<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                    For the fiscal year ended March 31, 1999

                                       OR

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

             For the transition period from __________ to __________

                         Commission file number 0-12829

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

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

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

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

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                     Yes   X            No
                         -----              -----

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant (based on the closing sales price of Gradco common stock on the
NASDAQ National Market System on June 15, 1999) was $18,977,727.

The number of outstanding shares of each class of the Registrant's common
stock outstanding at June 15, 1999 was: common stock, no par value--7,785,734
shares.

<PAGE>

                                     PART I

Item 1.  BUSINESS

         Gradco Systems, Inc. ("Gradco", the "Company" or the "Registrant")
was originally incorporated in California on November 9, 1978. As previously
reported in the Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1992, the Registrant changed its state of incorporation to Nevada
through a merger which became effective April 3, 1992. The Registrant's
principal 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 for the office
automation market. Information relating to revenues, net earnings and
identifiable assets attributable thereto for the fiscal years ended March 31,
1999, 1998 and 1997 is set forth in response to Item 8 below.

         (b) NARRATIVE DESCRIPTION OF BUSINESS.

         Gradco is a holding company which conducts business as follows:

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

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

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

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

         Due to the overall transition in the office equipment industry from
analog to digital equipment, which does not require the kind of multi-bin
sorters which the Company has produced and marketed, emphasis is being placed
on design, development and marketing of paper handling products for the
rapidly increasing digital equipment market.


                                        1
<PAGE>

BUSINESS OF GJ

         GENERAL

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

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

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

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

         GJ PRODUCTS

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

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

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

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


                                        2
<PAGE>

         GJ MARKETING AND CUSTOMERS

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

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

         In fiscal 1999, Xerox, Xerox Ltd., Panasonic and Mita accounted for
30%, 16%, 11% and 11%, respectively, of the Registrant's consolidated
revenues. In fiscal 1998, Xerox and Xerox Ltd. accounted for 26% and 20%,
respectively, of the Registrant's consolidated revenues. In fiscal 1997,
Xerox, Xerox Ltd., Mita and Lanier accounted for 26%, 17%, 11% and 11%,
respectively, of the Registrant's consolidated revenues. A loss of any of the
current principal customers could have a negative impact on the Registrant's
consolidated operations taken as a whole (see GJ COMPETITION).

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

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

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

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

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


                                        3

<PAGE>


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

         These agreements generated recurring royalty revenues of
approximately $2,213,000 during the fiscal year ended March 31, 1999,
$2,771,000 during the fiscal year ended March 31, 1998 and $2,694,000 during
the fiscal year ended March 31, 1997. These agreements allow GJ to receive
additional revenues from certain OEMs while also selling products to the
OEMs, and, overall, are expected to result in better market penetration of GJ
technology. However, the licensees are able to compete with GJ in some of
GJ's customary markets to the limited extent set forth in such agreements. No
licensee has the right to sublicense the technology to nonaffiliates.

         GJ COMPETITION

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

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

         GJ PATENTS AND PROPRIETARY TECHNOLOGY

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

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

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

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

         GJ PRODUCTION AND ASSEMBLY

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

         Agreements with the manufacturers for finished products provide for
quality 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


                                        4
<PAGE>

OEMs may specify electronics. Tooling for most common parts is owned by GJ or
its contract manufacturers, while a number of OEMs own tooling for parts
unique to models customized for their products.

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

BUSINESS OF VENTURE ENGINEERING, INC.

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

         Engineering services performed by Venture are principally related to
paper-handling products and semiconductor processing equipment, including
electronic motion control devices and devices used for putting marks on
paper/media. These devices and applications include printer-plotters,
peripheral media handling, and specialized printing and support. Services are
also performed for other applications such as automated medical diagnostic
equipment, manufacturing robotics, and test and process control equipment.
Services are typically billed on a time and material or fixed price basis.
However, Venture completed a development project in February 1992 which
provided a royalty stream through calendar 1998. This project generated
royalty revenues of approximately $87,000 in fiscal 1999, $305,000 in fiscal
1998, and $171,000 in fiscal 1997.

         Venture is also developing devices for processing automation
equipment for the semiconductor 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 equipment, medical equipment and
telecommunications.

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

COSTS AND REVENUES OF DEVELOPMENT ENGINEERING SERVICES

         In 1999, 1998 and 1997 the Registrant, on a consolidated basis,
spent approximately $3,011,000, $4,191,000 and $3,768,000, respectively, on
research and development and development engineering activities. Costs
incurred under research and development and development engineering contracts
are included in research and development expense. Included in research and
development expense are costs related to development engineering service
contracts of approximately $1,178,000, $1,914,000 and $1,111,000, in fiscal
1999, 1998 and 1997, respectively. The Registrant, on a consolidated basis,
also received revenues from customers under development engineering service
contracts of approximately $895,000, $1,421,000 and $1,125,000, in fiscal
1999, 1998 and 1997, respectively.

BACKLOG

         Registrant's order backlog at March 31, 1999 from consolidated
operations was estimated at approximately $14.3 million, and was estimated at
approximately $27.3 million at March 31, 1998. 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


                                        5
<PAGE>

any particular date may not be a meaningful measure of the Registrant's
actual sales for the succeeding fiscal period.

EMPLOYEES

         As of June 15, 1999, Gradco and its subsidiaries employed 99
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.

         $51,062,000 of the Registrant's consolidated revenues for the fiscal
year ended March 31, 1999 were attributed to the United States and
$30,755,000 were attributed to foreign countries ($30,654,000 to Japan).
$77,771,000 of the Registrant's consolidated revenues for the fiscal year
ended March 31, 1998 were attributed to the United States and $43,228,000
were attributed to foreign countries (all to Japan). $64,661,000 of the
Registrant's consolidated revenues for the fiscal year ended March 31, 1997
were attributed to the United States and $36,226,000 were attributed to
foreign countries (all to Japan). The Registrant attributes its revenues to
countries based on the location of the subsidiary's office generating the
sale. In its foreign sales, Registrant is subject to the usual risks of
international trade, including political instability, restrictive trade
policies, controls on fund transfers and foreign currency fluctuations.

         The Registrant's sales are primarily denominated in Japanese yen and
United States dollars. In order to limit the risk of foreign currency
exchange fluctuations, the Registrant attempts to buy and sell products and
services in the same currency. However, there are foreign currency exchange
gains and losses associated with some sales transactions. The Registrant had
a currency exchange loss of $482,000 in fiscal year 1999 caused by the
weakening of the dollar versus the yen during the middle of the year. The
Registrant had currency exchange gains of $1,098,000 and $904,000 in fiscal
years 1998 and 1997, respectively, caused by the strengthening of the dollar
versus the yen during each of those years.

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

Item 2.  DESCRIPTION OF PROPERTY.

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

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

Item 3.  LEGAL PROCEEDINGS.

         HAMMA V. GRADCO SYSTEMS, INC., ET AL;

         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 John C. Hamma, an ex-employee ("Hamma") and his
assignee Tenex Corporation (the "Hamma Case"). In June 1995, a jury found the
Registrant to have liability in the Hamma Case. The Registrant filed a motion
in August 1995 for judgment as a matter of law to reverse the verdict. This
motion was denied in 1998.

         On December 17, 1998, the parties settled the Hamma Case before the
damages trial and any appeals. Pursuant to such settlement, Gradco agreed to
pay $5 million and issued 250,000 five-year warrants to purchase common
shares of Gradco, exercisable immediately, at $4.00 per share. At the date of
closing Gradco paid $3 million in cash and provided an irrevocable letter of
credit securing its obligation to pay the remaining $2 million in two equal
installments on November 15, 1999 and November 15, 2000. On an after-tax
basis, this charge amounted to $3,300,000 or $.42 per share in fiscal 1999.


                                        6
<PAGE>

         DUBOIS V. GRADCO SYSTEMS, INC. ET AL.

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

         The DuBois suit will be tried as to liability and damages together.
There are substantial differences between the Hamma and DuBois cases. The
Company is presently unable to determine the amount of damages which is
likely to be awarded if DuBois is successful in his lawsuit. Although the
DuBois case will also be tried before a jury so that there are substantial
elements of uncertainty, the Company believes that the DuBois case will not
have a material adverse effect on its consolidated financial position, or on
its results of operations or liquidity.

         BANKRUPTCY OF MITA INDUSTRIAL CO., LTD.

         On August 10, 1998, the Registrant learned that Mita Industrial Co.,
Ltd. ("Mita"), one of GJ's largest customers, had filed a petition in Japan
along with five of its affiliates for the Japanese equivalent of a Chapter XI
Reorganization. The Registrant has established an allowance for the full
amount of Mita's remaining indebtedness to GJ as of the bankruptcy date. The
amount charged to expense during fiscal year 1999 was $5,543,000. On an
after-tax and minority interest basis, this charge amounted to $2,803,000, or
$.35 per share. Subsequent to the bankruptcy, GJ has continued to do
substantial business with Mita on a cash basis.

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

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

                                    PART II

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

         (a) MARKET INFORMATION.

         Gradco common stock is traded in the over-the-counter market and is
quoted on the NASDAQ National Market System under the symbol GRCO. The following
table sets forth the quarterly high and low closing sales prices from April 1,
1997 to March 31, 1999.

<TABLE>
<CAPTION>

QUARTER ENDED                                        HIGH              LOW
<S>                                                <C>                <C>
June 30, 1997...................................   $ 5.63             $ 3.19
September 30, 1997..............................   $10.63             $ 5.13
December 31, 1997...............................   $10.00             $ 6.63
March 31, 1998..................................   $ 7.75             $ 5.63
June 30, 1998...................................   $ 7.63             $ 5.19
September 30, 1998..............................   $ 7.44             $ 1.75
December 31, 1998...............................   $ 4.00             $ 1.44
March 31, 1999..................................   $ 3.13             $ 1.31

</TABLE>

         (b) HOLDERS.

         The approximate number of holders of record of Gradco common stock, no
par value (its sole class of common equity) as of the close of business on June
15, 1999 is 703.


                                       7
<PAGE>

         (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.

<TABLE>
<CAPTION>
                                                                              Years Ended March 31,
                                                -------------------------------------------------------------------
                                                  1999           1998          1997           1996           1995
                                                  ----           ----          ----           ----           ----
                                                              (In thousands, except per share amounts)
<S>                                             <C>           <C>            <C>            <C>            <C>
Statement of income data:
Operating revenues:                             $ 81,817      $ 120,999      $ 100,887      $ 100,596      $ 82,838
                                                --------      ---------      ---------      ---------      --------
Costs and expenses:
    Cost of sales.............................    62,362         95,019         79,271         77,497        64,919
    Other operating expenses..................    13,753         14,274         14,770         15,785        14,186
    Interest income, net......................      (262)          (160)          (183)          (226)          (55)
    Investment (gains) losses.................      --             --             --              (53)          205
    Provision for doubtful Mita receivable....     5,543           --             --             --            --
    Hamma litigation settlement...............     5,000           --             --             --            --
                                                --------      ---------      ---------      ---------      --------
                                                  86,396        109,133         93,858        93,003         79,255
                                                --------      ---------      ---------      ---------      --------
Earnings (loss) before income taxes and
    minority interest.........................    (4,579)        11,866          7,029          7,593         3,583
Income taxes..................................    (2,317)         4,378          2,983          2,748         1,331
Minority interest.............................       (72)         1,102          1,194          1,585           800
                                                --------      ---------      ---------      ---------      --------
        Net earnings (loss)...................  $ (2,190)     $   6,386      $   2,852      $   3,260      $  1,452
                                                --------      ---------      ---------      ---------      --------
                                                --------      ---------      ---------      ---------      --------

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

Average shares outstanding, basic EPS.........     7,897          7,809          7,799          7,796         7,784
                                                --------      ---------      ---------      ---------      --------
                                                --------      ---------      ---------      ---------      --------

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

Average shares outstanding, diluted EPS.......     7,897          8,051          7,832          7,813         7,798
                                                --------      ---------      ---------      ---------      --------
                                                --------      ---------      ---------      ---------      --------
Balance sheet data:
    Working capital........................... $  15,388      $  17,240      $  19,418      $  18,979     $  16,727
    Total assets..............................    43,902         48,471         58,086         58,015        64,383
    Long-term debt............................      --                2             15             25            35
    Shareholders' equity......................    21,030         21,473         15,339         16,201        16,997
</TABLE>


                                        8
<PAGE>

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

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

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

REVENUES

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

         The decrease in unit sales is primarily attributable to the shift
from analog to digital copiers by the Registrant's OEM customers as has been
discussed previously. The Registrant is attempting to provide new products to
the digital market and is reviewing cost savings which could be made to
lessen the effect of the change in the market. It is not currently possible
to gauge with any accuracy the adverse effect of the market change or the
degree to which such effect will be softened by the steps being taken by the
Registrant to meet such change.

         Revenues for the fiscal year ended March 31, 1998 increased by
$20,112,000 (19.9%) from the prior year primarily due to an increase of
$19,605,000 (20.2%) in net sales, from $96,897,000 to $116,502,000. Unit
sales in the copier market increased by 39%, but unit sales in the printer
market were flat compared to the previous year. Sales denominated in yen,
when translated into dollars, were approximately $6.5 million lower than they
would have been had the yen not decreased by 12% against the dollar during
the year. Development engineering services revenue increased $296,000,
primarily at Venture, while royalties increased by $211,000.

COSTS AND EXPENSES

         Gross margin on net sales was 20.7%, 18.4% and 18.2% in fiscal 1999,
1998 and 1997, respectively. The increase in the 1999 fiscal year is
primarily due to a change in product mix toward higher margin units in the
copier and printer business, but was tempered by a decrease in margins in
Venture's contract manufacturing business from prior year levels.

         Research and development expenses ("R&D") in fiscal 1999 totaled
$3,011,000 (3.7% of revenues), compared to $4,191,000 (3.5% of revenues) in
fiscal 1998 and $3,768,000 (3.7% of revenues) in fiscal 1997. R&D expenses
incurred under development engineering service contracts in the fiscal years
ended March 31, 1999, 1998 and 1997, respectively, were $1,134,000,
$1,914,000 and $1,111,000. Both the decrease from fiscal 1998 to 1999 and the
increase from fiscal 1997 to 1998 were attributable to Venture. R&D expenses
incurred on behalf of OEM customers and internal R&D expenses were
$1,877,000, $2,277,000 and $2,657,000 for the same periods.

         Selling, general and administrative expenses ("SG&A") increased by
$659,000 (6.5%) in fiscal 1999 from the prior year. There was a foreign currency
transaction loss of $482,000 included in SG&A in fiscal 1999 compared to a gain
of $1,098,000 in the prior year which accounted for a net increase of
$1,580,000. This increase was reduced by a favorable translation of SG&A at GJ
caused by the weaker yen during the year in the amount of approximately $300,000
and a decrease in amortization expense of $624,000. In addition to the normal
SG&A


                                        9
<PAGE>

expenses, the Registrant took a $5,000,000 charge for the settlement of the
Hamma litigation and a $5,543,000 charge due to the bankruptcy petition filed
by one of GJ's largest customers. On an after-tax basis, these charges
amounted to $6,103,000, or $.77 per share, in fiscal 1999. SG&A decreased by
$919,000 (8.4%) in fiscal 1998 from the prior year. The favorable translation
of SG&A at GJ caused by the weaker yen during the year accounted for a
decrease of approximately $650,000, GU's SG&A decreased by $575,000,
primarily from a reduction in staff associated with the printer distribution
business and foreign currency transaction gains increased by $194,000. These
decreases were offset by $527,000 in stock-based compensation expense
incurred by the Registrant.

PRE-TAX EARNINGS, TAXES, AND MINORITY INTEREST

         As a result of the above factors, earnings (loss) before income
taxes and minority interest were ($4,579,000), $11,866,000 and $7,029,000 in
fiscal 1999, 1998 and 1997, respectively. The tax provisions (benefit) of
($2,317,000), $4,378,000 and $2,983,000 in fiscal 1999, 1998 and 1997,
respectively, primarily comprise foreign taxes on the earnings (loss) of GJ
and federal and state taxes on the earnings of GU. The Registrant's
consolidated effective tax rate increased in fiscal 1999 as domestic income
was sheltered from federal taxes while deferred foreign tax benefits were
provided on the foreign losses. The tax rate decreased in fiscal 1998 as a
larger percentage of earnings were generated domestically and foreign
earnings were taxed at a lower rate. For further discussion regarding the tax
provisions, see Note 5 of "Notes to Consolidated Financial Statements" set
forth in Item 8 below.

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

LITIGATION

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

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

EFFECTS OF INFLATION

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

LIQUIDITY AND CAPITAL RESOURCES

         Working capital decreased by $1,852,000 at March 31, 1999, to
$15,388,000, from the prior year-end amount, primarily as a result of the
loss incurred in operations. Working capital was $17,240,000 at March 31,
1998, a decrease of $2,178,000 from March 31, 1997. Although $12,704,000 was
used to purchase the minority interest discussed above, working capital
generated from operations largely replenished this expenditure.

         Net cash provided by operations was $4.3 million, $3.4 million and
$3.0 million in fiscal 1999, 1998 and 1997, respectively. The increase in
1999 from 1998 was due to a decrease in accounts receivable which provided
$6.8 million in cash as compared to an increase in accounts receivable in
1998 which accounted for a use of $7.6 million. Net earnings before non-cash
charges for depreciation, amortization, deferred taxes, provision for losses


                                        10
<PAGE>

on accounts receivables, stock-based compensation and minority interest
provided $1.8 million in 1999, down from $9.2 million in 1998. Changes in
accounts payable, notes payable to suppliers and income taxes payable in 1999
provided $4.7 million, but in 1998 changes to these accounts used $0.1
million. Also, changes in other asset and liability accounts in 1999 provided
$3.4 million, but in 1998 changes to these accounts provided only $1.9
million. The increase in 1998 from 1997 was due to an increase of $2.6
million in cash provided by net earnings before depreciation, amortization,
deferred taxes, stock-based compensation and minority interest from $6.5
million in 1997 to $9.1 million in 1998 and a decrease in prepaid and other
assets in 1998 which provided $1.2 million as compared to an increase in 1997
which accounted for a use of $1.7 million, but was offset by an additional
$0.6 million used to fund accounts receivable. Also, changes in accounts
payable, notes payable to suppliers and income taxes payable in 1997 provided
$4.7 million, but in 1998 changes to these accounts used $0.1 million.

         Net cash used in investing activities of $0.2 million, $0.3 million
and $1.7 million in fiscal 1999, 1998 and 1997, respectively, was for
acquisition of property and equipment. In fiscal 1999, $2.0 million was also
used to purchase certificates of deposit and in fiscal 1998, $12.7 million
was used to repurchase GJ shares, decreasing the minority interest ownership
of GJ from 41.4% to 2.7%.

         Net cash provided by financing activities was $0.1 million and $0.2
million in fiscal 1999 and 1998, respectively, primarily from the exercise of
stock options. Net cash used in financing activities was $0.2 million in
fiscal 1997 representing a dividend to minority shareholders.

         Exchange rate changes associated with a stronger yen at year end
caused an increase of $1.6 million in cash in fiscal 1999 and decreases of
$0.2 million and $2.2 million in cash were caused by a weakening yen in
fiscal 1998 and 1997, respectively.

         At March 31, 1999, the Registrant had $12.4 million in cash and no
long-term debt. The Registrant's Japanese subsidiary has informal credit
facilities with a Japanese bank. There were no borrowings at March 31, 1999.
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.

IMPACT OF THE YEAR 2000

         The Registrant and its subsidiaries have addressed the impact of the
year 2000 on their internal accounting and operating systems and have
determined that these systems are Year 2000 ("Y2K") compliant as a result of
recent purchases of computer software upgrades. The Registrant's products
will not be affected by Y2K because they do not use dates to calculate
actions nor do they maintain any date fields within their internal logic. The
Registrant has completed an assessment of how its interface with customers
and suppliers, through sales and purchase orders might be impacted and has
determined that there do not appear to be any issues which would have a
material impact on the Registrant's results of operations, liquidity or
capital resources.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

Item 9.  DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE.

         Not applicable.


                                        11
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         (a) The following table sets forth the name of each director and
executive officer of the Registrant, and the nature of all positions and offices
with the Registrant held by him at present(1). Unless otherwise indicated, the
term of office of all directors and executive officers expires at the next
annual meeting of stockholders of the Registrant, which is expected to be held
in September 1999.

<TABLE>
<CAPTION>

NAME                       POSITION
----                       --------
<S>                        <C>
Martin E. Tash             Chairman of the Board, President and Chief Executive Officer

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

Bernard Bressler           Secretary, Treasurer and Director

Robert J. Stillwell        Director

Thomas J. Burger           Director

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

Akira (Tony) Shinomiya     Chief Financial Officer and Director of GJ*
</TABLE>
----------
* Term expires at ordinary general shareholders meeting of GJ for fiscal 1999,
  to be held in June 1999.

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

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

<TABLE>
<CAPTION>

NAME                       BUSINESS EXPERIENCE
----                       -------------------
<S>                        <C>
Martin E. Tash,            Mr. Tash has been Chairman of the Board and Chief
age 58                     Executive Officer of the Registrant since October
                           1990, and President of the Registrant since October
                           1991. Until June 1998 Mr. Tash was also Chairman of
                           the Board and President of Plenum Publishing
                           Corporation , a position he had held since July 1977.
                           After the sale of Plenum to a third party, Mr. Tash
                           resigned.

Harland L. Mischler,       Mr. Mischler has been Chief Financial Officer and a
age 67                     director of the Registrant since October 1990, and
                           Executive Vice President of the Registrant since
                           October 1991. Mr. Mischler is a certified public
                           accountant. Mr. Mischler served as Vice President,
                           Controller and Treasurer of Hobart Corporation from
                           1966 to 1981. From 1981 to 1984 he was Vice President
                           of Finance of Bausch & Lomb, Inc. At that time he
                           purchased, with another, Applied Research
                           Laboratories, Inc., an analytical instrument company,
                           in a leveraged buyout from Bausch & Lomb. After such
                           company was sold profitably in 1987, Mr. Mischler
                           founded HLM Capital Resources, Inc., a private
                           investment and holding company of which he is
                           President and Chairman.

                                        12
<PAGE>

Bernard Bressler,          Mr. Bressler has been Secretary and a director of the
age 71                     Registrant since October 1990 and Treasurer of the
                           Registrant since April 1992. He has been a practicing
                           attorney since 1952, and is presently a member of the
                           firm of Bressler, Amery & Ross, P.C., counsel to the
                           Registrant. Mr. Bressler was also a director of
                           Plenum Publishing Corporation until its sale.

Robert J. Stillwell,       Mr. Stillwell has been a director of the Registrant
age 63                     since October 1991. Mr. Stillwell owns and operates
                           the Robert J. Stillwell Agency, Inc., an independent
                           life and health insurance agency which he founded
                           over 20 years ago, and he owns and operates
                           Nationwide Property Management, which handles diverse
                           real estate investments in which he is involved.

Thomas J. Burger,          Mr. Burger has been a director of the Registrant
age 52                     since October 1993. He is Associate Senior Vice
                           President of NEC America, Inc. (a position he has
                           held since July 1993), and is responsible for the
                           sale and marketing of its business telephone systems
                           throughout the United States. Prior thereto, he was
                           President and a director of two wholly-owned
                           subsidiaries of NEC America Inc., which conducted the
                           sales, installation and maintenance of NEC
                           communication systems and networks throughout the
                           Central, South and Western United States. From August
                           1988 to December 1989 Mr. Burger was President and a
                           director of Marcom Communications Inc. After he
                           reorganized its telecommunication subsidiary, the
                           subsidiary was sold to NEC America and he became an
                           employee of NEC. In July 1987 Mr. Burger founded
                           Astra Services Inc., a computer company providing
                           various software development services to the
                           communications industry. Astra Services was sold
                           profitably in 1992. From 1973 to 1987 Mr. Burger was
                           employed in various capacities by Telecom Plus
                           International Inc., one of the major independent
                           interconnect companies in the U.S. He became
                           President in 1980, a position he held until May 1987
                           when the company was sold to Siemens Communications.

Masakazu (Mark)            Mr. Takeuchi has been a director of the Registrant
Takeuchi, age 62           since September 1997. He has been President and Chief
                           Executive Officer of GJ since 1989 and a director of
                           GJ since 1988. He is also President and a director of
                           GU. He was Senior Vice President of Far East
                           Operations and New Business Development of the
                           Registrant from August 1988 to October 1990, and a
                           director of the Registrant from March 1990 until
                           October 1990. Mr. Takeuchi was also Chairman of GJ
                           from August 1988 until December 1988. Previously,
                           from 1961, Mr. Takeuchi was employed by C. Itoh & Co.
                           Ltd. in various positions.

Akira (Tony)               Mr. Shinomiya has been Chief Financial Officer and a
Shinomiya, age 56          director of GJ since January 1989. From 1987 to 1988,
                           he served as deputy General Manager of C. Itoh
                           Electronics Corp. and from September 1985 through
                           1986 he was Section Manager of the Electronics
                           Division of C. Itoh & Co. Ltd. From 1975 to 1985 he
                           was Vice President of C. Itoh Electronics Inc. in Los
                           Angeles, California.

</TABLE>

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, 1999 for services rendered in
all capacities to the Registrant and its subsidiaries during each of the fiscal
years ended March 31, 1999, 1998 and 1997: (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, 1999 required to be disclosed below exceeded
$100,000:


                                        13
<PAGE>

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                       Securities
Name and                                       Salary and              Underlying
Principal Position              Year       Bonus  ($)(1) (2)           Options(3)
------------------              ----       -----------------           ----------
<S>                             <C>             <C>                      <C>
Martin E. Tash                  1999            125,000                   ---
Chairman of the Board,          1998            125,000                  100,000
President and Chief             1997            125,000                   ---
Executive Officer

Masakazu (Mark) Takeuchi        1999            267,419                   ---
President,                      1998            263,388                   60,000
Gradco (Japan) Ltd.             1997            317,996                   ---

Akira (Tony) Shinomiya          1999            235,986                   ---
Chief Financial Officer         1998            232,358                   40,000
Gradco (Japan) Ltd.             1997            278,757                   ---
</TABLE>
---------------
(1) With regard to Mr. Tash, the amounts shown in this column represent
compensation for special services rendered as a director.

(2) With regard to Messrs. Takeuchi and Shinomiya, the amounts shown in this
column represent compensation paid to such individuals for services as executive
officers of GJ. See note (1) in Item 10(a). Such compensation includes bonuses
for 1997 in the amount of $37,286 and $31,072 for Messrs. Takeuchi and
Shinomiya, respectively. All such compensation was paid in yen by GJ and is
translated into dollars at each year's average annual exchange rates in the
above table. When measured in yen, there was a 9.4% decrease in compensation
from 1997 to 1998, and a 5.8% increase in compensation from 1998 to 1999.

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

         (b) STOCK OPTION PLANS.

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

         The 1997 Plan is administered by the Registrant's Board of Directors.
Subject to limitations contained in the 1997 Plan, the Board determines the
optionees, option prices, number of shares subject to such options, the duration
of each option, the dates of grant (no options may be granted after September
11, 2007), and the schedule for exercise of each option. The options are not
transferable. Currently, options for 249,500 shares are outstanding under the
1997 Plan.
126,250 shares are available for issuance under the 1997 Plan.

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


                                        14
<PAGE>

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

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

         The following table sets forth the number of shares underlying
unexercised options held by the foregoing executive officers at March 31,
1999 together with the value of such options as of March 31, 1999.

                     UNEXERCISED OPTIONS AT FISCAL YEAR-END

<TABLE>
<CAPTION>
                              Number of Securities               Value of Unexercised
                                   Unexercised                   In-the-Money Options
                               at Fiscal Year-End                 at Fiscal Year-End
                                  Exercisable/                       Exercisable/
Name                              Unexercisable                    Unexercisable ($)
----                              -------------                    -----------------
<S>                             <C>                                      <C>
Martin E. Tash                  100,000 / 50,000                         None

Masakazu (Mark)                  48,000 / 30,000                         None
Takeuchi(1)

Akira (Tony)                     26,000 / 20,000                         None
Shinomiya(1)
</TABLE>
---------------
(1) Messrs. Takeuchi and Shinomiya are executive officers of Gradco (Japan) Ltd.
    See note 1 in Item 10(a).

         (c) RETIREMENT PLAN (GJ).

         In June 1994, GJ adopted a retirement plan providing that, subject
to approval by GJ's shareholders at the time of proposed payment, a
retirement allowance be paid by GJ to a member of GJ management who retires
after his term of office or by reason of reaching his mandatory retirement
age. The amount of the retirement allowance is determined by a formula
multiplying (1) the monthly salary at the time of retirement, by (2) the
number of years served, by (3) a factor which varies depending upon the
office held by the eligible individual. Each of Messrs. Takeuchi and
Shinomiya is eligible for payments under this Plan upon his retirement.

         (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 1999
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, 1999. This
amount is included in the SUMMARY COMPENSATION TABLE in Item 11(a) above.

         HLM Capital Resources, Inc., a closely-held corporation controlled
by Harland L. Mischler (the Registrant's Executive Vice President and Chief
Financial Officer) received $70,000 in cash for providing to the Registrant
special services rendered by Mr. Mischler as a director during the fiscal
year ended March 31, 1999.

         All directors (and Messrs. Tash, Mischler and Bressler in their
capacity as officers as well) are eligible to receive options under the 1997
Stock Option Plan. See table in Item 10(b) as to options held by Messrs. Tash
and Takeuchi as of March 31, 1999. 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.


                                        15
<PAGE>

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

         (e) INDEMNIFICATION.

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

         (f) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

         The Registrant's Board of Directors has no compensation committee
(or other Board committee performing equivalent functions); compensation
policies applicable to executive officers are determined by the Board. During
the fiscal year ended March 31, 1999, 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).

         During the fiscal year ended March 31, 1999 until June 30, 1998,
Martin E. Tash (an executive officer of the Registrant) served as a member of
the Board of Directors of Plenum Publishing Corporation ("Plenum"). Plenum
has no compensation committee (or other Board committee performing equivalent
functions); compensation policies applicable to executive officers are
determined by its Board. Mr. Tash is an executive officer of Plenum and is
the only such executive officer who also served on the Registrant's Board.
Bernard Bressler (Secretary, Treasurer and a director of the Registrant) was
an officer and director of Plenum until June 30, 1998, but he is not an
executive officer of either entity.

         During the period since April 1, 1998 (the beginning of the
Registrant's last fiscal year), there were no transactions between the
Registrant and Plenum of the type required to be disclosed under Item 13,
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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, 1999 based on 7,785,734 shares
of Common Stock, no par value, outstanding as of such date.

<TABLE>
<CAPTION>
                                                              Amount and Nature
                           Name and Address of                  of Beneficial            Percentage
Title of Class               Beneficial Owner                     Ownership               of Class
--------------        -------------------------------         -----------------          ----------
<S>                   <C>                                          <C>                      <C>
Common Stock,         Dimensional Fund Advisors, Inc.              611,124(1)               7.8%
no par value          1299 Ocean Avenue
                      11th Floor
                      Santa Monica, CA 90401
</TABLE>
---------------
(1) As set forth in Amendment No. 7 to Statement on Schedule 13G, dated February
11, 1999, Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment advisor, is deemed to have beneficial ownership of 611,124 shares as
of December 31, 1998, all of which shares are held on behalf of advisory clients
of Dimensional, a registered open-end management investment company. Dimensional
disclaims beneficial ownership of all such shares.


                                        16
<PAGE>

         (b) The following table sets forth information regarding the voting
securities of the Registrant beneficially owned by each director of the
Registrant, each of the executive officers named in the SUMMARY COMPENSATION
TABLE in Item 11(a), and all officers and directors as a group (7 persons), as
of June 15, 1999.

<TABLE>
<CAPTION>
                                                              Amount and Nature
                                                                    of Beneficial            Percentage
Title of Class                 Beneficial Owner                      Ownership               of Class (1)
--------------             -----------------------            -----------------------        ------------
<S>                        <C>                                     <C>                          <C>
Common Stock,              Martin E. Tash                          377,548 (2)                  4.8%
no par value
                           Harland L. Mischler                     123,000 (3)                  1.6%

                           Bernard Bressler                         33,786 (4)                     *

                           Robert J. Stillwell                      24,600 (5)                     *

                           Thomas J. Burger                          7,500 (6)                     *

                           Masakazu (Mark) Takeuchi                 48,000 (7)                     *

                           Akira (Tony) Shinomiya                   26,000 (8)                     *

                           All Executive Officers                  640,434 (9)                  8.0%
                           and Directors as a Group
                           (comprising the 7
                           persons shown above)
</TABLE>
* Less than 1%

---------------
(1) In each instance where a named individual is listed as the holder of a
currently exercisable option, the shares which may be acquired upon exercise
thereof have been deemed outstanding for the purpose of computing the
percentage of outstanding shares owned by such person, but not for the
purpose of computing the percentage owned by any other person, except the
group referred to in note (9).

(2) Includes 63,566 shares owned by Mr. Tash under a private profit sharing
plan for the benefit of Mr. Tash who is the trustee and sole lifetime
beneficiary and retains voting power, 91,000 shares owned by Mr. Tash jointly
with his wife and 122,982 shares owned directly by Mr. Tash. Also includes
currently exercisable options granted to Mr. Tash to purchase 100,000 shares
of the Registrant's stock.

(3) Includes 52,000 shares owned directly by HLM Capital Resources, Inc., a
private investment and holding corporation, of which Mr. Mischler is
President, Chairman and major shareholder, and 25,000 shares owned directly
by Mr. Mischler. Also includes currently exercisable options granted to Mr.
Mischler to purchase 46,000 shares of the Registrant's stock.

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

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

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

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

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

                                        17
<PAGE>

(9) The number of shares and percentage owned includes 235,000 shares which
may be acquired through exercise of currently exercisable options held by
certain of such persons individually named. The number of outstanding shares
used in computing the percentage of ownership by the group includes such
shares.

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 1999 fiscal year, the Registrant paid
legal fees of $166,700 to such firm.

                                    PART IV

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

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

         (b) 8-K Reports - None.

         (c) Exhibits:

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

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

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

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

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

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

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

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

         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.

                                        18
<PAGE>

         10.9     Gradco 1988 Stock Option Plan, incorporated by reference from
                  Form 8-K for July 1, 1988, Exhibit 19.3, and amendment thereto
                  dated July 24, 1991, incorporated by reference from Report on
                  Form 10-Q for quarter ended June 30, 1991, Exhibit 19.2.

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

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

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

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

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

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

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

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

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


         22       List of Significant Subsidiaries

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

         23       Consent of PricewaterhouseCoopers LLP - filed herewith.

         27       Financial Data Schedule - filed herewith.


                                        19
<PAGE>

                                   SIGNATURES

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



Dated:  June 25, 1999
                                       GRADCO SYSTEMS, INC.



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

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


        Signature                   Title                          Date
        ---------                   -----                          ----
                                Chairman of the Board,
                                President and Chief
                                Executive Officer (Principal
/s/ Martin E. Tash              Executive Officer)              June 25, 1999
-------------------------
Martin E. Tash

                                Executive Vice President,
                                Chief Financial Officer
                                (Principal Financial
                                and Accounting Officer)
/s/ Harland L. Mischler         and Director                    June 25, 1999
-------------------------
Harland L. Mischler



/s/ Bernard Bressler            Secretary, Treasurer and        June 25, 1999
-------------------------       Director
Bernard Bressler



/s/ Robert J. Stillwell         Director                        June 25, 1999
-------------------------
Robert J. Stillwell



/s/ Thomas J. Burger             Director                        June 25, 1999
-------------------------
Thomas J. Burger



/s/ Mark Takeuchi                Director                        June 25, 1999
-------------------------
Mark Takeuchi


<PAGE>

                           ANNUAL REPORT ON FORM 10-K

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

                        LIST OF FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULES


                       FINANCIAL STATEMENTS AND SCHEDULES

                            YEAR ENDED MARCH 31, 1999

                              GRADCO SYSTEMS, INC.

                                LAS VEGAS, NEVADA



<PAGE>

FORM 10-K--ITEM 14(a)

GRADCO SYSTEMS, INC.

INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<S>                                                                 <C>
(1) Financial Statements:

         Report of Independent Accountants........................  S-2
         Consolidated Balance Sheets--
              March 31, 1999 and 1998.............................  S-3
         Consolidated Statements of Income--Years Ended
              March 31, 1999, 1998 and 1997.......................  S-4
         Consolidated Statements of Shareholders' Equity--
              Years Ended March 31, 1999, 1998 and 1997...........  S-5
         Consolidated Statements of Cash Flows--Years Ended
              March 31, 1999, 1998 and 1997.......................  S-6
         Notes to Consolidated Financial Statements...............  S-8 to S-17
                                                                    inclusive
(2) Financial Statement Schedules:

         II--Valuation and Qualifying Accounts....................  S-18
</TABLE>

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




                                        S-1
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


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


In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page S-1 present fairly, in all material
respects, the financial position of Gradco Systems, Inc. and its subsidiaries
at March 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page S-1 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
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 15, 1999

                                     S-2


<PAGE>

                              GRADCO SYSTEMS, INC.

                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                      March 31,
                                                               ----------------------
                                                                 1999          1998
                                                                 ----          ----
                          ASSETS
<S>                                                            <C>           <C>
Current assets:
     Cash and cash equivalents                                 $ 12,423      $  8,691
     Short-term investments                                       1,000           --
     Accounts receivable, less allowance for
           doubtful accounts of $6,508 and $108                  17,389        29,930
     Inventories                                                  1,368         1,608
     Deferred income taxes                                        1,310           552
     Other current assets                                           612           166
                                                               --------      --------
          Total current assets                                   34,102        40,947
Furniture, fixtures and equipment, net                              855         1,290
Excess of cost over acquired net assets, net
     of accumulated amortization of $538 and $495                 1,191         1,234
Deferred income taxes                                             3,766         1,571
Other assets                                                      3,988         3,429
                                                               --------      --------
                                                               $ 43,902      $ 48,471
                                                               --------      --------
                                                               --------      --------

                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                          $  6,543      $ 10,241
     Notes payable to suppliers                                   9,281         9,849
     Accrued expenses                                             2,754         1,077
     Income taxes payable                                           133         2,527
     Current installments of long-term debt                           3            13
                                                               --------      --------
          Total current liabilities                              18,714        23,707
Long-term debt, excluding current installments                      --              2
Non-current liabilities                                           2,330         1,024
Excess of fair value of net assets acquired over cost,
     net of accumulated amortization of $600 and $200             1,200         1,600
Minority interest                                                   628           665
Commitments and contingencies (Note 8)

Shareholders' equity:
     Preferred stock, no par value; authorized
          7,500,000 shares, none issued
     Common stock, no par value; authorized 30,000,000
          shares, issued 7,910,934 and 7,854,598                 45,829        45,325
     Accumulated deficit                                        (26,162)      (23,972)
     Accumulated other comprehensive income                       1,363           120
                                                               --------      --------
          Total shareholders' equity                             21,030        21,473
                                                               --------      --------
                                                               $ 43,902      $ 48,471
                                                               --------      --------
                                                               --------      --------
</TABLE>

          See accompanying notes to consolidated financial statements.


                                     S-3
<PAGE>

                              GRADCO SYSTEMS, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                               For the years ended March 31,
                                              -------------------------------
                                               1999         1998       1997
                                               ----         ----       ----
<S>                                           <C>         <C>        <C>
Revenues:

Net sales                                     $ 78,622    $116,502   $ 96,897
Development engineering services                   895       1,421      1,125
Licenses and royalties                           2,300       3,076      2,865
                                              --------    --------   --------
                                                81,817     120,999    100,887
                                              --------    --------   --------
Costs and expenses:

Cost of sales                                   62,362      95,019     79,271
Research and development                         3,011       4,191      3,768
Selling, general and administrative             10,742      10,083     11,002
Provision for doubtful Mita receivable           5,543         --         --
Hamma litigation settlement                      5,000         --         --
                                              --------    --------   --------
                                                86,658     109,293     94,041
                                              --------    --------   --------
Income (loss) from operations                   (4,841)     11,706      6,846

Interest expense                                    (4)        (12)        (4)
Interest income                                    266         172        187
                                              --------    --------   --------
Earnings (loss) before income taxes
     and minority interest                      (4,579)     11,866      7,029
Income tax expense                              (2,317)      4,378      2,983
Minority interest                                  (72)      1,102      1,194
                                              --------    --------   --------
     Net earnings (loss)                      $ (2,190)   $  6,386   $  2,852
                                              --------    --------   --------
                                              --------    --------   --------

Basic earnings (loss) per common share        $   (.28)   $    .82   $    .36
                                              --------    --------   --------
                                              --------    --------   --------
Average shares outstanding, basic EPS            7,897       7,809      7,799
                                              --------    --------   --------
                                              --------    --------   --------
Diluted earnings (loss) per common share      $   (.28)   $    .79   $    .36
                                              --------    --------   --------
                                              --------    --------   --------
Average shares outstanding, diluted EPS          7,897       8,051      7,832
                                              --------    --------   --------
                                              --------    --------   --------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                     S-4
<PAGE>

                              GRADCO SYSTEMS, INC.

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                        Accumulated
                                        Common Stock                    Other Com-
                                     -----------------     Accumulated  prehensive
                                      Shares      Amount     Deficit      Income      Total
                                      ------      ------     -------      ------      -----
<S>                                  <C>         <C>        <C>           <C>       <C>
Balance at March 31, 1996            7,798,909   $44,618    $(33,210)     $4,793    $16,201
Components of comprehensive income:
     Net earnings                                   --         2,852        --        2,852
     Translation adjustments              --        --          --        (3,714)    (3,714)
                                                                                    -------
        Comprehensive income                                                           (862)
                                     ---------   -------    --------      ------    -------
Balance at March 31, 1997            7,798,909    44,618     (30,358)      1,079     15,339
Components of comprehensive income:
     Net earnings                         --        --         6,386        --        6,386
     Translation adjustments              --        --          --          (959)      (959)
                                                                                     ------
        Comprehensive income                                                          5,427
Issuance of shares in exchange
     for Ziyad shares                      689      --          --          --
Exercise of stock options               55,000       180        --          --          180
Stock-based compensation                  --         527        --          --          527
                                     ---------   -------    --------      ------    -------
Balance at March 31, 1998            7,854,598    45,325     (23,972)        120     21,473
Components of comprehensive income:
     Net loss                             --        --        (2,190)       --       (2,190)
     Translation adjustments              --        --          --         1,243      1,243
                                                                                     ------
        Comprehensive income                                                           (947)
Issuance of shares in exchange
     for Ziyad shares                       86      --          --          --
Exercise of stock options               56,250       158        --          --          158
Stock-based compensation                  --         346        --          --          346
                                     ---------   -------    --------      ------    -------
Balance at March 31, 1999            7,910,934   $45,829    $(26,162)     $1,363    $21,030
                                     ---------   -------    --------      ------    -------
                                     ---------   -------    --------      ------    -------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      S-5
<PAGE>

                              GRADCO SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                   For the years ended March 31,
                                                               -----------------------------------
<S>                                                            <C>           <C>           <C>
                                                                 1999          1998         1997
                                                                 ----          ----         ----
Cash flows from operating activities:
    Net earnings                                               $ (2,190)     $  6,386      $ 2,852
                                                               --------      --------      -------
    Adjustments to reconcile net income to
        net cash provided by operating activities:
           Depreciation                                             685         1,005        1,268
           Amortization                                             182           806        1,583
           Deferred income taxes                                 (2,959)         (684)        (406)
           Provision for losses on accounts receivable            5,769            50          240
           Loss (gain) on sale of property and equipment             31            41           (5)
           Stock-based compensation                                 346           527         --
           Minority interest                                        (72)        1,102        1,194
           Decrease (increase) in accounts receivable             6,769        (7,641)      (7,024)
           Decrease in inventory                                    248           124          142
           (Increase) decrease in prepaid assets                   (390)          149          968
           Decrease (increase) in other assets                      825         1,014       (2,662)
           (Decrease) increase in accounts payable               (4,010)         (183)       3,835
           (Decrease) increase in notes payable to suppliers     (1,339)       (1,047)       1,690
           Increase (decrease) in accrued expenses                1,520           435           (9)
           (Decrease) increase in income taxes payable           (2,369)        1,162         (842)
           Increase in other liabilities                          1,213           199          204
                                                               --------      --------      -------
               Total adjustments                                  6,449        (2,941)         176
                                                               --------      --------      -------
               Net cash provided by operations                    4,259         3,445        3,028
                                                               --------      --------      -------
Cash flows from investing activities:
    Purchase of investments                                      (2,000)         --           --
    Acquisition of property and equipment                          (230)         (330)      (1,753)
    Proceeds from sale of property and equipment                   --            --             10
    Purchase of minority interest                                  --         (12,704)        --
                                                               --------      --------      -------
        Net cash used in investing activities                    (2,230)      (13,034)      (1,743)
                                                               --------      --------      -------
</TABLE>

                                      S-6
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

<TABLE>
<CAPTION>
                                                                   For the years ended March 31,
                                                               -----------------------------------
<S>                                                            <C>           <C>           <C>
                                                                 1999          1998         1997
                                                                 ----          ----         ----
Cash flows from financing activities:
    Repayment of notes in excess of three months                    (12)          (11)         (10)
    Proceeds from exercise of stock options                         158           181         --
    Dividend to minority shareholders                              --            --           (231)
                                                               --------      --------      -------
        Net cash provided by (used in) financing activities         146           170         (241)
                                                               --------      --------      -------
Effect of exchange rate changes on cash                           1,557          (225)      (2,232)
                                                               --------      --------      -------
Net increase (decrease) in cash and cash equivalents              3,732        (9,644)      (1,188)
Cash and cash equivalents at beginning of year                    8,691        18,335       19,523
                                                               --------      --------      -------
Cash and cash equivalents at end of year                       $ 12,423      $  8,691      $18,335
                                                               --------      --------      -------
                                                               --------      --------      -------


Supplemental Disclosures of Cash Flow Information:

    Cash paid during the period for:
        Interest                                               $      4      $     12      $     4
        Income taxes                                              3,036         4,131        4,232
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      S-7
<PAGE>

                              GRADCO SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

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

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

CASH EQUIVALENTS

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

CONCENTRATIONS OF CREDIT RISK

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

INVENTORIES

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

LONG-LIVED ASSETS

         The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the book value of an asset may not be recoverable. With respect
to the excess of cost over acquired net assets ("goodwill"), the Company
records impairment to the extent that fair value (using future undiscounted
cash flows) is less than the carrying value of goodwill.

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.

                                      S-8
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

DEPRECIATION AND AMORTIZATION

         Furniture, fixtures 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.

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, 1999, 1998
and 1997, respectively, were $1,134,000, $1,914,000 and $1,111,000. Research
and development expenses on behalf of OEM customers and internal research and
development expenses in the fiscal years ended March 31, 1999, 1998 and 1997,
respectively, were $1,877,000, $2,277,000 and $2,657,000.

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. There was a foreign currency transaction loss of
$482,000 included in selling, general and administrative expenses in fiscal
year 1999 and gains of $1,098,000 and $904,000 in fiscal years 1998 and 1997,
respectively.

NET EARNINGS PER SHARE

Basic EPS is computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if stock options and other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. There is no difference in average shares outstanding between diluted
and basic in fiscal year 1999 because there was a net loss. For all periods
presented, the net earnings available to common shareholders is the same for
both basic and diluted EPS and is equal to the net earnings stated in the
Consolidated Statements of Operations. A reconciliation of the average number
of outstanding shares used in the computation of basic EPS to that used in
the computation of diluted EPS is shown in the following table (in thousands):
<TABLE>
<CAPTION>
                                                               FISCAL YEAR
                                                -----------------------------------
                                                 1999           1998          1997
                                                 ----           ----          ----
<S>                                             <C>           <C>           <C>
Average shares outstanding, basic EPS             7,897         7,809         7,799
Effect of dilutive securities:
      Stock options                               --              242            33
                                                -------       -------       -------
Average shares outstanding, diluted EPS           7,897         8,051         7,832
                                                -------       -------       -------
                                                -------       -------       -------
</TABLE>

                                      S-9
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

INCOME TAXES

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

NEW ACCOUNTING STANDARDS

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

NOTE 2--REORGANIZATION

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

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

NOTE 3--MITA BANKRUPTCY

         On August 10, 1998, the Company learned that Mita Industrial Co.
Ltd. ("Mita"), one of GJ's largest customers, had filed a petition in Japan
along with five of its affiliates for the Japanese equivalent of a Chapter XI
Reorganization. The Company has established an allowance for the full amount
of Mita's remaining 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.


                                      S-10
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
                                                              March 31,
                                                      ----------------------
                                                        1999           1998
                                                        ----           ----
                                                           (In Thousands)
<S>                                                   <C>             <C>
Inventories are summarized as follows:

     Raw materials                                    $  142          $  128
     Work-in-process                                     372             992
     Finished goods                                      854             488
                                                      ------          ------
                                                      $1,368          $1,608
                                                      ------          ------
                                                      ------          ------
Furniture, fixtures and equipment, at cost, are
     summarized as follows:

     Office, shop and automotive equipment            $1,217          $1,192
     Computer equipment                                  967             873
     Leasehold improvements                              132             122
     Tooling                                           4,014           3,911
                                                      ------          ------
                                                       6,330           6,098
     Less:
         Accumulated depreciation and amortization     5,475           4,808
                                                      ------          ------
                                                      $  855          $1,290
                                                      ------          ------
                                                      ------          ------
Other assets are summarized as follows:

     Deposits                                         $1,186          $1,352
     Investments                                       1,653             642
     Cash surrender value of life insurance              968             837
     Patents                                             --              250
     Intangible pension asset                            145             171
     License repurchase                                  --              130
     Other                                                36              47
                                                      ------          ------
                                                      $3,988          $3,429
                                                      ------          ------
                                                      ------          ------
Non-current liabilities are summarized as follows:

     Accumulated benefit obligation                   $1,154          $  867
     Hamma litigation settlement                       1,000             --
     Other                                               176             157
                                                      ------          ------
                                                      $2,330          $1,024
                                                      ------          ------
                                                      ------          ------
</TABLE>

NOTE 5--INCOME TAXES

         Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                    Fiscal Year
                                      ------------------------------------
                                        1999           1998          1997
                                        ----           ----          ----
<S>                                   <C>            <C>           <C>
         Current
             Foreign                  $   287        $ 4,251       $ 2,971
             Federal                      --             453           296
             State                        355            358           122
         Deferred
             Foreign                   (2,586)        (1,185)         (441)
             Federal                     (373)           501            35
                                      -------        -------       -------
          Total                       $(2,317)       $ 4,378       $ 2,983
                                      -------        -------       -------
                                      -------        -------       -------
</TABLE>

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

                                      S-11
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES--(CONTINUED)

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

<TABLE>
<CAPTION>
                                                                           Fiscal Year
                                                                  ---------------------------
                                                                   1999       1998     1997
                                                                   ----       ----     ----
<S>                                                                <C>        <C>      <C>
         Federal statutory tax rate                                 35.0%      35.0%    35.0%
         Increase (decrease) in tax rate resulting from:
             State income taxes, less federal benefit               (7.7)       2.1      1.2
             Foreign tax expense                                    12.6        7.9     12.4
             Recognition of deferred income, previously taxed       19.7       (7.6)    (6.4)
             Stock-based compensation                               (5.0)       0.6     --
             Other                                                  (4.0)      (1.1)     0.2
                                                                   -----      -----    -----
         Effective income tax rate                                  50.6%      36.9%    42.4%
                                                                   -----      -----    -----
                                                                   -----      -----    -----
</TABLE>

          Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
                                                              March 31,
                                                      -----------------------
                                                        1999           1998
                                                        ----           ----
<S>                                                   <C>             <C>
         Deferred tax assets
             Patent amortization                      $ 1,223         $   632
             Mita bad debt                              1,342            --
             Legal settlement                             680            --
             Local taxes                                   57             401
             Retirement benefits                          424             334
             Other                                        206             387
             Tax loss carryforwards                    10,820           9,390
             Valuation allowance                       (8,602)         (8,167)
                                                      -------         -------
                                                        6,150           2,977
                                                      -------         -------
         Deferred tax liabilities
             Intercompany loan revaluation                786             711
             Other                                        288             143
                                                      -------         -------
                                                        1,074             854
                                                      -------         -------
         Net deferred tax assets                      $ 5,076         $ 2,123
                                                      -------         -------
                                                      -------         -------
</TABLE>

         At March 31, 1999, the Company had federal net operating loss
carryforwards ("NOLs") for tax reporting purposes of $28,300,000 which will
expire in 2000 through 2019 if not utilized. These NOLs are utilizable by
Gradco Systems, Inc. and its subsidiaries, Venture Engineering, Inc.
("Venture") and Gradco (USA) Inc. GJ also has a net operating loss
carryforward in the amount of 344,000,000 Yen ($2,854,000) which will expire
in 2004 if not utilized. At this time it is not deemed more likely than not
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, 1999, the Company's share of such undistributed foreign earnings
totaled $9,500,000. Foreign withholding taxes of approximately $950,000 would
be due upon remittance of these earnings.

                                      S-12
<PAGE>


                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--LICENSE REPURCHASE

         In 1986, the Company entered into an agreement with C. Itoh
Electronics, Inc. ('CIE') to terminate the exclusive Japanese license granted
to CIE in 1983. The Company paid the equivalent of 1.864 billion yen
($11,500,000 in 1986-87), and was amortizing these costs over a period of 15
years. In conjunction with the reacquisition of GJ shares (Note 2), the
carrying value of the license repurchase was reduced by 421 million yen
(approximately $3.7 million) and its amortization period was shortened to 13
years. As of March 31, 1999, the asset is fully amortized. Amortization of
the license repurchase amounted to $144,000, $488,000 and $1,004,000 in the
years ended March 31, 1999, 1998 and 1997, respectively.

NOTE 7--EMPLOYEE BENEFITS

         The Board of Directors of the Company adopted the 1997 Stock Option
Plan (the "1997 Plan") in September 1997. A maximum of 400,000 shares of the
Company's common stock have been reserved for issuance pursuant to the 1997
Plan. Options may be granted only to officers, key employees, directors or
consultants of the Company or any of its subsidiaries. The options are not
intended to qualify as "Incentive Stock Options" within the meaning of
Section 422(a) of the Internal Revenue Code of 1986, but are instead
nonqualified options. Options for 312,000 shares were granted during
September 1997 at an exercise price of $6.00 per share below fair market
value of the common stock on the date of grant. This difference is being
recorded ratably as compensation expense during the period September 1997
through February 2001, the vesting period of the options. Options for 20,000
shares were granted during fiscal year 1999 at a price equal to the fair
market value at the date of grant. Stock-based compensation expense of
$346,000 and $527,000 is included in selling, general and administrative
expenses for the years ended March 31, 1999 and 1998, respectively.

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

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

         The following table summarizes stock option activity:
<TABLE>
<CAPTION>
                                                             Weighted Average
                                              Number          Exercise Price
                                              ------         ----------------
<S>                                          <C>                  <C>

         Outstanding March 31, 1996           323,910             $ 4.06
         Granted                               11,500               3.38
                                             --------

         Outstanding March 31, 1997           335,410               4.04
         Granted                              312,000               2.00
         Exercised                            (55,000)              3.29
         Expired                               (1,410)              8.31
                                             --------

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

         Outstanding March 31, 1999           459,000             $ 2.86
                                             --------
                                             --------
</TABLE>

                                      S-13
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--EMPLOYEE BENEFITS--(CONTINUED)

         Of the options outstanding at March 31, 1997, 1998 and 1999, options
to purchase 305,576, 351,250 and 323,500 shares, respectively, were
exercisable at weighted average prices of $4.10, $3.64 and $3.19 per share,
respectively.

         The following table summarizes information concerning currently
outstanding and exercisable stock options as of March 31, 1999:

<TABLE>
<CAPTION>
                                    Options Outstanding               Options Exercisable
                         ---------------------------------------- --------------------------
                                          Weighted       Weighted                  Weighted
                                           Average        Average                   Average
           Range of        Number         Remaining      Exercise      Number      Exercise
        Exercise Prices  Outstanding  Contractual Life     Price     Exercisable     Price
       --------------------------------------------------------------------------------------
         <S>             <C>                 <C>           <C>         <C>           <C>
             $2.00        229,500            8.5           $2.00       114,000       $2.00
         2.38 to 3.38     135,000            3.7            2.91       115,000        2.99
             4.25          70,500            2.0            4.25        70,500        4.25
             6.75          24,000            1.3            6.75        24,000        6.75
                         --------                                      -------
                          459,000                                      323,500
                         --------                                      -------
                         --------                                      -------
</TABLE>

         The Company's Japanese subsidiary has a retirement plan for its
management which provides for a lump sum payment to be made to each eligible
individual at his retirement date. The payment is based on a formula that
factors in length of service, position held and salary at the time of
retirement. Currently the plan is unfunded. At March 31, 1999, the Company
has recorded an intangible pension asset of $145,000 and an accumulated
benefit obligation of $1,154,000. The amount charged to expense in fiscal
years 1999, 1998 and 1997 was $282,000, $249,000 and $149,000, respectively.

         The Company's domestic subsidiaries each have a 401(k) employee
benefits plan. All employees are eligible for the plan upon the completion of
six months of service with the Company. As part of the plans, the Company may
match a portion of employee contributions or make an additional contribution
contingent upon the Company's annual earnings performance. In fiscal years
1999, 1998 and 1997, the Company contributed $63,000, $55,000 and $14,000,
respectively, to the plans.

NOTE 8--COMMITMENTS AND CONTINGENCIES

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

         Future minimum lease payments at March 31, 1999, under
non-cancelable facility and equipment leases with remaining lease terms in
excess of one year are as follows:

<TABLE>
<CAPTION>
                 <S>             <C>
                 2000            $ 671,000
                 2001              612,000
                 2002              604,000
                 2003              248,000
                 2004              168,000
                 Thereafter           --
</TABLE>

         Rent expense was approximately $1,087,000, $1,109,000 and $914,000
for fiscal years 1999, 1998 and 1997, respectively.

                                      S-14
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--COMMITMENTS AND CONTINGENCIES--(CONTINUED)

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

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

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

         In March 1992, Mr. DuBois and John C. Hamma (whose related case has
been settled) filed an Application for Prejudgment Remedy ("PJR") against the
Company and Gradco (Japan) Ltd. seeking to attach $10,000,000 of assets of
each of the two companies. This Application was dismissed as respects GJ. In
November 1992, the Company and DuBois and Hamma (together the "Plaintiffs")
agreed in principle to a Consent Order instead of proceeding with a hearing
on the PJR. If during the pendency of the lawsuits the Company desires to
sell, transfer or take any other action which would affect its ownership of
stock in GJ, it has agreed to give 30 days prior notice to the Plaintiffs,
who will then be permitted, if they so request, to renew the PJR within the
notice period. Should plaintiffs do so, the Company has agreed to forbear
from proceeding with any such transaction for a limited period.

         The DuBois suit will be tried as to liability and damages together.
There are substantial differences between the Hamma and DuBois cases. The
Company is presently unable to determine the amount of damages which is
likely to be awarded if DuBois is successful in his lawsuit. Although the
DuBois case will also be tried before a jury so that there are substantial
elements of uncertainty, the Company believes that the DuBois case will not
have a material adverse effect on its consolidated financial position, or on
its results of operations or liquidity.

                                      S-15
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--SEGMENT INFORMATION

         The majority of the Company's operations are in one industry
segment, the design, development, production and marketing of intelligent
paper handling devices for the office automation market. Three of the
Company's subsidiaries, GJ, GU and Gradco Belgium, S.C. (a wholly-owned
subsidiary of GJ) operate in this segment. A second industry segment involved
in high technology engineering and manufacturing services, whose operations
are conducted by Venture, accounts for the remainder (in thousands).
<TABLE>
<CAPTION>
                                        Paper     Engineering/                Intersegment
                                       Handling   Manufacturing                & Corporate
                                       Devices      Services      Corporate    Eliminations   Consolidated
                                      ---------   -------------   ---------   -------------   ------------
Fiscal Year 1999
----------------
<S>                                    <C>          <C>            <C>           <C>           <C>
         Revenues                      $ 73,552     $ 8,265        $  --         $   --        $ 81,817
         Interest income                    246           9             49            (38)          266
         Interest expense                     2           1             39            (38)            4
         Depreciation and amortization    4,192         202           (357)        (3,170)          867
         Provision for doubtful
              Mita receivable             5,543        --             --             --           5,543
         Hamma litigation settlement       --          --            5,000           --           5,000
         Income tax expense (benefit)    (1,949)          2           (370)          --          (2,317)
         Net earnings (loss)                617        (736)        (5,061)         2,990        (2,190)
         Assets                          46,104       3,470         10,432        (16,104)       43,902
<CAPTION>
Fiscal Year 1998
----------------
<S>                                    <C>          <C>            <C>           <C>           <C>
         Revenues                      $109,633     $11,366        $  --         $   --        $120,999
         Interest income                    129          20             23           --             172
         Interest expense                    10           2           --             --              12
         Depreciation and amortization    4,616         199           (157)        (2,847)        1,811
         Income tax expense               3,877          31            470           --           4,378
         Net earnings (loss)              4,562         540         (1,223)         2,507         6,386
         Assets                          49,595       4,956          8,327        (14,407)       48,471
<CAPTION>
Fiscal Year 1997
----------------
<S>                                    <C>          <C>            <C>           <C>           <C>
         Revenues                      $ 92,233     $ 8,654        $  --         $   --        $100,887
         Interest income                    120          33             34           --             187
         Interest expense                     2           2           --             --               4
         Depreciation and amortization    3,257         143             43           (592)        2,851
         Income tax expense               2,964          19           --             --           2,983
         Net earnings (loss)              2,385         236            (34)           265         2,852
         Assets                          58,911       3,778          5,651        (10,254)       58,096
</TABLE>

                                      S-16
<PAGE>

                              GRADCO SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--SEGMENT INFORMATION--(CONTINUED)

         Geographic data follows (in thousands):
<TABLE>
<CAPTION>
                                 United
                                 States          Japan      Belgium     Consolidated
                                 -------         -----      -------     ------------
Fiscal Year 1999
----------------
<S>                             <C>            <C>          <C>           <C>
         Revenues               $ 51,062       $ 30,654     $   101       $ 81,817
         Long-lived assets         1,476          3,363           4          4,843
<CAPTION>
Fiscal Year 1998
----------------
<S>                             <C>            <C>          <C>           <C>
         Revenues               $ 77,771       $ 43,228     $  --         $120,999
         Long-lived assets           634          4,079           6          4,719
<CAPTION>
Fiscal Year 1997
----------------
<S>                             <C>            <C>          <C>           <C>
         Revenues               $ 64,661       $ 36,226     $  --         $100,887
         Long-lived assets           669         10,879           4         11,552
</TABLE>

         The Company had sales to major customers (in excess of 10% of revenues)
in each fiscal year as follows:
<TABLE>
<CAPTION>
                                                Fiscal Year
                                    ---------------------------------
                                    1999           1998          1997
                                    ----           ----          ----
         <S>                        <C>            <C>           <C>
         Xerox                      30%            26%           26%
         Xerox Ltd.                 16%            20%           17%
         Panasonic                  11%            N/A           N/A
         Mita                       11%            N/A           11%
         Lanier                     N/A            N/A           11%
</TABLE>


NOTE 10--INTERIM FINANCIAL RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  Quarter
                                               --------------------------------------------
                                               First       Second        Third       Fourth      Year
                                               -----       ------        -----       ------      ----
                                                    (In thousands of dollars, except per share amounts)
Fiscal Year 1999
----------------
<S>                                           <C>          <C>          <C>          <C>       <C>
Net sales                                     $23,132      $19,366      $19,909      $16,215   $ 78,622
Gross margin                                    4,747        3,766        3,975        3,772     16,260
Earnings (loss) before income taxes            (2,175)         879       (4,736)       1,453     (4,579)
Net earnings (loss)                              (641)         647       (2,953)         757     (2,190)
Basic earnings (loss) per common share        $  (.08)     $   .08      $  (.37)     $   .10   $   (.28)
Diluted earnings (loss) per common share      $  (.08)     $   .08      $  (.37)     $   .10   $   (.28)
<CAPTION>
Fiscal Year 1998
----------------
<S>                                           <C>          <C>          <C>          <C>       <C>
Net sales                                     $39,802      $28,785      $23,548      $24,367   $116,502
Gross margin                                    7,725        5,001        4,363        4,394     21,483
Earnings before income taxes                    5,178        2,198        2,143        2,347     11,866
Net earnings                                    1,774        1,379        1,366        1,867      6,386
Basic earnings per common share               $   .23      $   .18      $   .18      $   .24   $    .82
Diluted earnings per common share             $   .23      $   .17      $   .17      $   .23   $    .79
</TABLE>

                                      S-17
<PAGE>


                                                                   SCHEDULE II

                              GRADCO SYSTEMS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                    For the three years ended March 31, 1999
                             (Amounts in thousands)

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

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

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

Year ended March 31, 1997:
     Accounts receivable                      $   103     $   240       $   284      $     59
     Deferred income taxes                    $ 9,800     $   --        $   350      $  9,450
</TABLE>



                                      S-18