---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

FORM 10-K

|ý | 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, 2003

OR

|o | 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(State or other jurisdiction of
incorporation or organization)

95-3342977(I.R.S. Employer Identification No.)39 Parker, Irvine, California(Address of principal executive offices)

92618(Zip Code)


Registrant's
telephone number, including area code:(949) 206-6100

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

Title of each class

Name of each exchange on which registeredNone

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 ý    No o

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. ý

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

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 OTCBB on June 30,
2003) was $162,608.

The
number of outstanding shares, net of treasury shares, of each class of the Registrant's common stock outstanding at June 30, 2003 was: common stock, no par
value229,026 shares.

---

---

---



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 offices are located at 39 Parker, Irvine, California and its telephone number is (949) 206-6100.

Unless
otherwise indicated or unless the context otherwise requires, (1) references to Gradco in the remainder of this document are to the parent company, (2) references to
GJ, in the document as it relates to the analog and digital copier businesses, include the activities of GJ and GU, (3) references to the Registrant or the Company, in the document include the
consolidated entity consisting of Gradco and its subsidiaries.

(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. It is seeking diversification and has entered into an agreement to distribute Dippin' Dots ice cream in Japan. The Company had distribution rights for a wide format
printer outside of Japan which has not generated significant revenue through March 31, 2003. The Company is presently in the process of liquidating its wide format printer inventory. Revenues
from the sale of Dippin' Dots ice cream were approximately $2.1 million in fiscal year 2003. Information relating to revenue, net earnings and identifiable assets attributable thereto for the
fiscal years ended March 31, 2003, 2002, and 2001 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

---



Business of GJ



GJ designs, develops, produces (through contract manufacturers) and markets on a worldwide basis, intelligent paper handling devices for computer controlled
digital copiers and printers. GJ is a supplier of 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. The engineering and design efforts and the tooling to customize its products to meet orders and
potential orders involves substantial investment which has often been borne by, or shared initially with the manufacturers of the product and/or the OEM customer. The market conditions in the Far East
and in the United States have impacted the availability of such resources. The absence of such support is likely to have a major impact on the future of the Company.

GJ's
products are marketed domestically and internationally primarily directly to OEMs for incorporation into their product lines. Principal OEM customers include Xerox, Fuji
Xerox, Panasonic, Oki Data and Lexmark. 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.

GJ
has produced its products at manufacturing facilities of contract manufacturers in Japan, South Korea and Canada. However, it is anticipated that in the future most products will be
produced in the Far East since the Canadian vendor, which was a subsidiary of Xerox, is no longer available as a manufacturing source.

In
addition to marketing intelligent paper handling devices, GJ licenses technology to certain OEMs to produce products 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. Such activities are now being outsourced due to the sharp curtailment of personnel employed by the Company.

Currently,
GJ's products are primarily paper output devices for copiers and printers. GJ has development and customization contracts with a number of OEMs for several new products
for intelligent electronic digital copiers and page printers. Its ability to fulfill such contracts is dependent upon its ability to obtain support for such activities beyond the limits of its own
resources.



GJ's products include certain specialized output print stations. These include a specialized high capacity stacker for a high speed laser printer and copier, a
stacker for many low speed laser printers, a sheet invertor and a sheet decurler for laser printers and facsimile machines. It has under development products for stapling, hole punching,
booklet-making and binding for output from digital copiers and printers.

2

---



GTL, a 95% owned subsidiary, engages in diversified activities which do not principally involve paper handling devices, except that in December 2000 it
entered into an agreement providing marketing rights to a wide format printer produced by Mastermind Company (a Japanese Company). This agreement gave GTL exclusive marketing rights outside of Japan
for two years (and outside of Korea until September 30, 2001). GTL canceled this agreement and is presently in the process of liquidating this inventory which has been written down to almost
nothing. GTL's other activities consist of distribution of Dippin' Dots Ice Cream.



General.GJ sells its products domestically and internationally to OEMs. GJ has licensed certain OEMs to
manufacture and sell certain products for use in conjunction with the OEMs' copiers marketed to other companies.

GJ
has in the past developed new products or a variation of an existing product in consultation with an OEM which has agreed to pay for or share in the cost of the development work. GJ
then submitted a prototype for evaluation to the OEM customer who could 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. Xerox, a principal customer of the Company, has become reluctant to continue this practice. Any
unique interface designed to work only with an OEM's particular equipment may be exclusive to the OEM; however, GJ retains ownership of the basic technology and any other technology developed by GJ
for use in its business. GJ has also developed products at its own expense, based on its evaluation of future market requirements. The extent to which GJ can finance such activities at this time is
limited.

In
fiscal 2003, Fuji Xerox, Xerox and Panasonic accounted for 25%, 17% and 14%, respectively, of the Registrant's consolidated revenues. In fiscal 2002, Fuji Xerox, Xerox, and
Xerox Ltd. accounted for 28%, 21% and 10%, respectively, of the Registrant's consolidated revenues. In fiscal 2001, Xerox, Fuji Xerox, Xerox Ltd. and Panasonic accounted for 30%, 18%,
16% and 14%, respectively, of the Registrant's consolidated revenues. A loss of any of these current principal customers is likely to 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.

Licenses.GJ has certain agreements and has granted certain licenses to others to manufacture products using its technology.
Most of these licenses were originally entered into before 1991. These agreements allow GJ to receive additional revenues from certain OEMs while also selling products using this same
technology to other OEMs. 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 non-affiliates. Since the majority of these agreements involve technology associated with analog equipment, the revenue from such licenses has continually been
reduced.

These
agreements generated royalty revenues of approximately $15,000 during the fiscal year ended March 31, 2003, $301,000 during the fiscal year ended March 31, 2002 and
$954,000 during the fiscal year ended March 31, 2001.



GJ's principal competition for its paper handling products is from companies, including its OEM licensees, who have much larger resources than GJ.

3

---



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 1 to 15 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 copier and multi-function machines.

Gradco
believes that the issued patents of GJ are material to the consolidated operations of Gradco and subsidiaries taken as a whole. However, there can be no assurance that GJ's
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. In such case, the Company may not have sufficient resources to defend its rights.

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



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

Agreements
with the manufacturers for finished products provide for quality controls and inspection by GJ and its customers. GJ seeks to control product quality in a variety of ways. It
emphasizes initial inspection and 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 contracted manufacturers have obtained quality systems certification under ISO 9001 (an International Standard promulgated under the European Economic Community Mandate).

Costs and Revenues of Development Engineering Services

In fiscal 2003, 2002 and 2001 the Registrant, on a consolidated basis, spent approximately $1,508,000, $2,355,000 and $9,178,000, 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 $1,191,000, $502,000 and $6,645,000, in fiscal 2003, 2002 and 2001, respectively. The
Registrant, on a consolidated basis, also received revenues from customers under development engineering service contracts of approximately $517,000, $522,000, and $5,509,000 in fiscal 2003, 2002 and
2001, respectively. There is an additional 88,685,500 yen ($738,000 as of March 31, 2003) in revenues which was negotiated with customers subsequent to year end, which will be recognized in
future billings (see Note 15 of Notes to Consolidated Financial Statements). The ability of the Company to continue to expend resources on research and development is extremely limited.

4

---

Backlog

Registrant's order backlog from consolidated operations was estimated at approximately $5,000,000 at March 31, 2003 and $3,700,000 at March 31,
2002. Backlog includes orders accepted for delivery to customers during the ensuing fiscal year, usually within six months, including purchases committed 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). The increase in backlog is primarily attributable to a delay in
production of some of the Company's digital products as a result of changing suppliers, which caused a backup in open orders. Because Gradco's operating subsidiaries generally ship products upon
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 2003, Gradco and its subsidiaries employed 30 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

For
the fiscal year ended March 31, 2003, $5,956,000 or 34% of the Registrant's consolidated revenues were attributed to sales in the United States and $11,658,000 or 66% were
attributed to foreign countries ($11,602,000 to Japan). For the fiscal year ended March 31, 2002, $8,991,000 or 39% of the Registrant's consolidated revenues were attributed to the United
States and $14,187,000 or 61% were attributed to foreign countries ($14,108,000 to Japan). For the fiscal year ended March 31, 2001, $19,281,000 or 49% of the Registrant's consolidated revenues
were attributed to the United States and $19,987,000 or 51% were attributed to foreign countries ($19,928,000 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, the 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 exchange gains and losses associated with some sales transactions. The Registrant had a foreign currency
loss of $161,000 in fiscal year 2003 and gains of $110,000 and $293,000 in fiscal years 2002 and 2001, respectively, arising from changes in the relationship of the yen and dollar during each of those
years. The Registrant has an agreement with Xerox whereby they share with the Company gains and losses arising from Xerox business with the Company based on predetermined yen to dollar relationships
on an annual basis.

Financial
information regarding foreign and domestic operations is set forth in Note 13 of Notes to the Consolidated Financial Statements.

Item 2.Description of Property.

Gradco
shares its corporate offices with GU at 39 Parker, Irvine, California 92618 in an 18,000 square foot facility under a lease which expires November 30, 2003. GJ's principal
office, located in Tokyo, Japan, is approximately 3,000 square feet and is leased through February 28, 2006.

Item 3.Legal Proceedings



Gradco and its (now former) president, Keith Stewart, were sued in an action filed in March 1988 in the United States District Court in Bridgeport,
Connecticut, by R. Clark DuBois ("DuBois"), a

5

---

former
employee of the Registrant. This case was settled in September 2000 with a payment of $3,200,000 which was charged to expense in the second quarter of the fiscal year ended
March 31, 2001.



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 charged $5,543,000 to expense during fiscal year 1999. 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. The Company recorded a
non-current receivable and a pre-tax credit to income in the year ended March 31, 2000 in the amount of $935,000, representing the present value of the
non-interest bearing payments to be received using an 8% discount rate. Installment payments were received in July 2000 and 2001. In fiscal 2002, GJ gave its approval to
Mita-Kyocera to prepay the remaining balance and take a .75% discount per annum. The final payment was received in February 2002.

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.

6

---



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 NASD Bulletin Board under the symbol GRDC. The following table sets forth the
quarterly high and low closing sales prices from April 1, 2001 to March 31, 2003. In September 2002, the Registrant's shareholders approved a
one-for-thirty reverse stock split which decreased the number of common shares issued to 264,205. All references to the number of common shares and per-share
amounts have been restated to reflect the reverse stock split.

Quarter Ended

High

LowJune 30, 2001

$
27.00

$
10.50September 30, 2001

$
15.00

$
4.50December 31, 2001

$
8.70

$
5.40March 31, 2002

$
6.90

$
5.40June 30, 2002

$
6.90

$
4.50September 30, 2002

$
4.20

$
1.50December 31, 2002

$
4.00

$
1.50March 31, 2003

$
2.35

$
1.70


(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 30, 2003 is 400.

(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 66,667 shares of its common stock in the market from time to time.

7

---

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.

|                                                                                     |                                        | Year Ended March 31, |        
|------------------------------------------------------------------------------------ | -------------------------------------- | -------------------- | -------
|
|
|Statement of operations data:                                                        |                                        |                      |        
|Revenues                                                                             |                                        | $                    | 17,614 
|                                                                                     |                                        |                      |        
|Costs and expenses:                                                                  |                                        |                      |        
|                                                                                     | Cost of sales                          |                      |        
|                                                                                     | Other operating expenses               |                      |        
|                                                                                     | Interest income, net                   |                      |        
|                                                                                     | Provision for doubtful Mita receivable |                      |        
|                                                                                     | DuBois/Hamma litigation settlements    |                      |        
|                                                                                     |                                        |                      |        
|                                                                                     |                                        |                      | 21,650 
|                                                                                     |                                        |                      |        
|Earnings (loss) from continuing operations before income taxes and minority interest |                                        |                      | (4,036 
|Income taxes                                                                         |                                        |                      | (49    
|Minority interest                                                                    |                                        |                      | (45    
|                                                                                     |                                        |                      |        
|Earnings (loss) from continuing operations                                           |                                        |                      | (3,942 
|Earnings (loss) from discontinued operations                                         |                                        |                      | 170    
|                                                                                     |                                        |                      |        
|Earnings (loss) before extraordinary item                                            |                                        |                      | (3,772 
|Extraordinary item:                                                                  |                                        |                      |        
|                                                                                     | Gain on purchase of minority interest  |                      |        
|                                                                                     |                                        |                      |        
|                                                                                     |                                        | Net earnings (loss)  |        
|                                                                                     |                                        |                      |        
|Basic earnings (loss) per common share:                                              |                                        |                      |        
|From continuing operations                                                           |                                        | $                    | (17.19 
|From discontinued operations                                                         |                                        |                      | .74    
|Extraordinary item                                                                   |                                        |                      | 1.95   
|                                                                                     |                                        |                      |        
|                                                                                     |                                        | Net earnings (loss)  |        
|                                                                                     |                                        |                      |        
|Average shares outstanding, basic EPS                                                |                                        |                      | 229,268
|                                                                                     |                                        |                      |        
|Diluted earnings (loss) per common share:                                            |                                        |                      |        
|From continuing operations                                                           |                                        | $                    | (17.19 
|From discontinued operations                                                         |                                        |                      | .74    
|Extraordinary item                                                                   |                                        |                      | 1.95   
|                                                                                     |                                        |                      |        
|                                                                                     |                                        | Net earnings (loss)  |        
|                                                                                     |                                        |                      |        
|Average shares outstanding, diluted EPS                                              |                                        |                      | 229,268
|                                                                                     |                                        |                      |        
|Balance sheet data:                                                                  |                                        |                      |        
|                                                                                     | Working capital                        |                      | $      
|                                                                                     | Total assets                           |                      |        
|                                                                                     | Shareholders' equity                   |                      |        

8

---



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.

The
Company's operations are conducted principally through its wholly-owned subsidiaries Gradco (Japan) Ltd. ("GJ") and Gradco (USA) Inc. ("GU") and its majority-owned
subsidiary Gradco Technology Ltd. ("GTL"). The Company's other wholly-owned subsidiary, Venture Engineering, Inc. ("Venture"), was involved with engineering and
manufacturing activities. On October 12, 2001, the Company announced its intention to immediately commence a controlled shutdown of Venture. The Board of Directors approved a plan to dispose of
the business, which was substantially completed by March 31, 2002. The disposal of Venture has been accounted for as a discontinued operation and, accordingly, its net assets have been
segregated from continuing operations in the accompanying Consolidated Balance Sheets, and its operating results are segregated and reported as discontinued operations in the accompanying Consolidated
Statements of Operations and Cash Flows. See Note 3 of Notes to Consolidated Financial Statements.

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.

The
Company's survival as a going concern is dependent upon the development of new sources in Japan and South Korea for the manufacture and engineering of products and the obtaining of
tooling for such manufacture within the limits of its financial resources.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including
those related to uncollectible receivables, excess and obsolete inventories, income taxes, and contingencies. We base our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue
recognition, inventories and valuation allowances.

Revenue recognition.Revenues are recognized in accordance with SAB 101. Revenues from product sales ("net sales") are
recorded as units or spare parts are shipped, under "FOB ex-factory"

9

---

contracts.
Revenues from development engineering services and research and development contracts are recognized as earned, which generally occurs as services are performed. Licenses and royalties are
recognized when all obligations of the appropriate agreements have been fulfilled.

Inventories.Inventories are stated at the lower of cost or market. The Company evaluates its inventories on a regular basis
and provides a reserve for excess and obsolete inventory to reduce the carrying value to its estimated net realizable value. The inventory reserve is determined by analysis of customers' current
orders as well as future forecasts and spare part commitment requirements. A significant portion of the current reserve pertains to the wide format printer business previously undertaken by GTL. In
the event management adjusts its estimates of future salability, the value of the Company's inventory may become under or overstated and recognition of such a change will affect cost of sales in a
future period, which could materially affect the Company's operating results and financial position.

Valuation Allowances.The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. These estimates are based on management's evaluation of the ability of customers to make payments, focusing on current economic conditions,
customer financial conditions, historical payment experience and aging of accounts
receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Management has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Because of the Company's operating losses over the last several years, both in the United States
and Japan, a valuation allowance for the entire amount of deferred tax assets has been established. Should the Company begin generating taxable income, the valuation allowance would be reduced.

Revenues

Revenues for the fiscal year ended March 31, 2003 decreased by $5,564,000 or 24% from the prior year. Net sales decreased by $5,273,000 (24%), from
$22,355,000 to $17,082,000, primarily from a 35% decrease in unit sales, partially offset by higher average unit prices and a stronger yen. The yen, which gained 2% against the dollar for the year,
caused an increase of $0.4 million in revenues when yen denominated sales were translated into dollars. The decrease in unit sales was principally attributable to the completion of the final
analog program in fiscal 2002. Primarily all units sold in fiscal 2003 were digital. Revenues from development engineering services decreased by only $5,000 and royalties decreased by $286,000 (95%)
as the Company's remaining royalty agreements are not significant.

Revenues
for the fiscal year ended March 31, 2002 decreased by $16,090,000 or 41% from the prior year. Net sales decreased by $10,450,000 (32%), from $32,805,000 to $22,355,000,
primarily representing the combined effect of a 54% decrease in unit sales and a weaker yen. The yen, which lost 12% against the dollar for the year, caused a decrease of $2.3 million in
revenues when yen denominated sales were translated into dollars. The decrease in unit sales was attributable to the shift from analog to digital. Revenues from development engineering services
decreased by $4,987,000 (91%), principally because fiscal 2001 amounts included customer funding of two significant programs under development at GJ. Royalties decreased by $653,000 (68%) as the
Company's principal royalty agreement with Canon expired in June 2001.

The
decrease in revenues over the past several years is the result of 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. It also is a result of the Company's inability to bring to fruition contracts for the

10

---

sale
of products which it developed for the digital market. The failure of GTL to enter into activities beyond the distribution of Dippin' Dots ice cream in Japan has resulted in a failure to fill
this void.

Costs and Expenses

Gross margin on net sales was 14.1%, 18.6% and 27.0% in fiscal 2003, 2002 and 2001, respectively. The decreases in the 2003 and 2002 fiscal years were primarily
because fixed manufacturing overhead costs could not be trimmed at the same pace as the decline in net sales and special charges. In fiscal 2002, an inventory writedown of approximately $700,000 was
incurred due to the abandonment of a program to distribute a wide format printer outside of Japan by GTL. In fiscal 2003, a final $200,000 inventory writedown for the wide format printer program was
taken and amortization of nonrefundable tooling advances was accelerated by $756,000 due to a lowering of the Company's estimate of future unit sales volume for units sold in Japan.

Research
and development expenses ("R&D") in fiscal 2003 totaled $1,508,000 (8.6% of revenues), compared to $2,355,000 (10.2% of revenues) in fiscal 2002 and $9,178,000 (23.4% of
revenues) in fiscal 2001. R&D expenses incurred under development engineering service contracts in the fiscal years ended March 31, 2003, 2002 and 2001, respectively, were $1,191,000, $502,000
and $6,645,000. Included in the current fiscal year amount is approximately $700,000 of expenses which will be recoverable from customers in the future through development engineering service billings
(see Note 15 of Notes to Consolidated Financial Statements). The unusually high amount in fiscal 2001 was principally attributable to the aforementioned development engineering service
contracts administered by GJ for its customers. R&D expenses incurred on behalf of internal R&D efforts were $317,000, $1,853,000 and $2,533,000 for the same periods. The decreases in fiscal 2002 and
2003 are primarily due to the elimination of the Company's internal engineering department in the latter part of fiscal 2002. Future expenditures will continue to be restricted in light of the
Company's limited resources.

Selling,
general and administrative expenses ("SG&A") decreased by $508,000 (8.7%) in fiscal 2003 from the prior year. There were reductions of $650,000 in payroll and severance costs,
$100,000 in advertising and trade show expenses, $80,000 in rental expenses and $60,000 in bad debt expenses, offset by $400,000 less of negative goodwill amortization. SG&A decreased by $1,385,000
(19.2%) in fiscal 2002 from the prior year. There was a decrease of $1,165,000 in SG&A at GJ and GTL, of which approximately $600,000 was a result of the favorable translation caused by the weaker
yen, and the balance was primarily due to a reduction in personnel. There was also $290,000 in stock-based compensation expense in fiscal 2001 and none in fiscal 2002.

There
was a foreign currency loss of $161,000 in fiscal year 2003 compared to foreign currency gains of $110,000 and $293,000 in fiscal years 2002 and 2001, respectively. In fiscal 2001,
the Registrant recorded a $3,200,000 charge for the settlement of the DuBois litigation.

Interest
income was $24,000, $318,000 and $415,000 in fiscal 2003, 2002 and 2001, respectively. The decreases reflect the decreasing cash balances available for investment, lower
interest rates and the collection of the Mita receivable in fiscal 2002 discussed in Item 3. Interest expense was nominal in all fiscal years presented.

Pre-tax Earnings from Continuing Operations, Income Taxes and Minority Interest

As a result of the above factors, losses from continuing operations before income taxes and minority interest were $4,036,000, $2,778,000 and $3,568,000 in fiscal
2003, 2002 and 2001, respectively. The income tax benefit of $49,000 in fiscal 2003 is primarily attributable to adjusting prior year estimates to actual amounts paid. The tax provisions of $1,319,000
and $3,273,000 in fiscal 2002 and 2001, respectively, are primarily due to an increase in the valuation allowance on deferred tax benefits associated with the net operating loss carryforwards ("NOLs")
in Japan and the U.S. to reflect the uncertainty of the Company being able to utilize the NOLs before they expire.

11

---

As
discussed above, the Company has terminated the operations of Venture and now reflects its operating results as discontinued operations. The earnings (loss) from Venture's operations
was $170,000, ($2,279,000) and $23,000 in fiscal 2003, 2002 and 2001, respectively. The $1,152,000 loss on disposal of discontinued operations in 2002 comprises the writeoff of the Company's remaining
goodwill related to Venture in the amount of $1,083,000 plus the estimated shutdown costs.

Extraordinary Item

In February 2003, the Company purchased the remaining 2.7% of GJ shares held by minority interests. The purchase price was 10 yen per share or
approximately $19,000 in total. In accordance with Statement of Financial Accounting Standards No. 141, when the purchase price is less than the fair value of net assets acquired and there are
no qualifying long-lived assets, including goodwill, to be written down, the excess is considered an extraordinary gain. Since the minority interest liability at the acquisition date was
$467,000 and 2.7% of GJ's qualifying long-lived assets were not material, the difference of $448,000 is shown as an extraordinary item in fiscal year 2003. See Note 9 of Notes to
Consolidated Financial Statements.

Litigation

There is no material litigation pending against the Company. The following cases, which have been settled, involved material claims 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 revenue from Hamma inventions, the parties settled the matter before completion of
the damages trial and any appeals. Pursuant to such settlement, Gradco paid $3,000,000 in cash at the date of closing, $1,000,000 on November 15, 1999 and $1,000,000 on November 15,
2000.

DuBois v. Gradco Systems Inc. et al.The federal case brought against the Company and its (now former) president,
Keith Stewart, in the U.S. District Court in Connecticut by R. Clark DuBois, a former employee of the Company, was settled before trial in September 2000. Pursuant to such settlement, Gradco
paid $3,200,000 to Mr. DuBois. The $3.2 million settlement or $.45 per share, was charged to expense in the second quarter of fiscal year 2001. Because the Company has substantial net
operating loss carryforwards for federal tax purposes, no tax benefits were recognized as a result of this charge.

Effects of Inflation

To date, the Registrant has not experienced significant inflationary cost increases. We are exposed to risks associated with foreign exchange rate fluctuations
due to our significant operations in Japan.

Liquidity and Capital Resources

Working capital at March 31, 2003 decreased by $1,067,000 to $3,319,000, from the amount of $4,386,000 at March 31, 2002, primarily as a result of
the loss from operations, partially offset by favorable currency translation adjustments and the amortization and disposal of non-current assets during the year.

Net
cash of $0.7 million, $4.9 million and $2.8 million was used in operations in fiscal 2003, 2002 and 2001, respectively, primarily to cover operating losses. The
Company has been able to meet its liquidity requirements primarily through its cash balances. The Company's ability to generate cash from operations will be dependent upon management's ability to
increase revenues and control costs.

12

---

Net
cash used in investing activities for the purchase of property and equipment and GJ's minority interest shares was $0.1 million in fiscal 2003. Net cash provided by investing
activities in fiscal 2002 was $0.6 million, primarily representing the redemption of life insurance policies. Net cash provided by investing activities in fiscal 2001was $0.9 million
consisting of $1.0 million provided by redemption of investments less $0.1 million used for acquisition of property and equipment.

Net
cash used in financing activities was $0.6 million representing $0.4 million provided from the proceeds of a short-term loan, offset by $1.0 million
pledged to secure the loan. Net cash used in financing activities was $0.1 million and $0.4 million in fiscal 2002 and 2001, respectively, representing the purchase of 3,030 shares and
8,547 shares of treasury stock in the respective fiscal years.

Exchange
rate changes associated with a stronger yen in fiscal 2003 caused an increase of $0.3 million in cash, and decreases of $0.3 million and $1.1 million in
cash was caused by a weakening yen in fiscal years 2002 and 2001, respectively. At March 31, 2003, the Company had approximately $3.0 million in Japanese banks.

At
March 31, 2003, the Registrant had $3.7 million in cash, of which $1.0 million is pledged as security for a short-term note payable to bank in the
amount of 50 million yen (approximately $0.4 million), and no long-term debt. Under the borrowing arrangement with the bank, another 50 million yen can be borrowed.
Management believes that its cash and available credit are adequate for its short term needs. The Company believes its long term survival is dependent upon the development of relationships and sources
of working capital to enable it to compete in the highly competitive digital market.

Item 7a.Quantitative and Qualitative Disclosures about Market Risk

Market
risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interests rates. The Registrant is exposed to certain
levels of market risks, especially changes in foreign currency exchange rates. Interest rates currently have little effect on the Registrant since it has only a minor amount of short-term
debt.

The
Registrant conducts a significant portion of its business in Japanese yen. There have been substantial fluctuations between the yen and the U.S. dollar over the past several years
and it is possible that such fluctuations will continue. These fluctuations could have a material adverse effect on the Registrant's revenues and results of operations.

The
Registrant does not enter into derivatives or other financial instruments for trading or speculative purposes.

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.

None.

13

---



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. Unless otherwise indicated, the term of office of all directors and executive officers expires at the next annual meeting of stock-holders of the Registrant, which is expected to be
held in September 2003.

Name

PositionMartin E. Tash

Chairman of the Board, President and Chief Executive OfficerHarland L. Mischler

Executive Vice President, Chief Financial Officer and DirectorBernard Bressler

Secretary, Treasurer and DirectorRobert J. Stillwell

DirectorThomas J. Burger

DirectorMasakazu (Mark) Takeuchi

Director of Registrant; Chairman of the Board and Director of GJ*


---

(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,
Age 62      |  | Mr. Tash has been Chairman of the Board and Chief 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,
Age 71 |  | Mr. Mischler has been Chief Financial Officer and a 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.
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

14

---

|Bernard Bressler,
age 75         |  | Mr. Bressler has been Secretary and director of 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,
age 67      |  | Mr. Stillwell has been a director of the Registrant 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 30 years ago. He also
owns and operates Nationwide Property Management, which handles diverse real estate investments. In 1985, Mr. Stillwell founded and is the principal owner of Service Concepts Unlimited, Inc. Mr. Stillwell is a director of Crusader Savings
Bank located in Rosemont, Pennsylvania.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Thomas J. Burger,
age 56         |  | Mr. Burger has been a director of the Registrant 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) Takeuchi,
age 66 |  | Mr. Takeuchi has been a director of the Registrant since September 1997. He has been Chairman of the Board of GJ since July 2002. He had 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. Previously, from 1961, Mr. Takeuchi was employed by C. Itoh &
Co. Ltd. in various positions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

15

---

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 30, 2003 for services rendered in all capacities to the
Registrant and its subsidiaries during each of the fiscal years ended March 31, 2003, 2002 and 2001: (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, 2003 required to be disclosed in column (c) below exceeded $100,000:

SUMMARY COMPENSATION TABLE

Name and Principal Position

Year

Salary and
Bonus ($)(1)(2)

Securities
Underlying
Options(3)Martin E. Tash(1)
Chairman of the Board, President and Chief Executive Officer

2003
2002
2001

95,000
125,000
125,000


1,667
3,334Masakazu (Mark) Takeuchi(2)
President, Gradco (Japan) Ltd.

2003
2002
2001

195,682
273,404
309,167



2,600


---

(b)Stock Option Plans.



16

---



The
following table sets forth the number of shares underlying unexercised options held by the foregoing executive officers at March 31, 2003 together with the value of such
options as of March 31, 2003.

UNEXERCISED OPTIONS AT FISCAL YEAR-END

Name

Number of Securities
Unexercised
at Fiscal Year-End
Exercisable/
Unexercisable

Value of Unexercised
In-the-Money Options
at Fiscal Year-End
Exercisable/
Unexercisable ($)Martin E. Tash

4,168 / 833

NoneMasakazu (Mark) Takeuchi(1)

2,300 / 300

None


---

(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 was 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 varied depending upon the office held by the eligible individual.
Mr. Takeuchi is eligible for a payment 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 him an amount equal to 80% of his vested
benefit at year end. The loan, which bears 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
¥103,000,000 ($857,000) at March 31, 2003. The deferred benefit obligation is shown net of the ¥82,000,000 ($682,000) loan on the Company's Consolidated Balance Sheet
and is combined with $153,000 due to employees.

17

---

(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 2003 fiscal year.

Martin
E. Tash (the Registrant's President and Chairman of the Board) received $95,000 in cash for special services rendered to the Registrant as a director during the fiscal year ended
March 31, 2003. This amount is included in theSummary Compensation Tablein 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, 2003.

All
directors (and Messrs. Tash, Mischler and Bressler in their capacity as officers as well) are eligible to receive options under the 2000 Stock Option Plan. See table in Item
10(b) as to options held by Messrs. Tash and Takeuchi as of March 31, 2003. As of that date, Mr. Mischler held options for 1,534 shares and Messrs. Stillwell and Burger
each held options for 250 shares.

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.

(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, 2003, 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).

18

---

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 30, 2003 based on 229,026 shares of Common Stock, no par value, outstanding as of such date.

|Title of Class             |  | Name and Address of
Beneficial Owner                                                                                                                     |  | Amount and Nature
of Beneficial
Ownership(1) |     | Percentage
of Class |  
|-------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | --- | ------------------- | -
|Common Stock,
no par value |  | Martin E. Tash                                                                                                                                           |  | 12,386                                       | (2) | 5.3                 | %
|Common Stock,
no par value |  | Larry Callahan
c/o Huntleigh Securities Corporation
7800 Forsyth Blvd., 5th Floor
St. Louis, MO 63105                                                    |  | 22,790                                       | (3) | 10.0                | %
|Common Stock,
no par value |  | Bradley R. Peyton
Claudia C. Peyton, Madeline J. Peyton,
Eric B. Peyton. David J. Peyton, and
Claudia C. Peyton
2932 NW 104th Street
Urbandale, IA 50322 |  | 18,471                                       | (4) | 8.1                 | %
|Common Stock,
no par value |  | Mitchell Partners, L.P.
and James E. Mitchell
c/o James E. Mitchell
General Partner
3187-D Airway Avenue,
Costa Mesa, CA 92626                           |  | 16,344                                       | (5) | 7.1                 | %

---

19

---

Madeline J. Peyton

2,000Eric B. Peyton

2,000David J. Peyton

2,000Leslie J. Peyton

2,000Claudia C. Peyton & Bradley R. Peyton as JTWRS

4,200


In
addition the Company has been advised that Bradley and Claudia Peyton have purchased 6,271 additional shares in the joint account as of June 30, 2003.

(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 theSummary Compensation Tablein Item 11(a), and all officers and directors as a group (6 persons), as of June 30, 2003.

Title of Class

Beneficial Owner

Amount and Nature
of Beneficial
Ownership

Percentage
of Class(1)Common Stock,
no par value

Martin E. Tash

12,386
(2)
5.3
%Harland L. Mischler

3,065
(3)
1.3
%Bernard Bressler

976
(4)
*Robert J. Stillwell

1,029
(5)
*Thomas J. Burger

250
(6)
*Masakazu (Mark) Takeuchi

2,300
(6)
*All Executive Officers and Directors as a Group (comprising the 6 persons shown above)

20,006
(7)
8.5
%


---

20

---

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 2003
fiscal year, the Registrant paid legal fees and expenses of $41,877.10 to such firm.

Item 14.Evaluation of Controls and Procedures

Based
on their evaluation of the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this report, the Company's officers including the
Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures result in the effective recordation, processing, summarization and reporting of
information that is required to be disclosed in the reports that the Company files under the Securities Exchange Act of 1934 and the rules thereunder.

There
were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Chief Executive
Officer and Chief Financial Officer completed their evaluation. However, the Company received a letter dated July 2, 2003 from Grant Thornton LLP expressing its opinion as to a material
weakness involving the adequacy of the communication and coordination between GJ and senior management of the Registrant as it pertains to the classification and recording of accounting transactions.
The Audit Committee will carefully review the issue and discuss it with both Grant Thornton LLP and management. Without accepting or rejecting Grant Thornton LLP's conclusions, the Audit Committee
will begin the process of gathering information which addresses the issue raised to study what corrective action, if any, is warranted.

21

---



PART IV

Item 15.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.                                                                                                     
|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 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.                                                                                                                         
|      |  |                                                                                                                                                                                                                                                                 

22

---

|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 herein 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, 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 fiscal year ended March 31, 1996, Exhibit 10.19.                                                                                                                                             
|22    |  | List of Significant Subsidiaries                                                                                                                                                                                                                                                                                                                     
|      |  | (i)                                                                                                                                                                                                                                                                                                                                                  
|      |  | (ii)                                                                                                                                                                                                                                                                                                                                                 
|23    |  | Consent of Independent Certified Public Accountants                                                                                                                                                                                                                                                                                                  
|99.1  |  | Section 906 Certification, as furnished by the Chief Executive Officer and Chief Financial Officer pursuant to SEC Releases No. 33-8212, 34-47551                                                                                                                                                                                                    

23

---



SIGNATURES

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

Dated:
July 11, 2003

| |  | GRADCO SYSTEMS, INC.
| |  | --------------------
| |  |                     
| |  | By:                 

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.

|Signature                                 |  | Title                                                                                                       |  | Date         
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------
|                                          |  |                                                                                                             |  |              
|/s/MARTIN E. TASHMartin E. Tash           |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)                  |  | July 11, 2003
|/s/HARLAND L. MISCHLERHarland L. Mischler |  | Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director |  | July 11, 2003
|/s/BERNARD BRESSLERBernard Bressler       |  | Secretary, Treasurer and Director                                                                           |  | July 11, 2003
|/s/ROBERT J. STILLWELLRobert J. Stillwell |  | Director                                                                                                    |  | July 11, 2003
|/s/THOMAS J. BURGERThomas J. Burger       |  | Director                                                                                                    |  | July 11, 2003
|/s/MARK TAKEUCHIMark Takeuchi             |  | Director                                                                                                    |  | July 11, 2003

24

---



CERTIFICATION OF CEO PURSUANT TO  SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14  AS ADOPTED PURSUANT TO  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I,
Martin E. Tash, Chairman of the Board, President and Chief Executive Officer, certify that:

1.     I
have reviewed this annual report on Form 10-K of Gradco Systems, Inc;

2.     Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.     The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.     The
registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

Date:
July 11, 2003

| |  | /s/MARTIN E. TASHChairman of the Board, President and Chief Executive
Officer
| |  | -----------------------------------------------------------------------------

25

---

CERTIFICATION OF CFO PURSUANT TO  SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14  AS ADOPTED PURSUANT TO  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I,
Harland L. Mischler, Executive Vice President and Chief Financial Officer, certify that:

1.     I
have reviewed this annual report on Form 10-K of Gradco Systems, Inc;

2.     Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



5.     The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):



6.     The
registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

Date:
July 11, 2003

| |  | /s/HARLAND L. MISCHLERExecutive Vice President and Chief Financial
Officer
| |  | --------------------------------------------------------------------------

26

---



FORM 10-KITEM 14(a)        GRADCO SYSTEMS, INC.        INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

(1)   Financial Statements:

Report of Independent Certified Public Accountants

S-2Consolidated Balance Sheets
March 31, 2003 and 2002

S-3Consolidated Statements of Operations
Years Ended March 31, 2003, 2002 and 2001

S-4Consolidated Statement of Shareholders' Equity
Years Ended March 31, 2003, 2002 and 2001

S-5Consolidated Statements of Cash Flows
Years Ended March 31, 2003, 2002 and 2001

S-6Notes to Consolidated Financial Statements

S-7


(2)   Financial
Statement Schedule:

IIValuation and Qualifying Accounts

S-20


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

---



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We
have audited the accompanying consolidated balance sheets of Gradco Systems, Inc. as of March 31, 2003 and 2002, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period ended March 31, 2003. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gradco Systems, Inc. as of
March 31, 2003 and 2002, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended March 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company generated a net loss of $3,324,000 and $7,485,000 for the years ended March 31, 2003 and 2002, and used cash in operations of $707,000 and $4,868,000,
respectively. The Company has also experienced a significant reduction in its sales volume. These factors raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We
have also audited Schedule II for the years ended March 31, 2003, 2002 and 2001. In our opinion, this Schedule presents fairly, in all material respects, the information
required to be set forth therein.

/s/
Grant Thornton LLP

Irvine,
California
July 2, 2003

S-2

---



GRADCO SYSTEMS, INC.        CONSOLIDATED BALANCE SHEETS        (Dollars in thousands)

|                                        |                                                                                                                                       | March 31,                  |       
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------
|
|ASSETS                                  |                                                                                                                                       |                            |       
|Current assets:                         |                                                                                                                                       |                            |       
|                                        | Cash and cash equivalents                                                                                                             |                            | $     
|                                        | Restricted cash                                                                                                                       |                            |       
|                                        | Accounts receivable, less allowance for doubtful accounts of $212 and $175, respectively                                              |                            |       
|                                        | Inventories, less allowance for obsolescence of $354 and $228, respectively                                                           |                            |       
|                                        | Prepaid expenses and refundable deposits                                                                                              |                            |       
|                                        |                                                                                                                                       |                            |       
|                                        |                                                                                                                                       | Total current assets       |       
|Property and equipment, net             |                                                                                                                                       |                            | 160   
|Cash surrender value of life insurance  |                                                                                                                                       |                            | 251   
|Other assets                            |                                                                                                                                       |                            | 1,270 
|                                        |                                                                                                                                       |                            |       
|                                        |                                                                                                                                       | $                          | 10,644
|                                        |                                                                                                                                       |                            |       
|LIABILITIES AND SHAREHOLDERS' EQUITY    |                                                                                                                                       |                            |       
|Current liabilities:                    |                                                                                                                                       |                            |       
|                                        | Accounts payable                                                                                                                      |                            | $     
|                                        | Note payable to bank                                                                                                                  |                            |       
|                                        | Notes payable to suppliers                                                                                                            |                            |       
|                                        | Accrued expenses                                                                                                                      |                            |       
|                                        | Income taxes payable                                                                                                                  |                            |       
|                                        | Net liabilities of discontinued operations                                                                                            |                            |       
|                                        |                                                                                                                                       |                            |       
|                                        |                                                                                                                                       | Total current liabilities  |       
|Deferred compensation obligation        |                                                                                                                                       |                            | 328   
|Minority interest                       |                                                                                                                                       |                            |      
|Commitments and contingencies (Note 12) |                                                                                                                                       |                            |      
|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 264,205 shares; outstanding 229,026 and 229,710 shares, respectively |                            |       
|                                        | Accumulated deficit                                                                                                                   |                            |       
|                                        | Accumulated other comprehensive income                                                                                                |                            |       
|                                        | Less cost of common stock in treasury, 35,179 and 34,495 shares, respectively                                                         |                            |       
|                                        |                                                                                                                                       |                            |       
|                                        |                                                                                                                                       | Total shareholders' equity |       
|                                        |                                                                                                                                       |                            |       
|                                        |                                                                                                                                       | $                          | 10,644
|                                        |                                                                                                                                       |                            |       

See
accompanying notes to consolidated financial statements.

S-3

---

GRADCO SYSTEMS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except share and per share amounts)

|                                                                          |                                       | For the years ended March 31, |        
|------------------------------------------------------------------------- | ------------------------------------- | ----------------------------- | -------
|
|Revenues:                                                                 |                                       |                               |        
|Net sales                                                                 |                                       | $                             | 17,082 
|Development engineering services                                          |                                       |                               | 517    
|Licenses and royalties                                                    |                                       |                               | 15     
|                                                                          |                                       |                               |        
|                                                                          |                                       |                               | 17,614 
|                                                                          |                                       |                               |        
|Costs and expenses:                                                       |                                       |                               |        
|Cost of sales                                                             |                                       |                               | 14,671 
|Research and development                                                  |                                       |                               | 1,508  
|Selling, general and administrative                                       |                                       |                               | 5,329  
|Foreign currency transaction losses (gains)                               |                                       |                               | 161    
|DuBois litigation settlement                                              |                                       |                               |       
|                                                                          |                                       |                               |        
|                                                                          |                                       |                               | 21,669 
|                                                                          |                                       |                               |        
|Loss from operations                                                      |                                       |                               | (4,055 
|Interest expense                                                          |                                       |                               | (5     
|Interest income                                                           |                                       |                               | 24     
|                                                                          |                                       |                               |        
|Loss from continuing operations before income taxes and minority interest |                                       |                               | (4,036 
|Income tax expense (benefit)                                              |                                       |                               | (49    
|Minority interest                                                         |                                       |                               | (45    
|                                                                          |                                       |                               |        
|Loss from continuing operations                                           |                                       |                               | (3,942 
|Income (loss) from discontinued operations                                |                                       |                               | 170    
|Loss on disposal of discontinued operations                               |                                       |                               |       
|                                                                          |                                       |                               |        
|Loss before extraordinary item                                            |                                       |                               | (3,772 
|Extraordinary item:                                                       |                                       |                               |        
|                                                                          | Gain on purchase of minority interest |                               |        
|                                                                          |                                       |                               |        
|                                                                          | Net loss                              |                               | $      
|                                                                          |                                       |                               |        
|Basic and diluted earnings (loss) per common share:                       |                                       |                               |        
|From continuing operations                                                |                                       | $                             | (17.19 
|From discontinued operations                                              |                                       |                               | .74    
|                                                                          |                                       |                               |        
|Loss before extraordinary items                                           |                                       |                               | (16.45 
|Extraordinary item                                                        |                                       |                               | 1.95   
|                                                                          |                                       |                               |        
|                                                                          | Net loss                              |                               | $      
|                                                                          |                                       |                               |        
|Weighted average shares outstanding, basic and diluted                    |                                       |                               | 229,268
|                                                                          |                                       |                               |        

See
accompanying notes to consolidated financial statements.

S-4

---



GRADCO SYSTEMS, INC.        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        (Dollars in thousands)

|                                    |                         | Common Stock       |   |   |        |   |   |         |        |   |      
|----------------------------------- | ----------------------- | ------------------ | - | - | ------ | - | - | ------- | ------ | - | -----
|
|
|Balance at March 31, 2000           |                         | 264,205            |   | $ | 46,164 |   | $ | (24,682 | )      | $ | 3,240
|Components of comprehensive income: |                         |                    |   |   |        |   |   |         |        |   |      
|                                    | Net loss                |                    |  |   |        |  |   |         | (6,734 | ) |      
|                                    | Translation adjustments |                    |  |   |        |  |   |         |       |   |      
|                                    |                         | Comprehensive loss |   |   |        |   |   |         |        |   |      
|Stock-based compensation            |                         |                   |   |   | 290    |   |   |        |        |   |     
|Purchase of treasury stock          |                         |                   |   |   |       |   |   |        |        |   |     
|                                    |                         |                    |   |   |        |   |   |         |        |   |      
|Balance at March 31, 2001           |                         | 264,205            |   |   | 46,454 |   |   | (31,416 | )      |   | 1,982
|Components of comprehensive income: |                         |                    |   |   |        |   |   |         |        |   |      
|                                    | Net loss                |                    |  |   |        |  |   |         | (7,485 | ) |      
|                                    | Translation adjustments |                    |  |   |        |  |   |         |       |   |      
|                                    |                         | Comprehensive loss |   |   |        |   |   |         |        |   |      
|Purchase of treasury stock          |                         |                   |   |   |       |   |   |        |        |   |     
|                                    |                         |                    |   |   |        |   |   |         |        |   |      
|Balance at March 31, 2002           |                         | 264,205            |   |   | 46,454 |   |   | (38,901 | )      |   | 1,344
|Components of comprehensive income: |                         |                    |   |   |        |   |   |         |        |   |      
|                                    | Net loss                |                    |  |   |        |  |   |         | (3,324 | ) |      
|                                    | Translation adjustments |                    |  |   |        |  |   |         |       |   |      
|                                    |                         | Comprehensive loss |   |   |        |   |   |         |        |   |      
|Purchase of treasury stock          |                         |                   |   |   |       |   |   |        |        |   |     
|                                    |                         |                    |   |   |        |   |   |         |        |   |      
|Balance at March 31, 2003           |                         | 264,205            |   | $ | 46,454 |   | $ | (42,225 | )      | $ | 2,112
|                                    |                         |                    |   |   |        |   |   |         |        |   |      

See
accompanying notes to consolidated financial statements.

S-5

---

GRADCO SYSTEMS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (Dollars in thousands)

|                                                                     |                                                                                                        | For the years ended March 31,                                   |                                      
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | -------------------------------------
|
|Cash flows from operating activities:                                |                                                                                                        |                                                                 |                                      
|                                                                     | Net loss from continuing operations                                                                    |                                                                 | $                                    
|                                                                     | Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |                                                                 |                                      
|                                                                     |                                                                                                        | Depreciation                                                    |                                      
|                                                                     |                                                                                                        | Amortization                                                    |                                      
|                                                                     |                                                                                                        | Unrealized foreign currency transaction gains                   |                                      
|                                                                     |                                                                                                        | Deferred income taxes                                           |                                      
|                                                                     |                                                                                                        | Provision for losses on accounts receivable                     |                                      
|                                                                     |                                                                                                        | Provision for inventory write-down                              |                                      
|                                                                     |                                                                                                        | Loss on sale of property and equipment                          |                                      
|                                                                     |                                                                                                        | Stock-based compensation                                        |                                      
|                                                                     |                                                                                                        | Installment portion of litigation settlement                    |                                      
|                                                                     |                                                                                                        | Minority interest                                               |                                      
|                                                                     |                                                                                                        | Decrease (increase) in accounts receivable                      |                                      
|                                                                     |                                                                                                        | Decrease (increase) in inventories                              |                                      
|                                                                     |                                                                                                        | (Increase) decrease in prepaid expenses and refundable deposits |                                      
|                                                                     |                                                                                                        | Decrease (increase) in other assets                             |                                      
|                                                                     |                                                                                                        | (Decrease) increase in accounts payable                         |                                      
|                                                                     |                                                                                                        | (Decrease) increase in notes payable to suppliers               |                                      
|                                                                     |                                                                                                        | (Decrease) increase in accrued expenses                         |                                      
|                                                                     |                                                                                                        | (Decrease) increase in income taxes payable                     |                                      
|                                                                     |                                                                                                        | Increase (decrease) in other liabilities                        |                                      
|                                                                     |                                                                                                        |                                                                 |                                      
|                                                                     |                                                                                                        |                                                                 | Total adjustments                    
|                                                                     |                                                                                                        |                                                                 |                                      
|                                                                     |                                                                                                        |                                                                 | Net cash used in operating activities
|                                                                     |                                                                                                        |                                                                 |                                      
|Cash flows from investing activities:                                |                                                                                                        |                                                                 |                                      
|                                                                     | Acquisition of property and equipment                                                                  |                                                                 |                                      
|                                                                     | Proceeds from sale of property and equipment                                                           |                                                                 |                                      
|                                                                     | Purchase of minority interest shares                                                                   |                                                                 |                                      
|                                                                     | Redemption of life insurance policies                                                                  |                                                                 |                                      
|                                                                     | Redemption of investments                                                                              |                                                                 |                                      
|                                                                     |                                                                                                        |                                                                 |                                      
|                                                                     |                                                                                                        | Net cash (used in) provided by investing activities             |                                      
|                                                                     |                                                                                                        |                                                                 |                                      
|Cash flows from financing activities:                                |                                                                                                        |                                                                 |                                      
|                                                                     | Proceeds from issuance of note payable to bank                                                         |                                                                 |                                      
|                                                                     | Cash pledged as security for note payable to bank                                                      |                                                                 |                                      
|                                                                     | Acquisition of treasury stock                                                                          |                                                                 |                                      
|                                                                     |                                                                                                        |                                                                 |                                      
|                                                                     |                                                                                                        | Net cash used in financing activities                           |                                      
|                                                                     |                                                                                                        |                                                                 |                                      
|Effect of exchange rate changes on cash                              |                                                                                                        |                                                                 | 280                                  
|                                                                     |                                                                                                        |                                                                 |                                      
|Net decrease in cash and cash equivalents from continuing operations |                                                                                                        |                                                                 | (1,068                               
|Net increase (decrease) in cash from discontinued operations         |                                                                                                        |                                                                 | 190                                  
|                                                                     |                                                                                                        |                                                                 |                                      
|Net decrease in cash and cash equivalents                            |                                                                                                        |                                                                 | (878                                 
|Cash and cash equivalents at beginning of year                       |                                                                                                        |                                                                 | 3,597                                
|                                                                     |                                                                                                        |                                                                 |                                      
|Cash and cash equivalents at end of year                             |                                                                                                        | $                                                               | 2,719                                
|                                                                     |                                                                                                        |                                                                 |                                      
|Supplemental Disclosures of Cash Flow Information:                   |                                                                                                        |                                                                 |                                      
|                                                                     | Cash paid (refunded) during the period for:                                                            |                                                                 |                                      
|                                                                     |                                                                                                        | Interest                                                        |                                      
|                                                                     |                                                                                                        | Income taxes                                                    |                                      

See accompanying notes to consolidated financial statements.

S-6

---



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 conducts its operations principally through its wholly-owned subsidiaries Gradco
(Japan) Ltd. ("GJ") and Gradco (USA) Inc. ("GU") and its majority-owned subsidiary Gradco Technology Ltd. ("GTL"). GJ and GU design, develop, produce (by contract)
and market on a worldwide basis, intelligent paper handling devices for office copiers, computer controlled printers and facsimile machines. GTL develops other technical and non-technical
business opportunities. The Company's other wholly-owned subsidiary Venture Engineering, Inc. ("Venture") was substantially closed during fiscal 2002. Its operations have been classified as
discontinued operations in the accompanying consolidated financial statements (see Note 3).

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

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.

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 transaction gains and losses are included in net earnings (loss), except for those
relating to intercompany transactions of a long-term investment nature which are accumulated in shareholders' equity.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

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. At March 31, 2003, approximately 45% of trade accounts receivable was due from Xerox related entities.

Inventories

Inventories at GJ and GU consist of materials and finished assemblies which are held to satisfy spare parts requirements of the Company's customers. The Company
has certain contractual

S-7

---

commitments
to make spare parts available for purchase for up to six years after the end of a production cycle. Inventories at GTL consist primarily of materials and supplies used in its ice cream
business. Inventories are stated at the lower of cost (first-in, first-out and weighted average) or market (net realizable value). The Company provides a reserve for excess and
obsolete inventory to reduce the carrying value to its net realizable value. The inventory reserve is determined by analysis of customers' current orders as well as future forecasts and spare part
commitment requirements.

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.

Long-lived Assets

The excess of cost over acquired net assets ("goodwill"), which pertained to Venture and was written off during fiscal 2002 as part of the discontinued operation
charges, was 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. Intangible assets are
reviewed for impairment on an annual basis or 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. See the discussion underRecent Accounting
Pronouncements.

Revenue Recognition

Revenues from product sales ("net sales") are recorded as units or spare parts are shipped since the terms of the Company's sales contracts are "FOB
ex-factory". Revenues from development engineering services and research and development contracts are recognized as earned,
which generally occurs as services are performed. Licenses and royalties are recognized when all obligations of the appropriate agreements have been fulfilled.

Research and Development Expenses

Research and development expenses incurred on behalf of OEM customers and internal research and development are reflected in research and development expense.
These expenses amounted to $1,508,000, $2,355,000 and $9,178,000 in the fiscal years ended March 31, 2003, 2002 and 2001, respectively.

Net Earnings (loss) Per Share(EPS)

Basic earnings (loss) per share is computed by dividing net earnings (loss) 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 years 2003, 2002 and 2001 because there were net losses.
Potentially dilutive securities that were excluded from the computation of earnings (loss) per share were 10,170, 15,100, and 15,483, in 2003, 2002, and 2001, respectively. 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 Operations.

S-8

---

Stock-Based Compensation

The Company accounts for stock-based compensation as prescribed by APB Opinion No. 25, Accounting for Stock issued to Employees, and, effective
March 31, 2003, has adopted Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based CompensationTransition and Disclosure
("SFAS 148") that supercedes SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 requires pro forma disclosures of net income and net income per share as if the fair value
based method of accounting for stock-based awards had been applied for both employee and non-employee grants. It also requires disclosure of option status on a more prominent and frequent
basis. The Company accounts for stock options and warrants issued to non-employees based on the fair value method, but has not elected this treatment for grants to employees and board
members. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period. Accordingly, no compensation cost
has been recognized on the Incentive Stock
Options. Had compensation cost been determined consistent with SFAS 148, there would have been no change in results of operations for the periods presented.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of assets and liabilities for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future income taxes. Valuation allowances are established as a reduction of net deferred tax assets when management cannot determine
that it is now more likely than not that the deferred assets will be realized.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." Under these new standards, all acquisitions subsequent to June 30, 2001 must be accounted for using the purchase method of accounting. The cost of intangible assets
with indefinite lives and goodwill are no longer amortized, but are subject to an annual impairment test based upon its fair value.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset retirement obligations. Under SFAS 143, the costs of retiring an asset will be recorded as a liability when the retirement
obligation arises, and will be amortized to expense over the life of the asset.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived assets and discontinued operations, and it provides guidance on estimating future cash flows to test
recoverability.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 provides financial
accounting and reporting guidance for costs associated with exit or disposal activities, including one-time termination benefits, contract termination costs other than for a capital lease,
and costs to consolidate facilities or relocate employees. SFAS 146 nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a

S-9

---

Restructuring)".
Under SFAS 146, a liability for a cost associated with an exit or disposal activity should be recognized and measured initially at its fair value in the period in which the
liability is incurred. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 amends
SFAS 123 and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amends
the disclosure requirements of SFAS 123 to require more prominent and frequent disclosures in financial statements about the effects of stock-based employee compensation. The transition
guidance and annual disclosure provisions of SFAS 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. Since the Company has not adopted the fair value based method of
accounting for stock-based employee compensation that is permitted, but not mandated, by SFAS 148, the adoption of SFAS 148 did not have a material impact on the Company's financial
position and results of operations.

The
FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," This
Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosure
requirements of the Interpretation are effective for annual financial statements after December 15, 2002.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This Interpretation defines a variable interest entity and provides
that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be
included in financial statements with those of the business enterprise. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. The Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.

The
implementation of these pronouncements in fiscal 2003 did not have a material impact on the Company's financial position or results of operations.

NOTE 2REALIZATION OF ASSETS

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than
provided, cash in its operations and has experienced a significant reduction in its sales volume. These factors raise substantial doubt about the Company's ability to continue as a going concern.

In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is
dependent upon continued operations of the Company, which in turn is dependent upon growth of revenues and the success of future operations. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty.

Management
has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue in
existence: the Company

S-10

---

has
shutdown the operations of Venture, reduced the size of its workforce and reduced other costs in an attempt to conserve cash. The Company's survival as a going concern is dependent upon the
development of new sources in Japan and South Korea for the manufacture and engineering of products and completing tooling for such manufacture within the limits of its financial resources. However,
there can be no assurance that these activities will be sufficient to reduce expenses quickly and sufficiently enough to meet declining revenues, if they persist.

NOTE 3DISCONTINUED OPERATIONS

On October 12, 2001, the Company announced its intention to immediately commence a controlled shutdown of Venture, one of its wholly-owned subsidiaries.
The industries serviced by Venture, primarily the semi-conductor industry and other electronic device manufacturers, were negatively affected by the downturn in the worldwide economy. A
number of customers cancelled orders and delayed deliveries, causing Venture to incur losses of an unacceptable magnitude. The Board of Directors approved a plan to dispose of the business, which was
substantially completed by
March 31, 2002. The loss on disposal for the year ended March 31, 2002 of $1,152,000 includes the writeoff of the Company's remaining goodwill related to Venture in the amount of
$1,083,000 as well as the final administrative expenses to be incurred in collecting Venture's remaining receivables and paying its remaining obligations.

The
disposal of Venture has been accounted for as a discontinued operation and, accordingly, its net assets have been segregated from continuing operations in the accompanying
consolidated balance sheets, and its operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows. There has been
no tax benefit recognized for the losses because the Company is already in a net operating loss carryforward position.

Information
relating to the discontinued operations of Venture is as follows (dollars in thousands):

For the years ended March 31,2003

2002

2001Net sales

$
84

$
5,564

$
10,975Development engineering services





113


99784


5,677


11,972Cost of sales





6,112


9,045Research and development





243


1,317Selling, general and administrative


(86
)

1,571


1,568Interest, net





29


20(86
)

7,955


11,950Income (loss) before income taxes


170


(2,278
)

22Income tax expense (benefit)





1


(1
)Income (loss) from discontinued operations

$
170

$
(2,279
)
$
23


S-11

---

The
net assets (liabilities), excluding cash of $25,000 and $116,000 as of March 31, 2003 and 2002, respectively, of the discontinued operations of Venture included in the
accompanying consolidated balance sheets as of March 31, 2003 and 2002 are as follows (dollars in thousands):

March 31,
2003

March 31,
2002Accounts receivable, net

$


$
55Other assets





30Accounts payable


(76
)

(61
)Accrued expenses





(10
)Income taxes payable


(3
)

(5
)Estimated costs related to disposal





(68
)Net liabilities of discontinued operations

$
(79
)
$
(59
)


NOTE 4REVERSE STOCK SPLIT

The Board of Directors authorized a one-for-thirty reverse stock split of the Company's common stock, which was approved by the
shareholders on September 27, 2002. This decreased the number of common shares issued to 264,205. All references in the accompanying consolidated financial statements to the number of common
shares and per-share amounts for prior periods have been restated to reflect the reverse stock split.

NOTE 5RESTRICTED CASH AND SHORT TERM BORROWING ARRANGEMENTS

GJ borrowed 50 million yen in February 2003, which is collateralized by a $1,000,000 time deposit. The note payable to bank is due in
August 2003 and bears interest at a rate of 1.875% per annum. The balance on this note is $416,000 at March 31, 2003. GJ can draw down approximately 50 million yen more under this
financing agreement.

Notes
payable to suppliers are non-interest bearing and have payment terms of 90 days.

S-12

---

NOTE 6DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

March 31,2003

2002(In Thousands)Inventories are summarized as follows:Raw materials

$
306

$
217Finished goods


762


975Allowance for obsolescence


(354
)

(228
)Net inventories

$
714

$
964Property and equipment, at cost, are summarized as follows:Office, shop and automotive equipment

$
165

$
175Computer equipment


527


531Leasehold improvements


151


156Tooling


1,518


2,1782,361


3,040Accumulated depreciation and amortization


(2,201
)

(2,811
)$
160

$
229Other assets are summarized as follows:Non-Refundable Tooling Advances

$
614

$
2,119Deposits


282


456Investments


175


249Canon license


167


193Distribution license for Dippin' Dots ice cream


32


57$
1,270

$
3,074


NOTE 7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 66,667 common shares (two million shares pre-split) from time to time on the open market. The Company purchased 684, 3,030 and 8,547 shares at
aggregate costs of $2,000, $51,000 and $361,000 during fiscal years 2003, 2002 and 2001, respectively.

S-13

---

NOTE 8INCOME TAXES

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

Fiscal Year2003

2002

2001CurrentForeign

$
(49
)
$
11

$
19Federal


(2
)

(8
)

6State


2


183


144DeferredForeign





70


2,847Federal





1,063


257Total

$
(49
)
$
1,319

$
3,273


The
foreign provision for all years primarily reflects GJ's income taxed in Japan.

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

Fiscal Year2003

2002

2001Tax provision (benefit) at U.S. statutory tax rate

(35.0
)%
(35.0
)%
(35.0
)%State income taxes, less federal benefit



(3.3
)
2.6Foreign tax expense

21.3

27.1

24.5Stock-based compensation





2.8Change in valuation allowance

13.5

58.4

93.2Other

(1.0
)
0.3

3.6(1.2
)%
47.5
%
91.7
%


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):

March 31,2003

2002Deferred tax assetsRetirement benefits

$
361

$
323Tax loss carryforwards


13,194


13,953Valuation allowance


(13,555
)

(14,276
)$


$



At
March 31, 2003, the Company had federal net operating loss carryforwards ("NOLs") for tax reporting purposes of $26,900,000 which will expire in 2004 through 2023 if not
utilized. These NOLs are utilizable by Gradco Systems, Inc. and its subsidiary, GU. GJ and its subsidiary also have NOLs in the amount of 1,158,419,000 yen ($9,637,000) which will expire in
2004 through 2008 if not utilized. At this time it is not deemed likely that 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.

S-14

---

The
Company does not provide for U.S. income taxes on undistributed foreign earnings considered permanently invested in its Japanese operations. At March 31, 2003, the Company's
share of such undistributed foreign earnings totaled $11,000,000. Foreign withholding taxes of approximately $1,100,000 would be due upon remittance of these earnings.

NOTE 9EXTRAORDINARY ITEM

In February 2003, the Company purchased the remaining 2.7% of GJ shares held by minority interests. The purchase price was 10 yen per share or
approximately $19,000 in total. In accordance with SFAS No. 141, when the purchase price is less than the fair value of net assets acquired and there are no qualifying long-lived assets,
including goodwill, to be written down, the excess is considered an extraordinary gain. Since the minority interest liability at the acquisition date was $467,000 and 2.7% of GJ's qualifying
long-lived assets were not material, the difference of $448,000 is presented as an extraordinary gain in the consolidated statement of operations for the year ended March 31, 2003. The
extraordinary gain was not presented net of tax because the transaction does not constitute a taxable event.

NOTE 10RELATED PARTY TRANSACTIONS

Bernard Bressler, Secretary, Treasurer and a director of the Company, is a member of the law firm of Bressler, Amery & Ross, P.C., counsel to the Company.
During fiscal year 2003, 2002 and 2001, the Company paid legal fees and expenses of $42,000, $50,000 and $173,000, respectively, to such firm.

NOTE 11EMPLOYEE BENEFITS

In August 2000, the Board of Directors of the Company approved the adoption of the 2000 Stock Option Plan (the "2000 Plan") offering Incentive Stock
Options ("ISOs") and Non-Qualified Stock Options ("NQSOs"). The 2000 Plan was approved by the Company's shareholders at the annual meeting held on September 22, 2000. A maximum of
23,334 shares of the Company's common stock have been reserved for issuance pursuant to the 2000 Plan. Options may be granted only to officers, key employees, directors or consultants of the Company
or any of its subsidiaries. The Board reserved options for 8,917 shares to replace NQSOs issued and still outstanding under the 1997 Stock Option Plan (the "1997 Plan") which was terminated at that
time. The replacement options carried terms identical to the previously issued options. Under the 1997 Plan, options for 10,400 shares were granted during September 1997 at an exercise price
below fair market value of the common stock on the date of grant. This difference was recorded ratably as compensation expense during the period September 1997 through February 2001, the
vesting period of the options. Stock-based compensation expense of $290,000 is included in selling, general and administrative expenses for the year ended March 31, 2001. Options for 5,117 and
4,167 were granted during fiscal year 2002 and 2001, respectively, at prices equal to the fair market value at the dates of grant. No options were granted in fiscal year 2003.

The
Company's 1988 Stock Option Plan has 250 options outstanding which will expire in October 2003.

S-15

---

The
following table summarizes stock option activity:

Number

Weighted Average
Exercise PriceOutstanding March 31, 2000

14,883

$
86.40Granted

4,167


48.60Expired or cancelled

(3,567
)

136.50Outstanding March 31, 2001

15,483


64.80Granted

5,117


11.70Expired or cancelled

(5,500
)

78.00Outstanding March 31, 2002

15,100


42.00Expired or cancelled

(4,930
)

42.31Outstanding March 31, 2003

10,170

$
41.85


Of
the options outstanding at March 31, 2003, 2002 and 2001, options to purchase 7,962, 8,821 and 11,400 shares, respectively, were exercisable at weighted average prices of
$48.58, $42.00 and $70.50 per share, respectively.

The
following table summarizes information concerning currently outstanding and exercisable stock options as of March 31, 2003:

| |         | Options Outstanding |       | Options Exercisable
| | ------- | ------------------- | ----- | -------------------
|
| | $  9.90 |                     | 3,451 |                    
| | 45.00   |                     | 968   |                    
| | 60.00   |                     | 5,501 |                    
| | 71.25   |                     | 250   |                    
| |         |                     |       |                    
| |         | 10,170              |       |                    
| |         |                     |       |                    

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. The remaining loan of 82 million yen ($682,000 at March 31, 2003), bears interest at a nominal rate and must be repaid at the
time of retirement when the accrued benefit will be paid. The Company has recorded the loan as a reduction of the deferred compensation obligation, which totaled $328,000 and $245,000 at
March 31, 2003 and 2002 respectively

The
Company's domestic subsidiary has a 401(k) employee benefit plan. All employees are eligible for the plan upon the completion of one month of service with the Company. As part of the
plan, 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 2003, 2002 and 2001, the
Company contributed $3,000, $31,000 and $25,000, respectively, to the plan.

S-16

---

NOTE 12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, 2003, under
non-cancelable facility and equipment leases with remaining lease terms in excess of one year are as follows:

Year ending March 31,2004

$
100,0002005


69,0002006


44,0002007


22,000Thereafter


$
235,000


Rent
expense was approximately $614,000, $682,000 and $759,000 for fiscal years 2003, 2002 and 2001, respectively.

There
is no material litigation pending against the Company. The following case, which has been settled, involved material claims asserted against the Company:

DuBois v. Gradco Systems Inc. et al.The federal case brought against the Company and its (now former) president,
Keith Stewart, in the U.S. District Court in Connecticut by R. Clark DuBois, a former employee of the Company, was settled before trial in September 2000. Pursuant to such settlement, Gradco
paid $3,200,000 to Mr. DuBois. The $3.2 million settlement or $13.51 per share, was charged to expense in the second quarter of fiscal year 2001. Because the Company has substantial net
operating loss carryforwards for federal tax purposes, no tax benefits were recognized as a result of this charge.

NOTE 13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. Two of the Company's subsidiaries, GJ and GU operate in this segment. Gradco Belgium ("GJB"), S.C. (a wholly-owned subsidiary of GJ) was also in this segment, but was
closed during fiscal 2003. The operations of GJB were nominal and therefore have not been segregated into discontinued operations.

S-17

---

GTL,
whose operations are focused on developing markets for new technologies and products, including those of Dippin' Dots Ice Cream, accounts for the remainder (in thousands).

|                              |  | Paper
Handling
Devices |        | New
Technology/
Products |   | Corporate |   | Discontinued
Operations |        | Intersegment
& Corporate
Eliminations |   | Consolidated |  
|----------------------------- |  | ---------------------- | ------ | ------------------------ | - | --------- | - | ----------------------- | ------ | ------------------------------------- | - | ------------ | -
|Fiscal Year 2003              |  |                        |        |                          |   |           |   |                         |        |                                       |   |              |  
|Revenues                      |  | $                      | 15,554 |                          | $ | 2,060     |   | $                       |       |                                       | $ |             |  
|Interest income               |  |                        | 273    |                          |   |          |   |                         | 1      |                                       |   |             |  
|Interest expense              |  |                        | (5     | )                        |   |          |   |                         | (250   | )                                     |   |             |  
|Depreciation and amortization |  |                        | 779    |                          |   | 38        |   |                         |       |                                       |   |             |  
|Extraordinary gain            |  |                        |       |                          |   |          |   |                         | 448    |                                       |   |             |  
|Income tax expense (benefit)  |  |                        | 4      |                          |   | 1         |   |                         | (54    | )                                     |   |             |  
|Net earnings (loss)           |  |                        | (3,112 | )                        |   | (212      | ) |                         | (170   | )                                     |   | 170          |  
|Assets                        |  |                        | 24,462 |                          |   | 662       |   |                         | 5,312  |                                       |   | 25           |  
|Fiscal Year 2002              |  |                        |        |                          |   |           |   |                         |        |                                       |   |              |  
|Revenues                      |  | $                      | 20,711 |                          | $ | 2,467     |   | $                       |       |                                       | $ |             |  
|Interest income               |  |                        | 567    |                          |   |          |   |                         | 1      |                                       |   |             |  
|Interest expense              |  |                        | (1     | )                        |   |          |   |                         | (250   | )                                     |   |             |  
|Depreciation and amortization |  |                        | 93     |                          |   | 44        |   |                         | (378   | )                                     |   |             |  
|Income tax expense            |  |                        | 318    |                          |   | 1         |   |                         | 1,000  |                                       |   |             |  
|Net loss                      |  |                        | (1,842 | )                        |   | (1,103    | ) |                         | (1,109 | )                                     |   | (3,431       | )
|Assets                        |  |                        | 28,075 |                          |   | 970       |   |                         | 5,400  |                                       |   | 116          |  
|Fiscal Year 2001              |  |                        |        |                          |   |           |   |                         |        |                                       |   |              |  
|Revenues                      |  | $                      | 36,596 |                          | $ | 2,813     |   | $                       |       |                                       | $ |             |  
|Interest income               |  |                        | 600    |                          |   |          |   |                         | 40     |                                       |   |             |  
|Interest expense              |  |                        | (1     | )                        |   |          |   |                         | (225   | )                                     |   |             |  
|Depreciation and amortization |  |                        | 76     |                          |   | 40        |   |                         | (357   | )                                     |   |             |  
|DuBois litigation settlement  |  |                        |       |                          |   |          |   |                         | 3,200  |                                       |   |             |  
|Income tax expense            |  |                        | 3,056  |                          |   | 1         |   |                         | 216    |                                       |   |             |  
|Net earnings (loss)           |  |                        | (1,380 | )                        |   | (1,275    | ) |                         | (4,103 | )                                     |   | 24           |  
|Assets                        |  |                        | 42,093 |                          |   | 1,091     |   |                         | 7,577  |                                       |   | 2,273        |  

Geographic
data follows (in thousands):

|                 |                   | United States |   | Japan  |  | Belgium |        | Consolidated
|---------------- | ----------------- | ------------- | - | ------ |  | ------- | ------ | ------------
|Fiscal Year 2003 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 5,956  |  | $       | 11,602 |             
|                 | Long-lived assets |               |   | 36     |  |         | 1,645  |             
|Fiscal Year 2002 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 8,991  |  | $       | 14,108 |             
|                 | Long-lived assets |               |   | 53     |  |         | 3,525  |             
|Fiscal Year 2001 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 19,281 |  | $       | 19,928 |             
|                 | Long-lived assets |               |   | 73     |  |         | 5,154  |             

S-18

---

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

Fiscal Year2003

2002

2001Fuji Xerox

25
%
28
%
18
%Xerox

17
%
21
%
30
%Panasonic

14
%
N/A

14
%Xerox Ltd.

N/A

10
%
16
%


NOTE 14QUARTERLY FINANCIAL DATA (Unaudited)

The following table summarizes the unaudited quarterly results of operations for fiscal years 2003 and 2002.

|                                                    |  | Quarter |        |   |  
|--------------------------------------------------- |  | ------- | ------ | - | -
|
|
|Fiscal Year 2003                                    |  |         |        |   |  
|Revenues                                            |  | $       | 5,044  |   | $
|Costs and expenses, including interest              |  |         | 5,600  |   |  
|Loss from continuing operations before income taxes |  |         | (556   | ) |  
|Income from discontinued operations                 |  |         |       |   |  
|Extraordinary gain                                  |  |         |       |   |  
|Net loss                                            |  |         | (535   | ) |  
|Basic and diluted loss per common share             |  | $       | (2.33  | ) | $
|Fiscal Year 2002                                    |  |         |        |   |  
|Revenues                                            |  | $       | 7,779  |   | $
|Costs and expenses, including interest              |  |         | 8,425  |   |  
|Loss from continuing operations before income taxes |  |         | (646   | ) |  
|Loss from discontinued operations                   |  |         | (405   | ) |  
|Net loss                                            |  |         | (1,048 | ) |  
|Basic and diluted loss per common share             |  | $       | (4.53  | ) | $

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.

NOTE 15SUBSEQUENT EVENT

Subsequent to its year end, the Company reached an agreement with one of its customers to be reimbursed for development engineering services that were performed
and recognized as R&D expense in fiscal 2003. Revenues in the amount of 88,685,500 yen, or approximately $738,000 at the year-end exchange rate, will be recognized in fiscal 2004 as a
result of this agreement.

S-19

---



SCHEDULE II        GRADCO SYSTEMS, INC.        VALUATION AND QUALIFYING ACCOUNTS        For the three years ended March 31, 2003  (Amounts in thousands)

|                                                                                     |                       | Balance at
Beginning
of Year |   | Additions
Charged to
Costs and
Expenses |  | Deductions
and Currency
Translation
Adjustments |       | Balance
at End
of Year
|------------------------------------------------------------------------------------ | --------------------- | ---------------------------- | - | --------------------------------------- |  | ----------------------------------------------- | ----- | ----------------------
|Valuation reserve deducted in the balance sheets from the asset to which it applies: |                       |                              |   |                                         |  |                                                 |       |                       
|Year ended March 31, 2003:                                                           |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                     | Accounts receivable   |                              | $ | 175                                     |  | $                                               | 43    |                       
|                                                                                     | Deferred income taxes |                              | $ | 14,276                                  |  | $                                               | 928   |                       
|                                                                                     | Inventories           |                              | $ | 228                                     |  | $                                               | 303   |                       
|Year ended March 31, 2002:                                                           |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                     | Accounts receivable   |                              | $ | 72                                      |  | $                                               | 109   |                       
|                                                                                     | Deferred income taxes |                              | $ | 10,871                                  |  | $                                               | 3,454 |                       
|                                                                                     | Inventories           |                              | $ | 105                                     |  | $                                               | 291   |                       
|Year ended March 31, 2001:                                                           |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                     | Accounts receivable   |                              | $ | 70                                      |  | $                                               | 4     |                       
|                                                                                     | Deferred income taxes |                              | $ | 8,453                                   |  | $                                               | 2,649 |                       
|                                                                                     | Inventories           |                              | $ | 0                                       |  | $                                               | 105   |                       

S-20

---

QuickLinks