An automatic paper grading system comprises a main grader unit and a detachable portable teacher unit which can be coupled to the grader unit for bidirectional data transmission. The teacher unit includes a CPU, memory, data input means, a display, and a data port. The CPU means is operable to accept entry of a Scoring Key using the alphanumeric input means. The Scoring Key can be transmitted from the portable teacher unit to the grader unit. The grader unit includes a processor, a memory, a printer, a scanner unit having OCR capability, a data port, and a sheet-feeding means to receive a sheet of paper and automatically guide the sheet of paper through the grader unit and the printer means. An algorithm resident in the grader unit determines incorrect answers and scores the paper based on a Scoring Key: A print command can be sent to the printer to print indicia on the paper to indicate incorrect answers.