SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

For Quarter Ended ~~September~~June 30, ~~2002~~ 2003 Commission file number 0-12829

GRADCO SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

39 Parker, Irvine, California		92618
(Address of principal executive offices)		(Zip Code)

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

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes No ý

Applicable Only to Corporate Issuers:

Indicate the number of shares outstanding of each of the issuer’s ~~classes of common stock, as of the latest practicable date:~~

Class		Number of Shares Outstanding at September 30, 2002
Common Stock, without par value		228,971

classes of common stock, as of the latest practicable date:

			Number of Shares Outstanding
	Class		at July 31, 2003
	Common Stock, without		229,026
	par value

GRADCO SYSTEMS, INC.

INDEX

Part I. Financial Information:
Part I. FINANCIAL INFORMATION
	Consolidated Balance Sheets at September 30, 2002 (Unaudited) and March 31, 2002
Item 1.	Financial Statements
	Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2002 and September 30, 2001 (Unaudited)
Consolidated Balance Sheets at June 30, 2003 (Unaudited) and March 31, 2003
	Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2002 and September 30, 2001 (Unaudited)
Consolidated Statements of Operations for the Three Months Ended June 30, 2003 and June 30, 2002 (Unaudited)
	Notes to Unaudited Consolidated Financial Statements
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2003 and June 30, 2002 (Unaudited)
	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Notes to Unaudited Consolidated Financial Statements
	Quantitative and Qualitative Disclosures About Market Risk
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II. Other Information
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signature

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

GRADCO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30, 2002			March 31, 2002
	June 30,			March 31,
	2003			2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	32,~~571~~193		$	32,~~597~~719
Accounts receivable, net of allowance for doubtful accounts of $73 and $175	4,938			6,242
Restricted cash	1,000			1,000
Inventories, net	1,034			964
Accounts receivable, less allowance for doubtful accounts of $214 and $212, respectively	5,374			4,092
Other current assets	620			281
Inventories, less allowance for obsolescence of $334 and $354, respectively	866			714
Total current assets	10,163			11,084
Prepaid expenses and refundable deposits	547			438
Property and equipment, net	229			229
Total current assets	9,980			8,963
Cash surrender value of life insurance	304			278
Property and equipment, net	245			160
Other assets	2,767			3,074
Cash surrender value of life insurance	252			251
	$	13,463		$	14,665
Other assets	1,130			1,270
	$	11,607		$	10,644
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,~~485~~442		$	21,~~059~~372
Notes payable to suppliers	2,749			3,238
Note payable to bank	418			416
Accrued expenses	1,272			1,004
Notes payable to suppliers	2,937			3,350
Income taxes payable	309			338
Accrued expenses	204			166
Net liabilities of discontinued operations	54			59
Income taxes payable	260			261
Total current liabilities	5,869			6,698
Net liabilities of discontinued operations	53			79
Non-current liabilities	265			245
Total current liabilities	6,314			5,644
Minority interest	480			492
Deferred compensation obligation	329			328
Shareholders’ equity:
Common stock, no par value; authorized 30,000,000 shares, issued 264,150 shares	46,454			46,454
Common stock, no par value; authorized 30,000,000 shares, issued 264,205 shares	46,454			46,454
Accumulated deficit	(4041,~~069~~954		)	(3842,~~901~~225		)
Accumulated other comprehensive income	2,~~132~~133			12,~~344~~112
Less cost of common stock in treasury, 35,179 shares and 34,495 shares, respectively	(1,668		)	(1,667		)
Less cost of common stock in treasury, 35,179 shares	(1,669		)	(1,669		)
Total shareholders’ equity	64,~~849~~964			74,~~230~~672
	$	1311,~~463~~607		$	1410,~~665~~644

See accompanying notes to consolidated financial statements.

GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

	Three Months Ended						~~Six Months Ended~~
	September 30,			September 30,			September 30,			September 30,
	June 30,			June 30,
	2002			2001			2002			2001
	2003			2002
Revenues:
Net sales	$	45,~~053~~318		$	54,~~655~~664		$	~~8,411~~		$	~~13,276~~
Development engineering services	58741			—375			~~433~~			—
Licenses and royalties	42			~~113~~5			9			~~271~~
	4,115			5,768			8,853			13,547
	6,061			5,044
Costs and expenses:
Cost of sales	34,~~340~~650			43,~~278~~477			~~6,711~~			~~10,289~~
Research and development	9125			~~474~~395			~~486~~			~~1,354~~
Selling, general and administrative	1,~~265~~141			1,~~468~~431			~~2,696~~			~~3,045~~
Foreign currency transaction losses	249			93304			~~328~~			~~106~~
	4,720			6,313			10,221			14,794
	5,825			5,607
Loss from operations	(605		)	(545		)	(1,368		)	(1,247		)
Income (loss) from operations	236			(563		)
Interest expense	(15		)	—			(1		)	(1		)
Interest income	65			457			13			~~102~~
Loss from continuing operations before income taxes and minority interest	(600		)	(500		)	(1,356		)	(1,146		)
Income (loss) from continuing operations before income taxes and minority interest	236			(556		)
Income tax expense (benefit)	(1		)	1,009			—			1,009
Income tax expense	2			1
Minority interest	(8—		)	(1422		)	~~(35~~		)	~~(17~~		)
Loss from continuing operations	(591		)	(1,495		)	(1,321		)	(2,138		)
Income (loss) from continuing operations	234			(535		)
Income (loss) from discontinued operations	153			(293		)	153			(698		)
Income from discontinued operations	37			—
Estimated loss on disposal of discontinued operations, including provision for operating losses through disposal date	—			(2,733		)	—			(2,733		)
Net income (loss)	$	271		$	(535	)
Net loss	$	(438	)	$	(4,521	)	$	(1,168	)	$	(5,569	)
Basic and diluted income (loss) per common share:
Basic and diluted loss per common share:
Continuing operations	$	1.02		$	(2.33	)
Continuing operations	$	(2.58	)	$	(6.51	)	$	(5.76	)	$	(9.28	)
Discontinued operations	.16			—
Discontinued operations	.67			(13.17		)	.67			(14.89		)
Total	$	1.18		$	(2.33	)
Total	$	(1.91	)	$	(19.68	)	$	(5.09	)	$	(24.17	)
Weighted average shares outstanding, basic and diluted	229,026			229,710
Average shares outstanding, basic and diluted EPS	229,254			229,665			229,453			230,452

See accompanying notes to consolidated financial statements.

GRADCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended
	Three Months Ended
	September 30,				September 30,
	June 30,			June 30,
	2002				2001
	2003			2002
Cash flows from operating activities:
Loss from continuing operations	$		(1,321	)	$		(2,138	)
Income (loss) from continuing operations	$	234		$	(535	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
Adjustments to reconcile income (loss) from continuing operations to net cash used in operating activities:
Depreciation	349			16	44
Amortization	3920			19	~~(160~~			)
Loss on sale of property and equipment	18				—
Provision for losses on accounts receivable	1			1
Deferred income taxes	—				1,009
Provision for inventory write-down	1			—
Provision for loss on inventories	139				—
Minority interest	—			(22		)
(Recoveries of) provision for losses on accounts receivable	(98			)	2
(Increase) decrease in accounts receivable	(1,269		)	592
Minority interest	(35			)	(17			)
Increase in inventories	(150		)	(117		)
Decrease in accounts receivable	1,814				5,510
Increase in prepaid expenses and refundable deposits	(109		)	(13		)
Increase in inventories	(139			)	(898			)
Decrease in other assets	132			509
Increase in other current assets	(323			)	(475			)
Increase (decrease) in accounts payable	1,064			(415		)
Decrease in other assets	785				578
(Decrease) increase in notes payable to suppliers	(426		)	141
Decrease in accounts payable	(742			)	(2,417			)
Increase (decrease) in accrued expenses	38			(458		)
Decrease in notes payable to suppliers	(793			)	(1,852			)
Decrease in income taxes payable	(1		)	—
Increase (decrease) in accrued expenses	279				(104			)
Decrease in other liabilities	—			(26		)
Decrease in income taxes payable	(29			)	(9			)
Total adjustments	(690		)	227
Decrease in other liabilities	(4			)	(166			)
Net cash used in operating activities	(456		)	(308		)
Total adjustments	945				1,045
Cash flows from investing activities:
Net cash used in operating activities	(376			)	(1,093			)
Acquisition of property and equipment	(93		)	(23		)
Cash flows from investing activities:
Net cash used in investing activities	(93		)	(23		)
Acquisition of property and equipment	(39			)	(11			)
Effect of exchange rate changes on cash	12			286
Proceeds from sale of property and equipment	5				—
Net decrease in cash and cash equivalents from continuing operations	(537		)	(45		)
Net cash used in investing activities	(34			)	(11			)
Net increase in cash and cash equivalents from discontinued operations	11			55
Cash flows from financing activities:
Net (decrease) increase in cash and cash equivalents	(526		)	10
Acquisition of treasury stock	(1			)	(51			)
Cash and cash equivalents at beginning of period	2,719			3,597
Net cash used in financing activities	(1			)	(51			)
Cash and cash equivalents at end of period	$	2,193		$	3,607
Effect of exchange rate changes on cash	237				235
Supplemental Disclosures of Cash Flow Information:
Net decrease in cash and cash equivalents from continuing operations	(174			)	(920			)
Cash paid during the period for:
Net increase (decrease) in cash from discontinued operations	148				(21			)
Interest	$	5		$	—
Net decrease in cash and cash equivalents	(26			)	(941			)
Income taxes	$	3		$	—
Cash and cash equivalents at beginning of period	3,597				7,791
Cash and cash equivalents at end of period	$	3,571			$	6,850
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	1			$	1
Income taxes	29				9

See accompanying notes to consolidated financial statements.

GRADCO SYSTEMS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: INTERIM ACCOUNTING POLICY AND STOCK-BASED COMPENSATION

TheInterim accompanying consolidatedAccounting financial statements include the accounts of Gradco Systems, Inc. and its wholly and majority-owned subsidiaries (the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.Policy

InThe ~~the opinion of the Company’s management, the~~ accompanying unaudited consolidated financial statements include ~~all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of~~ the ~~financial~~accounts ~~position~~ of ~~the~~Gradco ~~Company at September 30~~Systems, ~~2002~~Inc. and ~~the~~its ~~results~~wholly ~~of operations~~ and ~~cash~~majority-owned ~~flows~~subsidiaries ~~for~~ (the ~~three and six months ended September 30, 2002 and 2001~~ “Company”). ~~Although~~All ~~the Company believes that the~~significant ~~disclosures~~intercompany inbalances ~~these financial statements are adequate to make the information presented not misleading, certain information~~ and ~~footnote~~transactions ~~disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles~~ have been ~~condensed~~eliminated orin ~~omitted pursuant to the rules and regulations of the Securities and Exchange Commission~~consolidation. ~~Results of operations for interim periods are not necessarily indicative of results of operations to be expected for the full year.~~

~~The~~In ~~financial~~the opinion of the Company’s management, the information furnished herein reflects all known accruals and adjustments (which include only normal recurring adjustments) ~~included~~necessary infor ~~this~~a ~~quarterly~~fair ~~report~~presentation ~~should~~of bethe ~~read~~financial inposition ~~conjunction~~of ~~with~~the Company at June 30, 2003 and the results of operations and cash flows for the three months ended June 30, 2003 and 2002. Although ~~consolidated~~the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and ~~related~~footnote ~~notes~~disclosures ~~thereto~~normally included in ~~the~~financial ~~Company’s~~statements prepared in accordance with generally accepted accounting principles have been condensed or ~~Annual~~omitted ~~Report~~pursuant onto ~~Form~~the ~~10-K~~rules ~~for~~and regulations of the ~~fiscal~~Securities ~~year~~and ~~ended~~Exchange Commission. Results ~~March~~of ~~31,~~operations ~~2002~~for interim periods are not necessarily indicative of results of operations to be expected for the full year.

~~NOTE~~The ~~2: REALIZATION~~financial OFinformation included ~~ASSETS~~in this quarterly report should be read in conjunction with the consolidated financial statements and related notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

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

InThe ~~view~~Company accounts offor ~~the~~stock-based ~~matters~~compensation as prescribed by APB Opinion No. 25, ~~described~~Accounting infor ~~the~~Stock ~~preceding~~issued ~~paragraph~~to Employees, ~~recoverability~~and, ofeffective aMarch ~~major~~31, ~~portion~~2003, has adopted Statement of ~~the~~Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS ~~recorded~~148”) ~~asset~~that ~~amounts~~supercedes ~~shown~~SFAS in123, ~~the~~Accounting ~~accompanying~~for ~~balance~~Stock-Based ~~sheets~~Compensation. SFAS is148 ~~dependent upon~~requires ~~continued~~pro ~~operations~~forma disclosures of net income and net income per share as if the ~~Company,~~fair ~~which~~value inbased ~~turn~~method isof accounting ~~dependent~~for ~~upon~~stock-based awards had been applied for both employee and non-employee grants. It also requires ~~growth~~disclosure of ~~revenues~~option ~~and~~status ~~the~~on ~~success~~a ofmore ~~future~~prominent ~~operations~~and frequent basis. The ~~consolidated~~Company ~~financial~~accounts ~~statements~~for dostock options and warrants issued to non-employees based on the fair value method, but has not ~~include~~elected ~~any~~this ~~adjustments~~treatment ~~relating~~for grants to employees and board members. Under the ~~recoverability~~fair ~~and~~value ~~classification~~based ofmethod, compensation cost is recorded ~~asset~~based ~~amounts~~on orthe ~~amounts~~value of the award at the grant date and ~~classification~~is ofrecognized ~~liabilities~~over ~~that~~the ~~might~~service period. beAccordingly, ~~necessary~~no ~~should~~compensation cost has been recognized on the ~~Company~~Incentive beStock Options. Had ~~unable~~compensation tocost ~~continue~~been determined consistent with SFAS 148, there would have been no material change in ~~existence~~results of operations for the periods presented.

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 shut down the operations of Venture Engineering, Inc. (“Venture”, see Note 5), 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 on 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. 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.6

6NOTE 2: REALIZATION OF ASSETS

~~NOTE~~The 3: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. ~~RECENT~~However, ~~ACCOUNTING~~the ~~PRONOUNCEMENTS~~Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than provided, cash in its operations and has experienced a significant reduction in its sales volume. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

In ~~June~~view ~~2001,~~of the ~~FASB~~matters ~~issued~~described ~~SFAS~~in ~~No.~~the ~~141,~~preceding ~~“Business Combinations~~paragraph,” ~~and~~recoverability ~~SFAS~~of ~~No.~~a ~~142,~~major ~~“Goodwill~~portion ~~and~~of the ~~Other~~recorded ~~Intangible~~asset ~~Assets.”~~amounts ~~Under~~shown ~~these~~in ~~new~~the ~~standards,~~accompanying ~~all~~balance ~~acquisitions~~sheets is dependent ~~subsequent~~upon tocontinued ~~June~~operations 30of the Company, ~~2001~~which ~~must~~in beturn ~~accounted~~is ~~for~~dependent ~~using~~upon growth ~~the~~of ~~purchase~~revenues ~~method~~and the success of ~~accounting.~~ future operations. The ~~cost~~consolidated offinancial ~~intangible~~statements ~~assets~~do ~~with~~not include ~~indefinite~~any ~~lives~~adjustments relating to the recoverability and ~~goodwill~~classification of ~~are~~recorded noasset ~~longer~~amounts ~~amortized,~~or ~~but~~amounts ~~are~~and ~~subject~~classification toof anliabilities ~~annual~~that ~~impairment~~might be ~~test~~necessary ~~based upon~~should ~~its~~the ~~fair~~Company ~~value~~be unable to continue in existence.

InManagement ~~August~~has ~~2001,~~taken the ~~FASB~~ ~~issued~~following ~~SFAS~~steps ~~No.~~to ~~143,~~revise ~~“Accounting~~its ~~for~~operating ~~Asset~~and ~~Retirement~~financial ~~Obligations”~~requirements, ~~(“SFAS~~which ~~143”).~~it ~~SFAS~~believes ~~143~~are ~~establishes~~sufficient ~~accounting~~to ~~standards~~provide ~~for~~the ~~recognition~~Company ~~and~~with ~~measurement~~the ofability ato continue in ~~liability~~existence: ~~for~~the Company has shut down the ~~costs~~operations of ~~asset~~Venture ~~retirement obligations~~Engineering, Inc. ~~Under~~(“Venture”, ~~SFAS~~see ~~143~~Note 4), reduced the ~~costs~~ size of ~~retiring~~its workforce and reduced other costs in an ~~asset~~attempt ~~will~~to beconserve ~~recorded~~cash. The Company’s survival as a ~~liability~~going ~~when~~concern is dependent on the development ~~retirement~~of new sources in Japan and South Korea for the manufacture and engineering of products and the obtaining of tooling for such manufacture ~~obligation~~within ~~arises~~the limits of its financial resources. However, ~~and~~there ~~will~~can be ~~amortized~~no assurance that these activities will be sufficient to ~~expense~~reduce ~~over~~expenses ~~the~~quickly ~~life~~and ofsufficiently ~~the~~enough ~~asset~~to meet declining revenues, if they persist.

InNOTE ~~October~~3: RECENT ~~2001,~~ACCOUNTING 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.PRONOUNCEMENTS

~~The~~In ~~implementation~~May 2003, the Financial Accounting Standards Board issued Statement No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer ~~these~~classifies ~~pronouncements~~and measures in ~~fiscal~~its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and ~~has~~otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not ~~had~~expected to have a material ~~impact~~effect on the Company’s consolidated financial position or results of operations.

~~NOTE 4: REVERSE STOCK SPLIT~~7

~~The~~NOTE ~~Board of Directors authorized a one-for-thirty reverse stock split of the Company’s common stock which was approved by the shareholders on September 27, 2002.~~4: ~~This~~DISCONTINUED decreased the number of common shares issued to 264,150. All references in the accompanying financial statements to the number of common shares and per-share amounts for prior periods have been restated to reflect the reverse stock split.OPERATIONS

~~NOTE~~In 5:fiscal 2002, the Company announced its intention to shut down Venture, one of its wholly-owned subsidiaries. ~~DISCONTINUED~~The ~~OPERATIONS~~Board of Directors approved a plan to dispose of the business, which was substantially completed by March 31, 2002.

InThe ~~fiscal~~disposal ~~2002,~~of ~~the~~Venture ~~Company~~has ~~announced~~been ~~its~~accounted ~~intention~~for toas ~~shut~~a ~~down~~discontinued ~~Venture~~operation and, ~~one~~accordingly, of its ~~wholly-owned~~net ~~subsidiaries. The~~liabilities ~~Board~~have ofbeen ~~Directors approved~~segregated afrom ~~plan~~continuing tooperations ~~dispose~~in of the ~~business~~accompanying consolidated balance sheets, ~~which~~and ~~was~~its ~~substantially~~operating ~~completed~~results byare segregated and reported as discontinued operations in the accompanying consolidated statements ~~March~~of ~~31,~~operations ~~2002~~and cash flows.

The ~~disposal~~$37,000 of ~~Venture~~income ~~has~~from ~~been~~discontinued ~~accounted~~operations ~~for~~in asthe aquarter ~~discontinued~~ended ~~operation~~June ~~and~~30, ~~accordingly,~~2003 ~~its~~was ~~net liabilities have been segregated~~ from ~~continuing operations in~~ the ~~accompanying~~ ~~consolidated~~collection ~~balance~~of ~~sheets,~~fully ~~and~~reserved ~~its~~accounts ~~operating~~receivable ~~results are segregated~~ and ~~reported~~ ~~as discontinued operations in~~ the ~~accompanying~~adjustment ~~consolidated statements~~ of ~~operations and cash flows. The Company has not recorded a tax benefit~~ ~~attributable~~liabilities, tonet ~~the~~of ~~loss~~general ~~from discontinued operations due to losses from continuing operations~~ and ~~the~~administrative ~~uncertainty of recoverability~~expenses.

7The net liabilities, excluding cash of $36,000 and $25,000 as of June 30, 2003 and March 31, 2003, respectively, of the discontinued operations of Venture included in the accompanying consolidated balance sheets as of June 30, 2003 and March 31, 2003 are as follows (dollars in thousands):

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

	June 30,		March 31,
	2003		2003
Accounts payable	$	50	$	76
Income taxes payable	3		3

Net liabilities of discontinued operations	$	53	$	79

	Three and Six			Three			Six
	Months Ended			Months Ended			Months Ended
	Sept. 30, 2002			Sept. 30, 2001			Sept. 30, 2001
Net sales	$	78		$	1,574		$	3,725
Development engineering services	—			4			109
	78			1,578			3,834
Cost of sales	—			1,427			3,470
Research and development	—			51			233
Selling, general and administrative	(75		)	384			808
Interest, net	—			9			20
	(75		)	1,871			4,531
Income (loss) before income taxes	153			(293		)	(697		)
Income tax expense	—			—			1
Income (loss) from discontinued operations	$	153		$	(293	)	$	(698	)

NOTE 5: DETAILS OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS

The net liabilities, excluding cash of $132,000 and $116,000 as of September 30, 2002 and March 31, 2002, respectively, of the discontinued operations of Venture included in the accompanying consolidated balance sheets as of September 30, 2002 and March 31, 2002 are as follows (dollars in thousands):

Inventories are summarized as follows:
	(Dollars in Thousands)
	June 30, 2003			March 31, 2003
Raw materials	$	266		$	306
Finished goods	934			762
Allowance for obsolescence	(334		)	(354		)

	$	866		$	714

Other assets are summarized as follows:
	(Dollars in Thousands)
	June 30, 2003			March 31, 2003
Non-Refundable Tooling Advances	$	493		$	614
Deposits	282			282
Investments	176			175
Canon License	155			167
Distribution license for Dippin’ Dots ice cream	24			32

	$	1,130		$	1,270

	September 30,			March 31,
	2002			2002
	(Unaudited)
Accounts receivable, net	$	—		$	55
Other assets	—			30
Accounts payable	(44		)	(61		)
Accrued expenses	(10		)	(10		)
Income taxes payable	—			(5		)
Estimated costs related to disposal	—			(68		)
Net liabilities of discontinued operations	$	(54	)	$	(59	)

NOTE 6: ~~DETAILS~~INCOME ~~OF CERTAIN CONSOLIDATED BALANCE SHEET CAPTIONS~~TAXES

~~Inventories~~The Company has federal net operating loss carryforwards (“NOLs”) for tax reporting purposes of $26.9 million, which will expire in fiscal 2004 through 2023 if not utilized. These NOLs are utilizable by the Company and its domestic subsidiary. ~~summarized~~The asCompany’s ~~follows~~foreign ~~(dollars~~subsidiaries in ~~thousands~~Japan also have NOLs in the amount of 1,158 million Yen ($9.7 million): which will expire in fiscal 2004 through 2008 if not utilized. Management has determined at this time that it is not deemed likely these NOLs can be utilized and therefore a valuation allowance has been established for the full amount of deferred tax assets. The amounts shown as income tax expense reflect only required minimum amounts due under local jurisdictions.

	September 30,		March 31,
	2002		2002
	(Unaudited)
Raw materials	$	222	$	169
Finished goods	812		795
	$	1,034	$	964

NOTE 7: EARNINGS (LOSS) PER SHARE

~~Inventory~~Basic ~~reserves~~EPS ~~for~~is computed ~~excess~~by dividing net income (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 ~~obsolete~~other ~~inventories~~contracts to issue common stock were ~~$356~~exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For both periods presented,~~000~~ the net earnings (loss) available to common shareholders is the same for both basic and diluted EPS and is equal to the net earnings (loss) stated in the Consolidated Statements of Operations. There is no difference in average shares outstanding between diluted and ~~$229~~basic in both periods presented because potentially dilutive securities would have been antidilutive. Potentially dilutive securities that were excluded from the computation of earnings (loss) per share were 10,~~000~~170 ~~for~~and ~~September~~12,750 in the three months ended June 30, ~~2002~~2003 and ~~March 31~~2002, ~~2002~~respectively.

NOTE 8: COMPREHENSIVE INCOME

~~Other~~Statement ~~assets~~of Financial ~~are~~Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”), establishes standards for reporting and displaying of comprehensive ~~summarized~~income and its components in the Company’s consolidated financial statements. Comprehensive income is defined in SFAS 130 as ~~follows~~the ~~(dollars~~change in ~~thousands~~equity (net assets): of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Total comprehensive income was $292,000 and $425,000 for the three months ended June 30, 2003 and 2002, respectively. The difference from net income (loss) as reported is the change in the cumulative currency translation adjustment.

	September 30,		March 31,
	2002		2002
	(Unaudited)
Nonrefundable tooling advances	$	1,847	$	2,119
Deposits	469		456
Investments	187		249
Canon License	188		193
Distribution license for Dippin’ Dots ice cream	47		57
Other	29		—
	$	2,767	$	3,074

NOTE 9: TREASURY STOCK

~~NOTE~~In ~~7: INCOME~~fiscal ~~TAXES~~2000, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in March 1999 which authorizes the Company to purchase up to 66,667 common shares from time to time on the open market. The Company did not make any purchases during the three months ended June 30, 2003 or 2002.

The Company has federal net operating loss carryforwards (“NOLs”) for tax reporting purposes of $32.7 million, which will expire in fiscal 2003 through 2022 if not utilized. These NOLs are utilizable by the Company and its domestic subsidiary. The Company’s foreign subsidiaries in Japan also have NOLs in the amount of 892 million Yen ($7.5 million) which will expire through fiscal 2007. Management has determined at this time that it is not deemed likely these NOLs can be utilized and therefore a valuation allowance has been established for the full amount of deferred tax assets. The amounts shown as income tax expense reflect only required minimum amounts due under local jurisdictions.9

NOTE 810: ~~EARNINGS~~SEGMENT ~~(LOSS) PER SHARE~~INFORMATION

~~Basic~~The ~~EPS~~majority isof ~~computed by dividing net income (loss) by~~ the ~~weighted~~Company’s ~~average~~operations ~~number~~are ofin ~~common shares~~one ~~outstanding~~industry ~~during~~segment, the ~~period. Diluted~~design, ~~EPS reflects the potential dilution that could occur if stock~~development, ~~options~~production and ~~other~~marketing ~~contracts~~of tointelligent ~~issue~~paper ~~common~~handling ~~stock~~devices ~~were~~for ~~exercised~~the ~~or converted~~office ~~into~~automation ~~common~~market. Two ~~stock~~of orthe ~~resulted~~Company’s subsidiaries, inGradco ~~the~~(Japan) ~~issuance~~Ltd. ofand ~~common~~Gradco ~~stock~~(USA) ~~that~~Inc. ~~then~~operate ~~shared~~ in ~~the~~this segment. Gradco ~~earnings~~Technology ~~of the entity~~Ltd. ~~For~~ ~~all~~(a ~~periods~~majority-owned ~~presented,~~subsidiary ~~the~~of ~~net earnings (loss~~GJ) ~~available~~focuses toon ~~common~~developing ~~shareholders~~markets ~~is the same~~ for ~~both~~new technologies ~~basic~~ and ~~diluted~~products, ~~EPS~~including ~~and~~those isof ~~equal~~Dippin’ toDots ~~the~~ice ~~net~~cream, ~~earnings (loss)~~accounts ~~stated~~for in the ~~Consolidated Statements of Operations~~remainder. ~~The~~ ~~average~~Venture, ~~number~~whose ofoperations ~~outstanding~~are ~~shares~~reflected ~~used~~as ~~in the computation~~discontinued, ofoperated ~~basic~~in ~~EPS~~an ~~and~~industry ~~diluted~~segment ~~EPS~~involved isin ~~the~~high ~~same~~technology ~~for~~engineering ~~all~~and manufacturing ~~periods presented~~services. AsThe ~~of September 30, 2002 and 2001, the~~following ~~Company~~table ~~had~~reflects ~~outstanding~~information ~~stock~~by ~~options~~reportable ofsegments ~~10,170~~for ~~and~~the ~~15,350,~~quarters ~~respectively. No~~ended ~~stock options were dilutive as of~~June ~~September~~ 30, ~~2002~~2003 and ~~2001,~~2002 ~~respectively.~~(in thousands):

	Net Income
Three Months Ended 6/30/03	Revenues		(loss)			Assets
Paper handling devices	$	5,614	$	407		$	25,294
New technology/products	447		(69		)	780
Discontinued operations	—		37			36
Corporate	—		(104		)	5,394
Inter-segment & corporate eliminations	—		—			(19,897		)

Consolidated	$	6,061	$	271		$	11,607


Three Months Ended 6/30/02
Paper handling devices	$	4,541	$	(322	)	$	27,909
New technology/products	503		(54		)	1,131
Discontinued operations	—		—			71
Corporate	—		(159		)	5,534
Inter-segment & corporate eliminations	—		—			(19,650		)

Consolidated	$	5,044	$	(535	)	$	14,995

~~NOTE 9: COMPREHENSIVE INCOME~~10

~~Statement~~Item ~~of Financial Accounting Standards No~~2. ~~130 (“SFAS 130”), Reporting Comprehensive Income establishes standards for reporting and displaying of comprehensive income and its components in the Company~~ MANAGEMENT’~~s consolidated financial~~S ~~statements. Comprehensive~~DISCUSSION ~~income~~AND ~~is defined~~ANALYSIS inOF ~~SFAS~~FINANCIAL ~~130 as the change in equity (net assets) of a business~~CONDITION ~~enterprise~~AND ~~during~~RESULTS aOF period from transactions and other events and circumstances from nonowner sources. Total comprehensive income (loss) was $(592,000) and $(380,000) for the three and six months ended September 30, 2002, respectively and $(4,059,000) and $(5,181,000) for the three and six months ended September 30, 2001, respectively. The difference from net loss as reported is the change in the cumulative currency translation adjustment.OPERATIONS

~~NOTE~~In ~~10:~~addition to historical information, management’s discussion and analysis includes certain forward-looking statements, including those related to the Company’s growth and strategies, regarding events and financial trends that may affect the Company’s future results of operations and financial position. ~~TREASURY~~The ~~STOCK~~Company’s actual results and financial position could differ materially from those anticipated in the forward-looking statements as a result of competition, general economic and business conditions, changes in technology, fluctuations in the rates of exchange of foreign currency and other risks and uncertainties over which the Company has little or no control.

InThe ~~fiscal 2000,~~Company’s ~~the~~operations ~~Company~~are ~~began~~conducted ~~acquiring~~principally ~~shares~~through of its ~~common~~wholly-owned ~~stock~~subsidiaries Gradco in(Japan) ~~connection~~Ltd. ~~with~~(“GJ”) ~~a stock~~and ~~repurchase~~Gradco ~~program~~(USA) ~~announced~~Inc. in(“GU”) ~~March~~and ~~1999~~its ~~which~~majority-owned subsidiary ~~authorizes~~Gradco ~~the~~Technology ~~Company to~~Ltd. ~~purchase~~(“GTL”). upVenture toEngineering, 66Inc. (“Venture”),~~667~~ ~~common~~another ~~shares~~wholly-owned ~~from~~subsidiary, ~~time~~was toinvolved ~~time~~with onengineering ~~the open~~and ~~market~~manufacturing activities. The ~~Company~~Board ~~purchased~~of Directors 3approved a plan to dispose of Venture,~~030~~ which was substantially completed by March 31, 2002. This ~~shares~~disposal ~~during~~has ~~the~~been ~~six~~accounted ~~months~~for ~~ended~~as ~~September~~a 30discontinued operation and, ~~2001~~accordingly, Venture’s atnet anliabilities ~~aggregate~~have ~~cost~~been ofsegregated from continuing operations in ~~$51~~the accompanying consolidated balance sheets,~~000~~ and ~~684~~its ~~shares~~operating ~~during~~results ~~the~~are segregated ~~six~~and ~~months~~reported ~~ended~~as ~~September~~discontinued ~~30,~~operations ~~2002~~in atthe anaccompanying ~~aggregate~~consolidated ~~cost~~statements of ~~$1,000~~operations and cash flows. See Note 4 of Notes to Unaudited Consolidated Financial Statements.

~~NOTE~~GJ ~~11:~~and GU operate jointly in the development and marketing of products to their customer base, primarily OEMs. ~~SEGMENT~~Both ~~INFORMATION~~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 ~~majority of the~~ Company’s ~~operations are in one industry segment, the design, development,~~ ~~production~~survival ~~and~~as ~~marketing~~a ofgoing ~~intelligent~~concern ~~paper~~is ~~handling~~dependent ~~devices~~on ~~for~~ the ~~office automation~~development ~~market. Three~~ of ~~the Company’s~~new ~~subsidiaries,~~sources ~~Gradco (~~in Japan) ~~Ltd.~~and ~~(“GJ”),~~South ~~Gradco~~Korea ~~(USA)~~for ~~Inc.~~the manufacture and ~~Gradco~~ ~~Belgium,~~engineering ~~S.C. (a wholly-owned subsidiary~~ of ~~GJ)~~products ~~operate~~and ~~in this~~the ~~segment. Gradco~~obtaining ~~Technology Ltd. (a majority-owned subsidiary~~ of ~~GJ)~~tooling ~~focuses on developing markets~~ for ~~new technologies~~such ~~and~~manufacture ~~products. Venture, whose~~within operations are reflected as discontinued, operated in an industry segment involved in high technology engineering and manufacturing services. The following table reflects information by reportable segments for the ~~three~~limits ~~and~~of ~~six~~its ~~month periods ended September 30,~~financial ~~2002 and 2001 (in thousands):~~resources.

			Net Earnings
	Revenues		(Loss)			Assets
Three Months Ended 9/30/02
Paper handling devices	$	3,330	$	(450	)	$	26,438
New technology/products	785		63			1,090
Discontinued operations	—		153			132
Corporate	—		(204		)	5,496
Inter-segment & corporate eliminations	—		—			(19,693		)
Consolidated	$	4,115	$	(438	)	$	13,463

			Net Earnings
	Revenues		(Loss)			Assets
Three Months Ended 9/30/01
Paper handling devices	$	4,932	$	(191	)	$	34,479
New technology/products	836		(223		)	1,898
Discontinued operations, including disposal costs	—		(3,026		)	2,175
Corporate	—		(1,081		)	5,466
Inter-segment & corporate eliminations	—		—			(19,897		)
Consolidated	$	5,768	$	(4,521	)	$	24,121
Six Months Ended 9/30/02
Paper handling devices	$	7,565	$	(967	)	$	26,438
New technology/products	1,288		9			1,090
Discontinued operations	—		153			132
Corporate	—		(363		)	5,496
Inter-segment & corporate eliminations	—		—			(19,693		)
Consolidated	$	8,853	$	(1,168	)	$	13,463
Six Months Ended 9/30/01
Paper handling devices	$	11,986	$	(519	)	$	34,479
New technology/products	1,561		(464		)	1,898
Discontinued operations, including disposal costs	—		(3,431		)	2,175
Corporate	—		(1,155		)	5,466
Inter-segment & corporate eliminations	—		—			(19,897		)
Consolidated	$	13,547	$	(5,569	)	$	24,121

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 Company’s growth and strategies, regarding events and financial trends that may affect the Company’s future results of operations and financial position. The Company’s actual results and financial position could differ materially from those anticipated in the forward-looking statements as a result of competition, general economic and business conditions, changes in technology, fluctuations in the rates of exchange of foreign currency and other risks and uncertainties over which the Company 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. The Board of Directors approved a plan to dispose of Venture, which was substantially completed by March 31, 2002. This disposal has been accounted for as a discontinued operation and, accordingly, Venture’s net liabilities 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 5 of Notes to Unaudited 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 on 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

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. On On an ongoing basis, management evaluates its estimates, including those ~~related~~ related to uncollectible receivables, excess and obsolete inventories, income taxes and contingencies. Management bases its 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~~ and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

1211

Management believes the following critical accounting policies affect our more significant judgments and estimates used in preparing the Company’s consolidated financial statements: revenue recognition, ~~and~~inventories and valuation allowances.

Revenues ~~from~~are recognized in accordance with SAB 101. Revenues from product sales (“net sales”) are recorded ~~when~~as units or spare parts are shipped under “FOB ex-factory” contracts. Revenues from development engineering service contracts are recognized as earned, which generally occurs as services are performed. Licenses and royalties are recognized when all obligations of the appropriate agreements have been fulfilled.

Inventories are stated at the lower of cost or market. ~~Each~~The ~~quarter, the~~ Company evaluates its inventories ~~for~~on ~~excess quantities~~a regular basis and ~~obsolescence.~~ provides a ~~Inventories~~reserve ~~that~~for ~~are~~excess ~~considered~~and obsolete ~~are~~inventory ~~written~~to ~~off. Remaining~~reduce ~~inventory~~the ~~balances~~carrying ~~are~~value ~~adjusted~~ to its estimated net realizable value. The ~~approximate~~inventory ~~the~~reserve ~~lower~~is determined by analysis of ~~cost~~customers’ orcurrent ~~market~~orders ~~value.~~ as ~~The~~well ~~valuation~~as offuture ~~inventories~~forecasts atand ~~the~~spare ~~lower~~parts ofcommitment ~~cost~~requirements. A orsignificant ~~market~~portion ~~requires~~of the ~~use~~ ofcurrent ~~estimates~~reserve pertains as to the ~~amounts~~wide offormat ~~current~~printer ~~inventories~~business ~~that~~previously ~~will~~undertaken ~~be sold~~by GTL. ~~These~~In ~~estimates~~the ~~are~~event ~~dependent~~management onadjusts its estimates of future salability, the value of the Company’s ~~assessment~~inventory ofmay ~~current~~become under or overstated and ~~expected~~recognition ~~orders~~of ~~from~~such ~~its~~a ~~customers~~change will affect cost of sales in a future period, which could materially affect the Company’s operating results and financial position.

~~Valuation~~The Company maintains allowances ~~are maintained~~ for doubtful accounts for estimated losses ~~from~~resulting ~~the~~from the inability of the Company’s customers to make required payments. IfThese ~~the~~estimates ~~financial~~are ~~condition~~based ofon ~~our customers~~management’s ~~were~~evaluation toof ~~deteriorate,~~the ~~resulting~~ability ~~in an impairment~~ of ~~their~~customers ~~ability~~ to make payments, ~~additional~~focusing ~~allowances~~on ~~may~~current economic beconditions, ~~required. Management~~customer ~~also~~financial ~~records~~conditions, ahistorical ~~valuation allowance to reduce the~~payment ~~Company’s~~experience ~~deferred~~and ~~tax~~aging ~~assets~~of toaccounts receivable. If the ~~amount~~financial ~~that~~condition isof ~~more~~our ~~likely~~customers ~~than~~were ~~not~~ to bedeteriorate, ~~realized. Management~~resulting ~~considers estimated~~in ~~future~~an ~~taxable~~impairment ~~income~~of ~~and~~their ~~ongoing~~ability ~~prudent~~to ~~and~~make ~~feasible~~payments, ~~tax planning~~additional ~~strategies~~allowances inmay ~~assessing~~be ~~the need for the valuation allowance~~required.

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

Results of Operations

Revenues for the three ~~and six~~ months ended ~~September~~June 30, ~~2002~~2003 ~~decreased~~increased $1,~~653~~017,000 ~~and $4,694,000, respectively,~~ from the ~~comparable~~amount in the prior year’s ~~periods~~first quarter. ~~The~~Net ~~decreases~~sales increased in$654,000, ~~both~~or ~~periods~~14%, ~~were~~ principally afrom ~~result~~$919,000 of atooling ~~decrease~~sales in ~~unit~~the current ~~sales. Unit~~quarter ~~sales~~versus $311,000 in the ~~office~~first ~~automation~~quarter ~~market~~of ~~decreased~~the ~~36%~~prior inyear. In ~~the current~~addition, ~~quarter~~unit ~~from~~sales in the ~~comparable~~office automation ~~quarter~~market inincreased ~~the~~by ~~prior~~6% ~~year. A~~and a slightly stronger yen, which increased by 26% against the dollar when compared to the same period in the previous year, caused an increase of $~~0.1~~279,000 ~~million~~ in revenue when yen denominated sales were translated into dollars. ~~In the~~These ~~six-month~~increases ~~period,~~were ~~unit~~partially ~~sales~~offset inby ~~the~~a ~~office~~decrease ~~automation~~of ~~market~~$115,000 ~~decreased~~in ~~49%~~spare ~~from~~parts sales ~~the~~and ~~prior~~a ~~year. Yen~~$56,000 ~~denominated~~decrease in sales ~~translated~~ ~~into~~of ~~$0.1~~Dippin’ ~~million~~Dots ~~less~~ice incream ~~revenue~~by ~~due~~GTL. The toCompany ahad ~~weaker~~one ~~yen,~~customer-funded development ~~which~~engineering ~~lost~~contract ~~1% against~~in the ~~dollar~~current ~~when~~quarter that amounted to $741,000 as compared to $375,000 in the ~~same~~first ~~period~~quarter inof the ~~previous~~prior year.

Gross margin on net sales decreased to 17.6% from 24.3% for the three months ended September 30, 2002 and 2001, respectively, and decreased to 20.2% from 22.5% for the six-month periods then ended, primarily because fixed manufacturing overhead costs could not be trimmed at the same pace as the declines in net sales. In addition, the mix of products shifted toward lower margin units and the Company took a charge of $139,000 in the current quarter to fully reserve for its remaining wide format printer inventory.12

13Gross margin on net sales decreased to 12.6% from 25.4% for the three months ended June 30, 2003 and June 30, 2002, respectively, primarily from the aforementioned tooling sales, which have a lower margin than product sales, and external cost increases caused by a change in contract manufacturers. The change in contract manufacturers may result in a recurring gross margin percentage decline which could be mitigated if volumes were to increase.

Research and development expenses (“R&D”) in the current quarter totaled $9125,000, ~~2.2% of revenues,~~ compared to $~~474~~395,000, ~~8.2% of revenues,~~ in the prior year’s comparable period. ~~For~~The ~~the~~prior ~~six~~year ~~months ended~~amount ~~September~~includes 30$371,000 ~~2002~~incurred ~~and~~in ~~2001,~~connection with ~~R&D~~the ~~totaled~~ $~~486~~375,000, 5in development engineering revenue recognized in that quarter.5% The ofremaining ~~revenues~~$24,000 from the prior year’s quarter and the $125,~~354,~~000, ~~10.0%~~in ofthe ~~revenues,~~current ~~respectively. The~~quarter ~~decreases~~ are ~~principally~~for ~~attributable~~internal R&D toand reflect the ~~elimination~~restrictions ofplaced on the Company by its limited financial resources. As was discussed in the Company’s March ~~internal~~31, 2003 Form 10-K, there was approximately $700,000 of R&D expenses incurred in the latter part of fiscal 2003 which were recovered through development engineering ~~department~~service ~~and~~billings ~~its~~in ~~decision~~the ~~not~~amount toof ~~contract~~$741,000 during the quarter ended June 30, 2003. ~~for~~Accordingly, ~~any~~these ~~significant~~revenues ~~outside~~have ~~R&D~~no ~~unless~~associated itcosts isin ~~customer~~the ~~funded~~current quarter.

Selling, general and administrative expenses (“SG&A”) in the current quarter totaled $1,~~265~~141,000, 30or 18.78% of revenues, compared to $1,~~468~~431,000, 25or 28.54% of revenues, in in the prior year’s comparable period, a decrease of $~~203~~290,000. ~~There~~Approximately ~~was a savings of approximately~~ $~~200~~229,000 ~~due~~of tothe adecrease ~~reduction in personnel, $100,000 in recovered bad debts and~~was ~~$50,000~~from inthe ~~reduced~~closure ~~advertising~~of ~~and~~the ~~trade~~Company’s ~~show~~Belgium ~~expenses~~office, ~~offset~~including byan ~~$89,000~~accrual ~~less~~ of ~~negative goodwill amortization and~~ $40200,000 made in ~~increased legal fees. For~~ the ~~six~~first ~~months~~quarter ~~ended September 30, 2002 and 2001, SG&A totaled $2,696,000, 30.5%~~ of ~~revenues~~fiscal ~~and~~2003 ~~$3,045,000,~~for ~~22.5% of~~the ~~revenues,~~estimated ~~respectively, a decrease of $349,000~~closing costs. ~~There~~The ~~was~~remainder ~~a savings~~ of ~~approximately~~the ~~$450,000 due to a reduction~~decrease inreflects ~~personnel,~~the ~~$100,000~~downsizing inof ~~recovered~~the ~~bad~~U.S. ~~debts~~ and ~~$70,000~~Japanese inoperations ~~reduced advertising~~undertaken ~~and trade show expenses, offset~~ by ~~$178,000 less of negative goodwill amortization and $100,000 in estimated expenses associated with~~ the ~~closure of the~~ Company~~’s operations in Belgium~~.

~~There~~Foreign ~~was a~~currency ~~foreign~~transaction ~~currency~~losses ~~loss~~decreased offrom $24304,000 in the ~~current~~first quarter ~~and a loss~~ of ~~$93,000 in~~ the prior year’s ~~comparable~~to ~~period~~$9,000 ain ~~decrease~~the ofcurrent ~~$69,000~~quarter. ~~For~~ In the ~~six~~prior ~~months ended September 30~~period, ~~2002 and~~the ~~2001,~~yen ~~there~~strengthened ~~was~~by a10% ~~foreign~~against ~~currency~~the ~~loss~~dollar ofbetween ~~$328,000~~March 31 and ~~$106,000, respectively,~~June ~~an increase of $222~~30,~~000. The~~ ~~losses~~2002 ~~are~~while ~~primarily~~the ~~attributable~~yen/dollar torelationship ~~receivables~~changed ~~held~~ by GJless inthan ~~Japan~~1% ~~but denominated~~ in ~~U.S. dollars. When~~ the ~~dollar~~current ~~weakens, the yen equivalent is reduced and a loss is recognized~~period. ~~The reverse is true when the dollar strengthens.~~

As a result of the above factors, ~~the~~income ~~loss~~ from continuing operations before income taxes and minority interest ~~increased~~was ~~from~~ $~~500~~236,000 infor the quarter ended ~~September~~June 30, ~~2001~~ to2003 ~~$600,000~~compared into a ~~the~~loss ~~current~~of ~~quarter and from~~ $1556,~~146,~~000 infor the ~~six~~quarter ~~months~~ ended ~~September~~June 30, ~~2001~~2002. As todiscussed $1above,~~356,000~~ inthe Company has terminated the ~~current~~operations ~~six-month~~of ~~period. The~~Venture ~~income~~and ~~tax~~now ~~provisions~~reflects inits ~~the~~operating ~~prior~~results ~~three~~as ~~and~~discontinued ~~six-month~~operations. There ~~periods~~ was $37,000 ~~primarily~~of ~~attributable~~income tofrom andiscontinued ~~increase~~operations toin the ~~valuation~~ ~~allowance~~current ~~related~~quarter ~~to the Company~~and Venture’s ~~non-current~~operations ~~deferred~~in ~~tax~~the ~~asset~~first ~~for net~~quarter ~~operating~~of ~~loss~~the ~~carryforwards~~prior year were break-even.

The Company commenced a shut down of Venture and therefore its results are included in the Consolidated Statements of Operations as discontinued operations. The income of $153,000 as reported in the current three and six-month periods is from the sale of inventory and the recovery of accounts receivable against which reserves had been fully established. The Company took a charge in the amount of $2,733,000 representing the estimated loss on disposal of Venture in the quarter ended September 30, 2001. This charge included the writedown of certain fixed assets and inventories to expected scrap value, closedown expenses including severance payments and expected operating losses of Venture through the shutdown date. It also included the writeoff of the Company’s remaining goodwill related to Venture in the amount of $1,083,000; see Note 5 of Notes to Unaudited Consolidated Financial Statements.

Financial Condition

Working capital ~~decreased~~increased to $43,~~294~~666,000 at ~~September~~June 30, ~~2002~~2003 from $43,~~386~~319,000 at March 31, 2003, primarily from net income. At June 30, ~~2002~~2003, ~~primarily~~the ~~because~~Company ~~the~~had ~~increase~~$3,193,000 in ~~net~~cash, ~~current~~of ~~yen-denominated~~which ~~assets resulting~~$1,000,000 ~~from~~is apledged ~~stronger~~as security ~~yen~~for ~~was~~a ~~almost~~short-term ~~enough~~note payable to ~~offset~~bank in the ~~loss~~amount ~~from operations. At~~of ~~September~~50 ~~30,~~million ~~2002,~~yen ~~the Company had~~ ($3418,~~571,~~000 ~~in cash~~), a decrease of $26526,000 from March 31, ~~2002, and~~2003. The Company had no long-term debt at June 30, 2003.

For the ~~six months~~three months ended ~~September~~June 30, ~~2002~~2003, net cash used in operating activities was approximately $0.45 million. Approximately $20.83 million was provided by ~~$1.8~~income ~~decrease~~from ~~in accounts~~continuing ~~receivable, $0.8 increase in oth er~~and ~~assets~~discontinued operations and ~~$0.2~~another ~~increase in accrued expenses. While, approximately~~ $31.2 million was ~~used~~provided toby ~~fund~~an ~~the~~increase ~~Company’s loss~~in ~~from~~accounts ~~continuing~~payable ~~operations~~ of $1.~~3, increases~~1 million and a decrease in other ~~current~~ assets of $0.~~3, decreases in accounts payable~~1 ofmillion. Approximately $02.80 ~~and~~million ~~decreases~~was inused ~~notes payable~~ to ~~suppliers~~fund ~~of $0.8.~~increases

Cash was positively affected by exchange rate changes in the amount of $0.2 million for the six months ended September 30, 2002 and cash provided by discontinued operations was approximately $0.2 million.13

~~The~~in ~~Company believes~~accounts ~~that~~receivable ~~its~~of ~~cash~~$1.3 ismillion, ~~adequate~~inventories ~~for~~of ~~its~~$0.2 ~~short-term needs~~million, prepaid ~~but~~expenses ~~its~~of ~~long-term survival~~$0.1 ismillion ~~dependent~~and ~~upon~~a ~~the~~decrease ~~development~~in ofnotes ~~relationships~~payable ~~and~~to ~~sources of~~suppliers ~~working~~of ~~capital~~$0.4 tomillion. Net ~~enable~~cash itused toin investing ~~compete~~activities inwas $0.1 million for the ~~highly~~purchase ~~competitive~~of ~~digital~~property and ~~market~~equipment.

15Cash was virtually unaffected by exchange rate changes for the three months ended June 30, 2003. The Company believes that its cash and credit facilities are adequate for its short-term needs, but 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.

~~QUANTITATIVE~~Item ~~AND~~3. 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 interest rates. The Company is exposed to certain levels of market risks, especially changes in foreign currency exchange rates. Interest rates currently have little effect on the Company since it has nominimal interest-bearing debt.

The Company 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 Company’s revenues and results of operations.

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

16Item 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of a date within 90 days of the filing date of this Form 10-Q, our principal executive officer and principal accounting officer have concluded that Gradco Systems, Inc.’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934) are effective to ensure that information required to be disclosed by Gradco Systems, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls over Financial Reporting. There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect our internal controls over financial reporting subsequent to the date that our principal executive officer and principal accounting officer carried out their evaluation. However, the Company received a letter dated July 2, 2003 from Grant Thornton LLP expressing its opinion as to a material weakness involving the adequacy of the communication and coordination between GJ and senior management of the Company as it pertains to the classification and recording of accounting transactions. The Audit Committee is carefully reviewing the issue and has discussed it with both Grant Thornton LLP and management. Without accepting or rejecting Grant Thornton LLP’s conclusions, the Audit Committee has begun the process of gathering information which addresses the issue raised to study what corrective action, if any, is warranted.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1.		LEGAL PROCEEDINGS
		Not Applicable.

ITEM 2.		CHANGES IN SECURITIES
		Not Applicable.

ITEM 3.		DEFAULTS UPON SENIOR SECURITIES
		Not Applicable.

ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
		Not Applicable.

ITEM 5.		OTHER INFORMATION
		Not Applicable.

ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K

		(a) Exhibits.

		31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32 Section 906 Certification, as furnished by the Chief Executive Officer and Chief Financial Officer pursuant to SEC Releases No. 33-8212, 34-47551

		(b) Reports on Form 8-K.

		None.

~~Not Applicable.~~15

~~ITEM 2. CHANGES IN SECURITIES~~SIGNATURE

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Company’s Annual Meeting of Stockholders was held on September 27, 2002.

(b) One purpose of the meeting was the election of six directors of the Company, to serve for a term of one year (i.e., until the Annual Meeting to be held in 2003). Proxies were solicited by management for its nominees, pursuant to Regulation 14 under the Securities Exchange Act of 1934, and there was no opposing solicitation. All of such nominees were elected as directors by the required plurality of the votes cast. The directors so elected (all of whom were incumbent directors) are Bernard Bressler, Thomas J. Burger, Harland L. Mischler, Robert J. Stillwell, Masakazu (Mark) Takeuchi and Martin E. Tash. The votes cast for, against and withheld from each of the nominees (out of the 6,879,148 shares (before reverse stock split) of Common Stock outstanding and entitled to vote as of the record date of August 12, 2002) are set forth below. There were no broker non-votes.

Nominees	FOR	WITHHELD	ABSTAIN
Bernard Bressler	6,174,970	91,367	95,057
Thomas J. Burger	6,214,720	51,617	95,057
Harland L. Mischler	6,214,720	51,617	95,057
Robert J. Stillwell	6,214,220	52,117	95,057
Masakazu (Mark) Takeuchi	6,175,920	90,417	95,057
Martin E. Tash	6,175,920	90,417	95,057

(c) The second purpose of the meeting was to vote on a reverse split of one share of Common Stock for each thirty shares outstanding with no fractional shares being issued but with the number being rounded up. This motion was passed by over 95% in favor.

ITEM 5. OTHER INFORMATION

Not Applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

	(a)	Exhibits.
	99.1	Certification persuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(b)	Reports on Form 8-K.
		None.

SIGNATURES

Pursuant to the requirements 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, who is also signing as the Chief Financial Officer.

		GRADCO SYSTEMS, INC.
		Registrant
		By:
Date: November 8, 2002		/s/ Harland L. Mischler
Date: August 22, 2003		/s/ Harland L. Mischler
		Harland L. Mischler
		Executive Vice President, Chief Financial Officer

1916

CERTIFICATION

I, Martin E. Tash, certify that:

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

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

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

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date” ); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant’s internal controls; and

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

Date: November 8, 2002 /s/ Martin E. Tash Chairman of the Board, President and Chief Executive Officer

CERTIFICATION

I, Harland L. Mischler, certify that:

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date” ); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant’s internal controls; and

Date: November 8, 2002 /s/ Harland L. Mischler Executive Vice President, Chief Financial Officer

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