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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended
    
    December 31, 2003


Commission file number
    
    0-10691


DELPHAX TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)


Minnesota
    
    41-1392000(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)


12500 Whitewater DriveMinnetonka, Minnesota
    
    55343-9420(Address of principal executive offices)
    
    (Zip Code)


(952) 939-9000

Registrants telephone number, including area code


Not Applicable

Former name, former address and former fiscal year, if changed since last report


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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date.

As of February 11, 2004, there were 6,214,873 shares outstanding of
Common Stock.





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TABLE OF CONTENTS



|                                      |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION        
|                                      |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                      |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                      |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                      |                                                                                               | CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                      | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|                                      | Item 3. Quantitative and Qualitative Disclosure of Market Risk                               
|                                      | Item 4. Controls and Procedures.                                                             
|PART II. OTHER INFORMATION           
|                                      | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                           
|Certification Pursuant to Section 302
|Certification Pursuant to Section 302
|Certification Pursuant to Section 906
|Certification Pursuant to Section 906



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INDEX

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed consolidated balance sheets  December 31, 2003 and September 30, 2003
    3Condensed consolidated statements of operations  Three months ended December 31, 2003 and 2002
    5Condensed consolidated statements of cash flows  Three months ended December 31, 2003 and 2002
    6Condensed notes to consolidated financial statements  December 31, 2003
    7Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    10Item 3. Quantitative and Qualitative Disclosure of Market Risk
    15Item 4. Controls and Procedures
    15PART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    16SIGNATURES
    17CERTIFICATIONS


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PART I. FINANCIAL INFORMATION

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)







December 31,
    
    September 30,2003
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    2,095,998
    
    
    $
    2,669,763Short-term investments
    
    
    
    
    
    
    41,608Accounts receivable, less allowance for doubtful
accounts of $774,891 and $737,018 as of December 31,
2003 and September 30, 2003, respectively
    
    
    10,814,281
    
    
    
    11,037,583Current portion of notes receivable from customers
    
    
    113,569
    
    
    
    105,377Inventory:Raw materials and component parts
    
    
    11,408,416
    
    
    
    11,321,554Work-in-progress
    
    
    1,186,283
    
    
    
    1,057,264Finished goods
    
    
    5,771,272
    
    
    
    5,479,88218,365,971
    
    
    
    17,858,700Other current assets
    
    
    1,664,492
    
    
    
    1,283,604TOTAL CURRENT ASSETS
    
    
    33,054,311
    
    
    
    32,996,635Long-term portion of notes receivable from customers
    
    
    634,374
    
    
    
    614,408EQUIPMENT AND FIXTURESMachinery and equipment
    
    
    4,464,032
    
    
    
    4,569,678Furniture and fixtures
    
    
    4,048,725
    
    
    
    3,748,663Leasehold improvements
    
    
    2,354,230
    
    
    
    2,342,68210,866,987
    
    
    
    10,661,023Less accumulated depreciation and amortization
    
    
    7,728,224
    
    
    
    7,199,8183,138,763
    
    
    
    3,461,205TOTAL ASSETS
    
    $
    36,827,448
    
    
    $
    37,072,248


See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

December 31,
      
      September 30,2003
      
      2003LIABILITIES
          AND SHAREHOLDERS EQUITYCURRENT
          LIABILITIESAccounts payable
      
      $
      4,412,101
      
      
      $
      3,422,082Accrued
          expenses
      
      
      3,288,677
      
      
      
      3,356,644Income
          taxes payable
      
      
      319,406
      
      
      
      375,444Current
          portion of bank credit facility
      
      
      11,900,000
      
      
      
      13,900,000Current
          portion of capital leases
      
      
      37,701
      
      
      
      44,289Current
          portion of deferred revenue
      
      
      645,101
      
      
      
      505,480TOTAL
          CURRENT LIABILITIES
      
      
      20,602,986
      
      
      
      21,603,939Long-term
          portion of deferred revenue
      
      
      586,894
      
      
      
      614,408Long-term
          portion of capital leases
      
      
      29,762
      
      
      
      33,566TOTAL
          LIABILITIES
      
      
      21,219,642
      
      
      
      22,251,913SHAREHOLDERS
          EQUITYCommon
          stock  par value $.10 per share  authorized 50,000,000 shares;
          issued and outstanding:6,214,873
          as of December 31, 2003 and September 30, 2003
      
      
      621,487
      
      
      
      621,487Additional
          paid-in capital
      
      
      17,161,118
      
      
      
      17,151,389Accumulated
          other comprehensive loss
      
      
      (754,516
      )
      
      
      (1,172,165
      )Accumulated
          deficit
      
      
      (1,420,283
      )
      
      
      (1,780,376
      )TOTAL
          SHAREHOLDERS EQUITY
      
      
      15,607,806
      
      
      
      14,820,335TOTAL
          LIABILITIES AND SHAREHOLDERS EQUITY
      
      $
      36,827,448
      
      
      $
      37,072,248


See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)







For the Three Months EndedDecember 31,2003
    
    2002Sales:Maintenance, spares and supplies
    
    $
    12,123,570
    
    
    $
    12,261,324Printing equipment
    
    
    2,119,155
    
    
    
    3,213,572NET SALES
    
    
    14,242,725
    
    
    
    15,474,896Costs and Expenses:Cost of sales
    
    
    6,710,972
    
    
    
    7,816,084Selling, general and administrative
    
    
      5,570,113
    
    
    
    6,218,897Research and development
    
    
      1,254,385
    
    
    
    1,115,693Restructuring costs
    
    
    
    
    
    
    1,185,00013,535,470
    
    
    
    16,335,674INCOME (LOSS) FROM SYSTEM SALES AND SERVICE
    
    
    707,255
    
    
    
    (860,778
    )Net interest expense
    
    
    195,238
    
    
    
    215,813Net realized exchange loss (gain)
    
    
    55,508
    
    
    
    (23,560
    )Net unrealized exchange loss
    
    
    21,416
    
    
    
    84,311INCOME (LOSS) BEFORE INCOME TAXES
    
    
    435,093
    
    
    
    (1,137,342
    )Income tax expense
    
    
    75,000
    
    
    
    NET INCOME (LOSS)
    
    $
    360,093
    
    
    $
    (1,137,342
    )Basic and diluted earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.18
    )Weighted average number of shares outstanding
during the period
    
    
      6,214,873
    
    
    
    6,175,898Weighted average number of shares and equivalents
outstanding during the period, assuming dilution
    
    
      6,264,220
    
    
    
    6,175,898


See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)







For the Three Months EndedDecember 31,2003
    
    2002OPERATING ACTIVITIESNet income (loss)
    
    $
    360,093
    
    
    $
    (1,137,342
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    360,731
    
    
    
    460,980Loss on disposal of equipment and fixtures
    
    
    137,250
    
    
    
    Other
    
    
    (211,516
    )
    
    
    19,093Changes in operating assets and liabilities:Accounts receivable, net
    
    
    461,906
    
    
    
    (930,115
    )Inventory
    
    
    (72,071
    )
    
    
    1,673,042Other current assets
    
    
    (260,670
    )
    
    
    345,856Notes receivable from customers
    
    
    (113,569
    )
    
    
    Accounts payable and accrued expenses
    
    
    745,758
    
    
    
    751,422Deferred revenue
    
    
    105,390
    
    
    
    588,298NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    1,513,302
    
    
    
    1,771,234INVESTING ACTIVITIESPurchase of equipment and fixtures
    
    
    (171,996
    )
    
    
    (80,269
    )Proceeds from sale of short-term investments
    
    
    42,911
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (129,085
    )
    
    
    (80,269
    )FINANCING ACTIVITIESRepayment on bank credit facility, net
    
    
    (2,000,000
    )
    
    
    (1,530,000
    )Principal payments on capital lease obligations
    
    
    (10,392
    )
    
    
    (7,680
    )NET
          CASH USED IN FINANCING ACTIVITIES
    
    
    (2,010,392
    )
    
    
    (1,537,680
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    52,410
    
    
    
    16,695(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (573,765
    )
    
    
    169,980CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    2,669,763
    
    
    
    1,717,973CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    2,095,998
    
    
    $
    1,887,953


See condensed notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

December 31, 2003

NOTE A  Basis of Presentation







The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by the accounting principles generally accepted in the
United States for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Companys annual report on Form 10-K for the year ended September 30, 2003.

Reclassifications have been made in the prior year to conform to
classifications in the current year.

NOTE B  Earnings per Share

The following table sets forth the computation of basic and diluted earnings
and loss per share:

For the Three Months EndedDecember 31,2003
    
    2002Numerator:Net income (loss)
    
    $
    360,093
    
    
    $
    (1,137,342
    )Numerator for basic and diluted earnings (loss)
per share  income (loss) applicable to
common shareholders
    
    $
    360,093
    
    
    $
    (1,137,342
    )Denominator:Denominator for basic earnings and loss per share,
weighted average shares
    
    
    6,214,873
    
    
    
    6,175,898Dilutive potential common shares, employee
stock options
    
    
      49,347
    
    
    
    
    aDenominator for diluted earnings and loss per share,
adjusted weighted average shares
    
    
      6,264,220
    
    
    
    6,175,898Earnings (loss) per common share
    
    $
    0.06
    
    
    $
    (0.18
    )Earnings (loss) per common share,
assuming dilution
    
    
    0.06
    
    
    
    (0.18
    )




| |  | a  No incremental shares related to options are included because the impact would be antidilutive.
| |  | ---------------------------------------------------------------------------------------------------

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NOTE C  Comprehensive Income

The components of comprehensive income and loss,
  net of related tax, for the three months ended December 31, 2003 and 2002
  were as follows:

For the Three Months EndedDecember 31,2003
    
    2002Net income (loss)
    
    $
    360,093
    
    
    $
    (1,137,342
    )Foreign currency translation adjustment
    
    
    417,649
    
    
    
    119,006Comprehensive income (loss)
    
    $
    777,742
    
    
    $
    (1,018,336
    )


NOTE D  Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB
25), and related interpretations. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation(SFAS 123) as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure(SFAS 148). Pro forma net income and loss, and
earnings and loss per share, determined as if the Company had accounted for its
employee stock options under the fair value method of those Statements, for the
three months ended December 31, 2003 and 2002 were as follows:

For the Three Months EndedDecember 31,2003
    
    2002Net income (loss), as reported
    
    $
    360,093
    
    
    $
    (1,137,342
    )Stock-based compensation determined under fair
value based method for all awards
    
    
    (51,992
    )
    
    
    (44,642
    )Pro forma net income (loss), assuming fair value
method for all stock-based awards
    
    $
    308,101
    
    
    $
    (1,181,984
    )Basic earnings (loss) per share, as reported
    
    $
    0.06
    
    
    $
    (0.18
    )Diluted earnings (loss) per share, as reported
    
    
    0.06
    
    
    
    (0.18
    )Basic earnings (loss) per share, pro forma
    
    
    0.05
    
    
    
    (0.19
    )Diluted earnings (loss) per share, pro forma
    
    
    0.05
    
    
    
    (0.19
    )


NOTE E  Credit Agreement

Effective December 20, 2001, the Company entered into a bank credit agreement,
secured by substantially all the assets of the Company. The credit facility,
under the agreement as amended over its course, expired December 31, 2003, at
which time payment was due in full for the balance outstanding of $11.9
million. At that date, the Company had not yet completed its negotiations for
replacement financing and, as a result, did not repay the loan when due. On
February 5, 2004, the Company refinanced its indebtedness to the lender by: (i)
issuing at par $3.0 million of convertible subordinated notes that were
accompanied by warrants to purchase Company Common Stock, and (ii) entering
into new senior credit agreements between the Company and a new senior lender
and between the Companys Canadian subsidiary and a Canadian affiliate of the
new lender to the Company. See Note G below for details.

As of December 31, 2003, the credit facility was outstanding at the default
rates applicable under the credit agreement as amended, for an estimated
average annual rate of 5.1%.

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Note F  Restructuring Initiatives

In April 2002, the Company effected a workforce reduction,
eliminating approximately 40 positions in the Canadian subsidiary. The total estimated
cost of the restructuring of $875,000, comprised entirely of employee severance
costs, was accounted for as a cost of acquisition in accordance with SFAS 141.
The restructuring was completed by September 30, 2003, at approximately the
original cost estimate.

In December 2002, the Company announced plans to consolidate its North American
manufacturing and engineering operations at its Canadian subsidiary. The
Company incurred approximately $1.1 million in restructuring expenses over the
course of the consolidation, originally estimated at $1.2 million. These
restructuring expenses were wholly comprised of employee severance costs
unrelated to the acquisition of the Canadian subsidiary and, therefore, were
properly charged to operating expense in fiscal 2003. As of December 31, 2003,
all benefits under the restructuring had been paid.

NOTE G  Subsequent Event

On February 5, 2004, the Company refinanced its indebtedness to its prior
lender by: (i) issuing at par $3.0 million of convertible subordinated notes
that were accompanied by warrants to purchase Company Common Stock, and (ii)
entering into new senior credit agreements between the Company and a new senior
lender and between the Companys Canadian subsidiary and a Canadian affiliate
of the new lender to the Company.

The subordinated debt financing consisted of a
  private placement to an accredited investor of $3.0 million in 7% convertible
  subordinated notes (the Convertible Notes) and accompanying four-year warrants
  to purchase 515,625 shares of Company Common Stock at an exercise price of $3.51
  per share (the Warrants). The Convertible Notes are immediately convertible
  to Company Common Stock at a conversion price of $3.20 per share, which would
  result in 937,500 shares being issued if all $3.0 million in principal
  of the Convertible Notes were converted at that conversion price. The Convertible
  Notes are junior to the senior credit facilities described below, bear interest
  at the rate of 7% per annum, payable quarterly in shares of Common Stock, and
  principal is due and payable in one lump sum in four years on February 4,
  2008, unless earlier paid or converted.

The number of shares of Common Stock to be issued in payment of interest is
determined by dividing the monetary value of the accrued interest by the
initial conversion price of $3.20 per common share, or 16,406 shares per
quarter. Interest expense will be recorded quarterly based on the fair value of
the common shares issued. Accordingly, interest expense may fluctuate from
quarter to quarter. The Convertible Notes are unsecured. The Warrants issued
in connection with the Convertible Notes are exercisable any time after August
5, 2004 and expire on February 4, 2008. The conversion price of the
Convertible Notes and the exercise price of the Warrants are subject to
adjustment in the event of stock splits, dividends and in certain other
circumstances affecting the capitalization of the Company. The relative fair
value of the Warrants on February 5, 2004 was estimated to be approximately
$562,000. Furthermore, the Convertible Notes contained a beneficial conversion
feature representing an effective initial conversion price that was less than
the fair value of the underlying common stock on February 5, 2004. The fair
value of the beneficial conversion feature was estimated to be approximately
$853,000. Both the relative fair value of the Warrants and the fair value of
the beneficial conversion feature will be recorded as an increase in additional
paid-in capital and as original issuance discount on the underlying debt. The
total original issue discount of approximately $1,415,000 will be amortized to
interest expense over the four-year life of the Convertible Notes. Anytime after February 4, 2006, if the
  average closing price of the Companys Common Stock has been above $7.00
  per share for the preceding 15 trading days and certain other conditions are
  met, the Company may issue a notice to redeem the Convertible Notes. Holders
  of the Convertible Notes would then be required to either convert the Convertible
  Notes to Common Stock or accept payment of 120% of the outstanding unpaid principal.

As a part of the subordinated debt financing, the Company agreed to file a
registration statement with the Securities and Exchange Commission covering the
resale from time to time of the shares of Common Stock issuable as interest on
the Convertible Notes, or upon the conversion of the Convertible Notes or
exercise of the Warrants. The Company also amended its shareholder rights plan
to permit the subordinated debt investors to beneficially own up to 25% of the
Companys Common Stock without being considered an acquiring person and
triggering the distribution and exercisability of the rights afforded under the
rights plan.

The Companys senior debt financing had both a U.S. and Canadian component.
The credit facility for the Company consisted of a secured, three-year term
loan of $114,000 and a secured three-year revolving credit facility of up to
$8.5 million, subject to a borrowing base of accounts receivable and inventory
and certain other conditions. The related senior loan to the Companys
Canadian subsidiary consisted of a secured, three-year term loan of $1,042,000
and a secured three-year revolving credit facility of up to $4.0 million,
subject to a borrowing base requirement and certain other conditions. The
senior credit facilities total approximately $13.7 million, of which the
Company and the Canadian subsidiary used about $8.1 million at the closing.
These proceeds and proceeds from the issuance of the Convertible Notes were
used to pay off all indebtedness to the prior lender and to pay expenses
relating to the new senior and subordinated debt.

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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition

Overview

For the first quarter of fiscal 2004 (the three months ended December 31, 2003)
compared with the same quarter in fiscal 2003, the Companys revenues from
maintenance contracts, spare parts, supplies and consumable items were about
the same, while revenues from equipment sales declined. Gross margin improved
as a result of the sales mix and programs in place to reduce cost of sales.
Income from system sales and service improved substantially, from a loss of
$861,000 for the first quarter of fiscal 2003, to a profit of $707,000 for the
first quarter of fiscal 2004, primarily because of the absence of the
$1,185,000 restructuring charge that was taken in the first quarter of fiscal
2003. Cash provided by operations was strong in both periods, being $1.8
million for the three months ended December 31, 2002 and $1.5 million for the
three months ended December 31, 2003, and debt outstanding was reduced in both
periods. Subsequent to December 31, 2003, the Company refinanced its credit
facility, which matured on that date. See Note G to the Condensed Notes to
Consolidated Financial Statements for details.

Critical Accounting Policies

Managements Discussion and Analysis of Results of
Operations and Financial Condition discusses the Consolidated Financial Statements of the Company,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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. On an ongoing basis,
management evaluates its estimates and assumptions, including those related to
inventory, income taxes, revenue recognition and restructuring initiatives.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements.

Inventory

The Company reduces the stated value of its inventory for obsolescence or
impairment in an amount equal to the difference between the cost of the
inventory and the estimated market value, based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional reductions in
stated value may be required.

Income Taxes

In determining the carrying value of the Companys net deferred tax assets, the
Company must assess the likelihood of sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions, to realize the
benefit of these assets. The Company has fully reserved its net deferred tax
assets, totaling $2.6 million and $2.5 million as of December 31, 2003 and
2002, respectively, recognizing that the Company has incurred losses in four of
the last five fiscal years, and there is no assurance that future years will be
profitable. If these estimates and assumptions change in the future, the
Company may record a reduction in the valuation allowance, resulting in an
income tax benefit in the Companys Consolidated Statements of Operations.
Management evaluates the realizability of the deferred tax assets and assesses
the valuation allowance quarterly.

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Revenue Recognition

Systems are tested at the Companys facility
  prior to shipment, and revenue related to orders shipped under standard performance
  conditions is recognized when systems are shipped. Systems shipped subject to
  non-standard contractual performance conditions, such as financing approval,
  are recognized as revenue upon completion or attainment of the specified condition.
  Service revenue is recognized as services are rendered. For spare parts, supplies
  and consumable items stored at customer sites, revenue is recognized when the
  customer uses the inventory. Amounts billed to customers under maintenance contracts
  are recorded as deferred revenue and recognized in income over the term of the
  maintenance agreement. Revenue on equipment manufactured by others is recorded
  on a gross basis. Freight revenue is recorded on a gross basis and recognized
  upon shipment. The related freight costs are recorded as a cost of sales.

Restructuring Initiatives

In April 2002, the Company effected a workforce
  reduction, eliminating approximately 40 positions in the Canadian subsidiary.
  In December 2002, the Company announced plans to consolidate its North
  American manufacturing and engineering operations at its Canadian subsidiary.
  See Note F to the Condensed Consolidated Financial Statements. At the end of
  each quarter, management evaluates its estimates of costs to complete the restructuring
  initiatives. Differences, if any, between previous and revised cost estimates
  may result in a charge or credit to the Companys results of operations.

Results of Operations

The following table sets forth the Companys Statements of Operations as a
percentage of net sales and should be read in connection with the Condensed
Consolidated Financial Statements and notes thereto presented elsewhere in this
report.

December 31,2003
    
      2002Sales:Maintenance, spares and supplies
    
    
    85.1
    %
    
    
    79.2
    %Printing equipment
    
    
    14.9
    
    
    
    20.8NET SALES
    
    
    100.0
    
    
    
    100.0Costs and Expenses:Cost of sales
    
    
    47.1
    
    
    
    50.5Selling, general and administrative
    
    
    39.1
    
    
    
    40.2Research and development
    
    
    8.8
    
    
    
    7.2Restructuring costs
    
    
    0.0
    
    
    
    7.795.0
    
    
    
    105.6INCOME (LOSS) FROM SYSTEM SALES AND SERVICE
    
    
    5.0
    
    
    
    (5.6
    )Net interest expense
    
    
    1.4
    
    
    
    1.4Net
          realized exchange loss (gain)
    
    
    0.4
    
    
    
    (0.2
    )Net unrealized exchange loss
    
    
    0.2
    
    
    
    0.5INCOME (LOSS) BEFORE INCOME TAXES
    
    
    3.0
    
    
    
    (7.3
    )Income tax expense
    
    
    0.5
    
    
    
    0.0NET INCOME (LOSS)
    
    
    2.5
    %
    
    
    (7.3
    )%


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Net Sales. The Companys revenues consists of sales of: (i) maintenance
contracts, spare parts, supplies and consumable items, and (ii) printing
systems and related equipment. For the first quarter of fiscal 2004, net
revenues were $14.2 million, down 8% from $15.5 million for the first quarter
of fiscal 2003.

For the first quarter of fiscal 2004, revenues
  from maintenance contracts, spare parts, supplies and consumable items of $12.1 million
  were insignificantly down from $12.3 million for the first quarter of fiscal
  2003. The Company attributes the 1% drop in revenues to a decline
in usage of the Companys installed base of check-printing
equipment, offset by increases in its OEM business and in *CR
  Series*usage,
and, in general, expects full-year revenues from maintenance
  contracts, spare parts, supplies and consumable items to be somewhat higher
  in fiscal 2004 than in fiscal 2003, consistent with a growing installed base
  of equipment.

Revenues from the sale of printing equipment were
  $2.1 million for the first quarter of fiscal 2004, down 34% from $3.2 million
  for the same period in fiscal 2003. The Companys printing systems primarily
  consist of the Imaggia, the CR Series, the RS Series, the
  Checktronicand the Foliotronicproduct lines. The Checktronicand Foliotronicare among the Companys legacy products. The
  decline in revenues from printing equipment for the first quarter of fiscal
  2004, compared with the first quarter of fiscal 2003, was due to significantly
  lower sales of the legacy products. The Checktronicis now sold principally
  as a system upgrade or refurbished product in Latin America, Asia and Africa.
  The Foliotronic is still actively marketed to customers with folio production
  applications.

Gross Margin.The Companys gross margin
  percentage for the first quarter of fiscal 2004 was 53%, compared with 49% for
  the first quarter of fiscal 2003. The improved margins were primarily due to
  the greater proportion of fiscal 2004 net sales derived from maintenance contracts,
  spare parts, supplies and consumable items, at margins greater than the margin
  on equipment sales. Margins on maintenance contracts, spare parts, supplies and consumable items
for the first quarter of fiscal 2004 were improved over margins for the first
quarter of fiscal 2003 as a result of price increases and cost reduction
efforts. In general, the Company anticipates that its gross margin percentage
in fiscal 2004 as a whole will be approximately the same as in fiscal 2003, as
the Company expects full-year fiscal 2004 revenues to be derived from a higher
proportion of printing equipment revenues at lower margins, offset by continued
cost reductions related to revenues from maintenance contracts, spare parts,
supplies and consumable items.

Selling, General and Administrative Expenses.Selling, general and administrative expenses for the first quarter decreased
  10%, from $6.2 million in fiscal 2003, to $5.6 million in fiscal 2004,
  and as a percentage of net sales were slightly lower at 39% for the first quarter
  of fiscal 2004, compared with 40% for the first quarter of fiscal 2003. The
  reduction was primarily due to reduced staffing as a result of the earlier restructuring
  initiatives and lower sales and marketing expenses, partially offset by the
  effect of paying expenses in foreign currencies that were stronger against the U.S. dollar
  in the first quarter of fiscal 2004 than in the comparable year-ago quarter.

Research and Development Expenses. Research
  and development expenses were $1.3 million for the first quarter of fiscal 2004,
  compared with $1.1 million for the first quarter of fiscal 2003, or 9%
  and 7% of net sales, respectively. These expenses for the first quarter of fiscal
  2004, compared with the first quarter of fiscal 2003, were
higher as a result of the effect of paying expenses in foreign
currencies that were stronger against the
  U.S. dollar in the first quarter of fiscal 2004 than in the comparable year-ago
  quarter, partially offset by reduced staffing as a result of the earlier restructuring
initiatives.

Net Interest Expense. Net interest expense
  for the three months ended December 31, 2003 and 2002 was $195,000 and $216,000,
  respectively. The decrease between fiscal periods was due to the lower average
  debt balance for the first quarter of fiscal 2004, compared with the first quarter
  of fiscal 2003.

Foreign Exchange Gains and Losses. The Company incurs realized and unrealized
transactional foreign exchange gains and losses on currency conversion
transactions that are reflected on the Companys Statements of Operations.
Realized and unrealized transactional exchange gains and losses reflect actual
and anticipated, respectively, gains or losses recognized as the result of
transactions between entities with different functional currencies. The net
transactional exchange losses for the three months ended December 31, 2003 and
2002 were $77,000 and $61,000, respectively. The Company experiences
translational foreign currency gains and losses, which are reflected in the
Companys equity, with gains due to the weakening, and losses due to the
strengthening, of the U.S. dollar against the currencies of the Companys
foreign

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subsidiaries and the resulting effect of
currency translation on the valuation of the intercompany accounts and certain assets of the subsidiaries,
which are denominated in U.S. dollars. The functional currency of the Companys Canadian
subsidiary is the U.S. dollar. The Company anticipates that it will continue
to have transactional and translational foreign currency gains and losses from
foreign operations in the future, although strategies to reduce the size of the
gains and losses will be reviewed and implemented whenever economical and
practical.

Income Taxes. For the first quarter of fiscal 2004, an interim period income
tax expense of $75,000 was recognized based on projected profitable
European operations for the fiscal year. For the first quarter of fiscal 2003, no income tax benefit was
recognized on the loss before income taxes. As of December 31, 2003 and 2002,
the Company had fully reserved deferred tax assets of $2.6 million and $2.5
million, respectively, recognizing that the Company has incurred losses in four
of the last five fiscal years and there is no assurance that future years will
be profitable.

Earnings or Loss per Share.For the first quarter of fiscal 2004, the
Companys basic and diluted earnings per share was $0.06, compared with basic
and diluted loss per share of $0.18 for the first quarter of fiscal
2003. The
increase in earnings between periods was primarily attributable to lower
operating expenses in fiscal 2004, compared with fiscal 2003, as a result of
benefits derived from the restructuring initiatives. A charge of $1.2 million
for the North American restructuring initiative was recognized in the first
quarter of fiscal 2003, resulting in a $1.1 million net loss in an otherwise
break-even quarter.

Restructuring Initiatives.On April 23, 2002, the Company effected a workforce
reduction, eliminating approximately 40 positions in the Canadian subsidiary.
The cost of terminating the employees in these positions, estimated at
approximately $875,000, was included in the cost of the acquisition in
accordance with SFAS 141 and included in accrued expenses in the consolidated
balance sheets This initiative was completed by September 30, 2003 at
approximately the original cost estimate. By taking this action, the Company
anticipates eliminating annual operating expenses of approximately $1.3 million
without affecting its ability to fulfill current or future orders.

On December 4, 2002, the Company announced plans to consolidate its North
American manufacturing and engineering operations at its Canadian subsidiary.
The Company expected to incur approximately $1.2 million in restructuring
expenses over the course of the consolidation, but paid out the last of the
benefits payable for the restructuring in the first quarter of fiscal 2004,
completing the restructuring at the slightly lower cost of $1.1 million. By
taking this action, the Company anticipates eliminating annual operating
expenses of $1.6 million while improving the Companys ability to provide
customer service and fulfill current and future orders.

The expense reductions realized and anticipated from the restructuring actions
taken are not directly accretive to results of operations, as reductions in
certain expenses may be reinvested in other endeavors, such as marketing or
research and development.

Market Risk

The Company has foreign subsidiaries located in Canada, the United Kingdom and
France, does business in more than 60 countries and generates approximately 30%
of its revenues from outside North America. The Companys ability to sell its
products in foreign markets may be affected by changes in economic, political
or market conditions in the foreign markets in which it does business.

The Companys net investment in its foreign subsidiaries was $7.5 million and
$7.2 million at December 31, 2003 and September 30, 2003, respectively,
translated into U.S. dollars at the closing exchange rates. The potential loss
based on end-of-period balances and prevailing exchange rates resulting from a
hypothetical 10% strengthening of the U.S. dollar against foreign currencies
was not material in the quarter ended December 31, 2003. The functional
currency of the Canadian subsidiary is the U.S. dollar.

From time to time, the Company has entered into foreign exchange contracts as a
hedge against specific foreign currency receivables. In the first three months
of fiscal 2004, the Company did not enter into any foreign exchange contracts
and does not anticipate entering into any such contracts in the near future.

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Interest Rate Risk

Substantially all of the Companys debt and the associated interest expense are
sensitive to changes in the level of interest rates. A hypothetical 100 basis
point increase in interest rates would result in incremental interest expense
in the three-month periods ended December 31, 2003 and 2002 of approximately
$35,000 and $34,000, respectively.

Factors Affecting Results of Operations

The Companys revenues are subject to fluctuations, which may be material. The
Companys net sales and operating results may fluctuate from quarter to quarter
because: (i) the Companys sales cycle is relatively long, (ii) the size of
orders may vary significantly, (iii) the availability of financing for
customers in some countries is variable, (iv) customers may postpone or cancel
orders, and (v) economic, political and market conditions in some markets
change with minimal notice and effect the timing and size of orders. Because
the Companys operating expenses are based on anticipated revenue levels and a
high percentage of the Companys operating costs are relatively fixed,
variations in the timing of revenue recognition will result in significant
fluctuations in operating results from period to period.

The Company has two significant customers that
  accounted for 18% and 17% of net sales in the first quarter of fiscal 2004 and
  8% and 18% of net sales in the first quarter of fiscal 2003. The Company anticipates,
  but cannot assure, that these customers will continue to be significant throughout
  fiscal 2004. However, the loss of, or significant decrease in sales to, either
  of these customers could have a material adverse effect on the Company.

The Company is dependent on its bank credit facilities
  to fund its operations. The Companys ability to maintain working capital
  depends on its compliance with the credit agreements. The Companys credit
  facilities are discussed below under the heading Liquidity and Capital
  Resources.

Liquidity and Capital Resources

Working capital was $12.5 million at December 31,
  2003, compared with $11.4 million at September 30, 2003. Accounts receivable
  decreased from $11.0 million at September 30, 2003, to $10.8 million
  at December 31, 2003 due to timing of collections. Inventory increased
  from $17.9 million at September 30, 2003, to $18.4 million at
  December 31, 2003, with increases in all inventory categories, due to new
  builds of printing equipment and inventory replenishments. Accounts payable
  and accrued expenses increased $922,000, from $6.8 million at September 30,
  2003, to $7.7 million at December 31, 2003. The increase was primarily
  due to the increase in inventory purchases and a slowing of payments to vendors.
  In the first quarter of fiscal 2004, the Company reduced the balance owed on
  the line of credit by $2.0 million, from $13.9 million at September 30,
  2003, to $11.9 million at December 31, 2003.

The Company has undertaken no significant investing activities. No significant
capital investment has been undertaken or is planned, and at December 31, 2003,
the Company had no material commitments for capital expenditures. Short-term
investments are purchased as cash is available and sold as they mature.

Effective December 20, 2001, the Company entered
  into a bank credit agreement secured by substantially all the assets of the
  Company. The credit facility, under the agreement as amended over its course,
  expired December 31, 2003, at which time payment was due in full for the
  balance outstanding of $11.9 million. At that date, the Company had not yet
  completed its negotiations for replacement financing and, as a result, did not
  repay the loan when due. On February 5, 2004, the Company
repaid the loan by: (i) issuing at par $3.0 million of convertible
  subordinated notes that were accompanied by warrants to purchase Company Common
  Stock, and (ii) entering into new senior credit agreements between the
  Company and a new senior lender and between the Companys Canadian subsidiary
  and a Canadian affiliate of the new lender to the Company. See Note G to the
  Condensed Notes to Consolidated Financial Statements for details.

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Cautionary Statement

Statements included in this Managements Discussion and Analysis of Results of
Operations and Financial Condition, the Companys Annual Report, the Companys
Form 10-K, in other filings with the Securities and Exchange Commission, in the
Companys press releases and in oral statements made to securities market
analysts and shareholders, which are not historical or current facts, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties that could cause the Companys actual
results to differ materially from historical earnings and those presently
anticipated or projected.

The factors mentioned under the subheading Factors Affecting Results of
Operations are among those that in some cases have affected, and in the future
could affect, the Companys actual results, and could cause the Companys
actual financial performance to differ materially from that expressed in any
forward-looking statement.







Item 3. Quantitative and Qualitative Disclosure of Market Risk

The information called for by this item is provided under the caption Market
Risk under Item 2.  Managements Discussion and Analysis of Results of
Operations and Financial Condition.







Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

The Companys Chairman and Chief Executive Officer, Jay A. Herman, and
Vice President and Chief Financial Officer, Robert M. Barniskis, have reviewed
the Companys disclosure controls and procedures within 90 days prior to the
filing of this report. Based upon this review, these officers believe that the
Companys disclosure controls and procedures are effective in ensuring that
material information related to the Company is made known to them by others
within the Company.

(b) Changes in Internal Controls.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-Q.

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PART II. OTHER INFORMATION







Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are included herein:

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. § 1350).

32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. § 1350).

(b) The following report on Form 8-K was filed during the three months ended
December 31, 2003:

December 19, 20034  Form 8-K: Item 9. Regulation FD Disclosure (Item
12. Disclosure of Results of Operations and Financial Condition) -
Earnings release issued December 19, 2003, for the fiscal year ended
September 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DELPHAX TECHNOLOGIES INC.RegistrantDate February 13, 2004
    
    /s/ Jay A. HermanJay A. HermanChairman and Chief Executive OfficerDate February 13, 2004
    
    /s/ Robert M. BarniskisRobert M. BarniskisVice President, Chief Financial Officer


17