GUNTHER INTERNATIONAL LTD, ARS, 2000-07-28

GUNTHER INTERNATIONAL LTD
ARS, 2000-07-28
OFFICE MACHINES, NEC

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GUNTHER LOGO

2000

GUNTHER LOGO

ANNUAL

GUNTHER LOGO

REPORT

GUNTHER LOGO
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COMPANY PROFILE

Gunther International, Ltd. designs and manufactures systems that
automatically assemble, fold, staple and/or bind printed documents. The systems
then insert the correct documents into appropriate envelopes according to
bar-coded instructions. Gunther's systems are unique in that they provide 100%
accuracy because of our bar code reading methods.

An optional inc.jet printing module enables customers to perform
high-quality ink jet printing of addresses, return addresses, message lines,
company logos and postal indicia without slowing down the system. This new
technology is available on the Company's finishing systems and also as an OEM
application for other manufacturers.

The Company is recognized as an industry leader for its innovative
technologies, for building what the customer wants, and for standing by its 100%
processing accuracy.
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TO OUR SHAREHOLDERS:

In early June, most of Gunther International's customers gathered in
Mystic, Connecticut for our biennial Users' Conference. At that meeting, we
presented our first Employee of the Year Award to Nic Viens, our Service
Coordinator. He received a rousing ovation from our customers. That says a great
deal about the last year at Gunther International.

When I came to Gunther International in 1998, our major strategic goal was
to convert our service operation to Gunther's own technicians from a third party
provider. That task is complete, with the end result being what I believe is the
best service organization in our industry. Although the cost of this transition
was much greater than I had originally anticipated, our ability to provide first
class service will be the cornerstone of our future. Now that our infrastructure
is in place, we are poised to add additional revenue at higher margins.

Reporting a loss is never a pleasant task, but I am very pleased by the
trend during the year. The fourth quarter of our fiscal year was the best
three-month period in the recent history of the Company by most measurement
standards. Revenue shortfalls in mid fiscal 2000 were the result of a low order
rate during the previous six months. The trailing six-month moving average of
orders received has virtually doubled over last year. We have expanded our sales
force and are optimistic about our future.

The word of the year at Gunther International for 2000 is QUALITY. We have
solicited the assistance of Philip Crosby, the guru of Quality Management, and
his firm, Philip Crosby Associates II to develop a quality management strategy
for Gunther International. We have added Evan Haag, a senior vice president with
over 15 years of management experience who is leading our Quality Management
effort. I believe that by developing an infrastructure consistent with the time
tested principals of Quality Management, and following it with an ISO 9001
quality registration, we can increase margins by reducing waste, while becoming
more responsive to our customers needs at the same time.

Gunther International is on the move. Over the next year we will introduce
new products that will make our inserting line even more superior than those of
our competitors. Two years ago, Gunther International's future was uncertain,
but we have persevered and regained the confidence of our customers. New
customers are joining the Gunther International family regularly, while existing
customers continue to return to us to address their ever increasing volumes of
document handling needs.

Also at our Users' Conference, Xerox introduced a new project -- outfitting
their high speed laser printer with a Gunther International inc.jet printer
which, using a new, Hewlett Packard invisible ink, will overspray printed
documents with invisible messages and barcodes. Xerox, Gunther, and Hewlett
Packard all have high hopes for this project.

Most importantly, I would like to thank the Gunther International people,
particularly the managers that have pushed over the years to make Gunther
International a better company. My appreciation cannot be overstated for Pierre
Viens, our director of Product Compliance and encyclopedia of mailing knowledge;
for Dan Chevalier, our Sales Manager whose 5:00 a.m. e-mails keep me honest; for
Will Viens, our director of research and development who continues to create
extraordinary products; for Brian Mogel, without whose software we could not
survive; for Mike Vehlies, our CFO, without whom we could not have dug out of
the hole of two years ago; for Kris Cote, who has led our floor team to record
production levels; and for Per Hellsund, who is leading our effort to bring
inc.jet to new levels. In addition, we have added top quality talent, including
Ted Langevin, who brings twenty years of experience in paper handling to our

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engineering effort. To them, and the rest of the Gunther International family,
thank you for continuing to produce what we consider the best finishing
equipment in the industry.

/s/ Marc I. Perkins

Marc I. Perkins
President and Chief Executive Officer

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WHY GUNTHER?

The Company has been an innovator within the post-processing, or finishing,
industry since its beginning in 1977. Its unique concept of software-driven
designs, tailored to the needs of the customer, initiated a paradigm shift
within the industry towards intelligent mail finishing. The Company ushered in a
new era of customer-centric system designs that provided intelligence, integrity
and audit trails, which redefined the focus of the industry. The Company
continues that tradition today.

The Company has developed a wide array of innovative modules to meet each
customer's individual requirements. Each system is tailored to the customer's
specific application needs, with built-in flexibility for upgrades and
enhancements should those needs change. The Company's focus has always been upon
the development of products that enhance customer productivity, while
maintaining the document integrity that customers demand.

Our latest innovation, an inc.jet printer, provides the final step in automating
the finishing process, allowing customers to perform high-quality and low-cost
printing either on a Gunther system, or as an OEM application by other
manufacturers.

The Company's reputation for close collaboration with its clients is further
enhanced by a biennial Users' Conference that encourages the open exchange of
information. Since 1992, users from across the United States have gathered in
various locations to network with each other regarding system applications, to
hear updates regarding new technologies, and to provide input concerning the
Company's future technological directions.

The Company's customer-oriented philosophy has resulted in a dedicated and
growing client base which includes leading names within the insurance, mutual
fund, retail, service bureau, and healthcare industries where package accuracy
and integrity are essential.

BLUE CHIP CUSTOMERS

The Company's principal customer base was initially property and casualty
insurance companies that required accurate, high-speed preparation and
distribution of personalized policies and insurance certificates to clientele.
The Company's customers comprise some of the top insurance companies in the US.
COMPANY

AFLAC
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Anthem Blue Cross/Blue Shield
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Chubb & Son
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CNA
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Fireman's Fund
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GEICO
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Liberty Mutual
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MetLife
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Mutual of Omaha
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Nationwide
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Prudential
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SAFECO
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St. Paul Companies
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The Hartford
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The Travelers
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UNUM
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Zurich

As the Company expanded into markets outside the insurance industry, its blue
chip list of customers continued to grow.
COMPANY

Hewitt Associates
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Moore Business Communication
Services
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Nike
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Poorman-Douglas
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SCICOM Data Services
------------------------------------------------------
US Census Bureau
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US Department of the Treasury
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Nippon Telephone & Telegraph

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INNOVATIVE PRODUCT LINE

The Company's finishing systems bring accuracy and integrity to the mailroom and
the comfort of knowing that the processing is 100% accurate. These modular,
upgradeable components also create flexibility for processing mail needs
now -- and in the future -- thereby protecting the client's investment. Having
the right hardware for document mailing and finishing is only part of the
process. Reliable, easy-to-use software that ensures integrity is essential for
an effective finishing solution. The Company's systems are the first truly
software-driven systems with user-definable applications -- software that has
become the benchmark for the mailing and finishing industry.

A hallmark of Gunther's software is the audit trail that records and tracks all
system operations giving the comfort of knowing that all mailing processes are
100% accurate.

The Company has led the field in researching innovative and faster ways of
reading and decoding coded information. The systems now read and process today's
more advanced, two-dimensional codes, glyphs, and even invisible codes, in
addition to standard bar codes.

The Company builds each system around the customer's requirements and
applications. Some of the basic configurations for designing the customer's
system consist of the following:

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GUNTHER SYSTEM FINISHING OUTPUT MAJOR BENEFIT
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EP-4000 - Multiple finishing tasks on one High-volume printer
system for binding or packaging output into flat
loose sheets. envelopes with a variety
- Multiple flight finishing. of unique binding
Processes loose sheets, bound capabilities.
documents and stapled sets in
one package from one print
stream.
- Various stapler sizes.
Accommodates documents of 2 to 100
sheets.
- Multiple binding methods:
VeloBind, Staple, Stitch, Slip &
Grip.
- Manifest Mail. Eliminates the
use of postage meters.
- Processes up to 180 sheets into
a 10 x 13 envelope.
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DM-2000 - Patented two-way conveyor One system for
separates print runs by page count processing both flat and
for flat or folded mail. folded mail within a
- Documents are folded and single job run
inserted into either #10 or 6 x 9 eliminates the need to
envelopes -- or processed separate print runs.
loose, with or without multiple
binding methods, into flat
envelopes.
- Processes from 5 -- 180 pages.
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CONVERTIBLE FEATURE - Changeover takes less than five Dockable inserting
minutes to perform. modules transform the
- The appropriate software is system from flat to
automatically updated for the folded mail, and vice
new module. versa, thereby enabling
- All systems have dockable both types of processing
inserting modules. on the same system,
using one paper path.
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GUNTHER SERVICE

Gunther prides itself on the quality of its service and has undertaken many
initiatives to realize its goal to be recognized as the premier service
organization in the intelligent finishing marketplace.

Much has happened with Gunther service over the past year. The foremost change
was the transitioning of its service from a third party provider to an in-house
service organization. This was a major undertaking that involved the hiring and
training of over 90 customer engineers and 5 regional managers to service the
150-plus systems in the field. This transition effort was successfully completed
as scheduled on March 31, 2000.

"...Since Gunther took over supporting the equipment, our periods of downtime
have been decreasing. ...the months of May and June having less than 1%
downtime. ...The equipment has never operated better."

HMO Provider

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Furthermore, a greater emphasis was placed on the documentation of technical
manuals, operator manuals, and training material. A training school was launched
to provide both technicians and system operators a comprehensive training
curriculum. Various certification training programs were established to support
the beginner through the expert. Specialized courses catering to the more
complex system modules were also made available.

"...communication and responsibility has improved greatly. There is a greater
presence of Gunther service management in the field. ... Ron is very responsive
to our needs..."

Life, Property and Casualty Insurer

Other initiatives include:
- increased communication via technical bulletins and the Gunther website,
- increased technical support including -- 24/7 dispatch center with
dedicated escalation support staff,
- new technical support positions specializing in electronics and third party
components,
- point to point video diagnostic support, and
- renewed emphasis in establishing monthly performance meetings between
Gunther and the customers.

"...We now know we can rely on Gunther to come through with whatever we need in
a timely and effective manner. Our on-site tech does a solid job for us, yet we
have had need of extraordinary effort from Gunther in the last few months as a
result of a major internal change to our output. Gunther has gone out of their
way (way beyond comfort levels) to help us through this change..."

Property and Casualty Insurer

The topics discussed at these monthly performance meetings include a review of
service and system performance, open and new issues, and upcoming service
requirements. These meetings further the communication and understanding between
the two companies.

"...hold our monthly service performance meetings on a prescheduled
basis. ...stronger support from the home office. Education and training are
increasing..."

Life, Property and Casualty Insurer

What was once considered a weakness has now become a major strength for Gunther.
Customers have expressed their satisfaction with the changes that were made.
Building upon this foundation, Gunther is committed in their quest for
preeminence in the service arena for the intelligent finishing marketplace.

INC.JET

The Company's inc.jet printing division offers an exclusive, environmentally
safe letter quality (600 dot-per-inch -- dpi) ink jet printer ("Inc.jet Imager")
that is designed specifically for high resolution, high-speed, low cost
printing. The Inc.jet Imager can be integrated with mail processing systems or
operate separately as a stand-alone printer.

The inc.jet technology is the result of a strategic partnership agreement
between Gunther and Hewlett-Packard Company's Specialty Printing Systems
Operation ("HP"). The agreement allows for cross licensing and marketing of HP's
thermal ink jet technology and Gunther's Inc.jet Imagers, providing the mailing
industry with a printing process that we believe is cleaner and more reliable
than current methods, at a significant cost savings.

The inc.jet division of Gunther International designs and markets the Inc.jet
Imager for original equipment manufacturers (OEMs) and users of high-volume
automated mailing equipment.

Consumable and peripheral products also being marketed include HP's thermal ink
jet pens and bulk ink supplies (also called bladders or ink systems) and
interface software.

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The Inc.jet Imager was initially targeted as an envelope printer to complement
Gunther's complete line of intelligent document automation and mail processing
systems. The Inc.jet Imager provides a solution to a problem that was voiced by
Gunther customers and prospects: low-cost, high quality personalized printing on
envelopes at document automation speeds. Secondary concerns were ease of use and
maintenance, as well as the size of the unit.

In response to the issues raised by our customers, Gunther performed a
substantial amount of research and development. The result is an extremely user
friendly product that prints a 1.5 inch address at letter quality printing (up
to 600 dots per inch) and at very high speeds (up to 50 inches per second or
25,000 envelopes per hour). This translates to a more professional mail piece
produced faster and more cost effectively.

The Inc.jet Imager is a modular, compact design that fits in the palm of a hand
(5.5" x 3.5" x 4.5") and weighs under 2 pounds. The print drivers and
electronics are all resident in the Inc.jet Imager. Commands to control the
Inc.jet Imager are communicated via a computer that comes with the Gunther
system, or through a standard PC. This feature allows the Inc.jet Imager to be
integrated into a wide range of OEM products,. including a small tabletop
envelope-addressing machine. For customers with high volume applications, bulk
ink supplies may be purchased. An Inc.jet Imager with bulk ink supplies can
print up to 75 million characters before requiring ink replenishment. The bulk
ink supplies are only available through HP licensees and sales of these supplies
will provide Gunther with additional revenues.

STRATEGY

The Company's goal is to expand on its position as a pioneer and technological
leader in the design and sale of intelligent document mailing and finishing
systems while it utilizes its leading-edge, high-quality, low-cost ink jet
solutions to expand its presence in the end user and OEM applications
marketplace.

We will continue to focus our product development efforts on further increasing
customer productivity and improving return on investment while ensuring that the
customers' demands for precision, consistency, and accuracy are achieved.

We will continue to collaborate with customers in order to develop a better
understanding of customer needs and to offer comprehensive solutions that meet
those needs.

We are devoting increased efforts towards developing partner alliances with
printer and software companies, thereby broadening the Company's options for its
customer base and allowing clients to work with one vendor versus multiple
vendors.

PARTNERS

The Company is an approved Marketing Partner with major print vendors: IBM, Oce,
and Xerox. In addition, the Company has a Marketing and Cross-Licensing
Agreement with HEWLETT-PACKARD to develop the Inc.jet Imager and sell the HP ink
cartridges. Marketing agreements are also in place with FIRSTLOGIC (Postalsoft),
a software vendor, as well as SIEMENS AUTOTRAY. Together, the Company and its
partners provide a total solution for the expanding customer base.

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000.

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
.

COMMISSION FILE NUMBER: 0-22994

GUNTHER INTERNATIONAL, LTD.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 51-0223195
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>

<TABLE>
<S> <C>
ONE WINNENDEN ROAD 06360
NORWICH, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

ISSUER'S TELEPHONE NUMBER: (860) 823-1427

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
None
</TABLE>

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]

The Registrant's revenues for the most recent fiscal year were $21,586,470.

The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the average of the reported closing bid and asked prices
of such stock on June 2, 2000, as reported by the OTC Bulletin Board, was
$4,631,000. The number of shares of the Registrant's Common Stock outstanding as
of June 2, 2000 was 4,291,769.

DOCUMENTS INCORPORATED BY REFERENCE. The information required by Part III of
this Annual Report on Form 10-KSB is incorporated by reference to the
Registrant's definitive proxy statement to be distributed to stockholders in
connection with the 2000 Annual Meeting of Stockholders. Such proxy statement is
expected to be filed with the Commission within one hundred and twenty (120)
days of the close of the fiscal year.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS

PART I

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<S> <C> <C>
Item 1. Description of Business..................................... 1
General................................................... 1
Development of the Business............................... 1
Finishing Systems......................................... 2
Strategy.................................................. 2
Systems................................................... 3
Inc.jet................................................... 5
Marketing and Sales......................................... 6
Customers................................................... 6
Manufacturing............................................... 7
Installation and Customer Service........................... 7
Research and Development.................................... 8
Competition................................................. 8
Patents and Proprietary Rights.............................. 9
Employees................................................... 9
Item 2. Description of Property..................................... 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 11
Item 6 Management's Discussion and Analysis or Plan of Operation
Summary Financial Data.................................... 12
Results of Operations..................................... 13
Liquidity and Capital Resources........................... 14
Inflation................................................. 15
Year 2000................................................. 15
Forward Looking Statements................................ 16
Item 7. Financial Statements........................................ 16
Item 8. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act....................................................... 17
Item 10. Executive Compensation...................................... 17
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 17
Item 12. Certain Relationships and Related Transactions.............. 17
</TABLE>

(i)
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<TABLE>
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PART IV
Item 13. Exhibits and Reports on Form 8-K............................ 18
Signatures............................................................ 22
Index to Financial statements......................................... F-1
</TABLE>

(ii)
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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

The Company designs, develops, assembles, markets and services high-speed
systems that automatically assemble printed documents, fold, staple or bind the
documents, as required, and insert completed documents into appropriate
envelopes for mailing or other distribution. The Company's systems are modular,
and may be reconfigured in accordance with customer specifications, and are
controlled by Company developed software.

DEVELOPMENT OF THE BUSINESS

The Company was incorporated under the laws of the State of Delaware on
March 22, 1978. After an initial period of inactivity, the Company engaged,
between 1981 and 1985, with a joint venture partner, in a program to develop an
automated system for packaging for distribution of Federal food stamps. Although
the Company was unsuccessful in its efforts to obtain a Federal Government
contract, the technology it developed was applicable to other uses. In 1985,
Aetna Life and Casualty Company requested the Company to develop finishing
systems for use in the insurance business and purchased the first systems
produced by the Company in 1986.

In 1992, the Company completed a restructuring that resulted in the
infusion of approximately $2,257,500 in equity financing in exchange for shares
of common stock, warrants to purchase common stock and convertible preferred
stock. The convertible preferred stock was fully converted into common stock
upon completion of the initial public offering of the Company, which was
completed during December 1993 and January 1994. The initial public offering
generated net proceeds of $4.6 million.

In fiscal 1999, the Company entered into a $5.7 million comprehensive
financing transaction with its then-existing senior lender (the "Bank"), the
Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC (the "New
Lender"), the proceeds of which were utilized to restructure and replace the
Company's pre-existing senior line of credit, fund a full settlement with the
Company's third-party service provider and provide additional working capital to
fund the Company's ongoing business operations. Under the terms of the
transaction, the New Lender loaned an aggregate of $4 million to the Company. At
the same time, the Bank reached an agreement with the Estate, which had
guaranteed a portion of the Company's senior line of credit, whereby the Estate
consented to the liquidation of approximately $1.7 million of collateral and the
application of the proceeds of such collateral to satisfy and repay in full a
like amount of indebtedness outstanding under the senior credit facility. The
balance of the indebtedness outstanding under the senior credit facility,
approximately $350,000, was repaid in full from the proceeds of the new
financing. The Company executed a new promissory note, bearing interest at 5.44%
per annum, in favor of the Estate evidencing the Company's obligation to repay
the amount of the collateral that was liquidated by the Bank.

To induce the New Lender to enter into the financing transaction, the
Company granted the New Lender a stock purchase warrant entitling the New
Lender, at any time during the period commencing on January 1, 1999 and ending
on the fifth anniversary of the transaction, to purchase up to 35% of the pro
forma, fully diluted number of shares of the Common Stock of the Company,
determined as of the date of exercise. The exercise price of the warrant is
$1.50 per share.

In addition, the Company, the New Lender, the Estate and certain
shareholders (Park Investment Partners, Inc. ("Park"), Gerald H. Newman, Four
Partners and Robert Spiegel) entered into a separate voting agreement, pursuant
to which they each agreed to vote all shares of Gunther stock held by them in
favor of (i) that number of persons nominated by the New Lender constituting a
majority of the Board of Directors, (ii) one person nominated by the Estate and
(iii) one person nominated by Park.

Through June 30, 1999, the Company had made principal payments to the New
Lender aggregating $800,000, plus interest. In September 1999, the Company
experienced a deficiency in operating cash flow and the New Lender agreed to
lend the Company an additional $800,000 and to otherwise restructure the payment
terms of the note. As amended, the outstanding balance due Gunther Partners LLC
is due in principal

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installments of $200,000 commencing on October 1, 2001 through April 1, 2002;
$100,000 on May 1, 2002; and $2,500,000 on October 1, 2003. If, at any time
prior to October 1, 2001, the accumulated deficit of the Company improves by
$1.0 million or more compared to the amount at June 30, 1999 of $14.4 million (a
"Triggering Event"), then the principal payments otherwise due from October 1,
2001 through May 1, 2002 shall be become due in consecutive monthly installments
beginning on the first day of the second month following the Triggering Event.
On April 4, 2000, the Company borrowed an additional $500,000 from Gunther
Partners LLC which is payable on demand; however, Gunther Partners LLC has
agreed to defer payment until April 1, 2001 if the Company's cash flow will not
support the repayment.

In December 1999 and April 2000, the Company borrowed a total of $350,000
from a director of the Company. All amounts were repaid within 20 days of the
borrowing date.

FINISHING SYSTEMS

Recent advances in computer technology have produced alternatives to the
traditional offset printing presses for printing of large quantities of
documents. Laser printers take data from computers and transfer the data onto a
print drum with a laser beam. Non-impact laser printing allows for variations in
the text of each document to be printed. The documents can be personalized and
modified as desired.

Computer-directed printers are employed, in conjunction with mainframe or
personal computers, to produce documents. The largest printers most often are
placed in centralized print centers that are near mainframe computers. More
recently developed non-impact laser printers that print five to 25 sheets per
minute can be placed in any location within offices where personal computers are
concentrated. The availability of non-impact laser printers has enabled many
businesses that generate large quantities of documents to create "in-house"
printing centers. There is a large concentration of non-impact laser printers is
in the insurance, finance, and banking industries, and government.

The ability to generate large quantities of documents has created a new
need to automate the assembly, sorting, and distribution of documents, a process
referred to as "finishing". Most of these functions have been performed "off
line", that is, without intelligent or computer directed machines. This requires
substantial labor, and documents cannot be assembled with the same degree of
accuracy, completeness, and speed as allowed by intelligent machines. The
output, or finishing of documents, is referred to as post processing and
includes such functions as folding, stapling, binding, booklet making and
packaging assembled documents for mailing and other distribution. Automated
processing systems also permit quicker turnaround of documents, improve the
accuracy and completeness of assembled documents, facilitate the elimination of
large inventories of pre-printed forms and enable the operator to make changes
in the type of documents being assembled without stopping the assembly process
and without incurring the expense of designing special mainframe computer
programs.

STRATEGY

The Company's objective is to capitalize on its position as a pioneer and
technology leader in the design and sale of intelligent document finishing and
mailing and systems and leading edge, high quality, low cost ink jet solutions
for end user and OEM applications. The Company's goal is to broaden the range of
markets, applications, and customers utilizing these unique technologies while
continuing to increase its leadership position in insurance and financial
markets. Further, it is the Company's objective to leverage both its well known
customer base and the strength of its relationships/alliances with partners like
Hewlett-Packard into a dominant position in the growing marketplaces, both end
user and OEM, for low cost, high resolution ink jet printing at document
processing speeds. The Company has also targeted aggressive expansion of its
system service and consumables/supplies businesses.

Expanded Marketing Efforts. The Company initially relied principally on
contacts within the insurance industry, particularly among large property and
casualty insurers, and on the growing reputation of its products to generate
sales. More recently, the Company's sales and marketing efforts have actively
targeted a far broader range of applications and industries including other
types of insurance companies and customers in the banking, finance and health
care industries. The Company has continued to experience success in expanding
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into other markets including government, retail distribution, outsourcing,
service bureaus, and others. The Company also continues to generate additional
sales to its existing customer base. As much as 50% of the Company's system
sales in a given year have been to previous purchasers of the Company's systems
and the Company believes that repeat sales and upgrades of existing systems will
continue to be an important source of revenue. The Company organizes user group
seminars to allow customers to discuss their system requirements with each other
and the Company and to collaborate on system design.

System Flexibility. The Company remains committed to the objective of
providing modular systems to meet customer needs. The Company's systems'
modularity offers customers the ability to have a custom designed system
assembled from standard components using software written for specific
requirements. Such systems are highly flexible and easily upgraded.

Focus on Accuracy of Document Assembly. The swift, accurate assembly of
documents is critical to customer satisfaction. The Company's systems
incorporate technology, including the ability to read various methods of coding
on each sheet included in documents, that check for proper page sequence, detect
duplicate or missing pages and verify recipients as each document moves down a
conveyor. Systems can verify that a given document has been processed properly
and maintain a record of the document. The Company continues to emphasize
document integrity in all its research, development, and marketing efforts.

Focus on Customer Productivity and Costs. The Company focuses its product
development efforts on further increasing customer productivity and the
reduction of system costs while maintaining the document integrity customers
require.

Collaborative Development. The Company will continue to collaborate with
customers (including organizing and conducting user seminars) in order to
develop a better understanding of customer needs and to offer comprehensive
solutions. The Company's newest product, the inc.jet imager, was developed as a
result of this collaborative effort.

SYSTEMS

The Company's current principal products are the Series III Billing System,
the EP-4000 Electronic Publishing System, the MS-6000 Mailing System, the
FM-1000 Flat Mailer and DM-2000 Dual Mailer.

The Series III is a high-speed statement and billing system. Up to nine
inserts may be added to the primary document prior to envelope insertion. The
system features a high-speed primary document feeder/accumulator and an
up-stream folder.

The EP-4000 processes flat mail and allows documents to be processed in a
series of individually processed subgroups. These subgroups can be stapled,
bound, matched with other documents and combined for insertion into a large,
flat envelope by the EP-4000.

The MS-6000 processes folded documents. The MS-6000 can tri-fold up to ten
sheets and insert the documents into a No. 10 envelope, and can half-fold up to
fifteen sheets and insert the documents into a 6-by-9-inch envelope. Postage is
then automatically applied.

The DM-2000 is designed to process both flat and folded mail from the same
print stream, and eliminates the need to separate print runs by page count, a
costly and time consuming process. The DM-2000 can process documents from one
page to 180 pages in length.

These systems are typically comprised of some or all of the following
component modules:

System Control Module, Operator Console and Reading Technology. The System
Control Module incorporates an IBM-compatible Pentium CPU with a 2 Gigabyte hard
drive, and a ZIP drive for back-up. It performs the system's control functions
and operates the system as defined by the customized application program created
by the Company after consultations with the customer. The System Control Module
communicates with microprocessors located in each module in the system,
monitoring all system functions. Upon initiation of operation, the System
Control Module triggers the operation of a Laser Reader or a CCD (Charged
Coupled Device) Image Reader. After the resulting information is checked against
parameters

3
<PAGE> 16

contained in the system's software, a signal is sent to the Feed Module so that
the sheet can be fed into the finishing system.

A laser reader is a scanning device which uses a laser light source to read
bar-code or OMR (Optical Mark Recognition) information. A CCD Image Reader is a
scanning device which is used to read bar-code or two dimensional information.
In the CCD Image Reader, the code being read is illuminated with ambient light
rather than a laser light source. OMR is a paper marking technology used with
mailing systems to indicate to the main system how to process the sheets that
are assembled into an envelope. The Company was the first to develop processing
systems utilizing Laser Readers to scan a bar code to identify each sheet of
paper processed. Reading the bar code at over 200 times per second, the System
Control Module requires three consecutive identical reads from the Laser Reader
before the sheets are fed into the system. Each document set is given a sequence
and completeness check from the information in the bar code prior to feeding
("read before feed"). Corrective action, if needed, is taken prior to the
assembly or packaging of the document. Systems also may incorporate CCD two
dimensional (2D) Image Readers. This reading technology returns a very precise
copy of the bar code or 2D image being scanned. The CCD Linear Image Reader
transmits the image to be processed by the System Control Module approximately
25 times a second. With this reading technology, large amounts of data can be
stored on the page, with reading accuracy and speed the equal of laser reading
technology.

Microprocessors monitor the sensors in each module and carry out the
instructions from the System Control Module, validating that each action
initiated has been completed. If an error occurs, i.e., an operation is not
completed, a message is sent back to the Operator Console for operator action.
The Operator Console communicates all messages from the system's modules to the
operator through the use of a CRT (Cathode Ray Tube). Bar code or OMR
information, scanned by the Laser Reader or CCD Image Reader, is stored on the
System Control Module's hard disk for retrieval and auditing with the system's
performance information for reporting purposes. A printer is included with each
system to provide a hard copy audit trail and postage reports. Communications
software and a modem are provided with each system to permit remote system
diagnosis and software updates.

2-D Code. 2-D is an improved method of coding documents, replacing more
traditional means such as bar-code or OMR. Unlike linear or one-dimensional bar
codes, 2-D code has the ability to represent large amounts of information in a
small area, thereby making the code less obtrusive and more aesthetic. Data
integrity is maintained through the use of 16 or 32 bit Cyclic Redundancy Check
(CRC), which is far more powerful than the self-checking within traditional bar
codes.

F-300 Feeder. The F-300 is a high speed, vacuum fed system. The first
stage of the feeder "shingle-feeds" the sheets from the bottom of the bin to the
second stage of the feeder. Optimum stack height in the second stage is
maintained by microprocessor control of the first stage. A Laser Reader or CCD
Linear Image Reader is located in the second stage, where the sheets are read
and fed individually at rates of up to 30,000 sheets per hour. In the final
stage, the sheets are collected on a conveyor and document set accumulator,
which is connected to the next module. Through the use of a diverter, the F-300
can separate particular sheets, such as banners or trailers, from the document
prior to collection on the conveyor.

Two-Way Conveyor Module. In a dual mailer system, each sheet of a document
is fed, face down, onto the Two-Way Conveyor until the document set is complete.
When the number of sheets in a document set is ten or less, they are moved in
the direction of the Folded Mail Inserter. When the number of sheets in the
document set is greater than ten, but less than 200, the document set is moved
in the opposite direction towards a 10 x 13 Enveloper.

Binding Methods. The systems can utilize a variety of binding options,
including stitching, stapling, VeloBind and Slip & Grip. Stitching and stapling
offers an inexpensive way to fasten from 2 to 100 sheets of paper. VeloBind and
Slip & Grip provide the recipient with a recloseable binding and a professional
look. Gunther system configurations commonly feature both stitching/stapling and
binding modules and make the type of binding decision based on preset
application parameters, such as document size or recipient.

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<PAGE> 17

Folder. This module may be placed up-stream, mid-stream, or down-stream in
the conveyor path, depending on the application. The folder may be adjusted to
produce C-folds, half-folds, or Z-folds and will dynamically handle 1-15 sheets
of paper.

Friction Feeder. The Friction Feeder is a versatile feeder which separates
and feeds material from the bottom of a stack of up to 24 inches. It efficiently
feeds a wide range of material from 20 lb. sheets up to 1/2 inch thick booklets.
The single knob separator gate adjustment allows for quick and easy set up and
material change over.

Inc.jet(TM) Printing. The Series III, EP-4000 and MS-6000 may be
configured with multi-head ink jet printing capability to dynamically print
envelope addresses, return addresses, specialized messages and bar codes in a
variety of font styles and sizes.

10 x 13 Enveloper Module. The 10 x 13 Enveloper places the document sets
in flat pocket envelopes (flap along short side). The envelopes can range in
size from 8 to 10 inches wide to 11 1/4 inches to 13 inches long. The pre-glued,
self-sealing envelopes are placed on their short ends, open side up. They are
fed one at a time to the insertion station. The envelope is opened, and a
receiving shoe is slid into the envelope to form an easy entry for the material.
After insertion, the envelope is moved to the sealing station where the flap is
sealed. The completed package is then placed onto a conveyor. This module is
also capable of exception and oversize document processing. Exception documents
can be inserted into the envelope without sealing the flap. Oversize documents
can be accumulated and placed directly onto the output conveyor.

Flat Metering. This module provides a means for automatically applying
postage to flat envelopes of varying thickness up to 180 sheets, thereby
avoiding the 0.25" thickness limitation of a standard postage meter. The module
applies postage to a self-stick label using a standard postage meter, after
which the label is fed to a transfer station and applied to the envelope. System
software calculates the weight of each package and automatically applies the
correct postage. The postage label can be applied in any corner of the envelope,
in either portrait or landscape orientation.

Dual Postage Software, Interface, and Meter with Divert. This system
component provides two postage meters for intermixed document weight groups. The
System Control Modules calculates the amount of postage for each document set
using a formula based on sheet count and insert weight previously supplied to
the system. The System Control Module transmits directions to the meters for
controlling which meter is to be used. If the postage amount is different than
the amount set on either meter, the product is deflected into the divert bin.

Manifest Mail Software. The most common technique used by the Company
systems to meet current United States Postal Service requirements requires the
manifest identification and postal zone information to be passed to the system
in the bar code. In addition, the customer application prints the manifest
identification on the address page, above the first line of the address, so that
it is visible through the envelope window. The manifest mail software processes
the information stored in single or multiple log files and generates reports
required by the United States Postal Service. Other alternatives are available
to print a manifest identification on the envelopes if the customer cannot print
the identification in the envelope window.

Convertible Systems. EP and MS systems can be configured to work in both
flat and folded modes, using a quick-connect and disconnect 10 x 13 flat
inserter or folded mail inserter. This feature allows a user to specify either
an EP or MS system, depending on the dominant applications, but still retain the
ability to run in both flat and folded mode.

INC.JET(TM)

The Company's inc.jet imager is a compact, high-speed, high resolution
inc.jet printer that can be used inline on the Company's finishing systems for
flat or folded mail. The inc.jet imager prints information on envelopes such as
the return address, recipient address, graphics, messages and postal indicia.
The new technology offers print quality resolution of 600 x 600 dpi (depending
on application) at extraordinary high speed -- up to 12,000 pieces per hour. The
inc.jet imager is environmentally safe and efficient, with a low net
cost-per-image. The inc.jet imager was initially targeted as an envelope printer
to complement Gunther's
5
<PAGE> 18

complete line of intelligent document automation and mailing systems. The
inc.jet imager provides a solution to a problem that was voiced by Gunther
customers and prospects: low-cost, high quality personalized printing on
envelopes at document automation speeds.

The inc.jet imager is also available for OEM licensing to printing and
postage system manufacturers for incorporation into desk and tabletop inserters
and folders, copiers, address printers, postage meters, standalone printers and
other applications. Potential markets include:

Postage/ESTAMP applications
Envelop printing and address labeling
Point of sales printing
Box and carton labeling
Tag printing
Spot color and anti-fraud marking of originals

The inc.jet imager is a rugged, compact design that fits in the palm of
your hand (5.5" x 3.5" x 4.5") and weighs under 2 pounds. The bulk ink supply
consists of three 1 3/4" x 3 3/4" bladders attached to the unit. The print
drivers and electronics are all resident in the imager. Commands to control the
imager are communicated via the computer that comes with the Gunther system, or
any standard PC.

The Information Based Indicia Program (IBIP) is an initiative by the United
States Postal Service (USPS) to move to a new method of applying postage
information on mail pieces. The plan involves getting away from the mechanical
postage meter as we know it and replacing it with a combination of regulated
"black box" technology and open architecture, computer/printer technology. This
arrangement will allow users to print newly designed indicia that include some
readable information, as well as some encoded data, using most standard, office
type printers. The advantages to the user of this proposed method include better
control of postage funds and less costly, more efficient printing of postage
information on the mail piece. The Company's inc.jet imager is capable of
printing the new indicia, including the encoded information. The Company's
experience with high-speed reading of 2-D codes is also an important part of the
overall application.

MARKETING AND SALES

The Company initially relied principally on contacts within the insurance
industry, particularly among large property and casualty insurers, and on the
growing reputation of its products to generate sales. More recently the
Company's sales and marketing efforts have actively targeted a far broader range
of applications and industries including other types of insurance companies and
customers in the banking, finance and healthcare industries. The Company has
continued to experience success in expanding into other markets including
government, retail distribution, outsourcing, service bureaus, and others. The
Company also continues to generate additional sales to its existing customer
base. As much as 50% of the Company's system sales in a given year have been to
previous purchasers of the Company's system and the Company believes that repeat
sales and upgrades of existing systems will continue to be an important source
of revenue. The Company organizes user group seminars to allow customers to
discuss their system requirements with each other and the Company, and to
collaborate on system design.

The Company is an approved Marketing Partner with major printing systems
vendors (Xerox, Oce, and IBM). Gunther products offer a strategic portion of the
total solution required by the customer base of these vendors and as such
Gunther products are often included in their sales presentations and there is a
growing amount of joint sales and marketing activity with these vendors. In
addition, the Company has other informal marketing arrangements with other
manufacturers and suppliers of related hardware and software products.

CUSTOMERS

To date, the Company's principal customers have been property and casualty
insurance companies, which require accurate, high-speed preparation and
distribution of personalized policies and insurance certificates.

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<PAGE> 19

The Company's customers include many of the top insurance companies in the
United States including Allstate Insurance Co., Chubb & Son Insurance, Fireman's
Fund, GEICO, The Hartford, Metropolitan Life, Mutual of Omaha, SAFECO and The
Travelers. In addition, the Company's systems have been purchased by Gartner
Group, Moore Business Communication Systems, Nike, Public Schools Employees
Retirement System, USAA, U.S. Census Bureau, U.S. Department of the Treasury,
and Nippon Telephone & Telegraph in Japan.

The Company has expanded into the mutual fund, pharmaceutical and outsource
provider markets with sales to customers in each of these industries. Despite
reliance on sales in the insurance industry, the development of the business has
not been dependent upon any single or few customers. Due to the relatively high
sales price of the Company's systems, customers who place multiple machine
orders within a single year may account for more than 10% of the Company's
revenues for that year. However, the Company has not relied on any one of these
customers to maintain its level of sales from year to year.

As of March 31, 2000, the Company has a backlog aggregating approximately
$4,153,000. Backlog consists of total contract price less revenue recognized to
date for all signed orders on hand. Typically, approximately 50% of the purchase
price of each system is received by the Company at the time an order is placed
by a customer and machine specifications are completed, 40% of the purchase
price is paid when the system is approved for shipment and the last installment
(typically 10% of the purchase price) is paid within 30 days of installation.
The Company recognizes revenues on the percentage of completion method over the
production period of the system.

MANUFACTURING

The Company does not fabricate most of the hardware components of its
finishing systems and is largely dependent upon third party suppliers to
fabricate and, in some cases, assemble components and/or sub-assemblies of a
typical system. Although the Company believes that other suppliers are available
to perform the services provided by the current suppliers, the termination of
the Company's relationship with one or more of these companies may result in a
temporary interruption in the supply, and potentially the manufacture and
shipment, of the Company's systems. While several of the Company's suppliers
require cash on delivery, the Company is not aware of any material change in the
relationships with its suppliers during the past year, nor have any suppliers
indicated an intent to materially modify the terms on which they supply
materials to the Company. In the past, the Company has replaced certain
suppliers who have been unable to meet the Company's requirements with respect
to quality, delivery or pricing, and the Company in the future may replace
certain other suppliers for similar reasons.

The Company manufactures, assembles and tests each system at its facilities
in Norwich, Connecticut. Each system is further tested for hardware and software
compliance with each customer's unique application and media requirements, using
customer supplied materials. Upon satisfactory completion of such tests and
customer acceptance of the system, each system is disassembled for shipment and
reassembled at customer facilities, which is followed by less stringent site
acceptance testing and operator training.

INSTALLATION AND CUSTOMER SERVICE

The Company's systems usually can be installed at a customer's facilities
in one day. The Company typically uses a systems engineer, who plans and carries
out the installation and programming of the systems. A Company employee will
remain at the customer's facilities for approximately two weeks to monitor the
initial operation of the system. As part of the installation, the Company trains
two operators for one week at either the Company's or the customer's facilities
in the operation and maintenance of the system. The Company has monthly meetings
with customers to evaluate the performance of systems. All systems are now
installed with a modem and diagnostic software that enable the Company to
monitor system performance from a remote location. As part of each installation,
the Company includes a supply of spare parts which can be resupplied on short
notice. Each system has been designed to facilitate parts replacements. The
Company typically warrants each system for a period of 90 days after
installation.

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<PAGE> 20

All Gunther customers have some form of maintenance contract with the
Company. Typically, this would take the form of on-call service, although in
larger installations on-site service is required. Basic on-call coverage comes
with a four hour response time guarantee; two hour response time is available to
customers for an additional charge.

Historically, the Company had contracted with a third-party service
provider to perform the Company's service obligations under the maintenance
agreements with its customers. During the third quarter of fiscal 1999, the
Company made a strategic decision to assume the maintenance services on
predominantly all current and future maintenance contracts. By assuming the
maintenance services, management believes that, once an appropriate
infrastructure has been developed, gross profit as a percentage of maintenance
sales will increase by eliminating certain duplicate costs inherent in a
third-party servicing relationship. The transition of maintenance services was
completed during the year ended March 31, 2000.

Alternatively, customers can elect to have the Company train its personnel
to maintain their systems. Such training is provided for up to three qualified
technicians for three weeks at the Company's facility prior to delivery of the
system. Under this program, a spare parts kit is purchased, and as parts are
used, they are replaced at a charge to the customer. Along with the maintenance
program, the Company also provides maintenance support of the system's software,
monthly performance meetings and telephone support for a monthly charge.

The typical cost to a customer of an annual maintenance contract is equal
to approximately 10% of the cost of the customer's system. For the fiscal year
ended March 31, 2000, revenues from customer maintenance agreements represented
approximately 44% of the Company's net sales. The Company believes that, as it
places more systems in service, maintenance revenues will represent an
increasing percentage of its net sales.

RESEARCH AND DEVELOPMENT

The Company's principal research and development efforts have been
conducted through software and hardware development groups located at its
facility in Norwich, Connecticut. These groups focus on improving upon and
creating new applications of the Company's technology. The Company's engineering
staff also generates the functional specifications and development schedules for
each of the Company's customers. The Company performs all material development
and engineering functions internally. The Company from time to time engages
third parties to design hardware and software components based upon
specifications developed by the Company.

For the fiscal years ended March 31, 2000 and 1999, the Company incurred
expenses of $1.2 million and $1.0 million, respectively, for research and
development activities.

COMPETITION

The Company's principal competitors are Pitney-Bowes and Bell & Howell.
Although the Company's total revenue is small relative to these large
competitors, the Company is nonetheless successful in many situations, primarily
due to the unique capabilities of Gunther equipment to handle effectively more
complex mailing system applications. The principal competitive factors in the
Company's business are product functionality, price/performance and reliability.
The Company believes that it competes favorably on the basis of each of these
factors. The Company also believes that it competes effectively in sales to its
existing customer base because of, among other things, its emphasis on document
integrity, its focus on customer needs and the flexibility of its systems
resulting from the application of its proprietary technology.

Gunther's inc.jet products include several important features that set them
apart from competitive products. The inc.jet accomplishes the high-speed
printing of data (50 inches per second) at very high resolution (up to 600 x 600
dots per inch). The compact modular construction combined with injection molded
plastic enable this product to be produced at low cost with a low level of
maintenance.

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<PAGE> 21

PATENTS AND PROPRIETARY RIGHTS

The Company has pursued an intellectual property rights strategy to protect
its proprietary product developments. The Company's policy is to file patent
applications to protect its technology, and the inventions and improvements that
may be important to the development of its business. As a further precaution,
the Company licenses, rather than sells, its proprietary system software to
customers. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to protect its intellectual
property rights. However, the Company does not consider its patent and other
intellectual property rights as material to its competitive position, which, it
believes, depends on the ability to adapt technology to customer needs and in
particular to modify software that controls system functions, and, to a lesser
extent, to combine modules.

The Company has been issued eleven patents in the United States, has two
pending patent applications in the United States, and intends to continue to
file patent applications on its products and systems. All patent applications
filed by the Company are directed to salient features of the Company's systems.
The Company regards certain computer software and service applications as
proprietary. The Company relies on nondisclosure agreements with its employees
and, where the Company regards it as necessary, with customers.

In connection with a development agreement with Connecticut Innovations,
Inc. ("CII") and as partial consideration for loans made in connection
therewith, the Company has assigned all existing, and future patents to CII as
security for the Company's performance under a development agreement. Title to
the patents will be transferred back to the Company upon the fulfillment of its
obligations under the development agreement. The Company has also granted
certain additional security interests in its patents in connection with the
financing transactions consummated on October 2, 1998.

Although the Company believes that patents and other intellectual property
rights may be important to its business, there can be no assurance that patents
will issue from any applications thereof, or if patents issue, that the claims
allowed will be of adequate scope to protect the Company's technology or the
issued patents or other technology rights will not be challenged or invalidated.
The Company's business could be adversely affected by increased competition in
the event that any patent granted to it is adjudicated to be invalid or is
inadequate in scope to protect the Company's operations, or if any of the
Company's other arrangements related to technology are breached or violated.
Although the Company believes that its products and technology do not infringe
the proprietary rights of others, there can be no assurance that third parties
will not assert infringement claims in the future or that such claims will not
be successful. Furthermore, the Company could incur substantial costs in
defending itself in patent infringement suits brought by others and in
prosecuting suits against patent infringments.

In connection with the restructuring completed by the Company in September
1992, the Company granted to Bell & Howell a nonexclusive license for read and
feed technology developed and patented by the Company. The technology previously
had been licensed by the Company to one of its component suppliers, Ascom
Holding, Inc. ("Ascom"), but was not transferable by Ascom. The license granted
to Bell & Howell was in consideration for the forgiveness of indebtedness of the
Company to Ascom and the payment by Ascom of $250,000 to CII on behalf of the
Company. The Company believes that Bell & Howell purchased the business and
assets of Ascom in 1992. The license granted to Bell & Howell is royalty-free
and coterminous with the patents with respect to the licensed technology. The
Company does not believe that the license granted to Bell & Howell has affected
the Company's competitive position. The Company does not regard the technology
itself as material to its competitive position, which depends on the Company's
ability to adapt technology to customer needs and, in particular, to modify
software that controls system functions and, to a lesser extent, to combine
modules. However, the development by Bell & Howell of a software driven system
based in part on the technology could adversely affect the Company's competitive
position.

EMPLOYEES

At March 31, 2000, the Company had 178 (121 at March 31, 1999) full-time
employees, consisting of 62 (68 at March 31, 1999) engaged in engineering,
development and manufacturing, 16 (14 at March 31, 1999) in marketing and sales
activities, 91 (30 at March 31, 1999) in customer services and 9 (9 at March 31,
1999)
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<PAGE> 22

in general administrative and executive functions. The increase in service
personnel is due to the Company assuming the maintenance services on
predominantly all maintenance contracts. The Company does not have a collective
bargaining agreement with any of its employees and considers its relationship
with its employees to be good.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's principal facilities are located at One Winnenden Road,
Norwich, Connecticut, where the Company leases approximately 75,000 square feet
of space. The Company lease requires payment of monthly rent in the amount of
$30,000 through September 30, 2001. Of the Company's space in Norwich,
approximately 15,000 square feet is devoted to office and administrative uses,
approximately 55,000 square feet to engineering, development and assembly
activities, and approximately 5,000 square feet to marketing, sales and customer
service functions. The Company believes that its facilities are adequately
equipped and maintained for present and planned operations.

ITEM 3. LEGAL PROCEEDINGS.

As previously reported, a purported class action lawsuit was filed against
the Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities law. The action
was filed in the United States District Court for the District of Connecticut.
Among other things, the complaint alleges that the Company's financial
statements for the first three quarters of fiscal 1998 were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and Rule 10b-5 promulgated thereunder, and Section 20(a) of
the Exchange Act. The plaintiffs are seeking compensatory damages and
reimbursement for the reasonable costs and expenses, including attorneys' fees,
incurred in connection with the action.

On December 17, 1999, the plaintiffs requested leave to file a second
amended and consolidated complaint. On May 1, 2000, the Court granted the
plaintiffs leave to serve that second amended and consolidated complaint.

Although the Company believes the complaint is without merit and will
vigorously defend the action, it is not possible to predict with certainty the
final outcome of this proceeding.

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

None.

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<PAGE> 23

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

During fiscal 1998, the Company's Common Stock was traded in the NASDAQ
SmallCap market under the symbol "SORT". On August 17, 1998, the National
Association of Securities Dealers ("NASD") delisted the Common Stock from the
NASDAQ SmallCap Market due to the Company's failure to maintain capital and
surplus of at least $1,000,000. Thereafter, the Common Stock was traded in the
"pink sheets" until January 1999, when it commenced trading on the OTC Bulletin
Board.

The following table sets forth the high and low bid prices of the Company's
Common Stock for each quarter of fiscal 1999 and fiscal 2000, as reported by
NASDAQ and the OTC Bulletin Board. These quotations represent prices between
dealers and do not include retail mark-ups, mark-downs or other fees or
commissions and may not represent actual transactions.

<TABLE>
<CAPTION>
Bid Prices
-------------
Fiscal Quarter High Low
-------------- ---- ---
<S> <C> <C>
First Fiscal Quarter - 1999
$4 23/32 2
(April 1 - June 30, 1998)

Second Fiscal Quarter - 1999
2 11/16 1 1/8
(July 1 - September 30, 1998)

Third Fiscal Quarter - 1999
2 3/4 1/2
(October 1 - December 31, 1998)

Fourth Fiscal Quarter - 1999
2 1/8 1 3/8
(January 1 - March 31, 1999)

First Fiscal Quarter - 2000
3 3/4 2 1/32
(April 1 - June 30, 1999)

Second Fiscal Quarter - 2000
2 15/16 2 7/16
(July 1 - September 30, 1999)

Third Fiscal Quarter - 2000
2 5/8 1 7/8
(October 1 - December 31, 1999)

Fourth Fiscal Quarter - 2000
3 2 3/8
(January 1 - March 31, 2000)
</TABLE>

On June 2, 2000, the high and low bid prices for the Company's Common Stock
were $2.25, as reported.

As of June 10, 2000, there were approximately 78 record owners of the
Company's Common Stock. The Company believes there are 876 beneficial owners of
Common Stock. The Company has not paid dividends on its Common Stock and intends
for the foreseeable future to retain earnings, if any, to finance the expansion
and development of its business.

SALES OF UNREGISTERED SECURITIES

During fiscal 2000, the Company granted certain officers and key employees
stock options covering an aggregate of 45,000 shares of Common Stock at exercise
prices ranging from $2.50 to $3.22 per share. Options covering 5,000 shares were
granted effective as of June 18, 1999, options covering 30,000 shares were
granted effective as of October 3, 1999, and options covering 10,000 shares were
granted effective as of February 7, 2000. The options vest ratably over a
five-year period and have a maximum duration of ten years.

During fiscal 2000, the Company also credited an aggregate of 14,679 shares
of Common Stock to the accounts of five directors who are participating in the
Gunther International, Ltd. Directors Equity Plan (the "Plan"). In accordance
with the terms of the Plan, each participating director is entitled to receive
grants of Common Stock in lieu of a quarterly cash retainer. The number of
shares to which each director is entitled to receive each fiscal quarter is
equal to (a) $2,500, divided by (b) the fair market value of a share of Common
Stock as of the last business day of the quarter. Based upon this formula, 5,128
shares of Common Stock were credited in respect of the fiscal quarter ended
September 30, 1999 (the fair market value of the Common Stock on the last
business day of the quarter being $2.44 per share), 4,550 shares of Common Stock
were

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<PAGE> 24

credited in respect to the fiscal quarter ended December 31, 1999 (the fair
market value of the Common Stock on the last business day of the quarter being
$2.75 per share), and 5,000 shares of Common Stock were credited in respect of
the fiscal quarter ended March 31, 2000 (the fair market value of the Common
Stock on the last business day of the quarter being $2.50 per share). Each
director elected to defer receipt of the shares credited to his account.

No underwriters were used in connection with any of the foregoing
transactions and, accordingly, there were no underwriting discounts or
commissions. The issuance of these securities was exempt from registration under
the Securities Act of 1933 in reliance upon Section 4(2) thereof and the rules
and regulations promulgated thereunder.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.

SUMMARY FINANCIAL DATA

The summary financial data presented below should be read in conjunction
with the information set forth in the financial statements and notes thereto
included elsewhere herein.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
Systems........................................... $12,052,692 $11,896,553 $ 8,630,103
Maintenance....................................... 9,533,778 8,847,082 6,454,716
----------- ----------- -----------
Total sales............................... 21,586,470 20,743,635 15,084,819
----------- ----------- -----------
Cost of sales:
Systems........................................... 8,094,029 8,521,585 7,030,092
Maintenance....................................... 8,289,268 6,684,135 4,771,692
----------- ----------- -----------
Total cost of sales....................... 16,383,297 15,205,720 11,801,784
----------- ----------- -----------
Gross profit........................................ 5,203,173 5,537,915 3,283,035
----------- ----------- -----------
Operating expenses:
Selling and administrative........................ 4,180,274 4,581,853 5,050,863
Research and development.......................... 1,227,626 1,046,569 618,735
----------- ----------- -----------
Total operating expenses.................. 5,407,900 5,628,422 5,669,598
----------- ----------- -----------
Operating loss...................................... (204,727) (90,507) (2,386,563)
Interest expense, net............................. (554,156) (466,653) (245,552)
----------- ----------- -----------
Loss before cumulative effect of change in
accounting principle.............................. (758,883) (557,160) (2,632,115)
Cumulative effect of change in accounting
principle......................................... -- (622,953) --
----------- ----------- -----------
Net loss............................................ $ (758,883) $(1,180,113) $(2,632,115)
=========== =========== ===========
Per share:
Loss before cumulative effect of change in
accounting principle.............................. $ (0.18) $ (0.13) $ (0.61)
Cumulative effect of change in accounting
principle......................................... -- (0.14) --
----------- ----------- -----------
Net loss............................................ $ (0.18) $ (0.27) $ (0.61)
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C> <C>
Current assets...................................... $ 5,682,690 $ 4,868,486
Total assets........................................ 9,616,566 8,806,647
Current liabilities................................. 7,310,139 7,484,265
Long-term debt, less current maturities............. 5,277,178 3,534,250
Stockholders' equity (deficit)...................... (2,970,751) (2,211,868)
</TABLE>

12
<PAGE> 25

RESULTS OF OPERATIONS

Fiscal Year ended March 31, 2000
Compared to Fiscal Year ended March 31, 1999

Systems sales include sales of high-speed assembly systems, upgrades to
previously sold systems and inc.jet imager systems and ancillary products.

Systems sales for fiscal year 2000 increased $156,000, or 1%, to $12.1
million from $11.9 million in fiscal year 1999. The increase in systems sales
was primarily due to an increase in inc.jet imager sales, which increased $1.3
million, or 212%, to $1.9 million. Inc.jet sales comprised 15% of total systems
sales in fiscal year 2000 as compared to 5% in fiscal year 1999. Sales of high
speed assembly systems for fiscal year 2000 decreased to $10.2 million, or 10%,
from $11.3 million in fiscal year 1999. The decrease in systems sales for fiscal
year 2000 is primarily due to a slow period of systems orders in the first and
second fiscal quarters. Backlog consists of total contract price less revenue
recognized to date for all signed orders on hand. A summary of orders, sales and
backlog for the each of the last four fiscal quarters for the high speed
assembly systems and related upgrades is as follows:

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
2000 1999 1999 1999
--------- ------------ ------------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Backlog, beginning of period.................. $ 4.5 $ 2.0 $ 2.0 $ 4.3
Orders........................................ 3.1 4.2 2.1 .6
Sales......................................... (3.4) (1.7) (2.1) (2.9)
----- ----- ----- -----
Backlog, end of period........................ $ 4.2 $ 4.5 $ 2.0 $ 2.0
===== ===== ===== =====
</TABLE>

Maintenance sales increased $687,000, or 8%, to $9.5 million in fiscal year
2000 from $8.8 million in fiscal year 1999 as a result of a larger number of
systems under service contract from shipments during the year and inflationary
price increases in service contracts between the periods.

Gross profit decreased by $335,000, or 6%, to $5.2 million in fiscal year
2000 from $5.5 million in fiscal year 1999. The gross margin on systems sales
increased to 33% in fiscal year 2000 from 28% in fiscal year 1999. The increase
in gross margin on systems sales is attributable to an increase in inc.jet
imager sales, which had a 62% margin. The gross margin on sales of high speed
assembly systems remained relatively stable at 28%. The gross margin on
maintenance sales decreased to 13% in fiscal year 2000 from 24% in fiscal year
1999. The Company has been assuming the maintenance services on predominantly
all maintenance contracts. The transition of maintenance services began on April
1, 1999 and was completed by March 31, 2000. By assuming the maintenance
services, management believes gross profit as a percentage of maintenance sales
will increase over time by eliminating certain duplicate costs associated with
the Company and the third party service provider. During fiscal year 2000, the
Company incurred certain costs necessary to build a service department
infrastructure, including the hiring of additional support personnel, while
still incurring costs from the third party service provider. The Company's
transition expenses were higher than expected because the number of customer
service engineers transitioning from the third party service provider were less
than anticipated. This resulted in the Company having to recruit and train more
personnel than anticipated and to incur additional expenses to provide customer
support from the Connecticut location to customer sites. The Company also
incurred an increase in service parts costs during the transition period. These
increased costs followed preventive maintenance reviews by Company personnel at
various sites. The Company found that in certain sites a substantial amount of
time and materials were required to bring the systems to a level of operation
the Company considers appropriate for those sites.

Selling and administrative expenses decreased $402,000, or 9%, to $4.2
million in fiscal year 2000 from $4.6 million in fiscal year 1999. Selling and
administrative expenses, as a percentage of total revenues, for fiscal years
2000 and 1999 were 19% and 22%, respectively. The decrease in selling and
administrative expenses is primarily attributable to a decrease in personnel
costs, including wages and commissions, related benefits and travel costs, as
well as a shift in personnel from the inc.jet sales department back to research
and development. During the 1999 period, inc.jet personnel were concentrating on
bringing the new imager to

13
<PAGE> 26

market. After the introduction of the inc.jet imager to the market, a majority
of the inc.jet personnel have concentrated their efforts on enhancements to the
inc.jet imager.

Research and development expenses increased $181,000 or 17%, to $1.2
million in fiscal year 2000 from $1.0 million in fiscal year 1999. The increase
in the research and development expenses was primarily attributable to an
increased focus on completing the inc.jet imager and the development of product
enhancements to the current product line of high-speed assembly systems.

Interest expense increased $87,000 to $554,000 in fiscal year 2000 from
$467,000 in fiscal year 1999. The increase was due to an increase in debt.

LIQUIDITY AND CAPITAL RESOURCES

For fiscal 2000 and 1999, the Company incurred net losses, before the
effect of accounting change, of $758,883 and $557,160, respectively. Further,
for those fiscal years, cash of $1,083,901 and $2,325,411, respectively, was
used for operating activities. At March 31, 2000, the Company has a deficiency
in working capital of $1,627,449 and a stockholders' deficit of $2,970,751.
While these conditions may raise doubt about the Company's ability to meet its
obligations as they become due in the ordinary course of business, management
believes there are several mitigating factors that will enable it to meet its
obligations through March 31, 2001. For the fourth quarter of fiscal 2000, based
on unaudited financial data, the Company recognized net income of $614,035 on
sales of $6,512,494 with a gross profit of $2,089,529 but used cash of $437,692
for operating activities. The improvement in operating results in the fourth
quarter reflects the benefits of higher sales volume coupled with reduced
production time gained through enhanced processes. At March 31, 2000, backlog
for high-speed assembly system and upgrade orders, consisting of total contract
price less revenue recognized to date for all signed orders on hand, was $4.2
million. The ability of the Company to achieve profitable operations in the
future is currently dependent on attaining sufficient future sales volumes.
Subsequent to year end, the Company borrowed an additional $500,000 from Gunther
Partners LLC which is payable on demand; however, Gunther Partners LLC has
agreed to defer payment until April 1, 2001 if the Company's cash flow will not
support the repayment. In addition, the Company has obtained commitments for
$500,000 of additional financing, if necessary.

The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and achieve consistent profitability. Historically,
the Company has derived liquidity through systems and maintenance sales
(including customer deposits), financing arrangements with banks and other third
parties and, from time to time, sales of its equity securities.

The negative cash flow for fiscal 2000 resulted primarily from a $1.9
million increase in accounts receivable. Approximately $1.0 million of the $1.9
million increase was attributable to payments due on 3 systems shipped prior to
March 31, 2000. Approximately 40% of the purchase price of a system is due at
the shipping date. A delay in payment of this amount on several systems will
cause an unusual increase in accounts receivable. The amounts due were received
by May 31, 2000.

In September 1999, the Company and Gunther Partners, LLC agreed to modify
the terms of a previous borrowing to defer payment of the $700,000 due from July
1999 through October 1999 and to loan the Company $800,000, thereby restoring
the aggregate principal amount of the indebtedness to the original principal
amount of $4.0 million. As amended, the total balance due of $4 million is to be
repaid in nine payments as follows: (a) $200,000 shall be paid on the first day
of each month commencing on October 1, 2001 and continuing and including April
1, 2002; (b) $100,000 shall be paid on May 1, 2002; and (c) the balance shall be
paid on October 1, 2003. If, at any time prior to October 1, 2001, the
accumulated deficit of the Company, calculated in accordance with generally
accepted accounting principles, improves by $1.0 million or more above the
Company's accumulated deficit at June 30, 1999 (a "Triggering Event"), then the
principal payments due on October 1, 2001 through May 1, 2002 shall be
accelerated and become due in consecutive monthly installments beginning on the
first day of the second month following the Triggering Event.

14
<PAGE> 27

On November 8, 1999, the Company entered into a revolving loan agreement
with a bank pursuant to which the bank has agreed to loan the Company up to
$500,000 based on a borrowing base of eligible accounts receivable. Eligible
accounts receivable include accounts receivable under 60 days past due,
excluding receivables from agencies of the United States. As of March 31, 2000,
the Company has borrowed $350,000 under the loan agreement. Interest is to be
paid monthly at the annual rate of prime plus 1.5%. The loan agreement contains
certain covenants, including a debt service coverage ratio of not less than 1.25
to 1. Unless extended by the bank, the loan agreement expires on August 31,
2000. As of March 31, the Company was in default of the debt service ratio. The
bank subsequently waived the default through August 31, 2000.

The Company also borrowed $200,000 from a director of the Company on a
short-term basis on December 16, 1999. This amount plus interest at 8% was paid
back to the director prior to December 31, 1999. Subsequent to March 31, 2000,
the Company borrowed an additional $150,000 from a director of the Company; this
amount has also been repaid.

The Loan and Security Agreement between the Company and Gunther Partners,
LLC expressly prohibits the Company from incurring any additional indebtedness
from any person or entity other than the Gunther Partners, LLC without the
permission of Gunther Partners LLC. The Company must depend, therefore, on
current cash balances, internally generated funds, and the revolving line of
credit to finance its operations. At March 31, 2000, the Company had cash and
cash equivalents of approximately $87,136, as well as $3.3 million of accounts
receivable.

Under the Company's normal sales pricing policy, approximately 50% of the
sales price of each system is received by the Company within 30 days from the
time an order is placed by a customer; approximately 40% is received at the time
the system is shipped to the customer and the remaining 10% is received
approximately 30 days after delivery of the system. As a result, the Company
receives a significant cash flow benefit from the receipt of new orders.

On a going forward basis, management believes that the Company has
sufficient cash and cash equivalents, together with the cash expected to be
derived from additional system sales and maintenance contracts, to meet the
Company's cash needs for the next fiscal year. Further, the Company has
commitments for additional funding, if necessary. The Company's cash needs may
be affected by a number of factors, however, many of which are beyond the
control of management. See "Forward Looking Statements," below. Thus, there can
be no assurance that the Company will not need significantly more cash than is
presently forecasted by management or that the Company's current and expected
sources of cash will be sufficient to fund the Company's ongoing operations.

INFLATION

The effect of inflation on the Company has not been significant during the
last two fiscal years.

YEAR 2000

The Company undertook a project designed to assess the potential impact of
the year 2000 on its internal business systems, products and operations. The
Company's year 2000 initiatives included (i) testing and upgrading internal
business systems and facilities, (ii) testing and developing necessary upgrades
for the Company's products; (iii) contacting key suppliers, vendors and
customers to determine their year 2000 compliance status; and (iv) developing
contingency plans. All phases of the project were completed before December 31,
1999.

The costs incurred by the Company in connection with the year 2000 issue
have not been material, and the Company does not expect any remaining year 2000
remediation costs to be material. However, the Company has not separately
tracked the internal costs incurred in its year 2000 project. Such costs are
principally for payroll and related costs for management and information systems
employees.

Since January 1, 2000, the Company has not experienced any significant
problems associated with the change in the century, and management does not
anticipate that any such problems will develop. Nonetheless, there can be no
assurance that year 2000 issues will not have a material adverse impact on the
Company's
15
<PAGE> 28

business, operations or financial condition. Despite the Company's efforts to
ensure that its material current products are year 2000 compliant, the Company
may see an increase in warranty and other claims, especially those related to
Company products that incorporate, or operate using, third-party hardware or
software. If any of the Company's significant suppliers, vendors or customers
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. In addition, the Company's research and
development, production, distribution, financial, administrative and
communications operations might be disrupted. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations and financial condition.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements within the meaning of Section
21E. Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other similar expressions are intended to
identify forward-looking statements. Investors should be aware that such
forward-looking statements are based on the current expectations of management
and are inherently subject to a number of risks and uncertainties that could
cause the actual results of the Company to differ materially from those
reflected in the forward-looking statements. Some of the important factors which
could cause actual results to differ materially from those projected include,
but are not limited to, the following: general economic conditions and growth
rates in the finishing and related industries; competitive factors and pricing
pressures; changes in the Company's product mix; technological obsolescence of
existing products and the timely development and acceptance of new products;
inventory risks due to shifts in market demands; component constraints and
shortages; the ramp-up and expansion of manufacturing capacity; and the
continued availability of financing. The Company does not undertake to update
any forward-looking statement made in this report or that may from time-to-time
be made by or on behalf of the Company.

ITEM 7. FINANCIAL STATEMENTS.

The financial statements required by this item are presented on pages F-1
through F-15 immediately after the signature page of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

16
<PAGE> 29

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by Item 9 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
2000 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2000. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

ITEM 10. EXECUTIVE COMPENSATION.

The information required by Item 10 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
2000 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2000. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by Item 11 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
2000 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2000. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 12 is hereby incorporated by reference to
the Company's Proxy Statement that will be distributed in connection with the
2000 Annual Meeting of Stockholders, which is currently scheduled to be held in
September 2000. Such proxy statement will be filed with the Commission within
one hundred and twenty (120) days of the close of the fiscal year, or this
Annual Report on Form 10-KSB will be amended to include the requisite
information.

17
<PAGE> 30

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

A. Exhibits required by Item 601 of Regulation S-B:

<TABLE>
<S> <C>
3.1 Restated Certificate of Incorporation of the Company (filed
as Exhibit 3(i) to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended December 31, 1998,
Commission File No 33-70052-B, and incorporated herein by
reference).
3.2 By-Laws of the Company, as amended (filed as Exhibit 3(iv)
to the Company's Quarterly Report on Form 10-QSB for the
fiscal quarter ended December 31, 1998, Commission File No.
33-70052-B, and incorporated herein by reference).
10.1 Recapitalization Agreement dated September 4, 1992 (filed as
Exhibit 10(a) to the Company's Registration Statement on
Form SB-2, Commission File No. 33-70052-B, and incorporated
herein by reference).
10.2 Royalty Agreement, dated September 3, 1992, between the
Company and William H. Gunther, Jr. (filed as Exhibit 10(s)
to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.3 Royalty Agreement, dated September 3, 1992, between the
Company and William H. Gunther III (filed as Exhibit 10(t)
to the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.4 Royalty Agreement, dated September 3, 1992, between the
Company and Joseph E. Lamborghini (filed as Exhibit 10(u) to
the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.5 Royalty Agreement, dated September 3, 1992, between the
Company and Rufus V. Smith (filed as Exhibit 10(v) to the
Company's Registration Statement on Form SB-2, Commission
File No. 33-70052-B, and incorporated herein by reference).
10.6 Royalty Agreement, dated September 3, 1992, between the
Company and Christine E. Gunther (filed as Exhibit 10(w) to
the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.7 Royalty Agreement, dated September 3, 1992, between the
Company and Susan G. Hotkowski (filed as Exhibit 10(x) to
the Company's Registration Statement on Form SB-2,
Commission File No. 33-70052-B, and incorporated herein by
reference).
10.8 Form of Employee Stock Option Plan and Founders Option Plan
(filed as Exhibit 10(kkk) to the Company's Registration
Statement on Form SB-2, Commission File No. 33-70052-B, and
incorporated herein by reference).
10.9 Warrant, dated October 20, 1993, to purchase 40,000 shares
of Common Stock issued to Mark Fisher (filed as Exhibit
10(vvv) to the Company's Registration Statement on Form
SB-2, Commission File No. 33-70052-B, and incorporated
herein by reference).
10.10 Warrant, dated January 9, 1995, to purchase 13,333 shares of
Common Stock issued to Mark Fisher (filed as Exhibit 10.49
to the Company's Annual Report on Form 10-KSB/A dated June
26, 1995, and incorporated herein by reference).
10.11 Warrant, dated January 12, 1995, to purchase 10,000 shares
of Common Stock issued to Michael Jesselson and Linda
Jesselson Trustees UIT 3/27/84 FOB Samuel Joseph Jesselson
(filed as Exhibit 10.51 to the Company's Annual Report on
Form 10-KSB/A dated June 26, 1995, and incorporated herein
by reference).
</TABLE>

18
<PAGE> 31
<TABLE>
<S> <C>
10.12 Warrant, dated January 12, 1995, to purchase 10,000 shares
of Common Stock issued to Michael Jesselson and Linda
Jesselson Trustees UIT 3/27/84 FOB Roni Aron Jesselson
(filed as Exhibit 10.52 to the Company's Annual Report on
Form 10-KSB/A dated June 26, 1995, and incorporated herein
by reference).
10.13 Warrant, dated January 12, 1995, to purchase 10,000 shares
of Common Stock issued to Michael Jesselson and Linda
Jesselson Trustees UIT 3/27/84 FOB Jonathan Judah Jesselson
(filed as Exhibit 10.53 to the Company's Annual Report on
Form 10-KSB/A dated June 26, 1995, and incorporated herein
by reference).
10.14 Warrant, dated January 12, 1995, to purchase 10,000 shares
of Common Stock issued to Michael Jesselson and Linda
Jesselson Trustees UIT 3/27/84 FOB Maya Ariel Ruth Jesselson
(filed as Exhibit 10.54 to the Company's Annual Report on
Form 10-KSB/A dated June 26, 1995, and incorporated herein
by reference).
10.15 Warrant, dated January 12, 1995, to purchase 13,333 shares
of Common Stock issued to Michael Jesselson and Linda
Jesselson Trustees UIT 3/27/84 FOB Maya Ariel Ruth Jesselson
(filed as Exhibit 10.55 to the Company's Annual Report on
Form 10-KSB/A dated June 26, 1995, and incorporated herein
by reference).
10.16 Non-exclusive License Agreement between the Company and Bell
& Howell (filed as Exhibit 10(qaii) to the Company's
Registration Statement on Form SB-2, Commission File No.
33-70052-B, and incorporated herein by reference).
10.17 Xerox Worldwide Printing Systems Partners Program
Partnership Guide dated August 1990 (filed as Exhibit 10.64
to the Company's Annual Report on Form 10-KSB/A dated June
26, 1995, and incorporated herein by reference).
10.18 Amendment and Restatement of Development Agreement made as
of December 31, 1995 between the Company and CII (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form
10-QSB dated February 12, 1996 and incorporated herein by
reference).
10.19 Building lease between the Company and UNC Incorporated,
dated July 31, 1996 (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB dated November 12, 1996 and
incorporated herein by reference).
10.20 Promissory Note dated September 9, 1996 between James H.
Whitney, CEO, Gunther International, Ltd. and the Company
(filed as Exhibit 10.4 to the Company's Quarterly Report on
Form 10-QSB dated November 12, 1996 and incorporated herein
by reference).
10.21 Non-exclusive License Agreement By and Between the
Hewlett-Packard Company and Gunther International
Incorporated for Envelope Printing Technology dated May 6,
1997.
10.22 Agreement, dated October 2, 1998, by and among the
registrant, June H. Geneen, Phil E. Gilbert, Jr., Thomas W.
Keesee and the United States Trust Company Of New York, as
Co-Executors of the Estate of Harold S. Geneen, Late of New
York, New York (the "Estate"), BankBoston, N.A. (successor
by merger to Bank of Boston Connecticut ("BOB") and Gunther
Partners, LLC (the "Lender") (filed as Exhibit 99.2 to the
registrant's Current Report on Form 8-K dated October 7,
1998 and incorporated herein by this reference).
10.23 Promissory Note, dated October 2, 1998, made by the
registrant to the order of the Estate (filed as Exhibit 99.3
to the registrant's Current Report on Form 8-K dated October
7, 1998 and incorporated herein by this reference).
10.24 Security Agreement, dated October 2, 1998, by and between
the registrant and the Estate (filed as Exhibit 99.4 to the
registrant's Current Report on Form 8-K dated October 7,
1998 and incorporated herein by this reference).
</TABLE>

19
<PAGE> 32
<TABLE>
<S> <C>
10.25 Loan and Security Agreement, dated October 2, 1998, by and
between the registrant and the Lender (filed as Exhibit 99.5
to the registrant's Current Report on Form 8-K dated October
7, 1998 and incorporated herein by this reference).
10.26 $4,000,000 Term Note, dated October 2, 1998, made by the
registrant to the order of the Lender (filed as Exhibit 99.6
to the registrant's Current Report on Form 8-K dated October
7, 1998 and incorporated herein by this reference).
10.27 Subordination Agreement dated as of October 2, 1998, between
the Lender and Connecticut Innovations, Inc. ("CII") (filed
as Exhibit 99.7 to the registrant's Current Report on Form
8-K dated October 7, 1998 and incorporated herein by this
reference).
10.28 Subordination Agreement, dated as of October 2, 1998,
between the Estate and CII (filed as Exhibit 99.8 to the
registrant's Current Report on Form 8-K dated October 7,
1998 and incorporated herein by this reference).
10.29 Subordination and Intercreditor Agreement, dated October 2,
1998, between the Lender and the Estate (filed as Exhibit
99.9 to the registrant's Current Report on Form 8-K dated
October 7, 1998 and incorporated herein by this reference).
10.30 Warrant Agreement, dated October 2, 1998, by and between the
Lender and the registrant (filed as Exhibit 99.10 to the
registrant's Current Report on Form 8-K dated October 7,
1998 and incorporated herein by this reference).
10.31 Registration Rights Agreement, dated October 2, 1998, by and
between the registrant and the Lender (filed as Exhibit
99.11 to the registrant's Current Report on Form 8-K dated
October 7, 1998 and incorporated herein by this reference).
10.32 Voting Agreement, dated October 2, 1998, by and among the
Estate, Gerald H. Newman, Park Investment Partners, Inc.,
the Lender, Robert Spiegel, Four Partners and the registrant
(filed as Exhibit 99.12 to the registrant's Current Report
on Form 8-K dated October 7, 1998 and incorporated herein by
this reference).
10.33 Non-Qualified Stock Option Agreement, dated as of October 5,
1998, between Marc I. Perkins and the registrant (filed as
Exhibit 10.14 to the registrant's Quarterly Report on Form
10-QSB dated February 12, 1999 and incorporated herein by
this reference).
10.34 Employment Agreement, dated as of October 7, 1998, between
the registrant and Michael M. Vehlies (filed as Exhibit
10.15 to the registrant's Quarterly Report on Form 10-QSB
dated February 12, 1999 and incorporated herein by this
reference).
10.35 Non-Qualified Stock Option Agreement, dated as of October
29, 1998, between Michael M. Vehlies and the registrant
(filed as Exhibit 10.16 to the registrant's Quarterly Report
on Form 10-QSB dated February 12, 1999 and incorporated
herein by this reference).
10.36 Revised Commitment Letter, dated as of August 27, 1999, from
People's Bank to the Registrant, as amended by (i) a letter
to People's Bank from the Registrant dated September 2, 1999
and (ii) a letter to People's Bank from the Registrant dated
October 23, 1999 (filed as Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-QSB dated February 22, 2000, and
incorporated herein by this reference).
10.37 Commercial Loan Agreement, dated as of October 23, 1999,
between the Registrant and People's Bank (filed as Exhibit
10.2 to the registrant's Quarterly Report on Form 10-QSB
dated February 22, 2000, and incorporated herein by this
reference).
10.38 Promissory Note, dated as of October 23, 1999, between the
Registrant and People's Bank (filed as Exhibit 10.3 to the
registrant's Quarterly Report on Form 10-QSB dated February
22, 2000, and incorporated herein by this reference).
</TABLE>

20
<PAGE> 33

<TABLE>
<S> <C>
10.39 Commercial Revolving Loan Agreement, dated as of October 23, 1999, between the
Registrant and People's Bank (filed as Exhibit 10.4 to the registrant's Quarterly
Report on Form 10-QSB dated February 22, 2000, and incorporated herein by this
reference).
10.40 Security Agreement, dated as of October 23, 1999, between the Registrant and People's
Bank (filed as Exhibit 10.5 to the registrant's Quarterly Report on Form 10-QSB dated
February 22, 2000, and incorporated herein by this reference).
10.41 Subordination and Intercreditor Agreement, dated as of October 23, 1999, between
People's Bank, Gunther Partners, LLC, and the Registrant (filed as Exhibit 10.6 to the
registrant's Quarterly Report on Form 10-QSB dated February 22, 2000, and incorporated
herein by this reference).
10.42 Subordination and Intercreditor Agreement, dated as of October 23, 1999, between
People's Bank and June H. Geneen, Phil E. Gilbert, Jr., Thomas W. Keesee and the
United States Trust Company of New York, as Co-Executors of the Estate of Harold S.
Geneen, late of New York, New York and the Registrant (filed as Exhibit 10.7 to the
registrant's Quarterly Report on Form 10-QSB dated February 22, 2000, and incorporated
herein by this reference).
10.43 Subordination and Intercreditor Agreement, dated as of October 23, 1999, between
People's Bank, Connecticut Innovations, Inc. and the Registrant (filed as Exhibit 10.8
to the registrant's Quarterly Report on Form 10-QSB dated February 22, 2000, and
incorporated herein by this reference).
10.44 Employment Agreement, dated October 3, 1999, between the Registrant and Marc I.
Perkins (filed as Exhibit 10.9 to the registrant's Quarterly Report on Form 10-QSB
dated February 22, 2000, and incorporated herein by this reference).
10.45 Promissory Note, dated December 16, 1999, between the Registrant and Robert Spiegel
(filed as Exhibit 10.10 to the registrant's Quarterly Report on Form 10-QSB dated
February 22, 2000, and incorporated herein by this reference).
10.46 Promissory Note, dated April 4, 2000, between the Registrant and Gunther Partners,
LLC.
10.47 Funding Letter, dated June 19, 2000 from Gunther Partners, LLC to the Registrant.
24.1 Power of Attorney pursuant to which this Annual Report on Form 10-KSB dated June 30,
2000 was executed.
27.1 Financial Data Schedule
</TABLE>

B. Reports on Form 8-K.

None.

21
<PAGE> 34

SIGNATURES

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

GUNTHER INTERNATIONAL, LTD.

By: /s/ MICHAEL M. VEHLIES
------------------------------------

Michael M. Vehlies
Chief Financial Officer and
Treasurer
(On Behalf of the Registrant and as
Principal
Financial and Accounting Officer)

Date:

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

<TABLE>
<CAPTION>
SIGNATURE: TITLE: DATE:
---------- ------ -----
<C> <S> <C>
/s/ MICHAEL M. VEHLIES June 29, 2000
---------------------------------------------
Michael M. Vehlies
Attorney-in-Fact for:

Marc I. Perkins President and Chief Executive June 29, 2000
Officer (Principal Executive
Officer) and Director

J. Kenneth Hickman Director June 29, 2000

Steven S. Kirkpatrick Director June 29, 2000

Gerald H. Newman Director June 29, 2000

George A. Snelling Director June 29, 2000

Robert Spiegel Director June 29, 2000

Thomas M. Steinberg Director June 29, 2000
</TABLE>

22
<PAGE> 35

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NO.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2

Report of Arthur Andersen LLP, Independent Public
Accountants................................................ F-3

Balance Sheets as of March 31, 2000 and 1999................ F-4
Statements of Operations for the Years Ended March 31, 2000
and 1999.................................................. F-5

Statements of Stockholders' Equity (Deficit) for the Years
Ended March 31, 2000 and 1999.............................. F-6

Statements of Cash Flows for the Years Ended March 31, 2000
and 1999................................................... F-7

Notes to Financial Statements............................... F-8
</TABLE>

F-1
<PAGE> 36

REPORT OF INDEPENDENT AUDITORS

Stockholders of Gunther International, Ltd.

We have audited the accompanying balance sheet of Gunther International,
Ltd. as of March 31, 2000, and the related statements of operations,
stockholders' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gunther International, Ltd.
at March 31, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.

ERNST & YOUNG LLP

Hartford, Connecticut
June 19, 2000

F-2
<PAGE> 37

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Gunther International, Ltd.:

We have audited the accompanying balance sheet of Gunther International,
Ltd. (the "Company") (a Delaware corporation) as of March 31, 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at March 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

As explained in Note 2 to the financial statements, effective April 1,
1998, the Company changed its method of accounting for deferred preproduction
costs.

ARTHUR ANDERSEN LLP

Hartford, Connecticut
June 7, 1999

F-3
<PAGE> 38

GUNTHER INTERNATIONAL, LTD.

BALANCE SHEETS
MARCH 31, 2000 AND 1999

<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash...................................................... $ 87,136 $ 731,943
Restricted cash........................................... -- 150,000
Accounts receivable, less allowance....................... 3,315,783 1,520,201
Costs and estimated earnings in excess of billings on
uncompleted contracts................................... 200,691 864,525
Inventories............................................... 1,798,206 1,506,554
Prepaid expenses.......................................... 280,874 95,263
------------ ------------
Total current assets.................................... 5,682,690 4,868,486
------------ ------------
Equipment and leasehold improvements:
Machinery and equipment................................... 1,485,369 1,370,552
Furniture and fixtures.................................... 378,852 320,262
Leasehold improvements.................................... 38,589 255,017
------------ ------------
1,902,810 1,945,831
Accumulated depreciation and amortization................. (808,354) (1,079,954)
------------ ------------
1,094,456 865,877
------------ ------------
Other Assets:
Excess of costs over fair value of net assets acquired,
net..................................................... 2,774,893 2,998,357
Other..................................................... 64,527 73,927
------------ ------------
2,839,420 3,072,284
------------ ------------
$ 9,616,566 $ 8,806,647
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt -- related parties... $ -- $ 1,000,000
Current maturities of long-term debt -- other............. 13,134 13,440
Note payable to bank...................................... 350,000 --
Accounts payable.......................................... 2,502,231 2,436,430
Accrued expenses.......................................... 1,385,066 1,151,518
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... 1,052,734 1,211,673
Deferred service contract revenue......................... 1,856,974 1,521,204
Note payable to stockholder............................... 150,000 150,000
------------ ------------
Total current liabilities............................... 7,310,139 7,484,265
------------ ------------
Long-term debt, less current maturities:
Related parties........................................... 5,261,446 3,521,931
Other..................................................... 15,732 12,319
------------ ------------
Total long-term debt............................... 5,277,178 3,534,250
------------ ------------
Total Liabilities....................................... 12,587,317 11,018,515
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' Equity (Deficit):
Common Stock, $.001 par value: 16,000,000 shares
authorized; 4,291,769 shares issued and outstanding..... 4,292 4,292
Additional paid-in capital................................ 12,188,556 12,188,556
Accumulated deficit....................................... (15,163,599) (14,404,716)
------------ ------------
Total Stockholders' Equity (Deficit).................... (2,970,751) (2,211,868)
------------ ------------
$ 9,616,566 $ 8,806,647
============ ============
</TABLE>

See accompanying notes.
F-4
<PAGE> 39

GUNTHER INTERNATIONAL, LTD.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Sales:
Systems................................................... $12,052,692 $11,896,553
Maintenance............................................... 9,533,778 8,847,082
----------- -----------
Total sales............................................ 21,586,470 20,743,635
----------- -----------
Cost of sales:
Systems................................................... 8,094,029 8,521,585
Maintenance............................................... 8,289,268 6,684,135
----------- -----------
Total cost of sales.................................... 16,383,297 15,205,720
----------- -----------
Gross profit......................................... 5,203,173 5,537,915
----------- -----------
Operating expenses:
Selling and administrative................................ 4,180,274 4,581,853
Research and development.................................. 1,227,626 1,046,569
----------- -----------
Total operating expenses............................... 5,407,900 5,628,422
----------- -----------
Operating loss....................................... (204,727) (90,507)
Interest expense, net....................................... (554,156) (466,653)
----------- -----------
Loss before cumulative effect of change in accounting
principle................................................. (758,883) (557,160)
Cumulative effect of change in accounting principle......... -- (622,953)
----------- -----------
Net loss............................................. $ (758,883) $(1,180,113)
=========== ===========
Basic and fully diluted loss per share:
Loss before cumulative effect of change in accounting
principle................................................. $ (0.18) $ (0.13)
Cumulative effect of change in accounting principle......... -- (0.14)
----------- -----------
Net loss per share................................... $ (0.18) $ (0.27)
=========== ===========
Weighted average number of common shares outstanding........ 4,291,769 4,291,769
=========== ===========
</TABLE>

See accompanying notes.
F-5
<PAGE> 40

GUNTHER INTERNATIONAL, LTD.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999

<TABLE>
<CAPTION>
SERIES B
COMMON STOCK COMMON STOCK
$.001 PAR VALUE $.001 PAR VALUE ADDITIONAL
------------------ --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ------ ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998...... 4,291,269 $4,291 500 $ 1 $11,390,818 $(13,224,603) $(1,829,493)
Conversion of Series B stock
to common stock............ 500 1 (500) (1) -- -- --
Issuance of warrants for
debt....................... -- -- -- -- 345,000 -- 345,000
Capitalization of below
market interest rate loan
from a related party....... -- -- -- -- 452,738 -- 452,738
Net loss..................... -- -- -- -- -- (1,180,113) (1,180,113)
--------- ------ ---- --- ----------- ------------ -----------
Balance, March 31, 1999...... 4,291,769 4,292 -- -- 12,188,556 (14,404,716) (2,211,868)
Net loss..................... -- -- -- -- -- (758,883) (758,883)
--------- ------ ---- --- ----------- ------------ -----------
Balance, March 31, 2000...... 4,291,769 $4,292 -- $-- $12,188,556 $(15,163,599) $(2,970,751)
========= ====== ==== === =========== ============ ===========
</TABLE>

See accompanying notes.
F-6
<PAGE> 41

GUNTHER INTERNATIONAL, LTD.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss.................................................. $ (758,883) $(1,180,113)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 568,295 550,265
Provision for doubtful accounts........................ 63,530 40,000
Interest accrued on related party note payable......... 239,518 118,500
Cumulative effect of change in accounting principle.... -- 622,953
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,859,112) (1,194,073)
Inventories.......................................... (291,652) (249,702)
Prepaid expenses..................................... (185,611) (33,444)
Accounts payable..................................... 65,801 (487,037)
Accrued expenses..................................... 233,548 154,524
Deferred service contract revenue.................... 335,770 (277,862)
Billings, costs and estimated earnings on uncompleted
contracts, net...................................... 504,895 (389,422)
----------- -----------
Net cash used for operating activities............ (1,083,901) (2,325,411)
----------- -----------
Investing activities:
Acquisitions of equipment and leasehold improvements...... (564,010) (230,853)
Other assets.............................................. -- 18,017
Proceeds from sale of investment.......................... -- 20,000
----------- -----------
Net cash used for investing activities............ (564,010) (192,836)
----------- -----------
Financing activities:
Repayment of notes payable and long-term debt............. (515,110) (2,873,347)
Proceeds from notes payable and long-term debt............ 1,368,214 5,701,169
Transfer from (to) restricted cash........................ 150,000 (150,000)
----------- -----------
Net cash provided by financing activities......... 1,003,104 2,677,822
----------- -----------
Net increase (decrease) in cash............................. (644,807) 159,575
Cash, beginning of year..................................... 731,943 572,368
----------- -----------
Cash, end of year........................................... $ 87,136 $ 731,943
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest.................................... $ 326,687 $ 293,105
Cash paid for income taxes................................ 7,561 26,311
</TABLE>

See accompanying notes.
F-7
<PAGE> 42

GUNTHER INTERNATIONAL, LTD.

NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999

1. BUSINESS:

Gunther International, Ltd. (the "Company") operates as a single business
segment. The Company designs, develops, assembles, markets and services high
speed systems that automatically assemble printed documents, fold, staple or
bind the documents and insert completed documents into appropriate envelopes for
mailing or other distribution. The Company was incorporated in Delaware in 1978
and currently operates from its facilities located in Norwich, Connecticut.

The Company's products were developed in the mid-1980's to meet a need for
greater reliability and integrity in document finishing systems. These products
are dependent upon proprietary technology and require specially skilled
engineers and technicians to design, enhance and produce them to meet customer
needs.

2. CHANGE IN ACCOUNTING PRINCIPLE:

Effective April 1, 1998, the Company adopted Statement of Position 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires
costs of start-up activities and organizational costs to be expensed as
incurred. In connection with the adoption of SOP 98-5 the Company wrote-off, as
a cumulative effect of a change in accounting principle, $622,953 of previously
deferred preproduction costs.

3. ACCOUNTING POLICIES:

Revenue recognition -

The Company recognizes revenues under sales contracts for its high-speed
assembly equipment using the percentage of completion method based on the ratio
of incurred costs to total estimated costs. Changes in estimated earnings
thereon are recognized in the period determined. Sales of inc.jet imagers are
recognized when the products are delivered.

Allowance for doubtful accounts -

The Company evaluates the collectibility of accounts receivable on an
ongoing basis and makes allowances for credit losses ($86,900 at March 31, 2000
and $23,400 at March 31, 1999).

Inventories -

Inventories, consisting primarily of purchased parts used in the assembly
and repair of the Company's products, are stated at the lower of cost,
determined by the first-in, first-out (FIFO) method, or market.

Equipment and leasehold improvements -

Depreciation of equipment is computed using the straight-line method over
the estimated useful lives of the respective assets as follows: machinery and
equipment -- 3 - 7 years; and furniture and fixtures -- 7 years. Amortization of
leasehold improvements is computed over the useful life of the improvement or
lease term, whichever is shorter. Depreciation expense was $330,000 and $315,020
for fiscal 2000 and 1999, respectively.

Excess of cost over fair value of net assets acquired -

The excess of cost over the fair value of net assets acquired ("goodwill"),
which resulted from a business acquisition, is being amortized over its
estimated life of 20 years. As of March 31, 2000 and 1999, accumulated
amortization thereon was $1,694,676 and $1,471,212, respectively. The
realization of the carrying value of the Company's assets, including goodwill,
is dependent on the Company's ability to sustain

F-8
<PAGE> 43

profitable operations in the future. If objective evidence becomes known
indicating the carrying value of the goodwill has been impaired, the Company
will evaluate the carrying value based on undiscounted cash flows.

Research and development -

Expenses associated with research and development activities are expensed
as incurred.

Deferred service contract revenue -

Service contract revenue is recognized over the term of the contract;
amounts applicable to future periods are deferred.

Product warranties -

The Company provides a warranty on each product for a period of 90 days
after installation. Warranty expense for fiscal 2000 and 1999, was approximately
$255,000 and $283,000, respectively.

Deferred income taxes -

Deferred income taxes are provided on temporary differences between the
financial statement and tax basis of assets and liabilities and on operating
loss carryovers using enacted tax rates in effect in the years in which
differences are expected to reverse. A valuation allowance is recorded for the
amount of deferred income tax assets that are not expected to be realized. See
Note 7.

Royalty expense -

The Company has royalty agreements with Connecticut Innovations, Inc. and
with certain stockholders (see Note 9). Royalties due under these agreements are
expensed as incurred.

Loss per share -

The denominators used for purposes of computing the loss per share consist
of the weighted average number of common shares outstanding of 4,291,769 for
both fiscal 2000 and 1999. Common stock equivalents were not used because their
effect would have been anti-dilutive. There are 1,178,071 and 1,114,539 common
stock equivalents outstanding at March 31, 2000 and 1999.

Use of estimates -

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

4. INVENTORIES:

Inventories consist of:

<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Raw materials............................................... $1,532,703 $1,639,625
Work-in-process............................................. 625,719 197,592
---------- ----------
2,158,422 1,837,217
Valuation allowance......................................... (360,216) (330,663)
---------- ----------
$1,798,206 $1,506,554
========== ==========
</TABLE>

F-9
<PAGE> 44

5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:

The following schedule reflects the costs incurred, estimated earnings and
billings to date on uncompleted contracts:

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts..................... $ 2,537,418 $ 3,544,031
Estimated earnings.......................................... 1,305,603 1,638,821
----------- -----------
3,843,021 5,182,852
Billings to date............................................ (4,695,068) (5,530,000)
----------- -----------
$ (852,043) $ (347,148)
=========== ===========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 200,691 $ 864,525
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (1,052,734) (1,211,673)
----------- -----------
$ (852,043) $ (347,148)
=========== ===========
</TABLE>

6. DEBT:

Long-term debt consists of:

<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Notes payable to related parties (stockholders):
Gunther Partners LLC, less unamortized debt discount of
$241,500 and $310,500 at March 31, 2000 and 1999,
respectively........................................... $3,758,500 $ 3,189,500
Estate of Harold S. Geneen, less unamortized debt discount
of $339,195 and $414,651 at March 31, 2000 and 1999,
respectively........................................... 1,502,946 1,332,431
---------- -----------
5,261,446 4,521,931
Other....................................................... 28,866 25,759
---------- -----------
5,290,312 4,547,690
Current maturities of long-term debt........................ (13,134) (1,013,440)
---------- -----------
$5,277,178 $ 3,534,250
========== ===========
</TABLE>

As of March 31, 2000, aggregate annual maturities of long-term debt for the next
five fiscal years are:

<TABLE>
<CAPTION>
FISCAL YEAR
ENDING MARCH 31, AMOUNT
---------------- ----------
<S> <C> <C>
2001................................................. $ 13,134
2002............................................... 1,404,042
2003................................................. 303,664
2004................................................. 2,062,558
2005................................................. 1,506,914
</TABLE>

In 1999, in exchange for cash of $4.0 million the Company issued an 8% note
payable to Gunther Partners LLC with a face value of $4.0 million and also
granted Gunther Partners LLC a warrant to purchase up to 35% of the pro forma,
fully diluted number of shares of the Company's Common Stock, determined as of
the date of exercise, at any time through November 2003 at $1.50 a share. The
warrant was valued at $345,000 and has been included in additional paid-in
capital. The note was valued at $3,655,000, which resulted in an effective
interest rate of 9.8%. The debt discount on the note is being amortized by the
effective interest method. Interest on the note payable to Gunther Partners LLC
is paid quarterly at the stated rate of 8%.

F-10
<PAGE> 45

Through June 30, 1999, the Company made principal payments of $800,000 on this
note. In September 1999, the Company and Gunther Partners LLC agreed to modify
the terms of the note. In connection therewith Gunther Partners LLC loaned the
Company $800,000. As amended, the outstanding balance due Gunther Partners LLC
is due in principal installments of $200,000 commencing on October 1, 2001
through April 1, 2002; $100,000 on May 1, 2002; and $2,500,000 on October 1,
2003. If, at any time prior to October 1, 2001, the accumulated deficit of the
Company improves by $1.0 million or more compared to the amount at June 30, 1999
of $14.4 million (a "Triggering Event"), then the principal payments otherwise
due from October 1, 2001 through May 1, 2002 shall be become due in consecutive
monthly installments beginning on the first day of the second month following
the Triggering Event. The debt is secured by a first priority interest in all
tangible and intangible (excluding accounts receivable, patents and trademarks)
personal property and a secondary interest in patents and trademarks. In April
2000, the Company borrowed an additional $500,000 from Gunther Partners LLC
which is payable on demand; however, Gunther Partners LLC has agreed to defer
payment until April 1, 2001 if the Company's cash flow will not support the
repayment.

In fiscal 1999, in exchange for cash of $1.7 million the Company issued a
note payable to the Estate of Harold S. Geneen (the "Estate") with a face amount
of $1.7 million and a stated interest rate of 5.44%. The Company has valued the
note at $1.3 million based on an effective interest rate of 10.5% and recorded
the balance of $453,000 as additional paid-in capital. The resulting debt
discount on the note is being amortized by the effective interest method. The
note is due at the earlier of one year after the Company's obligations to
Gunther Partners LLC are paid in full or October 2, 2004. Accrued interest on
the note is added to the outstanding principal balance. This indebtedness is
secured by a security interest in all tangible and intangible personal property.
The Company's obligations to the Estate are subordinated to the Company's
obligations to Gunther Partners LLC and a bank. The Company also has a $150,000
note payable to the Estate that does not have a stated interest rate or maturity
date.

Under a voting agreement which expires on the date the Company pays in full
all outstanding indebtedness under the $4.0 million note payable to Gunther
Partners and $1.7 million note payable to the Estate of Harold S. Geneen, the
Company, Gunther Partners LLC, the Estate and other shareholders (Park
Investment Partners, Gerald H. Newman, Four Partners and Robert Spiegel) have
each agreed to vote all shares of the Company's stock held by them in favor of
(i) that number of persons nominated by Gunther Partners LLC constituting a
majority of the Board of Directors, (ii) one person nominated by the Estate and
(iii) one person nominated by Park Investment Partners.

On November 8, 1999, the Company entered into a revolving loan agreement
with a bank. Under the agreement the Company may borrow up to $500,000 at prime
plus 1% (10.5% at March 31, 2000) based on eligible accounts receivable, as
defined. As of March 31, 2000, $350,000 was outstanding. The revolving loan
agreement contains certain covenants, including a debt service coverage ratio of
not less than 1.25 to 1. Unless extended by the bank, the agreement expires on
August 31, 2000. As of March 31, 2000, the Company is in default of the debt
service ratio. The lender agreed to waive the default through August 31, 2000.
This indebtedness is secured by a first priority interest in accounts receivable
and a secondary interest in all other personal property.

F-11
<PAGE> 46

7. DEFERRED INCOME TAXES:

Significant components of the Company's deferred income tax assets
(liabilities) are:

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Equipment and leasehold improvements...................... $ (102,212) $ (130,409)
Accrued expenses.......................................... 222,301 274,411
Inventories............................................... 182,574 170,516
Allowance for doubtful accounts........................... 33,903 9,828
Research and development.................................. 204,226 209,312
Net operating loss carryforwards.......................... 4,158,792 4,268,635
----------- -----------
Net total deferred income tax asset....................... 4,699,584 4,802,293
Valuation allowance....................................... (4,699,584) (4,802,293)
----------- -----------
Net deferred income tax asset............................. $ -- $ --
=========== ===========
</TABLE>

At March 31, 2000 the Company has federal and state net operating loss
carryforwards of $11.6 million and $4.0 million, respectively, which are
scheduled to expire in varying amounts from 2001 to 2013.

8. WARRANTS, COMMON STOCK PURCHASE OPTIONS AND CAPITAL STOCK:

See Note 6 for an explanation of the stock purchase warrant granted to
Gunther Partners LLC in fiscal 1999. Further, at March 31, 2000 and 1999,
warrants were outstanding to purchase 25,000 shares of the Company's Common
Stock for $4.00 a share. These warrants expire in August 2000.

The Company has stock option plans. The Executive Compensation/Stock Option
Committee of the Board of Directors determines the prices and terms at which
options may be granted. Options vest over periods ranging from three to five
years and may be exercisable up to ten years from the date of grant. A summary
of stock option activity follows:

<TABLE>
<CAPTION>
2000 1999
--------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
year.................... 400,000 $1.98 275,000 $3.12
Granted................... 45,000 2.91 285,000 1.63
Cancelled................. (100,000) (1.88) (160,000) (3.33)
--------- ----- -------- -----
Outstanding, end of
year.................... 345,000 $2.13 400,000 $1.98
========= ===== ======== =====
Exercisable, end of
year.................... 193,999 $2.00 151,666 $2.00
========= ===== ======== =====
Weighted average fair
value of options
granted................. $ 2.24 $ 1.44
========= ========
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations to recognize
compensation expense under its stock option plans. As such, no expense is
recognized if, at the date of grant, the exercise price of the option is at
least equal to the fair market value of the Company's Common Stock. No
compensation expense was recognized in fiscal 2000 or 1999.

If compensation expense for the Company's stock option plans had been
determined using the fair value method under SFAS 123, "Accounting for Stock
Based Compensation", the Company would have reported a net loss of $825,170
($.19 a share) in fiscal 2000 and $1,403,410 ($.33 a share) in fiscal 1999. In
connection

F-12
<PAGE> 47

therewith, the Company used the Black-Scholes option pricing model with the
following weighted average assumptions:

<TABLE>
<CAPTION>
2000 1999
------- ---------
<S> <C> <C>
Risk free interest rate................................ 5.00% 5.00-5.75%
Expected dividend yield................................ None None
Expected lives......................................... 5 Years 5 years
Expected volatility.................................... 68-199% 176-182%
</TABLE>

The Company is authorized to issue 16,501,000 shares of capital stock
consisting of 16,000,000 shares of Common Stock, 500 shares of Series B Common
Stock, 500,000 shares of Preferred Stock, and 500 shares of Class B Senior
Non-Convertible Preferred Stock ("Class B Preferred Stock"), all with a par
value of $.001 a share. The Board of Directors is authorized to determine the
powers, preferences, rights and restrictions of the Preferred Stock. Class B
Preferred Stock is non-voting and does not have a dividend right. The Class B
Preferred Stock is redeemable at $1,000,000 per share on the occurrence of
certain defined events and has a $1,000 a share liquidation preference. At March
31, 2000 and 1999, there are no issued and outstanding shares of Series B Common
Stock, Preferred Stock, or Class B Preferred Stock. At March 31, 2000, 3,118,645
shares of the Company's Common Stock were reserved for issuance.

9. COMMITMENTS AND CONTINGENCIES:

Development Agreement -

The Company has a development agreement with Connecticut Innovations, Inc.
("CII"), which requires the Company to pay CII a royalty equal to .67%
(sixty-seven hundredths of a percent) of all systems cumulative sales and
provides for minimum payments of $125,000 for fiscal 2001, $137,500 for fiscal
2002 and $131,250 for fiscal 2003.

If, during any quarter, the royalty computation does not exceed the minimum
payment referred to above, the minimum payment would be made instead of the
actual computed royalty amount. Total royalty expense was $106,250 and $100,000
for fiscal 2000 and 1999, respectively. CII has a security interest in all of
the Company's patents, trademarks and other assets as collateral for the payment
of the royalty obligations, but CII has agreed to subordinate its security
interest (except for its security interest in patents and trademarks) in the
event that the Company enters into a financing arrangement with an institutional
lender. CII has subordinated its security interest in all tangible and
intangible personal property to Gunther Partners LLC and the bank.

Contingencies -

In fiscal 1999, two purported class action lawsuits were filed against the
Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities law. The actions
were filed in the United States District Court for the District of Connecticut.
On January 4, 1999, the two actions were consolidated. Among other things, the
complaint alleges that the Company's financial statements for the first three
quarters of fiscal 1998 were materially false and misleading in violation of
Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and
Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. The
plaintiffs are seeking compensatory damages and reimbursement for the reasonable
costs and expenses, including attorneys' fees, incurred in connection with the
action. Although the Company believes the complaint is without merit and will
vigorously defend the action, it is not possible to predict with certainty the
final outcome of this proceeding.

The Company is a party to various other legal proceedings arising in the
ordinary course of business which management believes, after consultation with
legal counsel, will not have a material adverse effect on the Company's
financial position, operating results or cash flows.

F-13
<PAGE> 48

Other commitments -

The Company has a royalty agreement with certain founding stockholders
whereby the Company will pay an amount equal to 1% of all the Company's sales
(as defined) commencing on the date of a public offering of the Company's Common
Stock. An additional royalty of .5% will be paid on all the Company's sales
provided that the payment of additional royalties does not reduce the Company's
after-tax profits below 9% of sales for the period. The Company's obligations
under this agreement terminate upon the payment of royalties aggregating
$12,000,000. For fiscal 2000 and 1999, royalties expensed under this agreement
were $204,000 and $207,000, respectively. Total royalties expensed under this
agreement were $900,000 through March 31, 2000.

The Company has an agreement related to the development and use of certain
inkjet technology. This agreement requires the Company to pay royalties of 1% of
inkjet sales up to a maximum of $5,000,000 through fiscal 2008. For fiscal 2000
and 1999, royalties expensed under this agreement were approximately $22,000 and
$5,000, respectively.

Leases -

The Company leases its office and manufacturing facility under an operating
lease which provides for monthly rental of $30,000 through September 2001. Under
this agreement, the Company is responsible for all operating costs and
maintenance. The Company also leases certain office equipment under operating
lease agreements. Lease expense for fiscal 2000 and 1999, was approximately
$435,000 and $380,000, respectively. Future minimum rental payments for
equipment are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
ENDING MARCH 31, AMOUNT
---------------- --------
<S> <C>
2001........................................ $ 47,077
2002........................................ 43,650
2003........................................ 33,070
2004........................................ 5,955
--------
$129,752
========
</TABLE>

10. EMPLOYEE BENEFIT PLANS:

The Company has a defined contribution benefit plan (the "Plan") covering
substantially all employees. The Plan is intended to comply with Section 401(k)
of the Internal Revenue Code. Each year eligible participants may elect to make
salary reduction contributions on their behalf up to a maximum of the lesser of
15% of compensation or the annual maximum established by the Internal Revenue
Service. Participants may also make voluntary after-tax contributions to the
Plan. The Company does not make contributions to the Plan but does pay certain
expenses of the Plan.

11. SIGNIFICANT CUSTOMERS AND BUSINESS CONCENTRATION:

Due to the nature of the Company's products, a significant portion of the
Company's revenues in all periods are generally derived from a few customers.
The majority of the Company's customers are property and casualty insurance
companies. During fiscal 2000 and 1999, sales to one customer were 16% and 15%
of sales, respectively.

12. LIQUIDITY:

For fiscal 2000 and 1999, the Company incurred net losses before the effect
of accounting change of $758,883 and $557,160, respectively. Further, for those
fiscal years, cash of $1,083,901 and $2,325,411, respectively, was used for
operating activities. At March 31, 2000, the Company has a deficiency in working
capital of $1,627,449 and a stockholders' deficit of $2,970,751. While these
conditions may raise doubt about the Company's ability to meet its obligations
as they become due in the ordinary course of business, management believes there
are several mitigating factors that will enable it to meet its obligations
through

F-14
<PAGE> 49

March 31, 2001. For the fourth quarter of fiscal 2000, based on unaudited
financial data, the Company recognized net income of $614,035 on sales of
$6,512,494 with a gross profit of $2,089,529 but used cash of $437,692 for
operating activities. The improvement in operating results in the fourth quarter
reflects the benefits of higher sales volume coupled with reduced production
time gained through enhanced processes. At March 31, 2000, backlog for
high-speed assembly system and upgrade orders, consisting of total contract
price less revenue recognized to date for all signed orders on hand, was $4.2
million. The ability of the Company to achieve profitable operations in the
future is currently dependent on attaining sufficient future sales volumes. See
Note 6 for borrowings subsequent to March 31, 2000. In addition, the Company has
obtained commitments for $500,000 of additional financing, if necessary.

13. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying value of financial instruments (accounts receivable, accounts
payable and debt) as of March 31, 2000 and 1999 approximate fair value. Fair
value was based on cash flows and current market conditions.

F-15
<PAGE> 50

GUNTHER INTERNATIONAL, LTD.
CORPORATE INFORMATION

BOARD OF DIRECTORS

THOMAS M. STEINBERG, CHAIRMAN
President, Tisch Family Interests

J. KENNETH HICKMAN
Independent Business and Financial
Consultant

STEVEN S. KIRKPATRICK
Vice President, United States Trust
Company of New York

GERALD H. NEWMAN
Private Investor

MARC I. PERKINS
President and Chief Executive Officer,
Gunther International, Ltd.

GEORGE A. SNELLING
Independent Business Consultant

ROBERT SPIEGEL
Private Investor

COMMON STOCK
OTC-Bulletin Board
Symbol: SORT

TRANSFER AGENT
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
CORPORATE OFFICERS

MARC I. PERKINS
President and Chief Executive Officer

MICHAEL M. VEHLIES
Senior Vice President, Chief Financial
Officer

A. EVAN HAAG
Senior Vice President, Operations

DANIEL J. CHEVALIER
Vice President, Sales and Marketing

PER J. HELLSUND
Vice President, Operations

FIELD OFFICES
Cool, California
Lithonia, Georgia
Oak Park, Illinois
Norwood, Massachusetts
Minneapolis, Minnesota
Gibbsboro, New Jersey
Dallas, Texas

INDEPENDENT AUDITORS
Ernst & Young LLP
225 Asylum Street
Hartford, Connecticut 06103

LEGAL COUNSEL
Murtha, Cullina LLP
185 Asylum Avenue
Hartford, Connecticut 06103
<PAGE> 51

LOGO
GUNTHER INTERNATIONAL, LTD. - ONE WINNENDEN ROAD - NORWICH, CONNECTICUT
06360
PHONE: (800) 864-1490 FAX: (860) 886-0135
WEBSITE: WWW.GUNTHERINTL.COM E-MAIL: [email protected]