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

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FORM 10-K

(Mark One)

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

For the fiscal year ended March 31, 2002

OR

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

For the transition period from  to

Commission file number 0-12829

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

Nevada(State or other jurisdiction of
incorporation or organization)

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

92618(Zip Code)


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

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

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

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

Common Stock, No par value(Title of Class)

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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

The
aggregate market value of voting stock held by non-affiliates of the Registrant (based on the closing sales price of Gradco common stock on the OTCBB on June 14,
2002) was $1,100,664.

The
number of outstanding shares, net of treasury shares, of each class of the Registrant's common stock outstanding at June 14, 2002 was: common stock, no par
value6,879,148 shares.

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PART I

Item 1. Business

Gradco Systems, Inc. ("Gradco", the "Company" or the "Registrant") was originally incorporated in California on November 9, 1978. As previously
reported in the Registrant's Report on Form 10-K for the fiscal year ended March 31, 1992, the Registrant changed its state of incorporation to Nevada through a merger which
became effective April 3, 1992. The Registrant's principal offices are located at 39 Parker, Irvine, California and its telephone number is (949) 206-6100.

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







1

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Business of GJ



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

GJ's
products are marketed domestically and internationally primarily directly to OEMs for incorporation into their product lines. Principal OEM customers include Xerox, Fuji
Xerox, Panasonic and Kyocera Mita. Marketing in Asia is conducted by GJ, and marketing in North America is conducted by GU. Marketing in Europe is conducted by GJ and GU.

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

In
addition to marketing intelligent paper handling devices, GJ licenses technology to certain OEMs to produce products for license fees and/or royalties, and receives fees from
OEMs for research and development and customization contracts for its products. GJ's development engineering activities on behalf of OEMs include engineering, development and prototype
production of various paper handling devices. Such activities are now being outsourced due to the sharp curtailment of personnel employed by the Company.

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

2

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intelligent electronic digital copiers and page printers. Its ability to fulfill such contracts is dependent upon its ability to obtain support for such activities beyond the limits of its own
resources.

Products.GJ's products include certain automatic paper feeders and specialized output print stations. These include high
capacity sheet feeders applicable to a variety of laser printers, a specialized high capacity stacker for a high speed laser printer, a stacker for many low speed laser printers, a sheet invertor and
a sheet decurler for laser printers, facsimile machines and a specialized wide format printer. It has under development products for stapling, hole punching and booklet-making output from digital
copiers and printers. It is presently anticipated that these products will be introduced in fiscal 2003 if the development and tooling support is available to complete the development.



GTL, a 95% owned subsidiary, engages in diversified activities which do not principally involve paper handling devices, except that in December 2000 it
entered into an agreement providing marketing rights to a wide format printer produced by Mastermind Company (a Japanese Company). This agreement gave GTL exclusive marketing rights outside of Japan
for two years (and outside of Korea until September 30, 2001). GTL canceled this agreement and is presently in the process of liquidating this inventory totaling $309,000. The inventory has
been written down to its anticipated value by a charge of approximately $700,000, in the year ending March 31, 2002. It is anticipated that the Company will be completely out of this business
by the end of fiscal 2003. GTL's other activities consist of distribution of Dippin Dots Ice Cream.



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

GJ
has in the past developed new products or a variation of an existing product in consultation with an OEM which has agreed to pay for or share in the cost of the development work. GJ
then submitted a
prototype for evaluation to the OEM customer who could agree to purchase such product in commercial quantities and who may share tooling and initial production costs. In other cases, an OEM will
present GJ with a copier, printer or other product in the research and development stage and engage GJ (at the OEM's expense) to design a paper handling device to fit the OEM's specifications. Xerox,
a principal customer of the Company, has become reluctant to continue this practice.    Any unique interface designed to work only with an OEM's particular equipment may be exclusive to
the OEM; however, GJ retains ownership of the basic technology and any other technology developed by GJ for use in its business. GJ has also developed products at its own expense, based on its
evaluation of future market requirements. The extent to which GJ can finance such activities at this time is limited.

In
fiscal 2002, Fuji Xerox, Xerox and Xerox Ltd. accounted for 28%, 21% and 10%, respectively, of the Registrant's consolidated revenues. In fiscal 2001, Xerox, Fuji Xerox,
Xerox Ltd. and Panasonic accounted for 30%, 18%, 16% and 14%, respectively, of the Registrant's consolidated revenues. In fiscal 2000, Xerox, Panasonic, Xerox Ltd. and Kyocera Mita
accounted for 38%, 17%, 11% and 11%, respectively, of the Registrant's consolidated revenues. A loss of any of these current principal customers is likely to have a negative impact on the Registrant's
consolidated operations taken as a whole (see GJ Competition).

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

3

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Licenses.GJ has certain agreements and has granted certain licenses to others, described below, to manufacture products
using its technology. Most of these licenses were originally entered into before 1991 and the revenue from all licenses has continually been reduced. In the year ended March 31, 2002 such
licenses generated revenue of only $301,000.

In
exchange for a lump sum payment, the Registrant and a major OEM customer entered into a paid up, royalty-free, worldwide release and agreement not to assert against the
OEM most of the Registrant's patents relating to sorters existing at the time of the agreement. This agreement is limited to sorters made, used or sold by the OEM or its affiliates for use only with
certain products made by or for the OEM or its affiliates. In addition, this OEM has been granted a non-exclusive worldwide license on a royalty basis limited to certain sorter technology
and patent rights for use with certain products of the OEM or its affiliates. The Registrant and the OEM amended this license in 2002 to include additional defined sorters in exchange for a royalty
payable to the Registrant, in conjunction with the grant of royalty-free cross licenses between the Registrant and the OEM with respect to certain conflicting patent rights of the
Registrant in the United States and the OEM in Japan. With the shift from analog to digital equipment, the value to the Company and the revenue therefrom is expected to continue to shrink.

Other
licenses, with limited value, include a limited nonexclusive worldwide license for a lump sum payment and future royalties restricted to certain technology and patent rights for
use with certain products of the OEM or its affiliates, and a nonexclusive license in exchange for a lump sum payment and future royalties on certain limited sorter technology for use on copiers
manufactured by the OEM and certain sorters, which is territorially limited.

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

These
agreements generated royalty revenues of approximately $300,000 during the fiscal year ended March 31, 2002, $954,000 during the fiscal year ended March 31, 2001 and
$1,153,000 during the fiscal year ended March 31, 2000. These agreements allow GJ to receive additional revenues from certain OEMs while also selling products using this same technology
to other OEMS. The licensees are able to compete with GJ in some of GJ's customary markets to the limited extent set forth in such agreements. No licensee has the right to sublicense the technology to
non-affiliates.



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

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



GJ has an ongoing program of seeking patent protection for its technology. GJ holds numerous patents and patent applications (including those acquired by
assignment from Gradco as part of the sale of Copier Assets in fiscal 1991) relating principally to its sorters in the United States, United Kingdom, Japan, Germany, France, Switzerland and Canada.
The unexpired terms of the major U.S. sorter patents already issued range from 1 to 15 years. Patent applications are pending on most of GJ's recently introduced new
products,which address the digital copier market. Patents have been obtained or patent applications are pending in the United States and Japan relating
to GJ's paper stapling, punching, mailboxing and decurling technologies for digital copier and multi-function machines. During

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the fiscal year ending March 31, 2002,GJ has systematically allowed certain of its patents which do not cover current products to lapse.

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

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



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

Agreements
with the manufacturers for finished products provide for quality controls and inspection by GJ and its customers. GJ seeks to control product quality in a variety of ways. It
emphasizes initial inspection and testing of components. Each of GJ's product lines has a high commonality of parts, enabling GJ to effect certain economies of scale. Raw materials for GJ's products
are available from a number of sources to permit timely shipment of orders. Microprocessor programming and electronic assemblies are generally
proprietary,but certain OEMs may specify electronics. Tooling for most common parts is owned by GJ or its contract manufacturers, while a number
of OEMs own tooling for parts unique to models customized for their products.

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

Costs and Revenues of Development Engineering Services

In fiscal 2002, 2001 and 2000 the Registrant, on a consolidated basis, spent approximately $2,355,000, $9,178,000 and $1,483,000, 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 $502,000, $6,645,000 and $142,000, in fiscal 2002, 2001 and 2000, respectively. The Registrant, on a consolidated basis, also
received revenues from customers under development engineering service contracts of approximately $522,000, $5,509,000, and $142,000 in fiscal 2002, 2001 and 2000, respectively. The ability of the
Company to continue to expend resources on research and development is extremely limited. To continue even the 2002 level will require an assurance of short term revenue to enable it to obtain short
term financing.

Backlog

Registrant's order backlog from consolidated operations was estimated at approximately $3,700,000 at March 31, 2002 and $8,000,000 at March 31,
2001. 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). The sharp drop in backlog is an indication of the deterioration of the Company's market
for analog products and the absence of revenue from new digital products. Substantially all orders shown as backlog were scheduled for delivery within approximately 6 months. Because Gradco's
operating subsidiaries generally ship products upon specific

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

Employees

As of June 2002, Gradco and its subsidiaries employed 34 persons. To date, Gradco and its subsidiaries have encountered no difficulty in attracting and
retaining qualified employees. Gradco believes employee relations to be satisfactory.





Item 2. Description of Property.

Gradco shares its corporate offices with GU at 39 Parker, Irvine, California 92618. GJ's principal office is located in Tokyo, Japan.

Item 3. Legal Proceedings



Gradco and its (now former) president, Keith Stewart, were sued in an action filed in March 1988 in the United States District Court in Bridgeport,
Connecticut, by R. Clark DuBois ("DuBois"), a former employee of the Registrant. This case was settled in September 2000 with a payment of $3,200,000 which was charged to expense in the second
quarter of the fiscal year ended March 31, 2001.

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In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest customers, filed a petition in Japan along with five of its affiliates for
the Japanese equivalent of a Chapter XI Reorganization. The Company charged $5,543,000 to expense during fiscal year 1999. Mita's reorganization plan, approved by the court in January 2000,
made Mita a wholly-owned subsidiary of Kyocera Corporation and directed Mita to repay 18% of the unsecured creditors' debt over a period of 10 years. The Company recorded a
non-current receivable and a pre-tax credit to income in the year ended March 31, 2000 in the amount of $935,000, representing the present value of the
non-interest bearing payments to be received using an 8% discount rate. Installment payments were received in July 2000 and 2001. In fiscal 2002, GJ gave its approval to
Mita-Kyocera to prepay the remaining balance and take a .75% discount per annum. The final payment was received in February 2002.

Item 4. Submission of Matters to Vote of Security Holders

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

PART II

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





Quarter Ended

High

LowJune 30, 2000

$
2.59

$
1.38September 30, 2000

$
1.75

$
1.25December 31, 2000

$
1.75

$
0.63March 31, 2001

$
1.25

$
0.61June 30, 2001

$
0.90

$
0.35September 30, 2001

$
0.50

$
0.15December 31, 2001

$
0.29

$
0.18March 31, 2002

$
0.23

$
0.18








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Item 6. Selected Financial Data.

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

|                                                                                     |                                        | Year Ended March 31, |       
|------------------------------------------------------------------------------------ | -------------------------------------- | -------------------- | ------
|
|
|Statement of operations data:                                                        |                                        |                      |       
|Revenues                                                                             |                                        | $                    | 23,178
|                                                                                     |                                        |                      |       
|Costs and expenses:                                                                  |                                        |                      |       
|                                                                                     | Cost of sales                          |                      |       
|                                                                                     | Other operating expenses               |                      |       
|                                                                                     | Interest income, net                   |                      |       
|                                                                                     | Provision for doubtful Mita receivable |                      |       
|                                                                                     | DuBois/Hamma litigation settlements    |                      |       
|                                                                                     |                                        |                      |       
|                                                                                     |                                        |                      | 25,956
|                                                                                     |                                        |                      |       
|Earnings (loss) from continuing operations before income taxes and minority interest |                                        |                      | (2,778
|Income taxes                                                                         |                                        |                      | 1,319 
|Minority interest                                                                    |                                        |                      | (43   
|                                                                                     |                                        |                      |       
|Earnings (loss) from continuing operations                                           |                                        | $                    | (4,054
|Earnings (loss) from discontinued operations                                         |                                        |                      | (3,431
|                                                                                     |                                        |                      |       
|                                                                                     |                                        | Net earnings (loss)  |       
|                                                                                     |                                        |                      |       
|Basic earnings (loss) per common share:                                              |                                        |                      |       
|From continuing operations                                                           |                                        | $                    | (.59  
|From discontinued operations                                                         |                                        |                      | (.50  
|                                                                                     |                                        |                      |       
|                                                                                     |                                        | Net earnings (loss)  |       
|                                                                                     |                                        |                      |       
|Average shares outstanding, basic EPS                                                |                                        |                      | 6,891 
|                                                                                     |                                        |                      |       
|Diluted earnings (loss) per common share:                                            |                                        |                      |       
|From continuing operations                                                           |                                        | $                    | (.59  
|From discontinued operations                                                         |                                        |                      | (.50  
|                                                                                     |                                        |                      |       
|                                                                                     |                                        | Net earnings (loss)  |       
|                                                                                     |                                        |                      |       
|Average shares outstanding, diluted EPS                                              |                                        |                      | 6,891 
|                                                                                     |                                        |                      |       
|Balance sheet data:                                                                  |                                        |                      |       
|                                                                                     | Working capital                        |                      | $     
|                                                                                     | Total assets                           |                      |       
|                                                                                     | Long-term debt                         |                      |       
|                                                                                     | Shareholders' equity                   |                      |       

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

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technology, fluctuations in the rates of exchange of foreign currency and other risks and uncertainties over which the Registrant has little or no control.

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

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

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

Critical Accounting Policies

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

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

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, which generally occurs as services are performed. Licenses and royalties are recognized when all obligations of
the appropriate agreements have been fulfilled. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements". SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company adopted SAB 101 in fiscal 2001,
and it has not had a material effect on the Company's financial position or results of operations.

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Valuation Allowances.We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required.

We
record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation allowance.

Revenues

Revenues for the fiscal year ended March 31, 2002 decreased by $16,090,000 or 41%from the prior year. Net
sales decreased by $10,450,000 (31.9%), from $32,805,000 to $22,355,000, primarily representing the combined effect of a 54% decrease in unit sales and a weaker yen. The yen, which lost 12% against
the dollar for the year, caused a decrease of $2.3 million in revenues when yen denominated sales were translated into dollars. The decrease in unit sales was attributable to the shift from
analog to digital. Revenues from development engineering services decreased by $4,987,000 (91%), principally because fiscal 2001 amounts included customer funding of two significant programs discussed
below. Royalties decreased by $653,000 (68%) as the Company's principal royalty agreement with Canon expired in June 2001.

Revenues
for the fiscal year ended March 31, 2001 decreased by $4,761,000 from the year ended March 31, 2000. Net sales decreased by $9,928,000 (23.2%), from $42,733,000 to
$32,805,000, representing the combined effect of a $12,289,000 decrease in sales in the office automation market due to a 30% decrease in unit sales and increases in sales by GTL of $2,361,000. The
yen changed by less than 1% against the dollar for the year and therefore revenues derived from yen denominated sales were virtually unaffected when translated into dollars. Revenues from development
engineering services increased by $5,367,000, principally from customer funding of two new programs being developed by GJ.Royalties decreased by
$200,000.

The
decrease in revenue is the result of the overall transition in the office equipment industry from analog to digital equipment, which does not require the kind of
multi-bin sorters which the Company has produced and marketed, emphasis continues to be placed on design, development and marketing of paper handling products for the rapidly increasing
digital equipment market. It also is a result of the Company's inability to bring to fruition contracts for the sale of products which it developed for the digital market. The failure of GTL to enter
into profitable activities beyond the distribution of Dippin' Dots ice cream in Japan has resulted in a failure to fill this void.

Costs and Expenses

Gross margin on net sales was 18.6%, 27.0% and 26.1% in fiscal 2002, 2001 and 2000, respectively. The decrease in the 2002 fiscal year was primarily because fixed
manufacturing overhead costs could not be trimmed at the same pace as the decline in net sales and from inventory writedowns incurred due to the abandonment of a program to distribute a wide format
printer outside of Japan by GTL. Absent these one-time charges of approximately $700,000, gross margin in fiscal 2002 would have been 21.8%.

Research
and development expenses ("R&D") in fiscal 2002 totaled $2,355,000 (10.2% of revenues), compared to $9,178,000 (23.4% of revenues) in fiscal 2001 and $1,483,000 (3.4% of
revenues) in fiscal 2000. R&D expenses incurred under development engineering service contracts in the fiscal years ended March 31, 2002, 2001 and 2000, respectively, were $502,000, $6,645,000
and $142,000. The unusually high amount in fiscal 2001 was principally attributable to the aforementioned development engineering service contracts administered by GJ for its customers. R&D expenses

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incurred on behalf of internal R&D efforts were $1,853,000, $2,533,000 and $1,341,000 for the same periods. This expense level cannot continue in light of the Company's limited resources.

Selling,
general and administrative expenses ("SG&A") decreased by $1,385,000 (19.2%) in fiscal 2002 from the prior year. There was a decrease of $1,165,000 in SG&A at GJ and GTL, of
which approximately $600,000 was a result of the favorable translation caused by the weaker yen, and the balance was primarily due to a reduction in personnel. There was also $290,000 in stock-based
compensation expense in fiscal 2001 and none in the current fiscal year. SG&A decreased by $1,539,000 (17.6%) in fiscal 2001 from the prior year. The majority of this decrease ($957,000) was
attributable to the termination of GJ's retirement plan in fiscal 2000.

Foreign
currency gains were $110,000 and $293,000 in fiscal years 2002 and 2001, respectively, compared to a loss of $487,000 in fiscal year 2000. In fiscal 1999, the Registrant took a
$5,543,000 charge due to the bankruptcy petition filed by Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest customers. In fiscal 2000, Mita's reorganization plan was approved by the
bankruptcy court and Mita was directed to repay 18% of the unsecured creditors' debt over a period of 10 years. The Registrant recorded a pre-tax credit to income in the amount of
$935,000 in 2000 representing the present value of the non-interest bearing payments to be received. In fiscal 2001, the Registrant recorded a $3,200,000 charge for the settlement of the
DuBois litigation.

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

As a result of the above factors, earnings (loss) from continuing operations before income taxes and minority interest were ($2,778,000), $(3,568,000) and
$3,045,000 in fiscal 2002, 2001 and 2000, respectively. The tax provisions of $1,319,000 and $3,273,000 in fiscal 2002 and 2001, respectively, are primarily due to an increase in the valuation
allowance on deferred tax benefits associated with the net operating loss carryforwards ("NOLs") in Japan and the U.S. to reflect the uncertainty of the Company being able to utilize the NOLs before
they expire. The tax provision of $1,210,000 in fiscal 2000 primarily comprises foreign taxes on the earnings of GJ and state taxes on the earnings of GU.

As
discussed above, the Company has terminated the operations of Venture and now reflect its operating results as discontinued operations. The earnings (loss) from Venture's operations
was ($2,279,000), $23,000 and ($373,000) in fiscal 2002, 2001 and 2000, respectively. The $1,152,000 loss on
disposal of discontinued operations in 2002 comprises the writeoff of the Company's remaining goodwill related to Venture in the amount of $1,083,000 plus the estimated final shutdown costs.

Litigation

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

Hamma v. Gradco Systems Inc. et al.On December 17, 1998, following a federal District Court decision finding
that Gradco was liable to Mr. Hamma and Tenex, his transferee, for undetermined damages in connection with their release in 1982 of obligations of Gradco under an agreement providing royalties
based on Gradco revenue from Hamma inventions, the parties settled the matter before completion of the damages trial and any appeals. Pursuant to such settlement, Gradco paid $5,000,000 and issued
250,000 five-year warrants exercisable immediately, all of which are currently outstanding, to purchase shares of Gradco Systems, Inc. common stock at $4.00 per share. Gradco paid
$3,000,000 in cash at the date of closing, $1,000,000 on November 15, 1999 and $1,000,000 on November 15, 2000.

DuBois v. Gradco Systems Inc. et al.The federal case brought against the Company and its (now former) president,
Keith Stewart, in the U.S. District Court in Connecticut by R. Clark DuBois, a former employee of the Company, was settled before trial in September 2000. Pursuant to such

11

---

settlement, Gradco paid $3,200,000 to Mr. DuBois. The $3.2 million settlement or $.45 per share, was charged to expense in the second quarter of fiscal year 2001. Because the Company
has substantial net operating loss carryforwards for federal tax purposes, no tax benefits were recognized as a result of this charge.

Effects of Inflation

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

Liquidity and Capital Resources

Working capital at March 31, 2002 decreased by $4,298,000 to $4,386,000, from March 31, 2001 of $8,684,000, primarily as a result of the loss from
operations and unfavorable currency translation
adjustments, partially offset by the advanced payment of the Mita receivable and a redemption of life insurance policies, both of which were classified as non-current assets at
March 31, 2001.

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

Net
cash provided by investing activities in fiscal 2002 was $0.6 million, primarily representing the redemption of life insurance policies. Net cash used in investing activities
for acquisition of property and equipment was $0.1 million in both fiscal 2001 and 2000. In fiscal 2000, $0.2 million was used to purchase a license to sell Dippin' Dots ice cream in
Japan.

Net
cash used in financing activities was $0.1 million, $0.4 million and $1.3 million in fiscal 2002, 2001 and 2000, respectively, representing the purchase of
90,800 shares, 256,411 shares and 687,075 shares of treasury stock in the respective fiscal years.

Exchange
rate changes associated with a weaker yen in fiscal 2002 and 2001 caused decreases of $0.3 million and $1.1 million in cash, respectively, and an increase of
$1.1 million in cash was caused by a strengthening yen in fiscal 2000. At March 31, 2002, the Company had approximately $2.5 million in Japanese banks.

At
March 31, 2002, the Registrant had $3.6 million in cash and no long-term debt. The Registrant believes that its cash and credit facilities are adequate for
its short term needs. The Company believes its long term survival is dependent upon the development of relationships and sources of working capital to enable it to compete in the highly competitive
digital market.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interests rates. The Registrant
is exposed to certain levels of market risks, especially changes in foreign currency exchange rates. Interest rates currently have little effect on the Registrant since it has no debt.

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

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

Item 8. Financial Statements and Supplementary Data.

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

Item 9. Disagreements in Accounting and Financial Disclosure.

None.

12

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PART III

Item 10. Directors and Executive Officers of the Registrant.

(a)  The
following table sets forth the name of each director and executive officer of the Registrant, and the nature of all positions and offices with the Registrant held by
him at present. Unless otherwise indicated, the term of office of all directors and executive officers expires at the next annual meeting of stock-holders of the Registrant, which is expected to be
held in September 2002.

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

---

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

|Name                        |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Martin E. Tash,
Age 61      |  | Mr. Tash has been Chairman of the Board and Chief Executive Officer of the Registrant since October 1990, and President of the Registrant since October 1991. Until June 1998 Mr. Tash was also Chairman of the Board and
President of Plenum Publishing Corporation, a position he had held since July 1977. After the sale of Plenum to a third party Mr. Tash resigned.                                                                                                                                                                                                                                                                                                                                                                          
|Harland L. Mischler,
Age 70 |  | Mr. Mischler has been Chief Financial Officer and a director of the Registrant since October 1990, and Executive Vice President of the Registrant since October 1991. Mr. Mischler is a certified public accountant. Mr. Mischler served as Vice President,
 Controller and Treasurer of Hobart Corporation from 1966 to 1981. From 1981 to 1984 he was Vice President of Finance of Bausch & Lomb, Inc. At that time he purchased, with another, Applied Research Laboratories, Inc., an analytical instrument
company, in a leveraged buyout from Bausch & Lomb. After such company was sold profitably in 1987, Mr. Mischler founded HLM Capital Resources, Inc., a private investment and holding company of which he is President and Chairman.
|Bernard Bressler,
Age 74    |  | Mr. Bressler has been Secretary and director of the Registrant since October 1990 and Treasurer of the Registrant since April 1992. He has been a practicing attorney since 1952, and is presently a member of the firm of Bressler, Amery & Ross,
P.C., counsel to the Registrant. Mr. Bressler was also a director of Plenum Publishing Corporation until its sale.                                                                                                                                                                                                                                                                                                                                                                               
|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

13

---

|Robert J. Stillwell,
age 66      |  | Mr. Stillwell has been a director of the Registrant since October 1991. Mr. Stillwell owns and operates the Robert J. Stillwell Agency, Inc., an independent life and health insurance agency which he founded over 30 years ago, and he owns and operates
Nationwide Property Management, which handles diverse real estate investments in which he is involved. In 1985, Mr. Stillwell founded and is the principal owner of Service Concepts Unlimited, Inc. Mr. Stillwell is a director of Crusader Savings Bank
located in Rosemont, Pennsylvania.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Thomas J. Burger,
age 55         |  | Mr. Burger has been a director of the Registrant since October 1993. He is Associate Senior Vice President of NEC America, Inc. (a position he has held since July 1993), and is responsible for the sale and marketing of its business telephone systems
throughout the United States. Prior thereto, he was President and a director of two wholly-owned subsidiaries of NEC America Inc., which conducted the sales, installation and maintenance of NEC communication systems and networks throughout the
Central, South and Western United States. From August 1988 to December 1989 Mr. Burger was President and a director of Marcom Communications Inc. After he reorganized its telecommunication subsidiary, the subsidiary was sold to NEC America and he
became an employee of NEC. In July 1987 Mr. Burger founded Astra Services Inc., a computer company providing various software development services to the communications industry. Astra Services was sold profitably in 1992. From 1973 to 1987 Mr.
Burger was employed in various capacities by Telecom Plus International Inc., one of the major independent interconnect companies in the U.S. He became President in 1980, a position he held until May 1987 when the company was sold to Siemens
Communications.
|Masakazu (Mark) Takeuchi,
age 65 |  | Mr. Takeuchi has been a director of the Registrant since September 1997. He has been President and Chief Executive Officer of GJ since 1989 and a director of GJ since 1988. He is also President and a director of GU. He was Senior Vice President of
Far East Operations and New Business Development of the Registrant from August 1988 to October 1990. Mr. Takeuchi was also Chairman of GJ from August 1988 until December 1988. Previously, from 1961, Mr. Takeuchi was employed by C. Itoh & Co. Ltd.
in various positions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Item 11. Executive Compensation.

(a)Summary Compensation Table.



14

---



SUMMARY COMPENSATION TABLE

|Name and Principal Position           |  | Year |  | Salary and
Bonus($)(1)(2) |  | Securities
Underlying
Options(3)
|------------------------------------- |  | ---- |  | ------------------------- |  | --------------------------------
|Martin E. Tash(1)                     |  | 2002 |  | 125,000                   |  | 50,000                          
|Chairman of the Board,                |  | 2001 |  | 125,000                   |  | 100,000                         
|President and Chief Executive Officer |  | 2000 |  | 125,000                   |  |                                
|Masakazu (Mark) Takeuchi(2)           |  | 2002 |  | 273,404                   |  |                                
|President,                            |  | 2001 |  | 309,167                   |  | 78,000                          
|Gradco (Japan) Ltd.                   |  | 2000 |  | 307,125                   |  |                                

---

(b)Stock Option Plans.



15

---



UNEXERCISED OPTIONS AT FISCAL YEAR-END

|Name                        |  | Number of Securities
Unexercised
at Fiscal Year-End
Exercisable/
Unexercisable |  | Value of Unexercised
In-the-Money Options
at Fiscal Year-End
Exercisable/
Unexercisable($)
|--------------------------- |  | ------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------
|Martin E. Tash              |  | 112,500 / 37,500                                                               |  | None                                                                                      
|Masakazu (Mark) Takeuchi(1) |  | 64,500 / 13,500                                                                |  | None                                                                                      

---

(c)Retirement Plan (GJ).



(d)Compensation of Directors.



16

---



(e)Indemnification.



(f)Compensation Committee Interlocks and Insider Participation.



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 14, 2002 based on 6,879,148 shares of Common Stock, no par value, outstanding as of such date.

|Title of Class             |  | Name and Address of Beneficial Owner                                                                                                   |  | Amount and Nature
of Beneficial
Ownership |     | Percentage
of Class |     
|-------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | --- | ------------------- | ----
|Common Stock, no par value |  | Mitchell Partners, L.P.
and James E. Mitchell
c/o James E. Mitchell
General Partner
3187-D Airway Avenue,
Costa Mesa, California 92626 |  | 490,277                                   | (1) | 7.1                 | %(2)

---

(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

17

---

Summary Compensation Tablein Item 11(a), and all officers and directors as a group (6 persons), as of June 14, 2002.

|Title of Class             |  | Beneficial Owner                                                                       |  | Amount and Nature
of Beneficial
Ownership |     | Percentage
of Class(1) |  
|-------------------------- |  | -------------------------------------------------------------------------------------- |  | ----------------------------------------- | --- | ---------------------- | -
|Common Stock, no par value |  | Martin E. Tash                                                                         |  | 359,048                                   | (2) | 5.1                    | %
|                           |  | Harland L. Mischler                                                                    |  | 80,500                                    | (3) | 1.2                    | %
|                           |  | Bernard Bressler                                                                       |  | 29,273                                    | (4) | *                      |  
|                           |  | Robert J. Stillwell                                                                    |  | 28,975                                    | (5) | *                      |  
|                           |  | Thomas J. Burger                                                                       |  | 7,500                                     | (6) | *                      |  
|                           |  | Masakazu (Mark) Takeuchi                                                               |  | 64,500                                    | (6) | *                      |  
|                           |  | All Executive Officers and Directors as a Group (comprising the 6 persons shown above) |  | 569,796                                   | (7) | 8.1                    | %

---

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 2002 fiscal year, the Registrant paid legal fees and expenses of $49,925.47 to such firm.

18

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PART IV

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



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.


19

---

10.9

Gradco 1988 Stock Option Plan, incorporated by reference from Form 8-K for July 1, 1988, Exhibit 19.3, and amendment thereto dated July 24, 1991, incorporated by reference from Form 10-Q for quarter ended June 30, 1991,
Exhibit 19.2.10.10

Gradco 1997 Stock Option Plan, incorporated by reference from its Registration Statement on Form S-8 filed February 3, 1998, Exhibit 4.10.11

Amended Umbrella Agreement dated as of December 5, 1990 among Gradco, Gradco (Japan) Ltd. and Gradco (USA) Inc., incorporated by reference from Form 8-K for December 5, 1990, Exhibit 28.10.12

Agreement between Gradco and Gradco (Japan) Ltd. dated March 1, 1991, incorporated by reference from Form 8-K for March 1, 1991, Exhibit 28.10.13

Letter Agreement dated March 29, 1991 between Gradco Systems, Inc. and Gradco (Japan) Ltd., incorporated by reference from Form 10-K for the fiscal year ended March 31, 1991, Exhibit 10.31.10.14

Lease Agreement between Venture Engineering, Inc. and Aetna Life Insurance Company, Inc. (formerly Trammell Crow Company) dated October 1, 1988 and subsequent amendments dated July 1, 1989, August 1, 1989, February 1,
1990 and March 1, 1991, incorporated herein by reference from Form 10-K for fiscal year ended March 31, 1991, Exhibit 19.3.10.15

Basic Agreement between Gradco (Japan) Ltd. and Ikegami Tsushinki Co. Ltd. dated as of January 1, 1996 (English Translation of Japanese original), incorporated by reference from Form 10-K for fiscal year ended March 31, 1996,
Exhibit 10.16.10.16

Agreement between Gradco (Japan) Ltd. and Lexmark International, Inc. dated September 1, 1992, incorporated by reference from Form 10-K for the fiscal year ended March 31, 1993, Exhibit 10.22.10.17

Regulations of Retirement Allowance for Board of Directors and Auditors of Gradco Japan, adopted June 3, 1994 (English translation of Japanese original), incorporated by reference from Form 10-K for the fiscal year ended March 31, 1995,
 Exhibit 10.22.10.18

Agreement among Gradco (Japan) Ltd., Gradco (USA) Inc., and Xerox Canada Ltd. dated as of August 17, 1995, incorporated by reference from Form 10-K for fiscal year ended March 31, 1996, Exhibit 10.19.22

List of Significant Subsidiaries(i)      Gradco (Japan) Ltd. (Japan)(ii)    Gradco (USA) Inc. (California)23

Consent of PricewaterhouseCoopers LLP23.1

Consent of Grant Thornton LLP


20

---



SIGNATURES

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

|Dated: July 9, 2002 |  | GRADCO SYSTEMS, INC.
|------------------- |  | --------------------
|                    |  |                     
|                    |  | By:                 

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

|Signature                                 |  | Title                                                                                                       |  | Date        
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | ------------
|                                          |  |                                                                                                             |  |             
|/s/MARTIN E. TASHMartin E. Tash           |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)                  |  | July 9, 2002
|/s/HARLAND L. MISCHLERHarland L. Mischler |  | Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) and Director |  | July 9, 2002
|/s/BERNARD BRESSLERBernard Bressler       |  | Secretary, Treasurer and Director                                                                           |  | July 9, 2002
|/s/ROBERT J. STILLWELLRobert J. Stillwell |  | Director                                                                                                    |  | July 9, 2002
|/s/THOMAS J. BURGERThomas J. Burger       |  | Director                                                                                                    |  | July 9, 2002
|/s/MARK TAKEUCHIMark Takeuchi             |  | Director                                                                                                    |  | July 9, 2002

21

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FORM 10-KITEM 14(a)

GRADCO SYSTEMS, INC.

INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

|(1) | Financial Statements:                                                                    |  |     
|--- | ---------------------------------------------------------------------------------------- |  | ----
|    | Report of Independent Certified Public Accountants                                       |  | S-2 
|    | Report of Independent Accountants                                                        |  | S-3 
|    | Consolidated Balance SheetsMarch 31, 2002 and 2001                                      |  | S-4 
|    | Consolidated Statements of OperationsYears Ended March 31, 2002, 2001 and 2000          |  | S-5 
|    | Consolidated Statement of Shareholders' EquityYears Ended March 31, 2002, 2001 and 2000 |  | S-6 
|    | Consolidated Statements of Cash FlowsYears Ended March 31, 2002, 2001 and 2000          |  | S-7 
|    | Notes to Consolidated Financial Statements                                               |  | S-9 
|(2) | Financial Statement Schedule:                                                            |  |     
|    | IIValuation and Qualifying Accounts                                                     |  | S-22

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

S-1

---



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We
have audited the accompanying consolidated balance sheets of Gradco Systems, Inc. as of March 31, 2002 and 2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gradco Systems, Inc. as of March 31, 2002 and
2001, and the consolidated results of its operations and its consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of
America.

We
have also audited Schedule II for the years ended March 31, 2002 and 2001. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information therein.

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

/s/GRANT THORNTON LLP

Irvine,
California
June 5, 2002

S-2

---

REPORT OF INDEPENDENT ACCOUNTANTS

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

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

PricewaterhouseCoopers
LLP
Orange County, California
June 13, 2000, except for Note 3, as to which the date is June 28, 2002

S-3

---



GRADCO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS  (Dollars in thousands)

|                                                                                                                          |                                                                                                                                             | March 31,                  |       
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------
|
|ASSETS                                                                                                                    |                                                                                                                                            
|Current assets:                                                                                                           |                                                                                                                                             |                            |       
|                                                                                                                          | Cash and cash equivalents                                                                                                                   |                            | $     
|                                                                                                                          | Accounts receivable, less allowance for doubtful accounts of $175 and $72, respectively                                                     |                            |       
|                                                                                                                          | Inventories, net                                                                                                                            |                            |       
|                                                                                                                          | Deferred income taxes                                                                                                                       |                            |       
|                                                                                                                          | Other current assets                                                                                                                        |                            |       
|                                                                                                                          | Net assets of discontinued operations                                                                                                       |                            |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | Total current assets       |       
|Property and equipment, net                                                                                               |                                                                                                                                             |                            | 229   
|Cash surrender value of life insurance                                                                                    |                                                                                                                                             |                            | 278   
|Deferred income taxes                                                                                                     |                                                                                                                                             |                            |      
|Other assets                                                                                                              |                                                                                                                                             |                            | 3,074 
|Net assets of discontinued operations                                                                                     |                                                                                                                                             |                            |      
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | $                          | 14,665
|                                                                                                                          |                                                                                                                                             |                            |       
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                      |                                                                                                                                            
|Current liabilities:                                                                                                      |                                                                                                                                             |                            |       
|                                                                                                                          | Accounts payable                                                                                                                            |                            | $     
|                                                                                                                          | Notes payable to suppliers                                                                                                                  |                            |       
|                                                                                                                          | Accrued expenses                                                                                                                            |                            |       
|                                                                                                                          | Income taxes payable                                                                                                                        |                            |       
|                                                                                                                          | Net liabilities of discontinued operations                                                                                                  |                            |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | Total current liabilities  |       
|Non-current liabilities                                                                                                   |                                                                                                                                             |                            | 245   
|Excess of fair value of net assets acquired over cost, net of accumulated amortization of $1,800 and $1,400, respectively |                                                                                                                                             |                            |      
|Minority interest                                                                                                         |                                                                                                                                             |                            | 492   
|Commitments and contingencies (Note 9)                                                                                    |                                                                                                                                             |                            |      
|Shareholders' equity:                                                                                                     |                                                                                                                                             |                            |       
|                                                                                                                          | Preferred stock, no par value; authorized 7,500,000 shares, none issued                                                                     |                            |       
|                                                                                                                          | Common stock, no par value; authorized 30,000,000 shares, issued 7,913,434 shares; outstanding 6,879,148 and 6,969,948 shares, respectively |                            |       
|                                                                                                                          | Accumulated deficit                                                                                                                         |                            |       
|                                                                                                                          | Accumulated other comprehensive income                                                                                                      |                            |       
|                                                                                                                          | Less cost of common stock in treasury, 1,034,286 and 943,486 shares, respectively                                                           |                            |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | Total shareholders' equity |       
|                                                                                                                          |                                                                                                                                             |                            |       
|                                                                                                                          |                                                                                                                                             | $                          | 14,665
|                                                                                                                          |                                                                                                                                             |                            |       

See
accompanying notes to consolidated financial statements.

S-4

---



GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share amounts)

|                                                                                   |                     | For the years ended March 31, |       
|---------------------------------------------------------------------------------- | ------------------- | ----------------------------- | ------
|
|Revenues:                                                                          |                     |                               |       
|Net sales                                                                          |                     | $                             | 22,355
|Development engineering services                                                   |                     |                               | 522   
|Licenses and royalties                                                             |                     |                               | 301   
|                                                                                   |                     |                               |       
|                                                                                   |                     |                               | 23,178
|                                                                                   |                     |                               |       
|Costs and expenses:                                                                |                     |                               |       
|Cost of sales                                                                      |                     |                               | 18,191
|Research and development                                                           |                     |                               | 2,355 
|Selling, general and administrative                                                |                     |                               | 5,837 
|Foreign currency transaction (gains) losses                                        |                     |                               | (110  
|Recovery of doubtful Mita receivable                                               |                     |                               |      
|DuBois litigation settlement                                                       |                     |                               |      
|                                                                                   |                     |                               |       
|                                                                                   |                     |                               | 26,273
|                                                                                   |                     |                               |       
|Income (loss) from operations                                                      |                     |                               | (3,095
|Interest expense                                                                   |                     |                               | (1    
|Interest income                                                                    |                     |                               | 318   
|                                                                                   |                     |                               |       
|Income (loss) from continuing operations before income taxes and minority interest |                     |                               | (2,778
|Income tax expense                                                                 |                     |                               | 1,319 
|Minority interest                                                                  |                     |                               | (43   
|                                                                                   |                     |                               |       
|Income (loss) from continuing operations                                           |                     |                               | (4,054
|Income (loss) from discontinued operations                                         |                     |                               | (2,279
|Loss on disposal of discontinued operations                                        |                     |                               | (1,152
|                                                                                   |                     |                               |       
|                                                                                   | Net earnings (loss) |                               | $     
|                                                                                   |                     |                               |       
|Basic and diluted earnings (loss) per common share:                                |                     |                               |       
|From continuing operations                                                         |                     | $                             | (.59  
|From discontinued operations                                                       |                     |                               | (.50  
|                                                                                   |                     |                               |       
|                                                                                   | Net earnings (loss) |                               | $     
|                                                                                   |                     |                               |       
|Average shares outstanding, basic EPS                                              |                     |                               | 6,891 
|                                                                                   |                     |                               |       
|Average shares outstanding, diluted EPS                                            |                     |                               | 6,891 
|                                                                                   |                     |                               |       

See
accompanying notes to consolidated financial statements.

S-5

---



GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY  (Dollars in thousands)

|                                    |                         | Common Stock         |   |   |        | Accumulated
Other
Comprehensive
Income |   |         |        |   |      
|----------------------------------- | ----------------------- | -------------------- | - | - | ------ | -------------------------------------- | - | ------- | ------ | - | -----
|
|
|Balance at March 31, 1999           |                         | 7,910,934            |   | $ | 45,829 |                                        | $ | (26,162 | )      | $ | 1,363
|Components of comprehensive income: |                         |                      |   |   |        |                                        |   |         |        |   |      
|                                    | Net earnings            |                      |  |   |        |                                       |   |         | 1,480  |   |      
|                                    | Translation adjustments |                      |  |   |        |                                       |   |         |       |   |      
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      
|                                    |                         | Comprehensive income |   |   |        |                                        |   |         |        |   |      
|Exercise of stock options           |                         | 2,500                |   |   | 5      |                                        |   |        |        |   |     
|Stock-based compensation            |                         |                     |   |   | 330    |                                        |   |        |        |   |     
|Purchase of treasury stock          |                         |                     |   |   |       |                                        |   |        |        |   |     
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      
|Balance at March 31, 2000           |                         | 7,913,434            |   |   | 46,164 |                                        |   | (24,682 | )      |   | 3,240
|Components of comprehensive income: |                         |                      |   |   |        |                                        |   |         |        |   |      
|                                    | Net loss                |                      |  |   |        |                                       |   |         | (6,734 | ) |      
|                                    | Translation adjustments |                      |  |   |        |                                       |   |         |       |   |      
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      
|                                    |                         | Comprehensive loss   |   |   |        |                                        |   |         |        |   |      
|Stock-based compensation            |                         |                     |   |   | 290    |                                        |   |        |        |   |     
|Purchase of treasury stock          |                         |                     |   |   |       |                                        |   |        |        |   |     
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      
|Balance at March 31, 2001           |                         | 7,913,434            |   |   | 46,454 |                                        |   | (31,416 | )      |   | 1,982
|Components of comprehensive income: |                         |                      |   |   |        |                                        |   |         |        |   |      
|                                    | Net loss                |                      |  |   |        |                                       |   |         | (7,485 | ) |      
|                                    | Translation adjustments |                      |  |   |        |                                       |   |         |       |   |      
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      
|                                    |                         | Comprehensive loss   |   |   |        |                                        |   |         |        |   |      
|Purchase of treasury stock          |                         |                     |   |   |       |                                        |   |        |        |   |     
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      
|Balance at March 31, 2002           |                         | 7,913,434            |   | $ | 46,454 |                                        | $ | (38,901 | )      | $ | 1,344
|                                    |                         |                      |   |   |        |                                        |   |         |        |   |      

See
accompanying notes to consolidated financial statements.

S-6

---



GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)

|                                      |                                                                                                                                 | For the years ended March 31,                          |                                          
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | -----------------------------------------
|
|Cash flows from operating activities: |                                                                                                                                 |                                                        |                                          
|                                      | Net earnings (loss) from continuing operations                                                                                  |                                                        | $                                        
|                                      |                                                                                                                                 |                                                        |                                          
|                                      | Adjustments to reconcile net earnings (loss) from continuing operations to net cash provided by (used in) operating activities: |                                                        |                                          
|                                      |                                                                                                                                 | Depreciation                                           |                                          
|                                      |                                                                                                                                 | Amortization                                           |                                          
|                                      |                                                                                                                                 | Unrealized foreign currency transaction (gains) losses |                                          
|                                      |                                                                                                                                 | Deferred income taxes                                  |                                          
|                                      |                                                                                                                                 | Provision for losses on accounts receivable            |                                          
|                                      |                                                                                                                                 | Provision for inventory write-down                     |                                          
|                                      |                                                                                                                                 | Loss on sale of property and equipment                 |                                          
|                                      |                                                                                                                                 | Stock-based compensation                               |                                          
|                                      |                                                                                                                                 | Installment portion of Hamma litigation settlement     |                                          
|                                      |                                                                                                                                 | Minority interest                                      |                                          
|                                      |                                                                                                                                 | Decrease (increase) in accounts receivable             |                                          
|                                      |                                                                                                                                 | (Increase) decrease in inventories                     |                                          
|                                      |                                                                                                                                 | Decrease (increase) in other current assets            |                                          
|                                      |                                                                                                                                 | Decrease (increase) in other assets                    |                                          
|                                      |                                                                                                                                 | (Decrease) increase in accounts payable                |                                          
|                                      |                                                                                                                                 | (Decrease) increase in notes payable to suppliers      |                                          
|                                      |                                                                                                                                 | (Decrease) increase in accrued expenses                |                                          
|                                      |                                                                                                                                 | (Decrease) increase in income taxes payable            |                                          
|                                      |                                                                                                                                 | (Decrease) increase in other liabilities               |                                          
|                                      |                                                                                                                                 |                                                        |                                          
|                                      |                                                                                                                                 |                                                        | Total adjustments                        
|                                      |                                                                                                                                 |                                                        |                                          
|                                      |                                                                                                                                 |                                                        | Net cash (used in) provided by operations
|                                      |                                                                                                                                 |                                                        |                                          
|Cash flows from investing activities: |                                                                                                                                 |                                                        |                                          
|                                      | Redemption of life insurance policies                                                                                           |                                                        |                                          
|                                      | Redemption of investments                                                                                                       |                                                        |                                          
|                                      | Acquisition of property and equipment                                                                                           |                                                        |                                          
|                                      | Proceeds from sale of property and equipment                                                                                    |                                                        |                                          
|                                      | Acquisition of Dippin' Dots license                                                                                             |                                                        |                                          
|                                      |                                                                                                                                 |                                                        |                                          
|                                      |                                                                                                                                 | Net cash provided by investing activities              |                                          
|                                      |                                                                                                                                 |                                                        |                                          

S-7

---

|Cash flows from financing activities:                                           |                                             |                                       |        |     |      |        |      |      |        |       
|------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------ | --- | ---- | ------ | ---- | ---- | ------ | ------
|                                                                                | Acquisition of treasury stock               |                                       |        | (51 | )    |        | (361 | )    |        | (1,255
|                                                                                | Proceeds from exercise of stock options     |                                       |        |    |      |        |     |      |        | 5     
|                                                                                |                                             |                                       |        |     |      |        |     
|                                                                                |                                             | Net cash used in financing activities |        |     | (51  | )      |      | (361 | )      |       
|                                                                                |                                             |                                       |        |     |      |        |     
|Effect of exchange rate changes on cash                                         |                                             |                                       | (333   | )   |      | (1,140 | )    |      | 1,055  |       
|                                                                                |                                             |                                       |        |     |      |        |     
|Net (decrease) increase in cash and cash equivalents from continuing operations |                                             |                                       | (4,698 | )   |      | (3,389 | )    |      | 896    |       
|Net increase (decrease) in cash from discontinued operations                    |                                             |                                       | 504    |     |      | (1,028 | )    |      | (1,111 | )     
|                                                                                |                                             |                                       |        |     |      |        |     
|Net decrease in cash and cash equivalents                                       |                                             |                                       | (4,194 | )   |      | (4,417 | )    |      | (215   | )     
|Cash and cash equivalents at beginning of year                                  |                                             |                                       | 7,791  |     |      | 12,208 |      |      | 12,423 |       
|                                                                                |                                             |                                       |        |     |      |        |     
|Cash and cash equivalents at end of year                                        |                                             | $                                     | 3,597  |     | $    | 7,791  |      | $    | 12,208 |       
|                                                                                |                                             |                                       |        |     |      |        |     
|Supplemental Disclosures of Cash Flow Information:                              |                                             |                                       |        |     |      |        |      |      |        |       
|                                                                                | Cash paid (refunded) during the period for: |                                       |        |     |      |        |      |      |        |       
|                                                                                |                                             | Interest                              |        | $   | 1    |        | $    | 1    |        | $     
|                                                                                |                                             | Income taxes                          |        |     | (124 | )      |      | (90  | )      |       

See
accompanying notes to consolidated financial statements.

S-8

---



GRADCO SYSTEMS, INC.    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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

Principles of Consolidation

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

Use of Estimates in the Preparation of Financial Statements

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

Concentrations of Credit Risk

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

Inventories

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

Property and Equipment

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

S-9

---

Long-lived Assets

The excess of cost over acquired net assets ("goodwill"), which pertained to Venture and was written off during fiscal 2002 as part of the discontinued operation
charges, was being amortized over a period of forty years. Other intangible assets are amortized over the estimated periods to be benefited, which is generally five years. Intangible assets are
reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that the book value of an asset may not be recoverable. The Company records impairment to the extent
that fair value (using future undiscounted cash flows) is less than the carrying value of the asset. See the discussion underRecent Accounting Pronouncements.

Revenue Recognition

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

Research and Development Expenses

Research and development expenses incurred on behalf of OEM customers and internal research and development are reflected in research and development expense.
These expenses amounted to $2,355,000, $9,178,000 and $1,483,000 in the fiscal years ended March 31, 2002, 2001 and 2000, respectively.

Foreign Currency Translation

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

Net Earnings (loss) Per Share(EPS)

Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted
EPS reflects the potential dilution that could occur if stock options and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. There is no difference in average shares outstanding between diluted and basic in fiscal years 2002 and 2001 because there were net losses.
Potentially dilutive securities that were excluded from the computation of earnings (loss) per share were 453,000, 464,500, and 446,493, in 2002, 2001, and 2000, respectively. For all periods
presented, the net earnings available to common shareholders is the same for both basic and diluted EPS and is equal to the net earnings stated in the Consolidated Statements of Operations. A
reconciliation of the average number of outstanding shares

S-10

---

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

|                                        |               | Fiscal Year
|--------------------------------------- | ------------- | -----------
|
|Average shares outstanding, basic EPS   |               | 6,891      
|Effect of dilutive securities:          |               |            
|                                        | Stock options |            
|                                        |               |            
|Average shares outstanding, diluted EPS |               | 6,891      
|                                        |               |            

Income Taxes

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

Reclassifications

Certain reclassifications have been made to the fiscal 2001 and 2000 consolidated financial statements to conform to the fiscal 2002 presentation.

Recent Accounting Pronouncements

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

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

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

Management
does not expect the implementation of these pronouncements to have a material impact on the Company's financial position or results of operations. The Company is required to
adopt each of these standards in fiscal 2003.

NOTE 2REALIZATION OF ASSETS

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than provided, cash

S-11

---

in its operations and has experienced a significant reduction in its sales volume. These factors raise substantial doubt about the Company's ability to continue as a going concern.

In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is
dependent upon continued operations of the company, which in turn is dependent upon growth of revenues and the success of future operations. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in
existence.

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

NOTE 3DISCONTINUED OPERATIONS

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

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

S-12

---

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

|                                    |                                            | For the years ended March 31, |       
|----------------------------------- | ------------------------------------------ | ----------------------------- | ------
|
|Net sales                           |                                            | $                             | 5,564 
|Development engineering services    |                                            |                               | 113   
|                                    |                                            |                               |       
|                                    |                                            |                               | 5,677 
|                                    |                                            |                               |       
|Cost of sales                       |                                            |                               | 6,112 
|Research and development            |                                            |                               | 243   
|Selling, general and administrative |                                            |                               | 1,571 
|Interest, net                       |                                            |                               | 29    
|                                    |                                            |                               |       
|                                    |                                            |                               | 7,955 
|                                    |                                            |                               |       
|Income (loss) before income taxes   |                                            |                               | (2,278
|Income tax expense (benefit)        |                                            |                               | 1     
|                                    |                                            |                               |       
|                                    | Income (loss) from discontinued operations |                               | $     
|                                    |                                            |                               |       

The
net assets (liabilities), excluding cash of $116,000 and $80,000 as of March 31, 2002 and 2001, respectively, of the discontinued operations of Venture included in the
accompanying consolidated balance sheets as of March 31, 2002 and 2001 are as follows (dollars in thousands):

|                                                            |  | March 31,
2002 |     | March 31,
2001 |  
|----------------------------------------------------------- |  | -------------- | --- | -------------- | -
|Accounts receivable, net                                    |  | $              | 55  |                | $
|Inventories                                                 |  |                |    |                |  
|Other assets                                                |  |                | 30  |                |  
|Accounts payable                                            |  |                | (61 | )              |  
|Accrued expenses                                            |  |                | (10 | )              |  
|Income taxes payable                                        |  |                | (5  | )              |  
|Estimated costs related to disposal                         |  |                | (68 | )              |  
|                                                            |  |                |     |                |  
|Net assets (liabilities) of discontinued operations-current |  | $              | (59 | )              | $
|                                                            |  |                |     |                |  
|Excess of cost over acquired net assets, net                |  | $              |    |                | $
|Furniture, fixtures and equipment, net                      |  |                |    |                |  
|                                                            |  |                |     |                |  
|Net assets of discontinued operations-noncurrent            |  | $              |    |                | $
|                                                            |  |                |     |                |  

S-13

---



NOTE 4MITA BANKRUPTCY

In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest customers, filed a petition in Japan along with five of its affiliates for
the Japanese equivalent of a Chapter XI Reorganization. The Company established an allowance for the full amount of Mita's indebtedness to Gradco as of the bankruptcy date. The amount charged to
expense during fiscal year 1999 was $5,543,000. Mita's reorganization plan, approved by the court in January 2000, made Mita a wholly-owned subsidiary of Kyocera Corporation and directed Mita
to repay 18% of the unsecured creditors' debt over a period of 10 years. These payments to the Company had a gross value of approximately $1.3 million since the yen had strengthened
against the dollar since the bankruptcy filing. The Company recorded a non-current receivable and a pre-tax credit to income in the amount of $935,000, representing the present
value of the non-interest bearing payments to be received using an 8% discount rate. Payments of approximately $111,000 and $300,000 were received in July 2001 and 2000,
respectively. In fiscal 2002, GJ gave its approval to Mita-Kyocera to prepay the remaining balance and take a .75% discount per annum. The final payment of $511,000 was received in
February 2002.

NOTE 5TREASURY STOCK

In fiscal 2000, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in March 1999. That program
authorizes the Company to purchase up to two million common shares from time to time on the open market. The Company purchased 90,800, 256,411 and 687,075 shares at aggregate costs of $51,000,
$361,000 and $1,255,000 during fiscal years 2002, 2001 and 2000, respectively. No shares have been purchased since June 2001.

NOTE 6DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

|                                       |                 | March 31,
|-------------------------------------- | --------------- | ---------
|
|
|Inventories are summarized as follows: |                 |          
|                                       | Raw materials   |          
|                                       | Finished goods  |          
|                                       |                 |          
|                                       | Net inventories |          
|                                       |                 |          

S-14

---

Inventory
reserves for excess and obsolete inventories were $377,000 and $105,000 in fiscal 2002 and 2001, respectively.

|Property and equipment, at cost, are summarized as follows: |                                       |                                           |       |       |       |      
|----------------------------------------------------------- | ------------------------------------- | ----------------------------------------- | ----- | ----- | ----- | -----
|                                                            | Office, shop and automotive equipment |                                           | $     | 175   |       | $    
|                                                            | Computer equipment                    |                                           |       | 531   |       |      
|                                                            | Leasehold improvements                |                                           |       | 156   |       |      
|                                                            | Tooling                               |                                           |       | 2,178 |       |      
|                                                            |                                       |                                           |       |      
|                                                            |                                       |                                           | 3,040 |       |       | 3,293
|                                                            | Less:                                 |                                           |       |       |       |      
|                                                            |                                       | Accumulated depreciation and amortization |       |       | 2,811 |      
|                                                            |                                       |                                           |       |      
|                                                            |                                       | $                                         | 229   |       | $     | 336  
|                                                            |                                       |                                           |       |      
|                                                            |                                       |                                           |       |       |       |      

|                                                   |                                                 | March 31,
|-------------------------------------------------- | ----------------------------------------------- | ---------
|
|
|Other assets are summarized as follows:            |                                                 |          
|                                                   | Non-Refundable Tooling Advances                 |          
|                                                   | Deposits                                        |          
|                                                   | Investments                                     |          
|                                                   | Mita receivable                                 |          
|                                                   | Canon license                                   |          
|                                                   | Distribution license for Dippin' Dots ice cream |          
|                                                   | Other                                           |          
|                                                   |                                                 |          
|                                                   |                                                 | $        
|                                                   |                                                 |          
|Non-current liabilities are summarized as follows: |                                                 |          
|                                                   | Accumulated benefit obligation                  |          
|                                                   | Other                                           |          
|                                                   |                                                 |          
|                                                   |                                                 | $        
|                                                   |                                                 |          

NOTE 7INCOME TAXES

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

Fiscal Year2002

2001

2000CurrentForeign

$
11

$
19

$
14Federal


(8
)

6


State


183


144


233DeferredForeign


70


2,847


477Federal


1,063


257


486Total

$
1,319

$
3,273

$
1,210


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

S-15

---

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

Fiscal Year2002

2001

2000Tax provision (benefit) at U.S. statutory tax rate

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

(3.3
)
2.6

5.0Foreign tax expense

27.1

24.5

5.6Stock-based compensation



2.8

3.8Change in valuation allowance

58.4

93.2

(5.2
)Other

0.3

3.6

(4.5
)47.5
%
91.7
%
39.7
%


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

March 31,2002

2001Deferred tax assetsRetirement benefits

$


$
674Mita bad debt recovery





92Local taxes





20Other





43Tax loss carryforwards


14,276


11,871Valuation allowance


(14,276
)

(10,871
)$


$
1,829


At
March 31, 2002, the Company had federal net operating loss carryforwards ("NOLs") for tax reporting purposes of $32,768,000 which will expire in 2003 through 2022 if not
utilized. These NOLs are utilizable by Gradco Systems, Inc. and its subsidiary, GU. GJ and its subsidiary also have NOLs in the amount of 891,964,000 Yen ($6,694,000) which will expire in the
future. At this time it is not deemed likely that these NOLs can be utilized and therefore a valuation allowance has been established. If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of net operating loss carryforwards which can be utilized.

The
Company does not provide for U.S. income taxes on undistributed foreign earnings considered permanently invested in its Japanese operations. At March 31, 2002, the Company's
share of such undistributed foreign earnings totaled $11,000,000. Foreign withholding taxes of approximately $1,100,000 would be due upon remittance of these earnings.

S-16

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NOTE 8EMPLOYEE BENEFITS

In August 2000, the Board of Directors of the Company approved the adoption of the 2000 Stock Option Plan (the "2000 Plan") offering Incentive Stock
Options ("ISOs") and Non-Qualified Stock Options ("NQSOs"). The 2000 Plan was approved by the Company's shareholders at the annual meeting held on September 22, 2000. A maximum of
700,000 shares of the Company's common stock have been reserved for issuance pursuant to the 2000 Plan. Options may be granted only to officers, key employees, directors or consultants of the Company
or any of its subsidiaries. The Board reserved options for 267,500 shares to replace NQSOs issued and still outstanding under the 1997 Stock Option Plan (the "1997 Plan") which was terminated at that
time. The replacement options carried terms identical to the previously issued options. Under the 1997 Plan, options for 312,000 shares were granted during September 1997 at an exercise price
of $6.00 per share below fair market value of the common stock on the date of grant. This difference was recorded ratably as compensation expense during the period September 1997 through
February 2001, the vesting period of the options. Stock-based compensation expense of $290,000 and $330,000 is included in selling, general and administrative expenses for the years ended
March 31, 2001 and 2000, respectively. Options for 153,500 and 125,000 were granted during fiscal year 2002 and 2001, respectively, at prices equal to the fair market value at the dates of
grant. No options were granted in fiscal year 2000.

The
Company's 1988 Stock Option Plan has 11,500 options outstanding. Such options are exercisable in increments over periods at a price equal to the fair market value at the date of
grant.

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

The
following table summarizes stock option activity:

Number

Weighted
Average
Exercise PriceOutstanding March 31, 1999

459,000

$
2.86Exercised

(2,500
)

2.00Expired or cancelled

(10,000
)

2.00Outstanding March 31, 2000

446,500


2.88Granted

125,000


1.62Expired or cancelled

(107,000
)

4.55Outstanding March 31, 2001

464,500


2.16Granted

153,500


.39Expired or cancelled

(165,000
)

2.60Outstanding March 31, 2002

453,000

$
1.40


Of the options outstanding at March 31, 2002, 2001 and 2000, options to purchase 264,625, 342,000 and 376,250 shares, respectively, were
exercisable at weighted average prices of $1.40, $2.35 and $3.03 per share, respectively.

The
following table summarizes information concerning currently outstanding and exercisable stock options as of March 31, 2002:

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$0.33 to 0.52 |  | 153,500             |  | 9.3                
|1.50          |  | 80,500              |  | 8.5                
|2.00          |  | 187,500             |  | 5.6                
|2.38 to 3.38  |  | 31,500              |  | 5.1                
|              |  |                     |  |                    
|              |  | 453,000             |  |                    
|              |  |                     |  |                    

S-17

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The Company's Japanese subsidiary had a retirement plan for its management which provided for a lump sum payment to be made to each eligible
individual at his retirement date. The payment was based on a formula that factored in length of service, position held and salary at the time of retirement. In an effort to reduce operating expenses
in future years, GJ management agreed to terminate the retirement plan at the end of fiscal year 2000. In return, the Company and GJ agreed to vest the then due amount to be paid upon actual
retirement and GJ agreed to loan to each individual an amount equal to 80% of his vested benefit. The loans, which bear interest at a nominal rate, must be repaid at the time of retirement when the
accrued benefit will be paid. The Company expensed the unamortized prior service cost during the third quarter of fiscal year 2000. This special charge amounted to $693,000. The amount charged to
expense, including the special charge, in fiscal year 2000 was $957,000. The Company has recorded the loan as a reduction of the deferred compensation obligation, which totaled $245,000 and $501,000
at March 31, 2002 and 2001 respectively

The
Company's domestic subsidiary has a 401(k) employee benefit plan. All employees are eligible for the plan upon the completion of one month of service with the Company. As part of the
plan, the Company may match a portion of employee contributions or make an additional contribution contingent upon the Company's annual earnings performance. In fiscal years 2002, 2001 and 2000, the
Company contributed $31,000, $25,000 and $25,000, respectively, to the plan.

NOTE 9COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain equipment under non-cancelable leases. Under the lease agreements for its facilities, the Company is
required to pay for insurance, taxes, utilities and building maintenance and is subject to certain consumer price index adjustments. Future minimum lease payments at March 31, 2001, under
non-cancelable facility and equipment leases with remaining lease terms in excess of one year are as follows:

Year ending March 31,2003

$
274,0002004


182,0002005


5,0002006


3,000Thereafter


$
464,000


Rent
expense was approximately $682,000, $759,000 and $816,000 for fiscal years 2002, 2001 and 2000, respectively.

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

Hamma v. Gradco Systems Inc. et al.On December 17, 1998, following a federal District Court decision finding
that Gradco was liable to Mr. Hamma and Tenex, his transferee, for undetermined damages in connection with their release in 1982 of obligations of Gradco under an agreement providing royalties
based on Gradco revenue from Hamma inventions, the parties settled the matter before completion of the damages trial and any appeals. Pursuant to such settlement, Gradco paid $5,000,000 and issued
250,000 five-year warrants exercisable immediately, all of which are currently outstanding, to purchase shares of Gradco Systems, Inc. common stock at $4.00 per share. Gradco paid
$3,000,000 in cash at the date of closing, $1,000,000 on November 15, 1999 and $1,000,000 on November 15, 2000.

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

S-18

---



NOTE 10SEGMENT INFORMATION

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

|                              |  | Paper
Handling
Devices |        | New
Technology/
Products |   | Corporate |   | Discontinued
Operations |        | Intersegment
& Corporate
Eliminations |   | Consolidated |  
|----------------------------- |  | ---------------------- | ------ | ------------------------ | - | --------- | - | ----------------------- | ------ | ------------------------------------- | - | ------------ | -
|Fiscal Year 2002              |  |                        |        |                          |   |           |   |                         |        |                                       |   |              |  
|Revenues                      |  | $                      | 20,711 |                          | $ | 2,467     |   | $                       |       |                                       | $ |             |  
|Interest income               |  |                        | 567    |                          |   |          |   |                         | 1      |                                       |   |             |  
|Interest expense              |  |                        | 1      |                          |   |          |   |                         | 250    |                                       |   |             |  
|Depreciation and amortization |  |                        | 93     |                          |   | 44        |   |                         | (378   | )                                     |   |             |  
|Income tax expense            |  |                        | 318    |                          |   | 1         |   |                         | 1,000  |                                       |   |             |  
|Net loss                      |  |                        | (1,842 | )                        |   | (1,103    | ) |                         | (1,109 | )                                     |   | (3,431       | )
|Assets                        |  |                        | 28,075 |                          |   | 970       |   |                         | 5,400  |                                       |   | 116          |  
|Fiscal Year 2001              |  |                        |        |                          |   |           |   |                         |        |                                       |   |              |  
|Revenues                      |  | $                      | 36,596 |                          | $ | 2,813     |   | $                       |       |                                       | $ |             |  
|Interest income               |  |                        | 600    |                          |   |          |   |                         | 40     |                                       |   |             |  
|Interest expense              |  |                        | 1      |                          |   |          |   |                         | 225    |                                       |   |             |  
|Depreciation and amortization |  |                        | 76     |                          |   | 40        |   |                         | (357   | )                                     |   |             |  
|DuBois litigation settlement  |  |                        |       |                          |   |          |   |                         | 3,200  |                                       |   |             |  
|Income tax expense            |  |                        | 3,056  |                          |   | 1         |   |                         | 216    |                                       |   |             |  
|Net earnings (loss)           |  |                        | (1,380 | )                        |   | (1,275    | ) |                         | (4,103 | )                                     |   | 24           |  
|Assets                        |  |                        | 42,093 |                          |   | 1,091     |   |                         | 7,577  |                                       |   | 2,273        |  
|Fiscal Year 2000              |  |                        |        |                          |   |           |   |                         |        |                                       |   |              |  
|Revenues                      |  | $                      | 43,721 |                          | $ | 308       |   | $                       |       |                                       | $ |             |  
|Interest income               |  |                        | 443    |                          |   |          |   |                         | 89     |                                       |   |             |  
|Interest expense              |  |                        | 1      |                          |   |          |   |                         | 155    |                                       |   |             |  
|Depreciation and amortization |  |                        | 203    |                          |   | 36        |   |                         | (357   | )                                     |   |             |  
|Income tax expense            |  |                        | 720    |                          |   |          |   |                         | 490    |                                       |   |             |  
|Net earnings (loss)           |  |                        | 3,357  |                          |   | (308      | ) |                         | (1,196 | )                                     |   | (373         | )
|Assets                        |  |                        | 42,004 |                          |   | 1,071     |   |                         | 8,937  |                                       |   | 2,249        |  

S-19

---

Geographic
data follows (in thousands):

|                 |                   | United
States |   | Japan  |  | Belgium |        | Consolidated
|---------------- | ----------------- | ------------- | - | ------ |  | ------- | ------ | ------------
|Fiscal Year 2002 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 8,991  |  | $       | 14,108 |             
|                 | Long-lived assets |               |   | 53     |  |         | 3,525  |             
|Fiscal Year 2001 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 19,281 |  | $       | 19,928 |             
|                 | Long-lived assets |               |   | 73     |  |         | 5,154  |             
|Fiscal Year 2000 |                   |               |   |        |  |         |        |             
|                 | Revenues          |               | $ | 24,983 |  | $       | 19,004 |             
|                 | Long-lived assets |               |   | 342    |  |         | 4,457  |             

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

Fiscal Year2002

2001

2000Fuji Xerox

28
%
18
%
N/AXerox

21
%
30
%
38
%Xerox Ltd.

10
%
16
%
11
%Panasonic

N/A

14
%
17
%Kyocera Mita

N/A

N/A

11
%


S-20

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NOTE 11INTERIM FINANCIAL RESULTS (Unaudited)

The following table summarizes the unaudited quarterly results of operations for fiscal years 2002 and 2001.

|                                                               |  | Quarter |        |   |  
|-------------------------------------------------------------- |  | ------- | ------ | - | -
|
|
|Fiscal Year 2002                                               |  |         |        |   |  
|Revenues                                                       |  | $       | 7,779  |   | $
|Costs and expenses, including interest                         |  |         | 8,425  |   |  
|Loss from continuing operations before income taxes            |  |         | (646   | ) |  
|Loss from discontinued operations                              |  |         | (405   | ) |  
|Net loss                                                       |  |         | (1,048 | ) |  
|Basic and diluted loss per common share                        |  | $       | (.15   | ) | $
|Fiscal Year 2001                                               |  |         |        |   |  
|Revenues                                                       |  | $       | 10,739 |   | $
|Costs and expenses, including interest                         |  |         | 10,209 |   |  
|Earnings (loss) from continuing operations before income taxes |  |         | 530    |   |  
|Income (loss) from discontinued operations                     |  |         | 100    |   |  
|Net earnings (loss)                                            |  |         | 360    |   |  
|Basic and diluted earnings (loss) per common share             |  | $       | .05    |   | $

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

During
the three months ended March 31, 2002, the Company recorded an increase to its inventory reserve of $248,000 for excess and obsolete inventories. In addition, the Company reduced certain
accrued liabilities that totaled $180,000 for the three months ended March 31, 2002.

S-21

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SCHEDULE II

GRADCO SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS

For the three years ended March 31, 2002
(Amounts in thousands)

|                                                                                     |                       | Balance at
Beginning
of Year |   | Additions
Charged to
Costs and
Expenses |  | Deductions
and Currency
Translation
Adjustments |       | Balance
at End
of Year
|------------------------------------------------------------------------------------ | --------------------- | ---------------------------- | - | --------------------------------------- |  | ----------------------------------------------- | ----- | ----------------------
|Valuation reserve deducted in the balance sheets from the asset to which it applies: |                       |                              |   |                                         |  |                                                 |       |                       
|Year ended March 31, 2002:                                                           |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                     | Accounts receivable   |                              | $ | 72                                      |  | $                                               | 109   |                       
|                                                                                     | Deferred income taxes |                              | $ | 10,871                                  |  | $                                               | 3,454 |                       
|                                                                                     | Inventories           |                              | $ | 105                                     |  | $                                               | 272   |                       
|Year ended March 31, 2001:                                                           |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                     | Accounts receivable   |                              | $ | 70                                      |  | $                                               | 4     |                       
|                                                                                     | Deferred income taxes |                              | $ | 8,453                                   |  | $                                               | 2,649 |                       
|                                                                                     | Inventories           |                              | $ | 0                                       |  | $                                               | 105   |                       
|Year ended March 31, 2000:                                                           |                       |                              |   |                                         |  |                                                 |       |                       
|                                                                                     | Accounts receivable   |                              | $ | 6,450                                   |  | $                                               | 4     |                       
|                                                                                     | Deferred income taxes |                              | $ | 8,602                                   |  | $                                               | 131   |                       

S-22

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