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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2002

OR

For the transition period from                              to                             

Commission file number 0-12829

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

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

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

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

Common Stock, No par value
(Title of Class)

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

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

        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.

PART I

Item 1. Business

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

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

(a)

Financial Information About Industry Segments.

        Gradco and its subsidiaries operate primarily in one industry segment, the design, development, production and marketing of intelligent paper handling devices and high technology short-run products. It is seeking diversification and has entered into an agreement to distribute Dippin Dots ice cream in Japan. The Company had distribution rights for a wide format printer outside of Japan which has not generated significant revenue through March 31, 2002. The Company is presently in the process of liquidating its wide format printer inventory. The joint venture to purchase and resell electronic components was determined not to be viable and has therefor been discontinued. Revenues from the sale of Dippin Dots ice cream were approximately $2.5 million in fiscal year 2002. Information relating to revenue, net earnings and identifiable assets attributable thereto for the fiscal years ended March 31, 2002, 2001, and 2000 is set forth in response to Item 8 below.

(b)

Narrative Description of Business.

        Gradco is a holding company which conducts business as follows:

(i)

Copier and Printer Product Business

        The various activities comprising these businesses, as described below, are conducted through Gradco's 97%-owned Japanese subsidiary Gradco (Japan) Ltd. ("GJ"), and Gradco's wholly-owned domestic subsidiary Gradco (USA) Inc. ("GU"). GU is engaged only in marketing and sales activities in the United States with eight employees.

        Sales by GJ of sorter products to the convenience analog copier market currently account for approximately 40% of the Registrant's consolidated revenues. This market can be expected to deteriorate further with the continuing replacement of analog products with digital products. In addition, GJ also has derived revenue from selected technology licenses and agreements with original equipment manufacturers and marketers ("OEMs"), and from research and development activities conducted by GJ through outside sources on behalf of its OEM customers.

        Due to the overall transition in the office equipment industry from analog to digital equipment which does not require the kind of multi-bin sorters which the Company has produced and marketed, the Company's principal activity involves the design, development and marketing of paper handling products for the digital equipment market. In addition, GJ has a 95% owned subsidiary, Gradco Technology Ltd. ("GTL") which seeks to engage in a variety of diversified businesses. Since March 1, 2000 GTL has distributed Dippin' Dots ice

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cream in Japan. Other activities of GTL have either been discontinued or failed. It is still exploring other business opportunities.

(ii)

High Technology Engineering And Manufacturing Services

        The Company's subsidiary, Venture Engineering, Inc. based in Carrollton, Texas ("Venture") was involved with engineering and manufacturing activities primarily for the semi-conductor industry and other electronic device manufacturers. These industries were negatively affected by the downturn in the worldwide economy. A number of customers cancelled orders and delayed deliveries, causing Venture to incur continuing losses of an unacceptable magnitude. 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. However, Venture will not be dissolved until all collections of its receivables and obligations of third parties relating to inventory have been resolved. 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.

Business of GJ

General

        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

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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.

Diversified Activities

        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.

GJ Marketing and Customers

        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.

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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 Competition

        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 Patents and Proprietary Technology

        GJ has an ongoing program of seeking patent protection for its technology. GJ holds numerous patents and patent applications (including those acquired by assignment from Gradco as part of the sale of Copier Assets in fiscal 1991) relating principally to its sorters in the United States, United Kingdom, Japan, Germany, France, Switzerland and Canada. The unexpired terms of the major U.S. sorter patents already issued range from 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 agreements to protect GJ's technology with each of its key technical employees and past employees.

GJ Production and Assembly

        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.

(c)

Financial Information about Geographic Areas

        For the fiscal year ended March 31, 2002, $8,991,000 or 39% of the Registrant's consolidated revenues were attributed to sales in the United States and $14,187,000 or 61% were attributed to foreign countries ($14,108,000 to Japan). For the fiscal year ended March 31, 2001, $19,281,000 or 49% of the Registrant's consolidated revenues were attributed to the United States and $19,987,000 or 51% were attributed to foreign countries ($19,928,000 to Japan). For the fiscal year ended March 31, 2000, $24,983,000 or 57% of the Registrant's consolidated revenues were attributed to the United States and $19,046,000 or 43% were attributed to foreign countries ($19,004,000 to Japan). The Registrant attributes its revenues to countries based on the location of the subsidiary's office generating the sale. In its foreign sales, the Registrant is subject to the usual risks of international trade, including political instability, restrictive trade policies, controls on fund transfers and foreign currency fluctuations.

        The Registrant's sales are primarily denominated in Japanese yen and United States dollars. In order to limit the risk of foreign currency exchange fluctuations, the Registrant attempts to buy and sell products and services in the same currency. However, there are foreign currency exchange gains and losses associated with some sales transactions. The Registrant had foreign currency gains of $110,000 and $293,000 in fiscal years 2002 and 2001, respectively, and a loss of $487,000 in fiscal year 2000, arising from changes in the relationship of the yen and dollar during each of those years. The Registrant has an agreement with Xerox whereby they share with the Company gains and losses arising from Xerox business with the Company based on predetermined yen to dollar relationships on an annual basis. The amount for fiscal year 2002 was not recorded in that year. The amount of the gain to the Company is approximately $140,000 and will be recorded when received.

        Financial information regarding foreign and domestic operations is set forth in Note 10 of Notes to the Consolidated Financial Statements.

Item 2. Description of Property.

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

Item 3. Legal Proceedings

DuBois v. Gradco Systems, Inc. et al.

        Gradco and its (now former) president, Keith Stewart, were sued in an action filed in March 1988 in the United States District Court in Bridgeport, Connecticut, by 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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Bankruptcy of Mita Industrial Co., Ltd.

        In August 1998, Mita Industrial Co. Ltd. ("Mita"), one of GJ's largest customers, filed a petition in Japan along with five of its affiliates for the Japanese equivalent of a Chapter XI Reorganization. The Company 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.

(a)

Market Information.

        Gradco common stock is traded in the over-the-counter market and is quoted on the NASD Bulletin Board under the symbol GRCO. The following table sets forth the quarterly high and low closing sales prices from April 1, 2000 to March 31, 2002.

(b)

Holders.

        The approximate number of holders of record of Gradco common stock, no par value (its sole class of common equity) as of the close of business on June 14, 2002 is 611.

(c)

Dividends.

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

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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.

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.

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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.

*

Term expires at ordinary general shareholders meeting of GJ for fiscal 2002.

        (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.

13

Item 11. Executive Compensation.

        (a)  Summary Compensation Table.

        The following table sets forth all compensation awarded to, earned by or paid to the following persons through June 14, 2002 for services rendered in all capacities to the Registrant and its subsidiaries during each of the fiscal years ended March 31, 2002, 2001 and 2000: (1) the Registrant's Chief Executive officer, and (2) each of the other executive officers whose total

14

compensation for the fiscal year ended March 31, 2002 required to be disclosed in column (c) below exceeded $100,000:

SUMMARY COMPENSATION TABLE

(1)

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

(2)

With regard to Mr. Takeuchi, the amounts shown in this column represent compensation for services as an executive officer of GJ. See note (1) in Item 10(a). All such compensation was paid in yen by GJ and is translated into dollars at each year's average annual exchange rates in the above table. When measured in yen the compensation was the same for all three fiscal years.

(3)

Represents the number of shares of common stock issuable upon the exercise of options granted to the named officer pursuant to the 2000 Stock Option Plan (see below) during each fiscal year including options granted as a replacement for options originally granted under the Company's 1997 stock option plan. See 3(b)(i) and 3(b)(ii) below.

        (b)  Stock Option Plans.

        (i)    Gradco has a 1988 Stock Option Plan (the "1988 Plan") which provides for the grant of options which either do or do not qualify as "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code. Any officer, director or key employee of Gradco or any of its subsidiaries, in the discretion of the Stock Option Committee, may be designated to receive options under this plan. The 1988 Plan, which provided for the issuance of up to 350,000 shares of Gradco common stock upon exercise of stock options, was terminated on May 25, 1998 in accordance with its terms. Thus, no additional options may be granted thereunder, but the termination does not affect the validity of outstanding options. Currently, options for 11,500 shares are outstanding under the 1988 Plan.

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

        (ii)  On September 11, 1997, the Board of Directors adopted the Registrant's 1997 Stock Option Plan (the "1997 Plan") which provided for the grant of options which do not qualify as "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code. In August 2000 the Board of Directors terminated the Plan and granted to option holders under such Plan options under the 2000 Plan under terms identical to the previously granted 1997 options.

        (iii)  In August 2000, the Board of Directors approved the adoption of a 2000 Stock Option Plan offering Incentive Stock Options ("ISO's") and Non-Qualified Stock Options ("NQSO's").

15

This Plan was approved by the Registrant's stockholders at the annual meeting held on September 22, 2000. The plan provided for 700,000 shares and the Board reserved 267,500 shares to replace NQSO's previously granted under the 1997 plan. As of June 14, 2002 there are 423,250 options outstanding under this plan owned by employees of the Company. The plan is administered by the Board of Directors.

        Including options replacing options previously granted under the 1997 Stock Option Plan, options for 228,000 shares were granted to executive officers named in the Summary Compensation Table (above) under the 2000 Stock Option Plan and no options were exercised by said executive officers under either stock option plan.

        The following table sets forth the number of shares underlying unexercised options held by the foregoing executive officers at March 31, 2002 together with the value of such options as of March 31, 2002.

UNEXERCISED OPTIONS AT FISCAL YEAR-END

(1)

Mr. Takeuchi is the Chief Executive Officer of Gradco (Japan) Ltd.

        (c)  Retirement Plan (GJ).

        In June 1994, GJ adopted a retirement plan providing that, subject to approval by GJ's shareholders at the time of proposed payment, a retirement allowance be paid by GJ to a member of GJ management who retires after his term of office or by reason of reaching his mandatory retirement age. The amount of the retirement allowance is determined by a formula multiplying (1) the monthly salary at the time of retirement, by (2) the number of years served, by (3) a factor which varies depending upon the office held by the eligible individual. Mr. Takeuchi is eligible for a payment under this Plan upon his retirement. In an effort to reduce operating expenses in future years, GJ management agreed to terminate the retirement plan at the end of fiscal year 2000. In return, the Company and GJ agreed to vest the then due amount to be paid upon actual retirement and GJ agreed to loan to him an amount equal to 80% of his vested benefit at year end. The loan, which bears interest at a nominal rate, must be repaid at the time of retirement when the accrued benefit will be paid. Mr. Takeuchi's vested benefit is ¥103,000,000 ($733,000) at March 31, 2002.

        (d)  Compensation of Directors.

        Each director who is not also an officer receives a fee of $1,250 for each quarter in a fiscal year during which he serves in such position. Accordingly, Mr. Stillwell and Mr. Burger each received $5,000 for the 2002 fiscal year.

        Martin E. Tash (the Registrant's President and Chairman of the Board) received $125,000 in cash for special services rendered to the Registrant as a director during the fiscal year ended March 31, 2002. This amount is included in the Summary Compensation Table in Item 11(a) above.

16

        HLM Capital Resources, Inc., a closely-held corporation controlled by Harland L. Mischler (the Registrant's Executive Vice President and Chief Financial Officer) received $70,000 in cash for providing to the Registrant special services rendered by Mr. Mischler as a director during the fiscal year ended March 31, 2002.

        All directors (and Messrs. Tash, Mischler and Bressler in their capacity as officers as well) are eligible to receive options under the 2000 Stock Option Plan. See table in Item 10(b) as to options held by Messrs. Tash and Takeuchi as of March 31, 2002. As of that date, Mr. Mischler held options for 46,000 shares and Messrs. Stillwell and Burger each held options for 7,500 shares.

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

        (e)  Indemnification.

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

        (f)    Compensation Committee Interlocks and Insider Participation.

        The Registrant's Board of Directors has no compensation committee (or other Board committee performing equivalent functions); compensation policies applicable to executive officers are determined by the Board. During the fiscal year ended March 31, 2002, the officers of the Registrant participating in the Board's deliberations concerning executive compensation were Martin E. Tash, Harland L. Mischler and Bernard Bressler (who are members of the Board).

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

        (a)  The following table sets forth information regarding persons known to the Registrant to be the beneficial owners of more than 5% of the Registrant's voting securities as of June 14, 2002 based on 6,879,148 shares of Common Stock, no par value, outstanding as of such date.

(1)

As set forth in Schedule 13D, dated October 4, 2001, James E. Mitchell is the sole general partner of Mitchell Partners with sole control over all matters relating to investment and voting control. Mitchell Partners is in the securities investment business.

(2)

Mitchell Partners owns 488,277 shares and James E. Mitchell owns 2,000 shares all of which are subject to the sole power to vote and sole power to dispose of James E. Mitchell.

        (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 Table in Item 11(a), and all officers and directors as a group (6 persons), as of June 14, 2002.

*

Less than 1%

(1)

In each instance where a named individual is listed as the holder of a currently exercisable option, the shares which may be acquired upon exercise thereof have been deemed outstanding for the purpose of computing the percentage of outstanding shares owned by such person, but not for the purpose of computing the percentage owned by any other person, except the group referred to in note (7).

(2)

Includes 84,952 shares owned by Mr. Tash under a private profit sharing plan for the benefit of Mr. Tash who is the trustee and sole lifetime beneficiary and retains voting power, 86,559 shares owned by Mr. Tash jointly with his wife and 75,037 shares owned directly by Mr. Tash. Also includes currently exercisable options granted to Mr. Tash to purchase 112,500 shares of the Registrant's stock.

(3)

Includes 52,000 shares owned directly by HLM Capital Resources, Inc., a private investment and holding corporation, of which Mr. Mischler is President, Chairman and major shareholder, and 17,000 shares owned directly by Mr. Mischler. Also includes currently exercisable options granted to Mr. Mischler to purchase 11,500 shares of the Registrant's stock.

(4)

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

(5)

Includes 27,100 shares held for Mr. Stillwell in an individual retirement account, and 1,875 shares which may be acquired upon the exercise of currently exercisable options.

(6)

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

(7)

The number of shares and percentage owned includes 197,875 shares which may be acquired through exercise of currently exercisable options held by certain of such persons individually named. The number of outstanding shares used in computing the percentage of ownership by the group includes such shares.

Item 13. Certain Relationships and Related Transactions

        Bernard Bressler, Secretary, Treasurer and a director of the Registrant, is a member of the law firm of Bressler, Amery & Ross, P.C., counsel to the Registrant. During the 2002 fiscal year, the Registrant paid legal fees and expenses of $49,925.47 to such firm.

18

PART IV

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

(a)

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



(b)

8-K Reports-:



1.

March 23, 2001—Notification of Change of Accountants



2.

April 6, 2001—Amendment to include letter from prior Accountants.




(c)

Exhibits:

19

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.

        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.

21

FORM 10-K—ITEM 14(a)

GRADCO SYSTEMS, INC.

INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

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)

See accompanying notes to consolidated financial statements.

S-4

GRADCO SYSTEMS, INC.

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

See accompanying notes to consolidated financial statements.

S-5

GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)

See accompanying notes to consolidated financial statements.

S-6

GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

S-7