SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-K

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

For the fiscal year ended March 31, 2001

OR

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

For the transition period from  to

Commission file number 0-12829

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

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

3753 Howard Hughes Pkwy, Ste 200, Las Vegas, Nevada

89109(Address of principal executive offices)

(Zip Code)


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

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

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
X    No

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  X

The
aggregate market value of voting stock held by non-affiliates of the Registrant (based on the closing sales price of Gradco common stock on the NASDAQ National Market System on
June 15, 2001) was $3,439,574.

The
number of outstanding shares, net of treasury shares, of each class of the Registrant's common stock outstanding at June 15, 2001 was: common stock, no par value6,879,148
shares.

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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 executive offices are located at 3753 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada and its telephone number is
(702) 892-3714.

(a)Financial Information About Industry Segments.

Gradco
and its subsidiaries operate primarily in one industry segment, the design, development, production and marketing of intelligent paper handling devices and high technology
short-run products. It is seeking diversification and has entered into agreements (i) to distribute Dippin Dots ice cream in Japan, and (ii) to distribute a wide format
printer outside of Japan. After March 31, 2001 it entered into a joint venture to purchase and resell certain electronic components. Only Dippin Dots has produced any revenue in the year ended
March 31, 2001. Such revenue is not material. Information relating to revenue, net earnings and identifiable assets attributable thereto for the fiscal years ended March 31, 2001, 2000,
and 1999 is set forth in response to Item 8 below.

(b)Narrative Description of Business.

Gradco
is a holding company which conducts business as follows:

(i)Copier and Printer Product Business

The
various activities comprising these businesses, as described below, are conducted through Gradco's 97%-owned Japanese subsidiary Gradco (Japan) Ltd. ("GJ"), and Gradco's
wholly-owned domestic subsidiary Gradco (USA) Inc. ("GU"). GU concentrates on marketing and sales activities in the United States and performs research and development in relation thereto.

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

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

Due
to the overall transition in the office equipment industry from analog to digital equipment which does not require the kind of multi-bin sorters which the Company has
produced and marketed, emphasis continues to be placed on design, development and marketing of paper handling products for the rapidly increasing digital equipment market. In addition, GJ has a 95%
owned subsidiary, Gradco Technology Ltd. ("GTL") which will engage in a variety of diversified businesses. As of March 1, 2000 it began the distribution of Dippin' Dots
ice cream in Japan. GTL has also acquired exclusive U.S. and European rights to market a specialized wide format printer and after the end of fiscal year 2001 entered into a joint venture to purchase
and resell certain electronic components. It is exploring and developing other technical and non-technical business opportunities.

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(ii)High Technology Engineering And Manufacturing Services

The
Company's subsidiary, Venture Engineering, Inc. based in Carrollton, Texas ("Venture") conducts this business. Its engineering and manufacturing activities are concentrated
in the paper handling and semiconductor industries, with manufacturing of short run high technology items constituting a growing part of the effort. Venture has been seeking to diversify into other
industries such as the Medical industry with some degree of success.

Business of GJ



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

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

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



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

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

Other Products.GJ's products include certain additional automatic paper feeders and specialized output print stations.
These include high capacity sheet feeders applicable to a variety of laser printers, a specialized high capacity stacker for a high speed laser printer, a stacker for many low speed laser printers, a
sheet invertor and a sheet decurler for laser printers, facsimile machines and a specialized wide format printer. It has under development products for stapling, hole punching and booklet-making
output from digital copiers and printers. It is presently anticipated that these products will be introduced in fiscal 2002.

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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 is obligated to purchase 102 units from
the manufacturer at an approximate cost of $1.5 million by December 31, 2001. At March 31, 2001 it had purchased 24 units. By June 30, 2001 it had purchased an additional
12 units. By June 30 three units had been sold. In the second year GTL is obligated to purchase 150 units in order to maintain exclusivity.

GTL's
other activities include distribution of Dippin Dots Ice Cream in Japan and the purchase and resale of certain electronic components pursuant to a Joint Venture
Agreement executed in June 2001.



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

In
fiscal 2001, Xerox, Fuji Xerox, Xerox Ltd. and Panasonic accounted for 23%, 14%, 12% and 10%, respectively, of the Registrant's consolidated revenues. In fiscal 2000, Xerox,
Panasonic and Xerox, Ltd. accounted for 33%, 14% and 10%, respectively, of the Registrant's consolidated revenues. In fiscal 1999, Xerox and Xerox Ltd. accounted for 30% and 16%,
respectively, of the Registrant's consolidated revenues. A loss of any of the current principal customers could have a negative impact on the Registrant's consolidated operations taken as a whole (see
GJ Competition).

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

Licenses.GJ has certain agreements and has granted certain licenses to others, described below, to manufacture
products using its technology. Most of these licenses were originally entered into before 1991.

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

4

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conjunction with the grant of royalty-free cross licenses between the Registrant and the OEM with respect to certain conflicting patent rights of the Registrant in the United States and
the OEM in Japan.

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

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

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

These
agreements generated royalty revenues of approximately $954,000 during the fiscal year ended March 31, 2001, $1,153,000 during the fiscal year ended March 31, 2000
and $2,213,000 during the fiscal year ended March 31, 1999. These agreements allow GJ to receive additional revenues from certain OEMs while also selling products to the 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.



GJ's principal competition for its sorters for convenience copiers is from its OEM licensees who generally have much larger resources than GJ. GJ also
experiences competition, to a more limited extent, from other OEMs, and from other manufacturers of sorters using different technology.

In
its marketing of digital products, GJ faces competition from a number of companies, many of whom have substantially greater resources.



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. During the fiscal year ending March 31, 2001 GJ has systematically allowed certain of its patents in the U.S. and elsewhere which do not cover
current products to lapse.

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

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
sorter patents will not be challenged or infringed. In addition, there can be no assurance that other parties will not develop new technology which does not violate such patents but which is
competitive with certain GJ products and patentable by such other parties.

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



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

Agreements
with the manufacturers for finished products provide for quality 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).

Business of Venture Engineering, Inc.

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

Engineering
services performed by Venture are principally related to paper-handling products, semiconductor processing equipment, waterjet metal fabrication and medical devices,
including electronic motion control devices and devices used for putting marks on paper/media. These devices and applications include printer-plotters, peripheral media handling, specialized printing
and support, micro BGA semi-conductor handling, and control and assembly of medical implants. Services are also performed for other applications such as manufacturing robotics and test and
process control equipment. Services are typically billed on a fixed price basis although time and material and royalty projects are also utilized.

Venture
is also developing devices for processing automation equipment for the semi-conductor industry both at the chip level and final packaging level. Venture is
concentrating on projects that can lead to long-term manufacturing contracts.

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

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

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Costs and Revenues of Development Engineering Services

In fiscal 2001, 2000 and 1999 the Registrant, on a consolidated basis, spent approximately $10,494,000, $2,742,000 and $3,011,000, 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 $7,691,000, $1,401,000 and $1,178,000, in fiscal 2001, 2000 and 1999, respectively.
The Registrant, on a consolidated basis, also received revenues from customers under development engineering service contracts of approximately $6,506,000, $1,162,000, and $895,000 in fiscal 2001,
2000 and 1999, respectively.

Backlog

Registrant's order backlog from consolidated operations was estimated at approximately $11,400,000 at March 31, 2001 and $13,600,000 at March 31,
2000. Backlog includes orders accepted for delivery to customers during the ensuing fiscal year, 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). Substantially all orders shown as backlog were scheduled for delivery within approximately
6 months. 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 2001, Gradco and its subsidiaries employed 127 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, 2001, $31,252,000 of the Registrant's consolidated revenues were attributed to sales in the United States and $19,987,000 were attributed to
foreign countries ($14,928,000 to Japan). For the fiscal year ended March 31, 2000, $32,228,000 of the Registrant's consolidated revenues were attributed to the United States and $19,046,000
were attributed to foreign countries ($19,004,000 to Japan). For the fiscal year ended March 31, 1999, $51,062,000 of the Registrant's consolidated revenues were attributed to the United States
and $30,755,000 were attributed to foreign countries ($30,654,000 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, 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 gain of $293,000 in fiscal year 2001 and losses of $487,000 and $482,000 in fiscal years 2000 and 1999, respectively, arising from changes in the relationship of the yen and dollar during
each of those years.

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

Item 2. Description of Property.

Gradco's corporate offices are located at 3753 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada 89109. The lease is month to month.

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GJ's
principal office is located in Tokyo, Japan. The principal office of GU is located in Irvine, California. Venture has its office, engineering, development and light production
facilities in Carrollton, Texas.

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 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.

Item 4. Submission of Matters to Vote of Security Holders

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

PART II

Item 5. Market for Registrant's Common Equity and Related Security Holder Matters.

(a)Market Information.

Gradco
common stock was traded in the over-the-counter market and was quoted on the NASDAQ National Market System under the symbol GRCO until July 9,
2001. Thereafter it is anticipated that it will be traded on the NASD Bulletin Board. The following table sets forth the quarterly high and low closing sales prices from April 1, 1999 to
March 31, 2001.

|Quarter Ended      |  | High |      | Low
|------------------ |  | ---- | ---- | ---
|June 30, 1999      |  | $    | 3.38 |    
|September 30, 1999 |  | $    | 2.69 |    
|December 31, 1999  |  | $    | 2.19 |    
|March 31, 2000     |  | $    | 2.63 |    
|June 30, 2000      |  | $    | 2.59 |    
|September 30, 2000 |  | $    | 1.75 |    
|December 31, 2000  |  | $    | 1.75 |    
|March 31, 2001     |  | $    | 1.25 |    

(b)Holders.

The
approximate number of holders of record of Gradco common stock, no par value (its sole class of common equity) as of the close of business on June 15, 2001 is 650.

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(c)Dividends.

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

Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with the consolidated financial statements of Gradco and the notes thereto included
elsewhere herein (in thousands, except per share amounts).

|                                         |                                        | Years Ended March 31, |       
|---------------------------------------- | -------------------------------------- | --------------------- | ------
|
|
|Statement of operations data:            |                                        |                       |       
|Revenues:                                |                                        | $                     | 51,239
|                                         |                                        |                       |       
|Costs and expenses:                      |                                        |                       |       
|                                         | Cost of sales                          |                       |       
|                                         | Other operating expenses               |                       |       
|                                         | Interest income, net                   |                       |       
|                                         | Provision for doubtful Mita receivable |                       |       
|                                         | DuBois/Hamma litigation settlements    |                       |       
|                                         |                                        |                       |       
|                                         |                                        |                       | 54,785
|                                         |                                        |                       |       
|Earnings (loss) before income taxes and  |                                        |                       |       
|minority interest                        |                                        |                       | (3,546
|Income taxes                             |                                        |                       | 3,272 
|Minority interest                        |                                        |                       | (84   
|                                         |                                        |                       |       
|                                         |                                        | Net earnings (loss)   |       
|                                         |                                        |                       |       
|Basic earnings (loss) per common share   |                                        | $                     | (.95  
|                                         |                                        |                       |       
|Average shares outstanding, basic EPS    |                                        |                       | 7,105 
|                                         |                                        |                       |       
|Diluted earnings (loss) per common share |                                        | $                     | (.95  
|                                         |                                        |                       |       
|Average shares outstanding, diluted EPS  |                                        |                       | 7,105 
|                                         |                                        |                       |       
|Balance sheet data:                      |                                        |                       |       
|                                         | Working capital                        |                       | $     
|                                         | Total assets                           |                       |       
|                                         | Long-term debt                         |                       |       
|                                         | Shareholders' equity                   |                       |       

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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 Venture Engineering, Inc. ("Venture") and Gradco (USA) Inc. ("GU") and its
majority-owned subsidiaries Gradco (Japan) Ltd. ("GJ") and 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. Venture performs contract engineering and manufacturing services for OEMs and
other customers, primarily for the U.S. market. GTL develops other technical and non-technical business opportunities.

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

Revenues

Revenues for the fiscal year ended March 31, 2001 decreased by $35,000 from the prior year. Net sales decreased by $5,180,000 (10.6%), from $48,959,000
to $43,779,000, representing the combined effect of a $12,290,000 decrease in sales in the office automation market due to a 30% decrease in unit sales and increases in sales by Venture and GTL of
$4,749,000 and $2,361,000, respectively. The yen changed by less than 1% against the dollar for the year and therefore revenues derived from yen denominated sales were virtually unaffected when
translated into dollars. Revenues from development engineering services increased by $5,344,000, principally from customer funding of two new programs being developed by GJ, and royalties decreased by
$199,000.

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

Due
to the overall transition in the office equipment industry from analog to digital equipment, which does not require the kind of multi-bin sorters which the Company has
produced and marketed, emphasis continues to be placed on design, development and marketing of paper handling products for the rapidly increasing digital equipment market. GTL, GJ's 95% owned
subsidiary, is also engaging in a variety of diversified businesses. In March 2000 it began the distribution of Dippin' Dots ice cream in Japan and it is exploring and developing other
technical and non-technical business opportunities. In December 2000 it entered into a contract to distribute a wide format printer outside of Japan.

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Costs and Expenses

Gross margin on net sales was 24.7%, 25.0% and 20.7% in fiscal 2001, 2000 and 1999, respectively. The increase in the 2000 fiscal year was primarily from unit
price increases resulting from lower volumes coupled with an increase in margins in Venture's contract manufacturing business.

Research
and development expenses ("R&D") in fiscal 2001 totaled $10,494,000 (20.5% of revenues), compared to $2,742,000 (5.3% of revenues) in fiscal 2000 and $3,011,000 (3.7% of
revenues) in fiscal 1999. R&D expenses incurred under development engineering service contracts in the fiscal years ended March 31, 2001, 2000 and 1999, respectively, were $7,961,000,
$1,401,000 and $1,178,000. The
increase from fiscal 2000 to 2001 was principally attributable to the aforementioned development engineering service contract expenses incurred by GJ and the increase from fiscal 1999 to 2000 was
attributable to Venture. R&D expenses incurred on behalf of internal R&D efforts were $2,533,000, $1,341,000 and $1,833,000 for the same periods.

Selling,
general and administrative expenses ("SG&A") decreased by $1,225,000 (12.2%) in fiscal 2001 from the prior year. The majority of this decrease ($957,000) was attributable to
the fact that the GJ retirement plan was terminated in fiscal 2000 and therefore there was no expense in fiscal 2001 (see Note 6 of "Notes to Consolidated Financial Statements" set forth in
Item 8 below). Reductions were made in personnel and other SG&A costs at GJ and GU, but were partially offset by an increase of $313,000 in SG&A at Venture resulting from its increased business. SG&A
decreased by $245,000 (2.4%) in fiscal 2000 from the prior year. Although there was a one-time charge of $693,000 included in SG&A attributable to the termination of the GJ retirement
plan, this was more than offset by a reduction of $250,000 in patent amortization costs and lower personnel costs at each of the Registrant's significant subsidiaries.

There
was a foreign currency gain of $293,000 in fiscal 2001 compared to losses of $487,000 and $482,000 in fiscal years 2000 and 1999, respectively. In fiscal 1999, the Registrant
took a $5,000,000 charge for the settlement of the Hamma litigation and a $5,543,000 charge due to the bankruptcy petition filed by Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest
customers. In fiscal 2000, Mita's reorganization plan was approved by the bankruptcy court and Mita was directed to repay 18% of the unsecured creditors' debt over a period of 10 years. The
Registrant recorded a pre-tax credit to income in the amount of $935,000 in the third quarter, representing the present value of the non-interest bearing payments to be
received. In fiscal 2001, the Registrant took a $3,200,000 charge for the settlement of the DuBois litigation.

Pre-tax Earnings, Income Taxes and Minority Interest

As a result of the above factors, earnings (loss) before income taxes and minority interest were ($3,546,000), $2,644,000 and ($4,579,000) in fiscal 2001, 2000
and 1999, respectively. The tax provisions (benefit) of $3,272,000, $1,182,000 and ($2,317,000) in fiscal 2001, 2000 and 1999, respectively, primarily comprise foreign taxes on the earnings (loss) of
GJ and state taxes on the earnings of GU. The Registrant's consolidated effective tax rate increased in fiscal 2001 primarily as a result of increasing the valuation allowance on deferred tax benefits
associated with the net operating loss carryforwards ("NOLs") in Japan to reflect the uncertainty of GJ and GTL being able to utilize the NOLs before they expire. The tax rate decreased in fiscal 2000
from the prior year as domestic income, taxed at a lower rate, represented a greater share of total pre-tax earnings and a portion of the domestic income was sheltered from federal taxes.
The tax rate increased in fiscal 1999 from the prior year as domestic income was sheltered from federal taxes while deferred foreign tax benefits were provided on the foreign losses. For further
discussion regarding the tax provisions, see Note 4 of "Notes to Consolidated Financial Statements" set forth in Item 8 below.

11

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Litigation

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, 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.

In
another case brought by John Hamma, a former employee, 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 $5,000,000 and issued 250,000 five-year warrants
exercisable immediately, all of which are currently outstanding, to purchase shares of Gradco Systems, Inc. common stock at $4.00 per share. 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. On an after-tax basis, this charge amounted to $3,300,000, or $.42 per share, which was recorded
in the third quarter of fiscal year 1999.

Effects of Inflation

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

Liquidity and Capital Resources

Working capital decreased by $7,947,000 at March 31, 2001, to $8,684,000, from the prior year-end amount, primarily as a result of the loss
from operations and unfavorable currency translation adjustments. Working capital was $16,631,000 at March 31, 2000, an increase of $1,243,000 from March 31, 1999, primarily from income
from operations.

Net
cash of $3.7 million and $0.7 million was used in operations in fiscal 2001 and 2000, respectively, as compared to net cash of $4.3 million being provided by
operations in fiscal 1999. Net earnings before non-cash charges for depreciation, amortization, unrealized foreign currency transactions, deferred taxes, provision for losses on accounts
receivable and sales of property and equipment, stock-based compensation and minority interest used $3.9 million in cash in 2001, while these same items provided $3.3 million in cash in
2000 and $2.3 million in 1999.

Changes
in accounts receivable, inventory, and prepaid and other assets used $5.8 million in 2001, but provided $3.5 million and $7.0 million in 2000 and 1999,
respectively.

Changes
in accounts payable, notes payable to suppliers, accrued expenses, income taxes payable and other liabilities provided $7.0 million in 2001, but used
$6.5 million and $5.0 million in 2000 and 1999, respectively.

In
2001 and 2000 $1.0 million was used for the installment payments on the Hamma litigation settlement.

Net
cash used in investing activities for acquisition of property and equipment was $0.2 million, $0.1 million and $0.2 million in fiscal 2001, 2000 and 1999,
respectively. In fiscal 2000, $0.2 million was used to purchase a license to sell Dippin' Dots ice cream in Japan. In fiscal 1999, $2.0 million was used to purchase certificates of
deposit, $1.0 million of which was redeemed in fiscal 2000 and the other $1.0 million was redeemed in fiscal 2001.

Net
cash used in financing activities was $0.4 million in fiscal 2001, representing the purchase of 256,411 shares of treasury stock and $1.3 million in fiscal 2000,
representing the purchase of 687,075

12

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shares of treasury stock. Net cash provided by financing activities was $0.1 million in fiscal 1999, primarily from the exercise of stock options.

Exchange
rate changes associated with a weaker yen in fiscal 2001 caused a decrease of $1.1 million in cash and increases of $1.1 million and $1.6 million in cash
were caused by a strengthening yen in fiscal 2000 and 1999, respectively.

At
March 31, 2001, the Registrant had $7.8 million in cash and no long-term debt. The Registrant's Japanese subsidiary has informal credit facilities with a
Japanese bank and Venture has a $750,000 line of credit. There were no borrowings at March 31, 2001. The Registrant believes that its cash and credit facilities are adequate for its short and
long-term needs. The Registrant does not have any material commitments for capital expenditures.

Item 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 no 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.

Not applicable.

13

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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 October 2001.

|Name                     |  | Position                                                      
|------------------------ |  | --------------------------------------------------------------
|Martin E. Tash           |  | Chairman of the Board, President and Chief Executive Officer  
|Harland L. Mischler      |  | Executive Vice President, Chief Financial Officer and Director
|Bernard Bressler         |  | Secretary, Treasurer and Director                             
|Robert J. Stillwell      |  | Director                                                      
|Thomas J. Burger         |  | Director                                                      
|Masakazu (Mark) Takeuchi |  | Director of Registrant; President and Director of GJ*         

---

(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 60      |  | 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 69 |  | 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

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|Bernard Bressler,
age 73         |  | 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 65      |  | 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, and he owns and operates Nationwide Property Management, which handles diverse real estate investments in which he is involved. 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 54         |  | 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 64 |  | Mr. Takeuchi has been a director of the Registrant since September 1997. He has been President and Chief Executive Officer of GJ since 1989 and a director of GJ since 1988. He is also President and a director of GU. He
was Senior Vice President of Far East Operations and New Business Development of the Registrant from August 1988 to October 1990. Mr. Takeuchi was also Chairman of GJ from August 1988 until December 1988. Previously, from 1961, Mr. Takeuchi was
employed by C. Itoh & Co. Ltd. in various positions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

15

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Item 11. Executive Compensation.

(a)Summary Compensation Table.

The
following table sets forth all compensation awarded to, earned by or paid to the following persons through June 15, 2001 for services rendered in all capacities to the
Registrant and its subsidiaries during each of the fiscal years ended March 31, 2001, 2000 and 1999: (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, 2001 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 |  | 2001
2000
1999 |  | 125,000
125,000
125,000   |  | 100,000

                     
|Masakazu (Mark) Takeuchi(2)
President,
Gradco (Japan) Ltd.                     |  | 2001
2000
1999 |  | 309,167
307,125
267,419   |  | 78,000

                      
|Akira (Tony) Shinomiya(2)
Chief Financial Officer
Gradco (Japan) Ltd.          |  | 2001
2000
1999 |  | 272,826
271,024
235,358   |  | 46,000

                      

---

16

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(b)Stock Option Plans.



The
following table sets forth the number of shares underlying unexercised options held by the foregoing executive officers at March 31, 2001 together with the value of such
options as of March 31, 2001.

17

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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              |  | 150,000 / None                                                                 |  | None                                                                                       
|Masakazu (Mark) Takeuchi(1) |  | 60,000 / 18,000                                                                |  | None                                                                                       
|Akira (Tony) Shinomiya(1)   |  | 40,000 / 6,000                                                                 |  | 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 is determined by a formula multiplying
(1) the monthly salary at the time of retirement, by (2) the number of years served, by (3) a factor which varies depending upon the office held by the eligible individual. Each
of Messrs. Takeuchi and Shinomiya is eligible for payments under this Plan upon his retirement. In an effort to reduce operating expenses in future years, GJ management agreed to terminate the
retirement plan at the end of fiscal year 2000. In return, the Company and GJ agreed to vest the then due amount to be paid upon actual retirement and GJ agreed to loan to each individual an amount
equal to 80% of his vested benefit at year end. The loans, which will bear interest at a nominal rate, must be repaid at the time of retirement when the accrued benefit will be paid.
Mr. Takeuchi's vested benefit is ¥103,000,000 ($830,000) and Mr. Shinomiya's benefit is ¥85,000,000 ($685,000) at March 31, 2001.

(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 2001 fiscal year.

Martin
E. Tash (the Registrant's President and Chairman of the Board) received $125,000 in cash for special services rendered to the Registrant as a director during the fiscal year
ended March 31, 2001. 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, 2001.

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, 2001. As of that date, Mr. Mischler held options for 46,000 shares and Messrs. Stillwell and Burger each held options for 7,500
shares, all of which were issued under the 1988 Plan.

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

18

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(e)Indemnification.

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

(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, 2001, the officers of the Registrant participating in the Board's deliberations concerning executive compensation were Martin
E. Tash, Harland L. Mischler and Bernard Bressler (who are members of the Board).

Item 12. Security Ownership of Certain Beneficial Owners and Management.

(a) The
following table sets forth information regarding persons known to the Registrant to be the beneficial owners of more than 5% of the Registrant's voting
securities as of June 15, 2001 based on 6,879,148 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 |  | Percentage
of Class |     
|-------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- |  | ------------------- | ----
|Common Stock, no par value |  | Dimensional Fund Advisors, Inc. 1299 Ocean Avenue 11th Floor Santa Monica, CA 90401                                                               |  | 620,574(1)                                |  | 9.0                 | %   
|                           |  | Mitchell Partners, L.P. and James E. Mitchell c/o James E. Mitchell General Partner 650 Town Center Drive, 6th Floor Costa Mesa, California 92626 |  | 389,277(2)                                |  | 5.7                 | %(3)

---

19

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(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 (7 persons), as of June 15,
2001.

|Title of Class             |  | Beneficial Owner                                                                       |  | Amount and Nature
of Beneficial
Ownership |     | Percentage
of Class(1) |  
|-------------------------- |  | -------------------------------------------------------------------------------------- |  | ----------------------------------------- | --- | ---------------------- | -
|Common Stock, no par value |  | Martin E. Tash                                                                         |  | 396,548(2)                                |     | 5.6                    | %
|                           |  | Harland L. Mischler                                                                    |  | 115,000(3)                                |     | 1.7                    | %
|                           |  | Bernard Bressler                                                                       |  | 29,273(4)                                 |     | *                      |  
|                           |  | Robert J. Stillwell                                                                    |  | 34,600(5)                                 |     | *                      |  
|                           |  | Thomas J. Burger                                                                       |  | 7,500(6)                                  |     | *                      |  
|                           |  | Masakazu (Mark) Takeuchi                                                               |  | 60,000(7)                                 |     | *                      |  
|                           |  | Akira (Tony) Shinomiya                                                                 |  | 40,000(7)                                 | (8) | *                      |  
|                           |  | All Executive Officers and Directors as a Group (comprising the 7 persons shown above) |  | 682,921(9)                                |     | 9.5                    | %

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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 2001 fiscal year, the Registrant paid legal fees and expenses of $172,622.69 to such firm.

20

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PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

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

(b) 8-K
Reports:



(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.                                                                              

21

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|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.                                                                                                                                                                                                              
|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)  Gradco (Japan) Ltd. (Japan)
(ii)  Venture Engineering, Inc. (Texas)
(iii) Gradco (USA) Inc. (California)                                                                                                                                                                                                                                        
|23    |  | Consent of PricewaterhouseCoopers LLPfiled herewith.                                                                                                                                                                                                                                                                                                
|23.1  |  | Consent of Grant Thornton LLPfiled herewith.                                                                                                                                                                                                                                                                                                        

22

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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 2, 2001 |  | 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 2, 2001
|/s/HARLAND L. MISCHLERHarland L. Mischler |  | Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director |  | July 2, 2001
|/s/BERNARD BRESSLERBernard Bressler       |  | Secretary, Treasurer and Director                                                                           |  | July 2, 2001
|/s/ROBERT J. STILLWELLRobert J. Stillwell |  | Director                                                                                                    |  | July 2, 2001
|/s/THOMAS J. BURGERThomas J. Burger       |  | Director                                                                                                    |  | July 2, 2001
|/s/MARK TAKEUCHIMark Takeuchi             |  | Director                                                                                                    |  | July 2, 2001

23

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FORM 10-KITEM 14(a)

GRADCO SYSTEMS, INC.
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

|    |  |                                                                                                   |  |                      
|--- |  | ------------------------------------------------------------------------------------------------- |  | ---------------------
|(1) |  | Financial Statements:                                                                             |  |                      
|    |  | Report of Independent Accountants                                                                 |  | S-2                  
|    |  | Report of Independent Accountants                                                                 |  | S-3                  
|    |  | Consolidated Balance SheetsMarch 31, 2001 and 2000                                               |  | S-4                  
|    |  | Consolidated Statements of OperationsYears Ended March 31, 2001, 2000 and 1999                   |  | S-5                  
|    |  | Consolidated Statements of Shareholders' EquityYears Ended March 31, 2001, 2000
        and 1999 |  | S-6                  
|    |  | Consolidated Statements of Cash FlowsYears Ended March 31, 2001, 2000 and 1999                   |  | S-7                  
|    |  | Notes to Consolidated Financial Statements                                                        |  | S-8 to S-17 inclusive
|(2) |  | Financial Statement Schedules:                                                                    |  |                      
|    |  | IIValuation and Qualifying Accounts                                                              |  | S-18                 

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 ACCOUNTANTS

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

We
have audited the accompanying consolidated balance sheet of Gradco Systems, Inc. as of March 31, 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We
conducted our audit 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 audit provides a reasonable basis for the 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, 2001, and the
consolidated results of its operations and its consolidated cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We
have also audited Schedule II for the year ended March 31, 2001. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information therein.

Grant
Thornton LLP
Irvine, California
June 28, 2001

S2

---



REPORT OF INDEPENDENT ACCOUNTANTS

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

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

PricewaterhouseCoopers
LLP
Costa Mesa, California
June 13, 2000

S3

---



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

|                                                                                                                          |                                                                                                                                             | March 31,                  |       
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------
|
|ASSETS                                                                                                                    |                                                                                                                                            
|Current assets:                                                                                                           |                                                                                                                                             |                            |       
|                                                                                                                          | Cash and cash equivalents                                                                                                                   |                            | $     
|                                                                                                                          | Short-term investments                                                                                                                      |                            |       
|                                                                                                                          | Accounts receivable, less allowance for doubtful accounts of $90 and $88, respectively                                                      |                            |       
|                                                                                                                          | Inventories                                                                                                                                 |                            |       
|                                                                                                                          | Deferred income taxes                                                                                                                       |                            |       
|                                                                                                                          | Other current assets                                                                                                                        |                            |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | Total current assets       |       
|Property and equipment, net                                                                                               |                                                                                                                                             |                            | 595   
|Cash surrender value of life insurance                                                                                    |                                                                                                                                             |                            | 915   
|Excess of cost over acquired net assets, net of accumulated                                                               |                                                                                                                                             |                            |       
|amortization of $624 and $581, respectively                                                                               |                                                                                                                                             |                            | 1,105 
|Deferred income taxes                                                                                                     |                                                                                                                                             |                            | 1,674 
|Other assets                                                                                                              |                                                                                                                                             |                            | 3,981 
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | $                          | 33,802
|                                                                                                                          |                                                                                                                                             |                            |       
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                      |                                                                                                                                            
|Current liabilities:                                                                                                      |                                                                                                                                             |                            |       
|                                                                                                                          | Accounts payable                                                                                                                            |                            | $     
|                                                                                                                          | Notes payable to suppliers                                                                                                                  |                            |       
|                                                                                                                          | Accrued expenses                                                                                                                            |                            |       
|                                                                                                                          | Income taxes payable                                                                                                                        |                            |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | Total current liabilities  |       
|Non-current liabilities                                                                                                   |                                                                                                                                             |                            | 601   
|Excess of fair value of net assets acquired over cost, net of accumulated amortization of $1,400 and $1,000, respectively |                                                                                                                                             |                            | 400   
|Minority interest                                                                                                         |                                                                                                                                             |                            | 549   
|Commitments and contingencies (Note 7)                                                                                    |                                                                                                                                             |                            |       
|Shareholders' equity:                                                                                                     |                                                                                                                                             |                            |       
|                                                                                                                          | Preferred stock, no par value; authorized 7,500,000 shares, none issued                                                                     |                            |       
|                                                                                                                          | Common stock, no par value; authorized 30,000,000 shares, issued 7,913,434 shares; outstanding 6,969,948 and 7,226,359 shares, respectively |                            |       
|                                                                                                                          | Accumulated deficit                                                                                                                         |                            |       
|                                                                                                                          | Accumulated other comprehensive income                                                                                                      |                            |       
|                                                                                                                          | Less cost of common stock in treasury, 943,486 and 687,075 shares, respectively                                                             |                            |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | Total shareholders' equity |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | $                          | 33,802
|                                                                                                                          |                                                                                                                                             |                            |       

See
accompanying notes to consolidated financial statements.

S4

---



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

|                                                          |                     | For the years ended March 31, |       
|--------------------------------------------------------- | ------------------- | ----------------------------- | ------
|
|Revenues:                                                 |                     |                               |       
|Net sales                                                 |                     | $                             | 43,779
|Development engineering services                          |                     |                               | 6,506 
|Licenses and royalties                                    |                     |                               | 954   
|                                                          |                     |                               |       
|                                                          |                     |                               | 51,239
|                                                          |                     |                               |       
|Costs and expenses:                                       |                     |                               |       
|Cost of sales                                             |                     |                               | 32,987
|Research and development                                  |                     |                               | 10,494
|Selling, general and administrative                       |                     |                               | 8,790 
|Foreign currency transaction (gains) losses               |                     |                               | (293  
|Provision for (recovery of) doubtful Mita receivable      |                     |                               |      
|DuBois/Hamma litigation settlements                       |                     |                               | 3,200 
|                                                          |                     |                               |       
|                                                          |                     |                               | 55,178
|                                                          |                     |                               |       
|Income (loss) from operations                             |                     |                               | (3,939
|Interest expense                                          |                     |                               | (2    
|Interest income                                           |                     |                               | 395   
|                                                          |                     |                               |       
|Earnings (loss) before income taxes and minority interest |                     |                               | (3,546
|Income tax expense (benefit)                              |                     |                               | 3,272 
|Minority interest                                         |                     |                               | (84   
|                                                          |                     |                               |       
|                                                          | Net earnings (loss) |                               | $     
|                                                          |                     |                               |       
|Basic earnings (loss) per common share                    |                     | $                             | (.95  
|                                                          |                     |                               |       
|Average shares outstanding, basic EPS                     |                     |                               | 7,105 
|                                                          |                     |                               |       
|Diluted earnings (loss) per common share                  |                     | $                             | (.95  
|                                                          |                     |                               |       
|Average shares outstanding, diluted EPS                   |                     |                               | 7,105 
|                                                          |                     |                               |       

See
accompanying notes to consolidated financial statements.

S5

---



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

|                                                |                         | Common Stock            |                      |   |        | Accumulated
Other
Comprehensive
Income |   |         |        |        |      
|----------------------------------------------- | ----------------------- | ----------------------- | -------------------- | - | ------ | -------------------------------------- | - | ------- | ------ | ------ | -----
|
|
|Balance at March 31, 1998                       |                         | 7,854,598               |                      | $ | 45,325 |                                        | $ | (23,972 | )      | $      | 120  
|Components of comprehensive income:             |                         |                         |                      |   |        |                                        |   |         |        |        |      
|                                                |                         | Net loss                |                      |  |        |                                        |  |         |        | (2,190 | )    
|                                                |                         | Translation adjustments |                      |  |        |                                        |  |         |        |       |      
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      
|                                                |                         |                         | Comprehensive income |   |        |                                        |   |         |        |        |      
|Issuance of shares in exchange for Ziyad shares |                         | 86                      |                      |   |       |                                        |   |        |        |        |     
|Exercise of stock options                       |                         | 56,250                  |                      |   | 158    |                                        |   |        |        |        |     
|Stock-based compensation                        |                         |                        |                      |   | 346    |                                        |   |        |        |        |     
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      
|Balance at March 31, 1999                       |                         | 7,910,934               |                      |   | 45,829 |                                        |   | (26,162 | )      |        | 1,363
|Components of comprehensive income:             |                         |                         |                      |   |        |                                        |   |         |        |        |      
|                                                | Net earnings            |                         |                     |   |        |                                       |   |         | 1,480  |        |      
|                                                | Translation adjustments |                         |                     |   |        |                                       |   |         |       |        |      
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      
|                                                |                         | Comprehensive income    |                      |   |        |                                        |   |         |        |        |      
|Exercise of stock options                       |                         | 2,500                   |                      |   | 5      |                                        |   |        |        |        |     
|Stock-based compensation                        |                         |                        |                      |   | 330    |                                        |   |        |        |        |     
|Purchase of treasury stock                      |                         |                        |                      |   |       |                                        |   |        |        |        |     
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      
|Balance at March 31, 2000                       |                         | 7,913,434               |                      |   | 46,164 |                                        |   | (24,682 | )      |        | 3,240
|Components of comprehensive income:             |                         |                         |                      |   |        |                                        |   |         |        |        |      
|                                                | Net loss                |                         |                     |   |        |                                       |   |         | (6,734 | )      |      
|                                                | Translation adjustments |                         |                     |   |        |                                       |   |         |       |        |      
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      
|                                                |                         | Comprehensive income    |                      |   |        |                                        |   |         |        |        |      
|Stock-based compensation                        |                         |                        |                      |   | 290    |                                        |   |        |        |        |     
|Purchase of treasury stock                      |                         |                        |                      |   |       |                                        |   |        |        |        |     
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      
|Balance at March 31, 2001                       |                         | 7,913,434               |                      | $ | 46,454 |                                        | $ | (31,416 | )      | $      | 1,982
|                                                |                         |                         |                      |   |        |                                        |   |         |        |        |      

See
accompanying notes to consolidated financial statements.

S6

---



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

|                                                     |                                                                                   | For the years ended March 31,                          |                                          
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------ | -----------------------------------------
|
|Cash flows from operating activities:                |                                                                                   |                                                        |                                          
|                                                     | Net earnings (loss)                                                               |                                                        | $                                        
|                                                     |                                                                                   |                                                        |                                          
|                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |                                                        |                                          
|                                                     |                                                                                   | Depreciation                                           |                                          
|                                                     |                                                                                   | Amortization                                           |                                          
|                                                     |                                                                                   | Unrealized foreign currency transaction (gains) losses |                                          
|                                                     |                                                                                   | Deferred income taxes                                  |                                          
|                                                     |                                                                                   | Provision for losses on accounts receivable            |                                          
|                                                     |                                                                                   | Loss on sale of property and equipment                 |                                          
|                                                     |                                                                                   | Stock-based compensation                               |                                          
|                                                     |                                                                                   | Installment portion of Hamma litigation settlement     |                                          
|                                                     |                                                                                   | Minority interest                                      |                                          
|                                                     |                                                                                   | (Increase) decrease in accounts receivable             |                                          
|                                                     |                                                                                   | (Increase) decrease in inventories                     |                                          
|                                                     |                                                                                   | (Increase) decrease in other current assets            |                                          
|                                                     |                                                                                   | (Increase) decrease in other assets                    |                                          
|                                                     |                                                                                   | Increase (decrease) in accounts payable                |                                          
|                                                     |                                                                                   | Increase (decrease) in notes payable to suppliers      |                                          
|                                                     |                                                                                   | Increase (decrease) in accrued expenses                |                                          
|                                                     |                                                                                   | Increase (decrease) in income taxes payable            |                                          
|                                                     |                                                                                   | (Decrease) increase in other liabilities               |                                          
|                                                     |                                                                                   |                                                        |                                          
|                                                     |                                                                                   |                                                        | Total adjustments                        
|                                                     |                                                                                   |                                                        |                                          
|                                                     |                                                                                   |                                                        | Net cash (used in) provided by operations
|                                                     |                                                                                   |                                                        |                                          
|Cash flows from investing activities:                |                                                                                   |                                                        |                                          
|                                                     | Redemption (purchase) of investments                                              |                                                        |                                          
|                                                     | Acquisition of property and equipment                                             |                                                        |                                          
|                                                     | Proceeds from sale of property and equipment                                      |                                                        |                                          
|                                                     | Acquisition of Dippin' Dots license                                               |                                                        |                                          
|                                                     |                                                                                   |                                                        |                                          
|                                                     |                                                                                   | Net cash provided by (used in) investing activities    |                                          
|                                                     |                                                                                   |                                                        |                                          
|Cash flows from financing activities:                |                                                                                   |                                                        |                                          
|                                                     | Acquisition of treasury stock                                                     |                                                        |                                          
|                                                     | Repayment of notes in excess of three months                                      |                                                        |                                          
|                                                     | Proceeds from exercise of stock options                                           |                                                        |                                          
|                                                     |                                                                                   |                                                        |                                          
|                                                     |                                                                                   | Net cash (used in) provided by financing activities    |                                          
|                                                     |                                                                                   |                                                        |                                          
|Effect of exchange rate changes on cash              |                                                                                   |                                                        | (1,140                                   
|                                                     |                                                                                   |                                                        |                                          
|Net (decrease) increase in cash and cash equivalents |                                                                                   |                                                        | (4,417                                   
|Cash and cash equivalents at beginning of year       |                                                                                   |                                                        | 12,208                                   
|                                                     |                                                                                   |                                                        |                                          
|Cash and cash equivalents at end of year             |                                                                                   | $                                                      | 7,791                                    
|                                                     |                                                                                   |                                                        |                                          
|Supplemental Disclosures of Cash Flow Information:   |                                                                                   |                                                        |                                          
|                                                     | Cash Paid (refunded) during the period for:                                       |                                                        |                                          
|                                                     |                                                                                   | Interest                                               |                                          
|                                                     |                                                                                   | Income taxes                                           |                                          

See
accompanying notes to consolidated financial statements.

S7

---



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 Venture
Engineering, Inc. ("Venture") and Gradco (USA) Inc. ("GU") and its majority-owned subsidiaries Gradco (Japan) Ltd. ("GJ") and 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. Venture
performs contract engineering and manufacturing services for OEMs and other customers, primarily for the U.S. market. GTL develops other technical and non-technical business
opportunities.

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.

Concentrations of Credit Risk

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

Inventories

Inventories at Venture consist of materials and work-in-process necessary to conduct its contract manufacturing business. 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 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).

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.

S8

---

Long-lived Assets

The excess of cost over acquired net assets ("goodwill") is being amortized over a period of forty years. Other intangible assets are amortized over the
estimated periods to be benefited which is generally five years. Goodwill and intangible assets are reviewed for impairment at a minimum 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 on goodwill underNew Accounting Standards.

Revenue Recognition

Revenues from product sales ("net sales") are recorded as units are shipped. Revenues from development engineering services and research and development
contracts are recognized as earned, and licenses and royalties are recognized when all obligations of the appropriate agreements have been fulfilled. In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company adopted SAB 101 in fiscal 2001; it has not had a material effect on the Company's financial position or results of
operations.

Research and Development Expenses

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

Research
and development expenses incurred under development engineering service contracts in the fiscal years ended March 31, 2001, 2000 and 1999, respectively, were
$1,316,000, $1,258,000 and $1,134,000. Research and development expenses on behalf of OEM customers and internal research and development expenses in the fiscal years ended March 31, 2001, 2000
and 1999, respectively, were $9,178,000, $1,484,000 and $1,877,000.

Foreign Currency Translation

Assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates and the resulting adjustments are
accumulated in shareholders' equity. Income and expenses are translated at average exchange rates for the year. Foreign currency transaction gains and losses are included in net income, except for
those relating to intercompany transactions of a long-term investment nature which are accumulated in shareholders' equity.

Net Earnings Per Share

Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if stock options and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. There is no difference in average shares outstanding between diluted and basic in fiscal years 2001 and 1999 because there were net losses. For all periods presented, the net
earnings available to common shareholders is the same for both basic and diluted EPS and is equal to the net earnings stated in the Consolidated Statements of Income. A reconciliation of the average
number of outstanding shares used

S9

---

in the computation of basic EPS to that used in the computation of diluted EPS is shown in the following table (in thousands):

|                                        |               | Fiscal Year
|--------------------------------------- | ------------- | -----------
|
|Average shares outstanding, basic EPS   |               | 7,105      
|Effect of dilutive securities:          |               |            
|                                        | Stock options |            
|                                        |               |            
|Average shares outstanding, diluted EPS |               | 7,105      
|                                        |               |            

Income Taxes

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

Reclassifications

Certain reclassifications have been made to the fiscal 2000 and 1999 consolidated financial statements to conform to the fiscal 2001 presentation.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets("SFAS 142"), which will become effective for the Company in fiscal year 2003. SFAS 142 establishes
accounting standards for purchased goodwill and intangible assets. The primary difference, as it applies to the Company currently, between the accounting standards prescribed by SFAS 142 and
the existing accounting standards will be the treatment of goodwill. The Company is currently amortizing its goodwill over a period of forty years, or $43,000 per annum, but will cease its
amortization under SFAS 142. Although the method of testing for impairment will differ slightly from today's method, the Company does not anticipate that the adoption of SFAS 142 will
have a material impact on its consolidated financial position, results of operations or cash flows.

NOTE 2MITA BANKRUPTCY

In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest customers, filed a petition in Japan along with five of its affiliates for
the Japanese equivalent of a Chapter XI Reorganization. The Company established an allowance for the full amount of Mita's indebtedness to Gradco as of the bankruptcy date. The amount charged to
expense during fiscal year 1999 was $5,543,000. On an after-tax basis, this charge amounted to $2,803,000, or $.35 per share. Mita's reorganization plan, approved by the court in
January 2000, made Mita a wholly-owned subsidiary of Kyocera Corporation and directed Mita to repay 18% of the unsecured creditors' debt over a period of 10 years. These payments to the
Company had a gross value of approximately $1.3 million since the yen had strengthened against the dollar since the bankruptcy filing. The Company recorded a non-current receivable
and a pre-tax credit to income in the amount of $935,000, representing the present value of the non-interest bearing payments to be received using an 8% discount rate. The
first payment of approximately $300,000 was received in July 2000.

S10

---

NOTE 3DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

|                                                            |                                                 | March 31,                                
|----------------------------------------------------------- | ----------------------------------------------- | -----------------------------------------
|
|
|Inventories are summarized as follows:                      |                                                 |                                          
|                                                            | Raw materials                                   |                                          
|                                                            | Work-in-process                                 |                                          
|                                                            | Finished goods                                  |                                          
|                                                            |                                                 |                                          
|                                                            |                                                 | $                                        
|                                                            |                                                 |                                          
|Property and equipment, at cost, are summarized as follows: |                                                 |                                          
|                                                            | Office, shop and automotive equipment           |                                          
|                                                            | Computer equipment                              |                                          
|                                                            | Leasehold improvements                          |                                          
|                                                            | Tooling                                         |                                          
|                                                            |                                                 |                                          
|                                                            |                                                 |                                          
|                                                            | Less:                                           |                                          
|                                                            |                                                 | Accumulated depreciation and amortization
|                                                            |                                                 |                                          
|                                                            |                                                 | $                                        
|                                                            |                                                 |                                          
|Other assets are summarized as follows:                     |                                                 |                                          
|                                                            | Deposits                                        |                                          
|                                                            | Mita receivable                                 |                                          
|                                                            | Investments                                     |                                          
|                                                            | Distribution license for Dippin' Dots ice cream |                                          
|                                                            | Other                                           |                                          
|                                                            |                                                 |                                          
|                                                            |                                                 | $                                        
|                                                            |                                                 |                                          
|Non-current liabilities are summarized as follows:          |                                                 |                                          
|                                                            | Accumulated benefit obligation                  |                                          
|                                                            | Other                                           |                                          
|                                                            |                                                 |                                          
|                                                            |                                                 | $                                        
|                                                            |                                                 |                                          

NOTE 4INCOME TAXES

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

|         |         | Fiscal Year |      
|-------- | ------- | ----------- | -----
|
|Current  |         |             |      
|         | Foreign |             | $    
|         | Federal |             |      
|         | State   |             |      
|Deferred |         |             |      
|         | Foreign |             |      
|         | Federal |             |      
|         |         |             |      
|Total    |         | $           | 3,272
|         |         |             |      

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

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

|                                                   |  | Fiscal Year |   
|-------------------------------------------------- |  | ----------- | --
|
|Tax provision (benefit) at U.S. statutory tax rate |  | (35.0       | %)
|State income taxes, less federal benefit           |  | 2.6         |   
|Foreign tax expense                                |  | 24.7        |   
|Recognition of deferred income, previously taxed   |  |            |   
|Stock-based compensation                           |  | 2.9         |   
|Change in valuation allowance                      |  | 93.8        |   
|Other                                              |  | 3.3         |   
|                                                   |  |             |   
|                                                   |  | 92.3        | % 
|                                                   |  |             |   

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 31,2001

2000Deferred tax assetsRetirement benefits

$
674

$
804Mita bad debt


92


163Patent amortization





232Legal settlement





340Local taxes


20


59Other


43


177Tax loss carryforwards


11,871


12,111Valuation allowance


(10,871
)

(8,453
)1,829


5,433Deferred tax liabilitiesIntercompany loan revaluation





893


893Net deferred tax assets

$
1,829

$
4,540


At
March 31, 2001, the Company had federal net operating loss carryforwards ("NOLs") for tax reporting purposes of $27,000,000 which will expire in 2002 through 2021 if not
utilized. These NOLs are utilizable by Gradco Systems, Inc. and its subsidiaries, Venture and GU. GJ and its subsidiary also have NOLs in the amount of 758,287,000 Yen ($6,120,000) which will
expire in 2004 through 2006 if not utilized. At this time it is not deemed likely that all of these NOLs can be utilized and therefore a valuation allowance has been established. If certain
substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of net operating loss carryforwards which can be utilized.

The
Company does not provide for U.S. income taxes on undistributed foreign earnings considered permanently invested in its Japanese operations. At March 31, 2001, the
Company's share of such undistributed foreign earnings totaled $12,000,000. Foreign withholding taxes of approximately $1,200,000 would be due upon remittance of these earnings.

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NOTE 5TREASURY STOCK

In fiscal 2000, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in March 1999. That
program authorizes the Company to purchase up to two million common shares from time to time on the open market. The Company purchased 256,411 shares at an aggregate cost of $361,000 and 687,075
shares at an aggregate cost of $1,255,000 during fiscal years 2001 and 2000, respectively. The purpose of the stock repurchase program is to help the Company achieve its long-term goal of
enhancing shareholder value.

NOTE 6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
700,000 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 267,500 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 312,000 shares were granted during September 1997 at an exercise price
of $6.00 per share below fair market value of the common stock on the date of grant. This difference was recorded ratably as compensation expense during the period September 1997 through
February 2001, the vesting period of the options. Options for 20,000 shares were granted during fiscal year 1999 and options for 125,000 were granted during fiscal year 2001 at prices equal to
the fair market value at the dates of grant. No options were granted in fiscal year 2000. Stock-based compensation expense of $290,000, $330,000 and $346,000 is included in selling, general and
administrative expenses for the years ended March 31, 2001, 2000 and 1999, respectively.

The
Company's 1988 Stock Option Plan has 115,000 options outstanding. Such options are exercisable in increments over periods at a price equal to the fair market value at the date of
grant.

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

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The following table summarizes stock option activity:

Number

Weighted Average
Exercise PriceOutstanding March 31, 1998

591,000

$
3.02Granted

20,000


2.44Exercised

(56,250
)

2.81Expired

(95,750
)

3.79Outstanding March 31, 1999

459,000


2.86Exercised

(2,500
)

2.00Expired or cancelled

(10,000
)

2.00Outstanding March 31, 2000

446,500


2.88Granted

125,000


1.62Expired or cancelled

(107,000
)

4.55Outstanding March 31, 2001

464,500

$
2.16


Of
the options outstanding at March 31, 2001, 2000 and 1999, options to purchase 342,000, 376,250 and 323,500 shares, respectively, were exercisable at weighted average prices
of $2.35, $3.03 and $3.19 per share, respectively.

The
following table summarizes information concerning currently outstanding and exercisable stock options as of March 31, 2001:

Options Outstanding

Options ExercisableRange of
Exercise Prices

Number
Outstanding

Weighted
Average
Remaining
Contractual Life

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$
1.50

94,500

9.5

$
1.50

0

N/A2.00

235,000

6.7


2.00

217,000

2.002.38 to 3.38

135,000

1.7


2.91

125,000

2.94464,500






342,000


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 loans, which bear interest at a nominal rate, must be repaid at the time of retirement when the accrued benefit will be paid. The Company expensed the
unamortized prior service cost during the third quarter of fiscal year 2000. This special charge amounted to $693,000. The amount charged to expense, including the special charge, in fiscal years 2000
and 1999 was $957,000 and $282,000, respectively.

The
Company's domestic subsidiaries each have a 401(k) employee benefits plan. All employees are eligible for the plan upon the completion of one month of service with the Company. As
part of the plans, the Company may match a portion of employee contributions or make an additional contribution contingent upon the Company's annual earnings performance. In fiscal years 2001, 2000
and 1999, the Company contributed $51,000, $60,000 and $63,000, respectively, to the plans.

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NOTE 7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, 2001, under
non-cancelable facility and equipment leases with remaining lease terms in excess of one year are as follows:

Year ending March 31,2002

$
631,0002003


265,0002004


174,000Thereafter


$
1,070,000


Rent
expense was approximately $1,105,000, $1,140,000 and $1,087,000 for fiscal years 2001, 2000 and 1999, respectively.

There
is no 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 $5,000,000 and issued 250,000
five-year warrants exercisable immediately, all of which are currently outstanding, to purchase shares of Gradco Systems, Inc. common stock at $4.00 per share. 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. On an after-tax basis, this charge amounted to $3,300,000, or
$.42 per share, which was recorded in the third quarter of fiscal year 1999.

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, 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.

NOTE 8SEGMENT INFORMATION

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

S15

---

engineering and manufacturing services. GTL, whose operations are focused on developing markets for new technologies and products, accounts for the remainder (in thousands).

|                              |  | Paper
Handling
Devices |        | Engineering/
Manufacturing
Services |   | New
Technology/
Products |   | Corporate |        | Intersegment
& Corporate
Eliminations |   | Consolidated |  
|----------------------------- |  | ---------------------- | ------ | ----------------------------------- | - | ------------------------ | - | --------- | ------ | ------------------------------------- | - | ------------ | -
|Fiscal Year 2001              |  |                        |        |                                     |   |                          |   |           |        |                                       |   |              |  
|Revenues                      |  | $                      | 36,596 |                                     | $ | 11,972                   |   | $         | 2,813  |                                       | $ |             |  
|Interest income               |  |                        | 600    |                                     |   | 4                        |   |           |       |                                       |   | 39           |  
|Interest expense              |  |                        | 1      |                                     |   | 24                       |   |           |       |                                       |   | 225          |  
|Depreciation and amortization |  |                        | 76     |                                     |   | 146                      |   |           | 40     |                                       |   | (357         | )
|DuBois litigation settlement  |  |                        |       |                                     |   |                         |   |           |       |                                       |   | 3,200        |  
|Income tax expense (benefit)  |  |                        | 3,056  |                                     |   | (1                       | ) |           | 1      |                                       |   | 216          |  
|Net earnings (loss)           |  |                        | (1,380 | )                                   |   | 24                       |   |           | (1,275 | )                                     |   | (4,103       | )
|Assets                        |  |                        | 42,093 |                                     |   | 4,086                    |   |           | 1,091  |                                       |   | 7,577        |  
|Fiscal Year 2000              |  |                        |        |                                     |   |                          |   |           |        |                                       |   |              |  
|Revenues                      |  | $                      | 43,721 |                                     | $ | 7,245                    |   | $         | 308    |                                       | $ |             |  
|Interest income               |  |                        | 443    |                                     |   | 18                       |   |           |       |                                       |   | 89           |  
|Interest expense              |  |                        | 1      |                                     |   |                         |   |           |       |                                       |   | 155          |  
|Depreciation and amortization |  |                        | 203    |                                     |   | 135                      |   |           | 36     |                                       |   | (357         | )
|Income tax expense (benefit)  |  |                        | 720    |                                     |   | (28                      | ) |           |       |                                       |   | 490          |  
|Net earnings (loss)           |  |                        | 3,357  |                                     |   | (373                     | ) |           | (308   | )                                     |   | (1,196       | )
|Assets                        |  |                        | 42,004 |                                     |   | 3,492                    |   |           | 1,071  |                                       |   | 8,937        |  
|Fiscal Year 1999              |  |                        |        |                                     |   |                          |   |           |        |                                       |   |              |  
|Revenues                      |  | $                      | 73,552 |                                     | $ | 8,265                    |   | $         |       |                                       | $ |             |  
|Interest income               |  |                        | 246    |                                     |   | 9                        |   |           |       |                                       |   | 49           |  
|Interest expense              |  |                        | 2      |                                     |   | 1                        |   |           |       |                                       |   | 39           |  
|Depreciation and amortization |  |                        | 4,192  |                                     |   | 202                      |   |           |       |                                       |   | (357         | )
|Provision for doubtful        |  |                        |        |                                     |   |                          |   |           |        |                                       |   |              |  
|Mita receivable               |  |                        | 5,543  |                                     |   |                         |   |           |       |                                       |   |             |  
|Hamma litigation settlement   |  |                        |       |                                     |   |                         |   |           |       |                                       |   | 5,000        |  
|Income tax expense (benefit)  |  |                        | (1,949 | )                                   |   | 2                        |   |           |       |                                       |   | (370         | )
|Net earnings (loss)           |  |                        | 617    |                                     |   | (736                     | ) |           |       |                                       |   | (5,061       | )
|Assets                        |  |                        | 46,104 |                                     |   | 3,470                    |   |           |       |                                       |   | 10,432       |  

Geographic
data follows (in thousands):

|                 |                   | United
States |   | Japan  |  | Belgium |        | Consolidated
|---------------- | ----------------- | ------------- | - | ------ |  | ------- | ------ | ------------
|Fiscal Year 2001 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 31,252 |  | $       | 19,928 |             
|                 | Long-lived assets |               |   | 332    |  |         | 5,154  |             
|Fiscal Year 2000 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 32,228 |  | $       | 19,004 |             
|                 | Long-lived assets |               |   | 342    |  |         | 4,457  |             
|Fiscal Year 1999 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 51,062 |  | $       | 30,654 |             
|                 | Long-lived assets |               |   | 1,476  |  |         | 3,363  |             

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

Fiscal Year2001

2000

1999Xerox

23
%
33
%
30
%Fuji Xerox

14
%
N/A

N/AXerox Ltd.

12
%
10
%
16
%Panasonic

10
%
14
%
11
%Kyocera Mita

N/A

N/A

11
%


NOTE 9INTERIM FINANCIAL RESULTS (Unaudited)

The following table summarizes the unaudited quarterly results of operations for fiscal years 2001 and 2000.

|                                         |  | Quarter |        |  |  
|---------------------------------------- |  | ------- | ------ |  | -
|
|
|Fiscal Year 2001                         |  |         |        |  |  
|Revenues                                 |  | $       | 13,560 |  | $
|Costs and expenses, including interest   |  |         | 12,929 |  |  
|Earnings (loss) before income taxes      |  |         | 631    |  |  
|Net earnings (loss)                      |  |         | 360    |  |  
|Basic earnings (loss) per common share   |  | $       | .05    |  | $
|Diluted earnings (loss) per common share |  | $       | .05    |  | $
|Fiscal Year 2000                         |  |         |        |  |  
|Revenues                                 |  | $       | 12,187 |  | $
|Costs and expenses, including interest   |  |         | 11,859 |  |  
|Earnings before income taxes             |  |         | 328    |  |  
|Net earnings                             |  |         | 159    |  |  
|Basic earnings per common share          |  | $       | .02    |  | $
|Diluted earnings per common share        |  | $       | .02    |  | $

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

S17

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SCHEDULE II

GRADCO SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the three years ended March 31, 2001
(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 sheet from the asset to which it applies: |                       |                              |   |                                         |  |                                                 |       |                       
|Year ended March 31, 2001:                                                          |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                    | Accounts receivable   |                              | $ | 88                                      |  | $                                               | 4     |                       
|                                                                                    | Deferred income taxes |                              | $ | 8,453                                   |  | $                                               | 2,649 |                       
|Year ended March 31, 2000:                                                          |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                    | Accounts receivable   |                              | $ | 6,508                                   |  | $                                               | (36   | )                     
|                                                                                    | Deferred income taxes |                              | $ | 8,602                                   |  | $                                               | 131   |                       
|Year ended March 31, 1999:                                                          |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                    | Accounts receivable   |                              | $ | 108                                     |  | $                                               | 5,769 |                       
|                                                                                    | Deferred income taxes |                              | $ | 8,167                                   |  | $                                               | 441   |                       

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