof have been deemed outstanding for the purpose of computing the percentage
of outstanding shares owned by such person, but not for the purpose of computing
the percentage owned by any other person, except the group referred to in note
(8).

(2) Includes 162,743 shares owned by Mr. Tash under a private profit sharing
plan for the benefit of Mr. Tash who is the trustee and sole lifetime
beneficiary and retains voting power, 60,000 shares owned by Mr. Tash jointly
with his wife and 23,805 shares owned directly by Mr. Tash. Also includes
currently exercisable options granted to Mr. Tash to purchase 125,000 shares of
the Registrant's stock.

(3) Includes 52,000 shares owned directly by HLM Capital Resources, Inc., a
private investment and holding corporation, of which Mr. Mischler is President,
Chairman and major shareholder, and 17,000 shares owned directly by Mr.
Mischler. Also includes currently exercisable options granted to Mr. Mischler to
purchase 46,000 shares of the Registrant's stock.

(4) Includes 2,626 shares held by Mr. Bressler's wife. Mr. Bressler disclaims
beneficial ownership of the shares owned by his wife.

(5) Includes 17,100 shares held for Mr. Stillwell in an individual retirement
account, and 7,500 shares which may be acquired upon the exercise of currently
exercisable options.

(6) Represents shares which may be acquired upon the exercise of currently
exercisable options.

(7) See note (1) to table in Item 10(a). The number of shares shown above
represents those which are subject to currently exercisable options.

(8) The number of shares and percentage owned includes 285,000 shares which may
be acquired through exercise of currently exercisable options held by certain of
such persons individually named. The number of outstanding shares used in
computing the percentage of ownership by the group includes such shares.


                                       17
<PAGE>


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         On November 30, 1999 Martin Tash filed a Rule 144 Report and sold
31,000 shares of common stock pursuant thereto. He neglected to file a timely
Form 4 reflecting such sale. Such report was filed June 19, 2000 and the table
under Item 12(b) reflects such sale.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Bernard Bressler, Secretary, Treasurer and a director of the
Registrant, is a member of the law firm of Bressler, Amery & Ross, P.C., counsel
to the Registrant. During the 2000 fiscal year, the Registrant paid legal fees
of $106,989 to such firm.

         During fiscal year 2000, Messrs. Takeuchi and Shinomiya each obtained
5% of GTL on its formation, the remaining 90% is owned by GJ.

         Pursuant to an agreement reached September 30, 1999 relating to the
termination of future contributions by GJ to a retirement plan, Mr. Takeuchi
borrowed $772,000 from GJ and Mr. Shinomiya borrowed $641,000 at nominal
interest, repayable upon their retirement and secured by their vested retirement
benefits as described in Item 11(c) above.

                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a) See index to financial statements and financial statement
schedules. See list of exhibits in paragraph (c) below.

         (b) 8-K Reports - None.

         (c) Exhibits:

         2        Agreement and Plan of Merger dated July 25, 1991 regarding
                  reincorporation of Gradco in Nevada, incorporated by reference
                  from definitive Proxy Statement dated September 18, 1991,
                  Exhibit C.

         3.1      Articles of Incorporation of Gradco as reincorporated in
                  Nevada, incorporated by reference from definitive Proxy
                  Statement dated September 18, 1991, Exhibit D.

         3.2      By-laws of Gradco as reincorporated in Nevada, incorporated by
                  reference from Form 10-K for the fiscal year ended March 31,
                  1992, Exhibit 3.2.

         10.1     Agreement between Gradco and Minolta Camera Co., Ltd. dated
                  March 19, 1984, incorporated by reference from Form 10-K for
                  the fiscal year ended April 7, 1984, Exhibit 10.16.

         10.2     Amended and Restated License Agreement between Gradco (Japan)
                  Ltd. and Minolta Camera Co., Ltd. dated July 1, 1991 (Japanese
                  original and English translation), incorporated by reference
                  from Form 10-K for the fiscal year ended March 31, 1992,
                  Exhibit 10.2.

         10.3     General Agreement between Gradco and Ricoh Company, Ltd. dated
                  July 1, 1984, incorporated by reference from Form 10-K for the
                  fiscal year ended March 31, 1985, Exhibit 10.19.

         10.4     Amended and Restated License Agreement between Gradco (Japan)
                  Ltd. and Ricoh Company, Ltd. dated April 1, 1991 (Japanese
                  original and English translation), incorporated by reference
                  from Form 10-K for the fiscal year ended March 31, 1992,
                  Exhibit 10.4.

         10.5     Agreement between Gradco Systems, Inc., and Canon, Inc., dated
                  as of July 1, 1988, incorporated by reference from Form 8-K
                  for July 1, 1988, Exhibit 10.62.

                                       18
<PAGE>

         10.6     Agreement between Gradco/Dendoki Inc. and Canon Inc. dated
                  February 25, 1983, incorporated by reference from Form 10-K
                  for the fiscal year ended March 31, 1986, Exhibit 19.0.

         10.7     Agreement between Gradco/Dendoki Inc. and Canon Inc. dated
                  February 25, 1983, incorporated by reference from Form 10-K
                  for the fiscal year ended March 31, 1986, Exhibit 19.3.

         10.8     Agreement among Gradco, Gradco (Japan) Ltd. and Canon, Inc.
                  dated April 1, 1991, incorporated by reference from Form 10-K
                  for the fiscal year ended March 31, 1992, Exhibit 10.12. 10.9
                  Gradco 1988 Stock Option Plan, incorporated by reference from
                  Form 8-K for July 1, 1988, Exhibit 19.3, and amendment thereto
                  dated July 24, 1991, incorporated by reference from Report on
                  Form 10-Q for quarter ended June 30, 1991, Exhibit 19.2.

         10.10    Gradco 1997 Stock Option Plan, incorporated by reference from
                  its Registration Statement on Form S-8 filed February 3, 1998,
                  Exhibit 4.

         10.11    Amended Umbrella Agreement dated as of December 5, 1990 among
                  Gradco, Gradco (Japan) Ltd. and Gradco (USA) Inc.,
                  incorporated by reference from Form 8-K for December 5, 1990,
                  Exhibit 28.

         10.12    Agreement between Gradco and Gradco (Japan) Ltd. dated March
                  1, 1991, incorporated by reference from Form 8-K for March 1,
                  1991, Exhibit 28.

         10.13    Letter Agreement dated March 29, 1991 between Gradco Systems,
                  Inc. and Gradco (Japan) Ltd., incorporated by reference from
                  Form 10-K for the fiscal year ended March 31, 1991, Exhibit
                  10.31.

         10.14    Lease Agreement between Venture Engineering, Inc. and Aetna
                  Life Insurance Company, Inc. (formerly Trammell Crow Company)
                  dated October 1, 1988 and subsequent amendments dated July 1,
                  1989, August 1, 1989, February 1, 1990 and March 1, 1991,
                  incorporated by reference from Form 10-K for fiscal year ended
                  March 31, 1991, Exhibit 19.3.

         10.15    Basic Agreement between Gradco (Japan) Ltd. and Ikegami
                  Tsushinki Co. Ltd. dated as of January 1, 1996 (English
                  translation of Japanese original ), incorporated by reference
                  from Form 10-K for fiscal year ended March 31, 1996, Exhibit
                  10.16.

         10.16    Agreement between Gradco (Japan) Ltd. and Lexmark
                  International, Inc. dated September 1, 1992, incorporated by
                  reference from Form 10-K for the fiscal year ended March 31,
                  1993, Exhibit 10.22.

         10.17    Regulations of Retirement Allowance for Board of Directors and
                  Auditors of Gradco (Japan) Ltd., adopted June 3, 1994 (English
                  translation of Japanese original), incorporated by reference
                  from Form 10-K for the fiscal year ended March 31, 1995,
                  Exhibit 10.22.

         10.18    Agreement among Gradco (Japan) Ltd., Gradco (USA) Inc., and
                  Xerox Canada Ltd. dated as of August 17, 1995, incorporated by
                  reference from Form 10-K for the fiscal year ended March 31,
                  1996, Exhibit 10.19.

         22       List of Significant Subsidiaries

                  (i)   Gradco (Japan) Ltd. (Japan)
                  (ii)  Venture Engineering, Inc. (Texas)
                  (iii) Gradco (USA) Inc. (California)

         23       Consent of PricewaterhouseCoopers LLP - filed herewith.

         27       Financial Data Schedule - filed herewith.



                                       19
<PAGE>




                                   SIGNATURES

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



Dated:  June 27, 2000
                                       GRADCO SYSTEMS, INC.



                                       By:  /s/ Martin E. Tash
                                            Martin E. Tash
                                            Chairman of the Board, President and
                                            Chief Executive Officer

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

<TABLE>
<CAPTION>
              Signature                               Title                          Date
              ---------                               -----                          ----
<S>                                         <C>                                 <C>
                                            Chairman of the Board,
                                            President and Chief
                                            Executive Officer (Principal
/s/ Martin E. Tash                          Executive Officer)                  June 27, 2000
------------------------------------
Martin E. Tash

                                            Executive Vice President,
                                            Chief Financial Officer
                                            (Principal Financial
                                            and Accounting Officer)
/s/ Harland L. Mischler                     and Director                        June 27, 2000
------------------------------------
Harland L. Mischler



/s/ Bernard Bressler                        Secretary, Treasurer and            June 27, 2000
------------------------------------
Bernard Bressler                            Director



/s/ Robert J. Stillwell                     Director                            June 27, 2000
------------------------------------
Robert J. Stillwell



/s/ Thomas J. Burger                        Director                            June 27, 2000
------------------------------------
Thomas J. Burger



/s/ Mark Takeuchi                           Director                            June 27, 2000
------------------------------------
Mark Takeuchi
</TABLE>


<PAGE>



                           ANNUAL REPORT ON FORM 10-K

                              ITEM 14(a)(1) AND (2)

                        LIST OF FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULES


                       FINANCIAL STATEMENTS AND SCHEDULES

                            YEAR ENDED MARCH 31, 2000

                              GRADCO SYSTEMS, INC.

                                LAS VEGAS, NEVADA




<PAGE>

FORM 10-K--ITEM 14(a)

GRADCO SYSTEMS, INC.

INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES



(1) Financial Statements:

         Report of Independent Accountants...................................S-2
         Consolidated Balance Sheets--
              March 31, 2000 and 1999........................................S-3
         Consolidated Statements of Income--Years Ended
              March 31, 2000, 1999 and 1998..................................S-4
         Consolidated Statements of Shareholders' Equity--
              Years Ended March 31, 2000, 1999 and 1998......................S-5
         Consolidated Statements of Cash Flows--Years Ended
              March 31, 2000, 1999 and 1998..................................S-6
         Notes to Consolidated Financial Statements..................S-8 to S-18
                                                                       inclusive
(2) Financial Statement Schedules:

         II--Valuation and Qualifying Accounts..............................S-19

All other schedules for which provision is made in the applicable regulation of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.



                                      S-1
<PAGE>




                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders
     of Gradco Systems, Inc.


In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page S-1 present fairly, in all material
respects, the financial position of Gradco Systems, Inc. and its subsidiaries at
March 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page S-1 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.





PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
June 13, 2000


                                      S-2
<PAGE>


                              GRADCO SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    March 31,
                                                                               --------------------
                                                                                 2000        1999
                                                                               --------    --------
                                              ASSETS
<S>                                                                            <C>         <C>
Current assets:
     Cash and cash equivalents                                                 $ 12,208    $ 12,423
     Short-term investments                                                       1,000       1,000
     Accounts receivable, less allowance for
           doubtful accounts of $88 and $6,508                                   13,766      17,389
     Inventories                                                                  1,739       1,368
     Deferred income taxes                                                        1,436       1,310
     Other current assets                                                           369         612
                                                                               --------    --------
          Total current assets                                                   30,518      34,102
Property and equipment, net                                                         723         855
Excess of cost over acquired net assets, net
     of accumulated amortization of $581 and $538                                 1,148       1,191
Deferred income taxes                                                             3,104       3,766
Other assets                                                                      4,078       3,988
                                                                               --------    --------
                                                                               $ 39,571    $ 43,902
                                                                               ========    ========

                                 LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                          $  5,672    $  6,543
     Notes payable to suppliers                                                   4,426       9,281
     Accrued expenses                                                             1,928       2,754
     Income taxes payable                                                           448         133
     Current installments of long-term debt                                        --             3
                                                                               --------    --------
          Total current liabilities                                              12,474      18,714
Non-current liabilities                                                           2,157       2,330
Excess of fair value of net assets acquired over cost,
     net of accumulated amortization of $1,000 and $600                             800       1,200
Minority interest                                                                   673         628
Commitments and contingencies (Note 8)

Shareholders' equity:
     Preferred stock, no par value; authorized
          7,500,000 shares, none issued
     Common stock, no par value; authorized 30,000,000
          shares, issued 7,913,434 and 7,910,934                                 46,164      45,829
     Accumulated deficit                                                        (24,682)    (26,162)
     Accumulated other comprehensive income                                       3,240       1,363
     Less cost of common stock in treasury, 687,075 shares                       (1,255)       --
                                                                               --------    --------
          Total shareholders' equity                                             23,467      21,030
                                                                               --------    --------
                                                                               $ 39,571    $ 43,902
                                                                               ========    ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      S-3
<PAGE>


                              GRADCO SYSTEMS, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                          For the years ended March 31,
                                                       -----------------------------------
                                                          2000         1999         1998
                                                       ---------    ---------    ---------
<S>                                                    <C>          <C>          <C>
Revenues:
Net sales                                              $  48,959    $  78,622    $ 116,502
Development engineering services                           1,162          895        1,421
Licenses and royalties                                     1,153        2,300        3,076
                                                       ---------    ---------    ---------
                                                          51,274       81,817      120,999
                                                       ---------    ---------    ---------
Costs and expenses:

Cost of sales                                             36,715       62,362       95,019
Research and development                                   2,742        3,011        4,191
Selling, general and administrative                       10,502       10,742       10,083
Provision for (recovery of) doubtful Mita receivable        (935)       5,543         --
Hamma litigation settlement                                 --          5,000         --
                                                       ---------    ---------    ---------
                                                          49,024       86,658      109,293
                                                       ---------    ---------    ---------
Income (loss) from operations                              2,250       (4,841)      11,706

Interest expense                                              (1)          (4)         (12)
Interest income                                              395          266          172
                                                       ---------    ---------    ---------
Earnings (loss) before income taxes
     and minority interest                                 2,644       (4,579)      11,866
Income tax expense (benefit)                               1,182       (2,317)       4,378
Minority interest                                            (18)         (72)       1,102
                                                       ---------    ---------    ---------
     Net earnings (loss)                               $   1,480    $  (2,190)   $   6,386
                                                       =========    =========    =========

Basic earnings (loss) per common share                 $     .19    $    (.28)   $     .82
                                                       =========    =========    =========
Average shares outstanding, basic EPS                      7,609        7,897        7,809
                                                       =========    =========    =========
Diluted earnings (loss) per common share               $     .19    $    (.28)   $     .79
                                                       =========    =========    =========
Average shares outstanding, diluted EPS                    7,616        7,897        8,051
                                                       =========    =========    =========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      S-4
<PAGE>

                              GRADCO SYSTEMS, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                               Accumulated
                                                                               Other Com-
                                           Common Stock         Accumulated    prehensive     Treasury
                                        Shares        Amount      Deficit       Income         Stock         Total
                                      ----------    ----------   ----------    ----------    ----------    ----------
<S>                                    <C>          <C>          <C>           <C>           <C>           <C>
Balance at March 31, 1997              7,798,909    $   44,618   $  (30,358)   $    1,079                  $   15,339
Components of comprehensive income:
     Net earnings                           --           6,386         --            --                         6,386
     Translation adjustments                --            --           --            (959)                       (959)
                                                                                                           ----------
        Comprehensive income                                                                                    5,427
Issuance of shares in exchange
     for Ziyad shares                        689          --           --            --
Exercise of stock options                 55,000           180         --            --                           180
Stock-based compensation                    --             527         --            --                           527
                                      ----------    ----------   ----------    ----------                  ----------
Balance at March 31, 1998              7,854,598        45,325      (23,972)          120                      21,473
Components of comprehensive income:
     Net loss                               --            --         (2,190)         --                        (2,190)
     Translation adjustments                --            --           --           1,243                       1,243
                                                                                                           ----------
        Comprehensive income                                                                                     (947)
Issuance of shares in exchange
     for Ziyad shares                         86          --           --            --
Exercise of stock options                 56,250           158         --            --                           158
Stock-based compensation                    --             346         --            --                           346
                                      ----------    ----------   ----------    ----------                  ----------
Balance at March 31, 1999              7,910,934        45,829      (26,162)        1,363                      21,030
Components of comprehensive income:
     Net earnings                           --            --          1,480          --                         1,480
     Translation adjustments                --            --           --           1,877                       1,877
                                                                                                           ----------
        Comprehensive income                                                                                    3,357
Exercise of stock options                  2,500             5         --            --                             5
Stock-based compensation                    --             330         --            --                           330
Purchase of treasury stock                  --            --           --            --      $   (1,255)       (1,255)
                                      ----------    ----------   ----------    ----------    ----------    ----------
Balance at March 31, 2000              7,913,434    $   46,164   $  (24,682)   $    3,240    $   (1,255)   $   23,467
                                      ==========    ==========   ==========    ==========    ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      S-5
<PAGE>

                              GRADCO SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                              For the years ended March 31,
                                                                            --------------------------------
                                                                              2000        1999        1998
                                                                            --------    --------    --------
<S>                                                                         <C>         <C>         <C>
Cash flows from operating activities:
    Net earnings (loss)                                                     $  1,480    $ (2,190)   $  6,386
                                                                            --------    --------    --------
    Adjustments to reconcile net income to net cash provided by operating
        activities:
           Depreciation                                                          321         685       1,005
           Amortization                                                         (304)        182         806
           Deferred income taxes                                                 963      (2,959)       (684)
           Provision for losses on accounts receivable                           (36)      5,769          50
           Loss on sale of property and equipment                                  5          31          41
           Stock-based compensation                                              330         346         527
           Installment portion of Hamma litigation settlement                 (1,000)       --          --
           Minority interest                                                     (18)        (72)      1,102
           Decrease (increase) in accounts receivable                          4,335       6,769      (7,641)
           (Increase) decrease in inventory                                     (358)        248         124
           Decrease (increase) in prepaid assets                                 252        (390)        149
           (Increase) decrease in other assets                                  (196)        825       1,014
           Decrease in accounts payable                                       (1,153)     (4,010)       (183)
           Decrease in notes payable to suppliers                             (5,419)     (1,339)     (1,047)
           (Decrease) increase in accrued expenses                              (905)      1,520         435
           Increase (decrease) in income taxes payable                           315      (2,369)      1,162
           Increase in other liabilities                                         689       1,213         199
                                                                            --------    --------    --------
               Total adjustments                                              (2,179)      6,449      (2,941)
                                                                            --------    --------    --------
               Net cash (used in) provided by operations                        (699)      4,259       3,445
                                                                            --------    --------    --------
Cash flows from investing activities:
    Redemption (purchase) of investments                                       1,000      (2,000)       --
    Acquisition of property and equipment                                       (151)       (230)       (330)
    Proceeds from sale of property and equipment                                   5        --          --
    Acquisition of Dippin' Dots license                                         (172)       --          --
    Purchase of minority interest                                               --          --       (12,704)
                                                                            --------    --------    --------
        Net cash provided by (used in) investing activities                      682      (2,230)    (13,034)
                                                                            --------    --------    --------
</TABLE>



                                      S-6
<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

<TABLE>
<CAPTION>
                                                                              For the years ended March 31,
                                                                            --------------------------------
                                                                              2000        1999        1998
                                                                            --------    --------    --------
<S>                                                                         <C>         <C>         <C>
Cash flows from financing activities:
    Repayment of notes in excess of three months                                  (3)        (12)        (11)
    Proceeds from exercise of stock options                                        5         158         181
    Acquisition of treasury stock                                             (1,255)       --          --
                                                                            --------    --------    --------
        Net cash (used in) provided by financing activities                   (1,253)        146         170
                                                                            --------    --------    --------
Effect of exchange rate changes on cash                                        1,055       1,557        (225)
                                                                            --------    --------    --------
Net (decrease) increase in cash and cash equivalents                            (215)      3,732      (9,644)
Cash and cash equivalents at beginning of year                                12,423       8,691      18,335
                                                                            --------    --------    --------
Cash and cash equivalents at end of year                                    $ 12,208    $ 12,423    $  8,691
                                                                            ========    ========    ========


Supplemental Disclosures of Cash Flow Information:

    Cash paid (refunded) during the period for:
        Interest                                                            $      1    $      4    $     12
        Income taxes                                                             (96)      3,036       4,131
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      S-7
<PAGE>


                              GRADCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

         Gradco Systems, Inc. (the "Company") is a holding company which,
through its subsidiaries, designs, develops, contracts to produce and markets,
worldwide, intelligent paper handling devices for the office automation
industry.

PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the accounts
of the Company and its majority and wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
During fiscal year 1998, the Company increased its ownership in Gradco (Japan)
Ltd. ("GJ"), its principal operating subsidiary, from 58.6% to 97.3% (Note 2).

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

CASH EQUIVALENTS

         Cash includes all highly liquid debt instruments purchased with a
maturity of three months or less.

CONCENTRATIONS OF CREDIT RISK

         Financial instruments which subject the Company to concentrations of
credit risk consist primarily of trade receivables. International copier
manufacturers comprise a significant portion of the Company's customer base.

INVENTORIES

         Inventories consist primarily of materials and finished assemblies
which are held to satisfy spare parts requirements of the Company's customers.
The Company has certain contractual commitments to make spare parts available
for purchase for up to six years after the end of a production cycle.
Inventories are stated at the lower of cost (first-in, first-out and weighted
average) or market (net realizable value).

PROPERTY AND EQUIPMENT

         Property and equipment are carried at cost and depreciated on a
straight-line basis over their estimated useful lives, ranging from three to ten
years. Tooling is amortized over its estimated useful life, generally four
years. Leasehold improvements are amortized over the lesser of their estimated
useful lives or the term of the lease.

GOODWILL AND INTANGIBLES

         The excess of cost over acquired net assets ("goodwill") is being
amortized over a period of forty years. Other intangible assets are amortized
over the estimated periods to be benefited which is generally five years.
Goodwill and intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company records impairment to the extent that fair value (using
future undiscounted cash flows) is less than the carrying value of the asset.


                                      S-8
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

REVENUE RECOGNITION

         Revenues from product sales ("net sales") are recorded as units are
shipped. Revenues from development engineering services and research and
development contracts are recognized as earned, and licenses and royalties are
recognized when all obligations of the appropriate agreements have been
fulfilled.

RESEARCH AND DEVELOPMENT EXPENSES

         Research and development expenses incurred under development
engineering service contracts, research and development contracts on behalf of
OEM customers and internal research and development are reflected in research
and development expense.

         Research and development expenses incurred under development
engineering service contracts in the fiscal years ended March 31, 2000, 1999 and
1998, respectively, were $1,258,000, $1,134,000 and $1,914,000. Research and
development expenses on behalf of OEM customers and internal research and
development expenses in the fiscal years ended March 31, 2000, 1999 and 1998,
respectively, were $1,484,000, $1,877,000 and $2,277,000.

FOREIGN CURRENCY TRANSLATION

         Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates and the resulting adjustments are
accumulated in shareholders' equity. Income and expenses are translated at
average exchange rates for the year. Foreign currency gains and losses are
included in net income, except for those relating to intercompany transactions
of a long-term investment nature which are accumulated in shareholders' equity.
There were foreign currency losses of $487,000 and $482,000 included in selling,
general and administrative expenses in fiscal years 2000 and 1999, respectively
and a gain of $1,098,000 in fiscal year 1998.

NET EARNINGS PER SHARE

Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if stock options and other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. There is no
difference in average shares outstanding between diluted and basic in fiscal
year 1999 because there was a net loss. For all periods presented, the net
earnings available to common shareholders is the same for both basic and diluted
EPS and is equal to the net earnings stated in the Consolidated Statements of
Income. A reconciliation of the average number of outstanding shares used in the
computation of basic EPS to that used in the computation of diluted EPS is shown
in the following table (in thousands):

<TABLE>
<CAPTION>
                                                                  Fiscal Year
                                                    -------------------------------------
                                                     2000            1999           1998
                                                     ----            ----           ----
<S>                                                  <C>             <C>            <C>
Average shares outstanding, basic EPS                7,609           7,897          7,809
Effect of dilutive securities:
      Stock options                                      7           --               242
                                                     -----           -----          -----
Average shares outstanding, diluted EPS              7,616           7,897          8,051
                                                     =====           =====          =====
</TABLE>


                                      S-9
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

INCOME TAXES

         The Company accounts for income taxes utilizing an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactment of changes in the tax law or rates.

NEW ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("SFAS 133"), which will become effective for the Company
in fiscal year 2001. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not
anticipate that the adoption of SFAS 133 will have a material impact on its
consolidated financial position, results of operations or cash flows.

NOTE 2--REORGANIZATION

         On June 5, 1997, the Company announced that GJ had obtained agreements
from the holders of 4,271,000 shares of the outstanding stock of Gradco Japan to
sell such stock back to GJ at a price of 299 yen per share. The transaction was
consummated by GJ in July, increasing the Company's ownership in the stock of GJ
from 58.6% to 90.0%. The total purchase price of $11.1 million was paid from
available cash of GJ and was $2.0 million less than the book value of the net
assets acquired. The purchase price has been allocated to the assets and
liabilities acquired based on their estimated fair values on the acquisition
date. In October 1997, an additional 580,000 shares of GJ were purchased by the
Company for 325 yen per share or approximately $1.6 million in total. This
increased the Company's ownership in the stock of GJ from 7,180,000 shares to
7,760,000 shares which represents 97.3% of the currently outstanding shares of
GJ. Included in this purchase were 60,000, 40,000 and 35,000 shares acquired
from Mark Takeuchi, President of GJ and a director of the Company, Tony
Shinomiya, Chief Financial Officer of GJ and the GJ Employee Stock Ownership
Plan, respectively.

         On September 30, 1997, GJ's U.S. subsidiary, Gradco (USA) Inc. ("GU"),
was sold to Gradco Systems, Inc. No gain or loss was recognized in connection
with this transaction. GU is included in the Company's consolidated U.S. federal
tax returns subsequent to the acquisition date. In accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income
Taxes, a reduction in the Company's valuation allowance for its tax loss
carryforwards in the amount of $1.8 million was recorded in conjunction with the
acquisition based on an assessment of expected future results of operations.
Because there were no material noncurrent assets of the acquired enterprise to
reduce, a corresponding credit to "excess of fair value of assets acquired over
cost" was recorded as required by SFAS 109 and is being amortized into income
over four and one-half years, the same period over which the utilization of the
tax loss carryforwards was estimated.

NOTE 3--MITA BANKRUPTCY

         In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest
customers, filed a petition in Japan along with five of its affiliates for the
Japanese equivalent of a Chapter XI Reorganization. The Company established an
allowance for the full amount of Mita's indebtedness to Gradco as of the
bankruptcy date. The amount charged to expense during fiscal year 1999 was
$5,543,000. On an after-tax basis, this charge amounted to $2,803,000, or $.35
per share. Mita's reorganization plan, approved by the court in January 2000,
made Mita a wholly-owned subsidiary of Kyocera Corporation and directed Mita to
repay 18% of the unsecured creditors' debt over a period of 10 years. These
payments to the Company will total $1,306,000 based on the value of the yen at
March 31, 2000, since the yen has strengthened against the dollar since the
bankruptcy filing. The Company recorded a non-current receivable and a pre-tax
credit to income in the amount of $935,000, representing the present value of
the non-interest bearing payments to be received using an 8% discount rate.


                                      S-10
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

<TABLE>
<CAPTION>
                                                                  March 31,
                                                              ---------------
                                                               2000     1999
                                                              ------   ------
                                                               (In Thousands)
<S>                                                           <C>      <C>
Inventories are summarized as follows:
     Raw materials                                            $  874   $  142
     Work-in-process                                             343      372
     Finished goods                                              522      854
                                                              ------   ------
                                                              $1,739   $1,368
                                                              ======   ======
Property and equipment, at cost, are summarized as follows:

     Office, shop and automotive equipment                    $1,049   $1,217
     Computer equipment                                        1,017      967
     Leasehold improvements                                      190      132
     Tooling                                                   4,341    4,014
                                                              ------   ------
                                                               6,597    6,330
     Less:
         Accumulated depreciation and amortization             5,874    5,475
                                                              ------   ------
                                                              $  723   $  855
                                                              ======   ======
Other assets are summarized as follows:

     Deposits                                                 $1,250   $1,186
     Cash surrender value of life insurance                    1,066      968
     Mita receivable                                             917     --
     Investments                                                 680    1,653
     Distribution license for Dippin' Dots ice cream             143     --
     Intangible pension asset                                   --        145
     Other                                                        22       36
                                                              ------   ------
                                                              $4,078   $3,988
                                                              ======   ======
Non-current liabilities are summarized as follows:

     Accumulated benefit obligation                           $1,810   $1,154
     Hamma litigation settlement                                --      1,000
     Other                                                       347      176
                                                              ------   ------
                                                              $2,157   $2,330
                                                              ======   ======
</TABLE>



NOTE 5--INCOME TAXES

         Income tax expense (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                       Fiscal Year
                                             --------------------------------
                                              2000        1999         1998
                                             -------     -------      -------
<S>                                          <C>         <C>          <C>
         Current
             Foreign                         $    14     $   287      $ 4,251
             Federal                            --          --            453
             State                               205         355          358
         Deferred
             Foreign                             477      (2,586)      (1,185)
             Federal                             486        (373)         501
                                             -------     -------      -------
         Total                               $ 1,182     $(2,317)     $ 4,378
                                             =======     =======      =======
</TABLE>

         The foreign provisions for all years primarily reflect GJ income taxed
in Japan.


                                      S-11
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES--(CONTINUED)

         Reconciliations of the applicable statutory U.S. federal income tax
rate of 35% to the effective tax rates on earnings are as follows:

<TABLE>
<CAPTION>
                                                                                        Fiscal Year
                                                                        ----------------------------------------
                                                                          2000             1999            1998
                                                                          ----             ----            ----
         <S>                                                              <C>             <C>              <C>
         Tax provision (benefit) at U.S. statutory tax rate               35.0%           (35.0%)          35.0%
         State income taxes, less federal benefit                          5.0              7.7             2.1
         Foreign tax expense                                               6.5            (12.6)            7.9
         Recognition of deferred income, previously taxed                  --             (19.7)           (7.6)
         Stock-based compensation                                          4.4              5.0             0.6
         Change in valuation allowance                                    (6.0)             --              --
         Other                                                            (0.2)             4.0            (1.1)
                                                                        -------         -------          -------
                                                                          44.7%         (50.6%)            36.9%
                                                                        =======         =======          =======
</TABLE>

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                      March 31,
                                               ----------------------
                                                 2000          1999
                                               --------      --------
         <S>                                   <C>           <C>
         Deferred tax assets
             Patent amortization               $    232      $  1,223
             Mita bad debt                          163         1,342
             Legal settlement                       340           680
             Local taxes                             59            57
             Retirement benefits                    804           424
             Other                                  177           206
             Tax loss carryforwards              12,111        10,820
             Valuation allowance                 (8,453)       (8,602)
                                               --------      --------
                                                  5,433         6,150
                                               --------      --------
         Deferred tax liabilities
             Intercompany loan revaluation          893           786
             Other                                 --             288
                                               --------      --------
                                                    893         1,074
                                               --------      --------
         Net deferred tax assets               $  4,540      $  5,076
                                               ========      ========
</TABLE>

         At March 31, 2000, the Company had federal net operating loss
carryforwards ("NOLs") for tax reporting purposes of $27,000,000 which will
expire in 2001 through 2019 if not utilized. These NOLs are utilizable by Gradco
Systems, Inc. and its subsidiaries, Venture Engineering, Inc. ("Venture") and
Gradco (USA) Inc. GJ and its subsidiary also have net operating loss
carryforwards in the amount of 736,891,000 Yen ($6,942,000) which will expire in
2004 through 2005 if not utilized. At this time it is not deemed likely that all
of these NOLs can be utilized and therefore a valuation allowance has been
established. If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of net operating loss
carryforwards which can be utilized.

         The Company does not provide for U.S. income taxes on undistributed
foreign earnings considered permanently invested in its Japanese operations. At
March 31, 2000, the Company's share of such undistributed foreign earnings
totaled $17,000,000. Foreign withholding taxes of approximately $1,700,000 would
be due upon remittance of these earnings.


                                      S-12
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--TREASURY STOCK

         In fiscal 2000, the Company began acquiring shares of its common stock
in connection with a stock repurchase program announced in March 1999. That
program authorizes the Company to purchase up to two million common shares from
time to time on the open market. The Company purchased 687,075 shares during the
year at an aggregate cost of $1,255,000. The purpose of the stock repurchase
program is to help the Company achieve its long-term goal of enhancing
shareholder value.

NOTE 7--EMPLOYEE BENEFITS

         The Board of Directors of the Company adopted the 1997 Stock Option
Plan (the "1997 Plan") in September 1997. A maximum of 400,000 shares of the
Company's common stock have been reserved for issuance pursuant to the 1997
Plan. Options may be granted only to officers, key employees, directors or
consultants of the Company or any of its subsidiaries. The options are not
intended to qualify as "Incentive Stock Options" within the meaning of Section
422(a) of the Internal Revenue Code of 1986, but are instead nonqualified
options. Options for 312,000 shares were granted during September 1997 at an
exercise price of $6.00 per share below fair market value of the common stock on
the date of grant. This difference is being recorded ratably as compensation
expense during the period September 1997 through February 2001, the vesting
period of the options. Options for 20,000 shares were granted during fiscal year
1999 at a price equal to the fair market value at the date of grant. No options
were granted in fiscal year 2000. Stock-based compensation expense of $330,000,
$346,000 and $527,000 is included in selling, general and administrative
expenses for the years ended March 31, 2000, 1999 and 1998, respectively.

         The Company's 1988 Stock Option Plan has 209,500 shares authorized for
issuance. Such options are exercisable in increments over periods at a price
equal to the fair market value at the date of grant.

         The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its plans. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting for Stock-Based Compensation. Accordingly, no
compensation cost has been recognized on the Incentive Stock Options. Had
compensation cost been determined consistent with SFAS 123, there would have
been no material effect on results of operations for the periods presented.

         The following table summarizes stock option activity:

<TABLE>
<CAPTION>
                                                                                      Weighted Average
                                                                Number                 Exercise Price
                                                                ------                ----------------
         <S>                                                     <C>                       <C>
         Outstanding March 31, 1997                              335,410                   $ 4.04
         Granted                                                 312,000                     2.00
         Exercised                                               (55,000)                    3.29
         Expired                                                  (1,410)                    8.31
                                                               ---------

         Outstanding March 31, 1998                              591,000                     3.02
         Granted                                                  20,000                     2.44
         Exercised                                               (56,250)                    2.81
         Expired or cancelled                                    (95,750)                    3.79
                                                               ---------

         Outstanding March 31, 1999                              459,000                     2.86
         Exercised                                                (2,500)                    2.00
         Expired or cancelled                                    (10,000)                    2.00
                                                               ---------

         Outstanding March 31, 2000                              446,500                   $ 2.88
                                                               =========
</TABLE>



                                      S-13
<PAGE>



                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--EMPLOYEE BENEFITS--(CONTINUED)

         Of the options outstanding at March 31, 1998, 1999 and 2000, options to
purchase 351,250, 323,500 and 376,250 shares, respectively, were exercisable at
weighted average prices of $3.64, $3.19 and $3.03 per share, respectively.

         The following table summarizes information concerning currently
outstanding and exercisable stock options as of March 31, 2000:

<TABLE>
<CAPTION>
                                 Options Outstanding                         Options Exercisable
                    --------------------------------------------        ---------------------------
                                      Weighted          Weighted                           Weighted
                                       Average           Average                            Average
   Range of           Number          Remaining         Exercise          Number           Exercise
Exercise Prices     Outstanding   Contractual Life        Price         Exercisable          Price
---------------------------------------------------------------------------------------------------
 <S>                 <C>                 <C>              <C>             <C>                <C>
     $2.00           217,000             7.5              $2.00           161,750            $2.00
 2.38 to 3.38        135,000             2.7               2.91           120,000             2.97
     4.25             70,500             1.0               4.25            70,500             4.25
     6.75             24,000             0.3               6.75            24,000             6.75
                    --------                                             --------
                     446,500                                              376,250
                    ========                                             ========
</TABLE>

         The Company's Japanese subsidiary had a retirement plan for its
management which provided for a lump sum payment to be made to each eligible
individual at his retirement date. The payment was based on a formula that
factored in length of service, position held and salary at the time of
retirement. In an effort to reduce operating expenses in future years, GJ
management agreed to terminate the retirement plan at the end of fiscal year
2000. In return, the Company and GJ agreed to vest the then due amount to be
paid upon actual retirement and GJ agreed to loan to each individual an amount
equal to 80% of his vested benefit at year end. The loans, which will bear
interest at a nominal rate, must be repaid at the time of retirement when the
accrued benefit will be paid. The Company expensed the unamortized prior service
cost during the third quarter of the current fiscal year. This special charge
amounted to $693,000. The amount charged to expense, including the special
charge, in fiscal years 2000, 1999 and 1998 was $957,000, $282,000 and $249,000,
respectively.

         The Company's domestic subsidiaries each have a 401(k) employee
benefits plan. All employees are eligible for the plan upon the completion of
six months of service with the Company. As part of the plans, the Company may
match a portion of employee contributions or make an additional contribution
contingent upon the Company's annual earnings performance. In fiscal years 2000,
1999 and 1998, the Company contributed $60,000, $63,000 and $55,000,
respectively, to the plans.



                                      S-14
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--COMMITMENTS AND CONTINGENCIES

         The Company leases its facilities and certain equipment under
non-cancelable leases. Under the lease agreements for its facilities, the
Company is required to pay for insurance, taxes, utilities and building
maintenance and is subject to certain consumer price index adjustments.

         Future minimum lease payments at March 31, 2000, under non-cancelable
facility and equipment leases with remaining lease terms in excess of one year
are as follows:

                                2001            $   633,000
                                2002                621,000
                                2003                252,000
                                2004                172,000
                                2005                   --
                                Thereafter             --

         Rent expense was approximately $1,140,000, $1,087,000 and $1,109,000
for fiscal years 2000, 1999 and 1998, respectively.

         In the following litigation, material claims have been asserted against
the Company:

         HAMMA V. GRADCO SYSTEMS INC. ET AL. On December 17, 1998, following a
federal District Court decision finding that Gradco was liable to Mr. Hamma and
Tenex, his transferee, for undetermined damages in connection with their release
in 1982 of obligations of Gradco under an agreement providing royalties based on
Gradco income from Hamma inventions, the parties settled the matter before
completion of the damages trial and any appeals. Pursuant to such settlement,
Gradco agreed to pay $5,000,000 and issued 250,000 five-year warrants
exercisable immediately, all of which are currently outstanding, to purchase
shares of Gradco Systems, Inc. common stock at $4.00 per share. At the date of
closing Gradco paid $3,000,000 in cash and provided an irrevocable letter of
credit securing its obligation to pay the remaining $2,000,000 in two equal
installments on November 15, 1999 and November 15, 2000. On an after-tax basis,
this charge amounted to $3,300,000 or $.42 per share.

         DUBOIS V. GRADCO SYSTEMS INC. ET AL. In 1989, the Company and its (now
former) president, Keith Stewart, were sued in the U.S. District Court in
Connecticut by R. Clark DuBois ("DuBois"), a former employee of the Company. The
complaint primarily alleges misrepresentation and fraudulent concealment by
Gradco and Mr. Stewart in connection with an agreement entered into in 1983 with
DuBois terminating and releasing the Company from royalty obligations under a
prior royalty agreement. The complaint, which has been amended a number of
times, seeks unspecified damages and other relief.

         In March 1992, DuBois and John C. Hamma (whose related case was
settled) filed an Application for Prejudgment Remedy ("PJR") against the Company
and Gradco (Japan) Ltd. In November 1992, the Company and DuBois and Hamma
(together the "Plaintiffs") agreed in principle to a Consent Order instead of
proceeding with a hearing on the PJR. If during the pendency of the lawsuits the
Company desires to sell, transfer or take any other action which would affect
its ownership of stock in GJ, it has agreed to give 30 days prior notice to the
Plaintiffs, who will then be permitted, if they so request, to renew the PJR
within the notice period. Should plaintiffs do so, the Company has agreed to
forbear from proceeding with any such transaction for a limited period.

         The DuBois suit will be tried as to liability and damages together.
There are major differences between the DuBois and Hamma cases. These
differences favor the Company's position. The Company is presently unable to
determine the amount of damages which is likely to be awarded if DuBois is
successful in his lawsuit. Motions for summary judgment filed in the Dubois case
were denied in October 1999. The Court entered a scheduling order calling for a
year 2000 trial. The DuBois case will be tried before a jury so that there are
substantial elements of uncertainty. Nevertheless, the Company believes that the
DuBois case will not have a material adverse effect on its consolidated
financial position or liquidity.



                                      S-15
<PAGE>




                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--SEGMENT INFORMATION

         The majority of the Company's operations are in one industry segment,
the design, development, production and marketing of intelligent paper handling
devices for the office automation market. Three of the Company's subsidiaries,
GJ, GU and Gradco Belgium, S.C. (a wholly-owned subsidiary of GJ) operate in
this segment. A second industry segment involved in high technology engineering
and manufacturing services, whose operations are conducted by Venture, accounts
for the remainder (in thousands).

<TABLE>
<CAPTION>
                                           Paper      Engineering/               Intersegment
                                         Handling     Manufacturing              & Corporate
                                          Devices       Services     Corporate   Eliminations  Consolidated
FISCAL YEAR 2000
<S>                                      <C>          <C>           <C>           <C>          <C>
         Revenues                        $  44,029    $   7,245     $    --       $    --      $  51,274
         Interest income                       288           18            89          --            395
         Interest expense                        1         --            --            --              1
         Depreciation and amortization         239          135          (357)         --             17
         Income tax expense                    720          (28)          490          --          1,182
         Net earnings (loss)                 3,049         (373)         (596)         (600)       1,480
         Assets                             44,488        3,492         8,937       (17,346)      39,571


FISCAL YEAR 1999

         Revenues                        $  73,552    $   8,265     $    --       $    --      $  81,817
         Interest income                       246            9            49           (38)         266
         Interest expense                        2            1            39           (38)           4
         Depreciation and amortization       4,192          202          (357)       (3,170)         867
         Provision for doubtful
              Mita receivable                5,543         --            --            --          5,543
         Hamma litigation settlement          --           --           5,000          --          5,000
         Income tax expense (benefit)       (1,949)           2          (370)         --         (2,317)
         Net earnings (loss)                   617         (736)       (5,061)        2,990       (2,190)
         Assets                             46,104        3,470        10,432       (16,104)      43,902

FISCAL YEAR 1998

         Revenues                        $ 109,633    $  11,366     $    --       $    --      $ 120,999
         Interest income                       129           20            23          --            172
         Interest expense                       10            2          --            --             12
         Depreciation and amortization       4,616          199          (157)       (2,847)       1,811
         Income tax expense                  3,877           31           470          --          4,378
         Net earnings (loss)                 4,562          540        (1,223)        2,507        6,386
         Assets                             49,595        4,956         8,327       (14,407)      48,471
</TABLE>


                                      S-16
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--SEGMENT INFORMATION--(CONTINUED)

         Geographic data follows (in thousands):

<TABLE>
<CAPTION>
                                                    United
                                                    States            Japan           Belgium          Consolidated
                                                    ------            -----           -------          ------------
<S>                                                <C>               <C>              <C>              <C>
FISCAL YEAR 2000

         Revenues                                  $  32,228         $ 19,004         $      42        $   51,274
         Long-lived assets                               342            4,457                 2             4,801


FISCAL YEAR 1999

         Revenues                                  $  51,062         $ 30,654         $     101        $   81,817
         Long-lived assets                             1,476            3,363                 4             4,843

FISCAL YEAR 1998

         Revenues                                  $  77,771         $ 43,228         $    --          $  120,999
         Long-lived assets                               634            4,079                 6             4,719
</TABLE>


         The Company had sales to major customers (in excess of 10% of revenues)
in each fiscal year as follows:

<TABLE>
<CAPTION>
                                                             Fiscal Year
                                                 -----------------------------------
                                                 2000           1999            1998
                                                 ----           ----            ----
         <S>                                     <C>             <C>             <C>
         Xerox                                   33%             30%             26%
         Xerox Ltd.                              10%             16%             20%
         Panasonic                               14%             11%             N/A
         Mita                                    N/A             11%             N/A
</TABLE>


NOTE 10--INTERIM FINANCIAL RESULTS (UNAUDITED)

         The following table summarizes the unaudited quarterly results of
operations for fiscal years 2000 and 1999.

<TABLE>
<CAPTION>
                                                                         Quarter
                                                      --------------------------------------------
                                                      First       Second        Third       Fourth         Year
                                                      -----       ------        -----       ------         ----
                                                         (In thousands of dollars, except per share amounts)
<S>                                                  <C>          <C>          <C>          <C>          <C>
FISCAL YEAR 2000
Net sales                                            $11,403      $12,465      $13,333      $11,758      $48,959
Gross margin                                           2,494        3,302        3,548        2,900       12,244
Earnings before income taxes                             328          502        1,146          668        2,644
Net earnings                                             159          378          600          343        1,480
Basic earnings per common share                      $   .02      $   .05      $   .08      $   .05      $   .19
Diluted earnings per common share                    $   .02      $   .05      $   .08      $   .05      $   .19
</TABLE>


                                      S-17
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10-- INTERIM FINANCIAL RESULTS (UNAUDITED)--(CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEAR 1999
<S>                                                  <C>          <C>          <C>          <C>          <C>
Net sales                                            $23,132      $19,366      $19,909      $16,215      $78,622
Gross margin                                           4,747        3,766        3,975        3,772       16,260
Earnings (loss) before income taxes                   (2,175)         879       (4,736)       1,453       (4,579)
Net earnings (loss)                                     (641)         647       (2,953)         757       (2,190)
Basic earnings (loss) per common share               $   (.08)    $   .08      $  (.37)     $   .10      $  (.28)
Diluted earnings (loss) per common share             $  (.08)     $   .08      $  (.37)     $   .10      $  (.28)
</TABLE>


         Basic and diluted earnings per common share for each of the quarters
presented above is based on the respective weighted average number of common and
dilutive potential common shares outstanding for each period and the sum of the
quarters may not necessarily be equal to the full year basic and diluted
earnings per common share amounts. For certain periods presented, the effect of
the Company's common stock options and warrants are excluded from the diluted
earnings per share calculations since inclusion of such items would be
antidilutive for that period.



                                      S-18
<PAGE>

                                                                     SCHEDULE II


                              GRADCO SYSTEMS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                    For the three years ended March 31, 2000
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                    Additions       Deductions
                                                  Balance at        Charged to      and Currency   Balance
                                                   Beginning        Costs and       Translation    at End
                                                   of Year          Expenses        Adjustments    of Year
                                                  ----------        ----------      ------------   -------
<S>                                                 <C>             <C>              <C>           <C>
Valuation reserve deducted in the balance
     sheet from the asset to which it applies:

Year ended March 31, 2000:
     Accounts receivable                            $ 6,508         $   (28)         $ 6,392       $    88
     Deferred income taxes                          $ 8,602         $   131          $   280       $ 8,453

Year ended March 31, 1999:
     Accounts receivable                            $   108         $ 5,769          $  (631)      $ 6,508
     Deferred income taxes                          $ 8,167         $   441          $     6       $ 8,602

Year ended March 31, 1998:
     Accounts receivable                            $    59         $    50          $     1       $   108
     Deferred income taxes                          $ 9,450         $   717          $ 2,000       $ 8,167
</TABLE>




                                      S-19