##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.
20549


FORM 10-Q

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|  |  | for the quarterly period ended December 31, 2002                                       

or

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|  |  | for the transition period from  to                                                      

Commission file number0-10691

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 Drive
Minnetonka, 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 10, 2003, there were 6,175,898 shares outstanding of
Common Stock.                                                                                                                                                                                                                                                                                  

1



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TABLE OF CONTENTS



|                                               |                                                                                               |                                                                                                 |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                 
|                                               | Item 1. Financial Statements (Unaudited)                                                     
|                                               |                                                                                               | Condensed consolidated balance sheets  December 31, 2002 and September 30, 2002               
|                                               |                                                                                               | Condensed consolidated statements of operations  Three months ended December 31, 2002 and 2001
|                                               |                                                                                               | Condensed consolidated statements of cash flows  Three months ended December 31, 2002 and 2001
|                                               |                                                                                               | Condensed notes to consolidated financial statements  December 31, 2002                       
|                                               | 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                                    
|CERTIFICATIONS                                
|Certificate Pursuant to 18 U.S.C. Section 1350



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##### Table of Contents



INDEX

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

|                              |  |                                                                                                 |  | 
|----------------------------- |  | ----------------------------------------------------------------------------------------------- |  | 
|PART
I. FINANCIAL INFORMATION
|                             
|Item 1.                       |  | Financial Statements (Unaudited)                                                               
|                              |  | Condensed consolidated balance sheets  December 31, 2002 and September 30, 2002               
|                              |  | Condensed consolidated statements of operations  Three months ended December 31, 2002 and 2001
|                              |  | Condensed consolidated statements of cash flows  Three months ended December 31, 2002 and 2001
|                              |  | Condensed notes to consolidated financial statements  December 31, 2002                       
|                             
|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                    |  |                                                                                                 |  | 
|                             
|CERTIFICATIONS                |  |                                                                                                 |  | 

2



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##### Table of Contents












PART I. FINANCIAL INFORMATION

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

|                       |                                                                                                                                                 |                                   |            |              |            |   |               |            |            | 
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------------ | ---------- | - | ------------- | ---------- | ---------- | 
|                       |                                                                                                                                                 |                                   |            | December 31, |            |   | September 30, |           
|                       |                                                                                                                                                 |                                   |            | 2002         |            |   | 2002          |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |               |           
|ASSETS                 |                                                                                                                                                 |                                   |            |              |            |   |               |           
|CURRENT ASSETS         |                                                                                                                                                 |                                   |            |              |            |   |               |           
|                       | Cash and cash equivalents                                                                                                                       |                                   | $          | 1,887,953    |            |   | $             | 1,717,973  |           
|                       | Short-term investments                                                                                                                          |                                   |            | 80,205       |            |   |               | 78,430     |           
|                       | Accounts receivable, less allowance for doubtful
accounts of $253,367 and $253,106 as of December 31,
2002 and September 30, 2002, respectively |                                   |            | 11,732,054   |            |   |               | 10,712,889 |           
|                       | Inventory:                                                                                                                                      |                                   |            |              |            |   |               |            |           
|                       |                                                                                                                                                 | Raw materials and component parts |            |              | 12,604,492 |   |               |            | 13,602,964 | 
|                       |                                                                                                                                                 | Work-in-progress                  |            |              | 588,564    |   |               |            | 597,388    | 
|                       |                                                                                                                                                 | Finished goods                    |            |              | 6,039,585  |   |               |            | 6,672,664  | 
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|                       |                                                                                                                                                 |                                   | 19,232,641 |              |            |   | 20,873,016    |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|                       | Other current assets                                                                                                                            |                                   |            | 1,190,704    |            |   |               | 1,525,695  |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|TOTAL CURRENT ASSETS   |                                                                                                                                                 |                                   | 34,123,557 |              |            |   | 34,908,003    |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|EQUIPMENT AND FIXTURES |                                                                                                                                                 |                                   |            |              |            |   |               |           
|                       | Machinery and equipment                                                                                                                         |                                   |            | 4,916,540    |            |   |               | 4,853,798  |           
|                       | Furniture and fixtures                                                                                                                          |                                   |            | 3,074,826    |            |   |               | 3,057,896  |           
|                       | Leasehold improvements                                                                                                                          |                                   |            | 2,389,541    |            |   |               | 2,386,996  |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|                       |                                                                                                                                                 |                                   | 10,380,907 |              |            |   | 10,298,690    |           
|                       | Less accumulated depreciation and amortization                                                                                                  |                                   |            | 6,000,283    |            |   |               | 5,539,303  |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|                       |                                                                                                                                                 |                                   | 4,380,624  |              |            |   | 4,759,387     |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              
|TOTAL ASSETS           |                                                                                                                                                 | $                                 | 38,504,181 |              |            | $ | 39,667,390    |           
|                       |                                                                                                                                                 |                                   |            |              |            |   |              

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, |           
|                                           |                                                                                                                                                          |   | 2002         |            |   | 2002          |           
|                                           |                                                                                                                                                          |   |              |            |   |               |           
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                                                          |   |              |            |   |               |            |           
|CURRENT LIABILITIES                        |                                                                                                                                                          |   |              |            |   |               |            |           
|                                           | Accounts payable                                                                                                                                         |   | $            | 3,372,009  |   |               | $          | 4,284,465  |  
|                                           | Accrued expenses                                                                                                                                         |   |              | 4,963,629  |   |               |            | 3,269,531  |  
|                                           | Income taxes payable                                                                                                                                     |   |              | 504,203    |   |               |            | 482,197    |  
|                                           | Current portion of bank credit facility                                                                                                                  |   |              | 13,750,000 |   |               |            | 2,300,000  |  
|                                           | Current portion of capital leases                                                                                                                        |   |              | 35,204     |   |               |            | 33,361     |  
|                                           | Deferred revenue                                                                                                                                         |   |              | 1,079,155  |   |               |            | 489,996    |  
|                                           |                                                                                                                                                          |   |              |            |   |               |           
|TOTAL CURRENT LIABILITIES                  |                                                                                                                                                          |   | 23,704,200   |            |   |               | 10,859,550 |           
|                                           | Long-term portion of bank credit facility                                                                                                                |   |              |           |   |               |            | 12,980,000 |  
|                                           | Long-term portion of capital leases                                                                                                                      |   |              | 18,694     |   |               |            | 28,217     |  
|                                           |                                                                                                                                                          |   |              |            |   |               |           
|TOTAL LIABILITIES                          |                                                                                                                                                          |   | 23,722,894   |            |   |               | 23,867,767 |           
|                                           |                                                                                                                                                          |   |              |            |   |               |           
|SHAREHOLDERS EQUITY                       |                                                                                                                                                          |   |              |            |   |               |            |           
|                                           | Common stock  par value $.10 per share  authorized
50,000,000 shares; issued and outstanding: 6,175,898 as of December 31, 2002 and
September 30, 2002 |   |              | 617,590    |   |               |            | 617,590    |  
|                                           | Additional paid-in capital                                                                                                                               |   |              | 17,039,945 |   |               |            | 17,039,945 |  
|                                           | Accumulated other comprehensive loss                                                                                                                     |   |              | (1,793,329 | ) |               |            | (1,912,335 | )
|                                           | Retained earnings                                                                                                                                        |   |              | (1,082,919 | ) |               |            | 54,423     |  
|                                           |                                                                                                                                                          |   |              |            |   |               |           
|TOTAL SHAREHOLDERS EQUITY                 |                                                                                                                                                          |   | 14,781,287   |            |   |               | 15,799,623 |           
|                                           |                                                                                                                                                          |   |              |            |   |               |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                          | $ | 38,504,181   |            |   | $             | 39,667,390 |           
|                                           |                                                                                                                                                          |   |              |            |   |               |           

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 Ended |           
|                                                                                                   |                                     |   | December 31,               |           
|                                                                                                   |                                     |   |                            |           
|                                                                                                   |                                     |   | 2002                       |            |  | 2001 |           
|                                                                                                   |                                     |   |                            |            |  |      |           
|Sales:                                                                                             |                                     |   |                            |            |  |      |            |          
|                                                                                                   | Printing equipment                  |   | $                          | 3,213,572  |  |      | $          | 6,437,923 | 
|                                                                                                   | Maintenance, spares and supplies    |   |                            | 12,261,324 |  |      |            | 5,339,619 | 
|                                                                                                   |                                     |   |                            |            |  |      |           
|NET SALES                                                                                          |                                     |   | 15,474,896                 |            |  |      | 11,777,542 |          
|Costs and Expenses:                                                                                |                                     |   |                            |            |  |      |            |          
|                                                                                                   | Cost of sales                       |   |                            | 7,816,084  |  |      |            | 6,149,261 | 
|                                                                                                   | Selling, general and administrative |   |                            | 6,046,503  |  |      |            | 3,813,035 | 
|                                                                                                   | Research and development            |   |                            | 1,288,087  |  |      |            | 742,419   | 
|                                                                                                   | Restructuring costs                 |   |                            | 1,185,000  |  |      |            |          | 
|                                                                                                   |                                     |   |                            |            |  |      |           
|                                                                                                   |                                     |   | 16,335,674                 |            |  |      | 10,704,715 |          
|                                                                                                   |                                     |   |                            |            |  |      |           
|(LOSS) INCOME FROM SYSTEM SALES AND SERVICE                                                        |                                     |   | (860,778                   | )          |  |      | 1,072,827  |          
|Net interest expense                                                                               |                                     |   | 215,813                    |            |  |      | 36,802     |          
|Net realized exchange (gain) loss                                                                  |                                     |   | (23,560                    | )          |  |      | 79,384     |          
|Net unrealized exchange loss (gain)                                                                |                                     |   | 84,311                     |            |  |      | (25,120    | )        
|                                                                                                   |                                     |   |                            |            |  |      |           
|(LOSS) INCOME BEFORE INCOME TAXES                                                                  |                                     |   | (1,137,342                 | )          |  |      | 981,761    |          
|Income tax expense                                                                                 |                                     |   |                           |            |  |      | 343,000    |          
|                                                                                                   |                                     |   |                            |            |  |      |           
|NET (LOSS) INCOME                                                                                  |                                     | $ | (1,137,342                 | )          |  | $    | 638,761    |          
|                                                                                                   |                                     |   |                            |            |  |      |           
|Basic and diluted (loss) earnings per common share                                                 |                                     | $ | (0.18                      | )          |  | $    | 0.10       |          
|Weighted average number of shares outstanding
during the period                                    |                                     |   | 6,175,898                  |            |  |      | 6,159,619  |          
|Weighted average number of shares and equivalents
outstanding during the period, assuming dilution |                                     |   | 6,175,898                  |            |  |      | 6,297,250  |          

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 Ended |          
|                                                                                  |                                            |   | December 31,               |          
|                                                                                  |                                            |   |                            |          
|                                                                                  |                                            |   | 2002                       |           |   | 2001 |            
|                                                                                  |                                            |   |                            |           |   |      |            
|OPERATING ACTIVITIES                                                              |                                            |   |                            |           |   |      |             |           
|Net (loss) income                                                                 |                                            | $ | (1,137,342                 | )         |   | $    | 638,761     |           
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                            |   |                            |           |   |      |             |           
|                                                                                  | Depreciation and amortization              |   |                            | 460,980   |   |      |             | 101,711    |  
|                                                                                  | Loss on disposal of equipment and fixtures |   |                            |          |   |      |             | 16,005     |  
|                                                                                  | Other                                      |   |                            | 19,093    |   |      |             | 6,254      |  
|Changes in operating assets and liabilities:                                      |                                            |   |                            |           |   |      |             |           
|                                                                                  | Accounts receivable, net                   |   |                            | (930,115  | ) |      |             | (1,407,202 | )
|                                                                                  | Inventory                                  |   |                            | 1,673,042 |   |      |             | (1,318,779 | )
|                                                                                  | Other current assets                       |   |                            | 345,856   |   |      |             | 369,144    |  
|                                                                                  | Accounts payable and accrued expenses      |   |                            | 751,422   |   |      |             | 2,785,642  |  
|                                                                                  | Deferred revenue                           |   |                            | 588,298   |   |      |             | 1,928,076  |  
|                                                                                  |                                            |   |                            |           |   |     
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                         |                                            |   | 1,771,234                  |           |   |      | 3,119,612   |           
|INVESTING ACTIVITIES                                                              |                                            |   |                            |           |   |      |             |           
|Business acquisition                                                              |                                            |   |                           |           |   |      | (16,673,000 | )         
|Purchase of equipment and fixtures                                                |                                            |   | (80,269                    | )         |   |      | (49,483     | )         
|Proceeds from sale of equipment and fixtures                                      |                                            |   |                           |           |   |      | 28,103      |           
|Purchase of short-term investments                                                |                                            |   |                           |           |   |      | (70,164     | )         
|                                                                                  |                                            |   |                            |           |   |     
|NET CASH (USED IN) INVESTING ACTIVITIES                                           |                                            |   | (80,269                    | )         |   |      | (16,764,544 | )         
|FINANCING ACTIVITIES                                                              |                                            |   |                            |           |   |      |             |           
|Issuance of common stock                                                          |                                            |   |                           |           |   |      | 23,299      |           
|Repurchase of common stock                                                        |                                            |   |                           |           |   |      | (22,050     | )         
|Borrowing (repayment) on bank credit facility, net                                |                                            |   | (1,530,000                 | )         |   |      | 14,173,157  |           
|Principal payments on capital lease obligations                                   |                                            |   | (7,680                     | )         |   |      |            |           
|                                                                                  |                                            |   |                            |           |   |     
|NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                               |                                            |   | (1,537,680                 | )         |   |      | 14,174,406  |           
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                           |                                            |   | 16,695                     |           |   |      | (90,059     | )         
|                                                                                  |                                            |   |                            |           |   |     
|INCREASE IN CASH AND CASH EQUIVALENTS                                             |                                            |   | 169,980                    |           |   |      | 439,415     |           
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    |                                            |   | 1,717,973                  |           |   |      | 591,539     |           
|                                                                                  |                                            |   |                            |           |   |     
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                          |                                            | $ | 1,887,953                  |           |   | $    | 1,030,954   |           
|                                                                                  |                                            |   |                            |           |   |     

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, 2002

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, 2002.

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 loss and
earnings per share:

|             |                                                                                                      |  |                            |            |   |   |  |  |  |      |   |           | 
|------------ | ---------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | - | - |  |  |  | ---- | - | --------- | 
|             |                                                                                                      |  | For the Three Months Ended |           
|             |                                                                                                      |  | December 31,               |           
|             |                                                                                                      |  |                            |           
|             |                                                                                                      |  | 2002                       |            |   |   |  |  |  | 2001 |  
|             |                                                                                                      |  |                            |            |   |   |  |  |  |      |  
|Numerator:   |                                                                                                      |  |                            |            |   |   |  |  |  |      |   |          
|             | Net (loss) income                                                                                    |  | $                          | (1,137,342 | ) |   |  |  |  |      | $ | 638,761   | 
|             |                                                                                                      |  |                            |            |   |   |  |  |  |     
|             | Numerator for basic and diluted earnings
per share  (loss) income applicable to
common shareholders |  | $                          | (1,137,342 | ) |   |  |  |  |      | $ | 638,761   | 
|Denominator: |                                                                                                      |  |                            |            |   |   |  |  |  |      |   |          
|             | Denominator for basic earnings per share,
weighted average shares                                    |  |                            | 6,175,898  |   |   |  |  |  |      |   | 6,159,619 | 
|             | Dilutive potential common shares, employee
stock options                                             |  |                            |           |   | a |  |  |  |      |   | 137,631   | 
|             |                                                                                                      |  |                            |            |   |   |  |  |  |     
|             | Denominator for diluted earnings per share,
adjusted weighted average shares                         |  |                            | 6,175,898  |   |   |  |  |  |      |   | 6,297,250 | 
|             | (Loss) earnings per common share                                                                     |  | $                          | (0.18      | ) |   |  |  |  |      | $ | 0.10      | 
|             | (Loss) earnings per common share,
assuming dilution                                                  |  |                            | (0.18      | ) |   |  |  |  |      |   | 0.10      | 

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 loss and income, net of related tax, for the
three months ended December 31, 2002 and 2001 are as follows:

|                                        |  |                            |            |   |      |   |         | 
|--------------------------------------- |  | -------------------------- | ---------- | - | ---- | - | ------- | 
|                                        |  | For the Three Months Ended |           
|                                        |  | December 31,               |           
|                                        |  |                            |           
|                                        |  | 2002                       |            |   | 2001 |  
|                                        |  |                            |            |   |      |  
|Net (loss) income                       |  | $                          | (1,137,342 | ) |      | $ | 638,761 | 
|Foreign currency translation adjustment |  |                            | 119,006    |   |      |   | 34,455  | 
|                                        |  |                            |            |   |      |  
|Comprehensive (loss) income             |  | $                          | (1,018,336 | ) |      | $ | 673,216 | 
|                                        |  |                            |            |   |      |  

NOTE D  Acquisition of Delphax Systems, Corporate Name Change and Workforce
Reduction

In December 2001, the Company through a newly organized Canadian subsidiary
acquired substantially all of the North American business assets of Delphax
Systems, a Massachusetts general partnership, and Delphax Systems, Inc., a
Delaware corporation (collectively, the Acquired Company). The Acquired
Company is located in suburban Toronto, Ontario, and was the supplier of the
print engines used in a number of the Companys products and to a number of
non-competing original equipment manufacturers.

The property acquired included fixed assets, inventory, accounts receivable,
contract rights, various intellectual property and intangibles, including
rights to the name Delphax. Effective April 1, 2002, following an
affirmative shareholder vote at the March 21, 2002 annual meeting of
shareholders, the Company changed its name from Check Technology Corporation to
Delphax Technologies Inc.

On April 23, 2002, the Company effected a workforce reduction, eliminating
approximately 40 positions in the Canadian subsidiary. Benefits are paid on
either a lump-sum basis or over time. As of December 31, 2002, the accrued
liability for benefits payable in the future was $106,000. It is estimated
that this balance will be sufficient to cover the remaining obligation under
the workforce reduction plan.

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NOTE D  Acquisition of Delphax Systems, Corporate Name Change and Workforce
Reduction (Continued)

The following unaudited pro forma combined summary statements of operations for
the three-month periods ended December 31, 2002 and 2001 were prepared in
accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets,and assumes the acquisition had occurred at the
beginning of fiscal 2001. The following pro forma data reflects adjustments
for interest expense in the period ended December 31, 2001. The unaudited pro
forma financial information is provided for informational purposes only and
does not purport to be indicative of future results of the Company.

Unaudited Pro Forma
Combined Summary Statements of Operations

|                                                   |  |                                 |            |   |      |   |            | 
|-------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | 
|                                                   |  | Three Months Ended December 31, |           
|                                                   |  |                                 |           
|                                                   |  | 2002                            |            |   | 2001 |  
|                                                   |  |                                 |            |   |      |  
|Net sales                                          |  | $                               | 15,474,896 |   |      | $ | 17,461,798 | 
|Net (loss) income                                  |  |                                 | (1,137,342 | ) |      |   | 270,684    | 
|Basic and diluted (loss) earnings per common share |  |                                 | (0.18      | ) |      |   | 0.04       | 

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 agreement
provides two types of loans, term and revolving, including letters of credit.
The term loan portion of the credit facility was advanced as a single borrowing
on December 20, 2001, in the amount of $4.0 million, $3.3 million of which
remained outstanding as of December 31, 2002. No amount repaid or prepaid on
any term loan may be borrowed again. The Company may borrow on a revolving
loan basis up to the lesser of: (i) the revolving credit commitment in effect
at such time and (ii) the borrowing base as then determined and computed.

On December 18, 2002, the lender and the Company amended the agreement. Under
the amendment, an installment payment of $250,000 was due and was paid on the
term loan on December 31, 2002, with future installments of $250,000 due March
31, 2003, June 30, 2003 and September 30, 2003, with the balance of the term
loans due on December 31, 2003. The amendment reduced the revolving credit
commitment from $12.5 million as of December 31, 2002, to $11.5 million
effective on January 1, 2003, and $10.5 million effective on July 1, 2003, and
the facility matures and comes due on December 31, 2003. Therefore, as of
December 31, 2002, the balance due on the credit facility was a current
liability. The revolving credit commitment is subject to a commitment fee of
0.5% per annum on the unused portion of the commitment. As of December 31,
2002, revolving loans outstanding were $10.5 million. Term loans and revolving
loans, at the Companys election, may be outstanding at one of two rates, the
banks prime rate plus 1% or the banks adjusted LIBOR rate plus 4%, provided
that $3.0 million of the principal amount of the revolving loans bear interest
at the fixed rate of 7.35% per annum. As of December 31, 2002, $10.8 million
was outstanding at the banks adjusted LIBOR rate plus 4%, $3.0 million at
7.35%, and in total, at a weighted average interest rate of approximately 6.5%.

As of December 31, 2002, the Company was in compliance with all covenants of
its credit agreement. The Company believes, but cannot assure, that it will be
able to fully meet the terms of the amended agreement. The Companys ability
to fund its future working capital requirements is dependent upon its ability
to extend or renegotiate financing before the end of the current term of the
facility. The Company believes it has the ability to secure alternative forms
of financing to meet its working capital requirements. However, the pricing of
these alternative forms of financing may not be as favorable as the current
credit facility.

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NOTE F  Business Combinations and Goodwill and Other Intangible Assets

On June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations(SFAS 141) and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets(SFAS 142). SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations, clarifies the criteria for
recognizing intangible assets separately from goodwill and is effective for
business combinations completed subsequent to June 30, 2001. Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed at least annually for impairment. Separable intangible assets not
deemed to have an indefinite life will continue to be amortized over their
useful lives, but with no maximum life. The amortization provisions of SFAS
142 apply immediately to goodwill and intangible assets acquired after June 30,
2001 and is required to be adopted for all prior acquisitions in years
beginning after October 1, 2002, our fiscal 2003. SFAS 141 has been applied in
accounting for the acquisition of the Canadian subsidiary described above in
NOTE D. The adoption of these Statements had no material effect on the
Companys results of operations or financial position.

NOTE G  Impairment or Disposal of Long-Lived Assets

As of October 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets(SFAS 144), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operationsfor a disposal of a segment of a
business. SFAS 144 is effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. The adoption of this Statement had
no effect on the Companys results of operations or financial position.

NOTE H  Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities(SFAS
146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and replaces Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in Restructuring) (EITF 94-3). SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. This Statement is effective for exit or
disposal activities initiated after December 31, 2002. The Companys
restructuring initiative, which commenced prior to the effective date of SFAS
146, was accounted for in accordance with EITF 94-3, and the estimated
restructuring costs of $1.2 million in severance and related payments were
accrued in the first quarter of fiscal 2003. No benefits under the
restructuring initiative have been paid as of December 31, 2002.

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

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 adjustments, including those related to
bad debts, inventories, income taxes, restructuring costs, litigation and
contingencies. 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.

Bad Debt

The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If
the financial condition of the Companys customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

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. Conversely, if actual future demand or market
conditions are more favorable than those projected by management, reserves in
excess of those estimated to be required in the future may be released.

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. For the fiscal year ended September 30, 2002 and the
three-month period ended December 31, 2002, the Company fully reserved its net
deferred tax assets, recognizing that the Company has incurred losses in three
of the last four 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. As
of December 31, 2002, deferred tax assets of $2.5 million had been fully
reserved. Management evaluates the realizability of the deferred tax assets
and assesses the valuation allowance quarterly.

Restructuring Initiatives

In April 2002, the Company effected a workforce reduction, eliminating
approximately 40 positions in the Canadian subsidiary. See NOTE D to the
financial statements. As of December 31, 2002, the accrued liability for
benefits payable in the future was $106,000. It is estimated that this balance
will be sufficient to cover the remaining obligation under the workforce
reduction plan. On December 4, 2002, the Company announced plans to
consolidate its North American manufacturing and engineering operations at its
Canadian subsidiary. These operations have been divided between the facilities
in the United States and Canada. The Companys worldwide headquarters and

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marketing functions will continue to be based in the United States. The
selling and customer service functions will remain unchanged in the United
States, as well as in the subsidiaries in the United Kingdom and France. The
Company expects to incur approximately $1.2 million in restructuring expenses
over the course of the consolidation, which is scheduled to be completed by the
end of calendar 2003. These restructuring costs are wholly comprised of
employee severance costs unrelated to the acquisition of the Canadian
subsidiary and, therefore, were properly charged to operating expense in the
first quarter of fiscal 2003, in accordance with EITF 94-3. No benefits under
the restructuring initiative had been paid as of December 31, 2002. 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 many result in a charge or credit to the Companys results of
operations.

Litigation and Contingencies

The Company is involved in legal proceedings, which are routine litigation
incident to its business. While it is impossible to estimate with certainty
the ultimate legal and financial result of such litigation, quarterly,
management reexamines the facts and circumstances of pending litigation and
determines whether current reserves, if any, are consistent with the expected
outcome of the litigation. As of December 31, 2002, management is of the
opinion that while such litigation may have an impact on results of a
particular reporting period, the ultimate disposition of such litigation will
not have any material effect on the Companys consolidated financial position,
results of operations or liquidity.

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Results of Operations

The Condensed Consolidated Statements of Operations for the three months ended
December 31, 2002 and 2001 include the post-acquisition results of the business
acquired by the Company on December 20, 2001. See NOTE D to the financial
statements.

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, |     
|                                            |                                     |  |              |     
|                                            |                                     |  | 2002         |      |   | 2001 |      
|                                            |                                     |  |              |      |   |      |      
|Sales:                                      |                                     |  |              |      |   |      |       |     
|                                            | Printing equipment                  |  |              | 20.8 | % |      |       | 54.7 | %
|                                            | Maintenance, spares and supplies    |  |              | 79.2 |   |      |       | 45.3 |  
|                                            |                                     |  |              |      |   |      |      
|NET SALES                                   |                                     |  | 100.0        |      |   |      | 100.0 |     
|Costs and Expenses:                         |                                     |  |              |      |   |      |       |     
|                                            | Cost of sales                       |  |              | 50.5 |   |      |       | 52.2 |  
|                                            | Selling, general and administrative |  |              | 39.1 |   |      |       | 32.4 |  
|                                            | Research and development            |  |              | 8.3  |   |      |       | 6.3  |  
|                                            | Restructuring costs                 |  |              | 7.7  |   |      |       | 0.0  |  
|                                            |                                     |  |              |      |   |      |      
|                                            |                                     |  | 105.6        |      |   |      | 90.9  |     
|                                            |                                     |  |              |      |   |      |      
|(LOSS) INCOME FROM SYSTEM SALES AND SERVICE |                                     |  | (5.6         | )    |   |      | 9.1   |     
|Net interest expense                        |                                     |  | 1.4          |      |   |      | 0.3   |     
|Net realized exchange (gain) loss           |                                     |  | (0.2         | )    |   |      | 0.7   |     
|Net unrealized exchange loss (gain)         |                                     |  | 0.5          |      |   |      | (0.2  | )   
|                                            |                                     |  |              |      |   |      |      
|(LOSS) INCOME BEFORE INCOME TAXES           |                                     |  | (7.3         | )    |   |      | 8.3   |     
|Income tax expense                          |                                     |  | 0.0          |      |   |      | 2.9   |     
|                                            |                                     |  |              |      |   |      |      
|NET (LOSS) INCOME                           |                                     |  | (7.3         | )%   |   |      | 5.4   | %   
|                                            |                                     |  |              |      |   |      |      

The Companys revenues consists of (i) sales of printing systems and related
equipment, and (ii) maintenance contracts, spare parts, supplies and consumable
items. For the three-month period ended December 31, 2002 (first quarter of
fiscal 2003), net revenues were $15.5 million, up 31% from $11.8 million for
the three-month period ended December 31, 2001 (first quarter of fiscal 2002).
Revenues from the sale of printing equipment were $3.2 million for the first
quarter of fiscal 2003, down 50% from $6.4 million for the same period in
fiscal 2002.

The Companys printing systems primarily consist of the Imaggia,the CR Series,
the RS Series, the Checktronic, the Foliotronicand the PS MICRsystems
(manufactured by Océ Printing Systems GmbH and sold on a private label basis as
the PS75 MICRand PS155 MICR) product lines. The Checktronicand Foliotronic
are among the Companys legacy products. The decline in revenues from printing
equipment for the first quarter of fiscal 2003, compared with the first quarter
of fiscal 2002, was primarily due to significantly lower sales of the Imaggia
product line, only slightly offset by sales of the CR Seriesproduct line,
which was not available for sale in the year earlier quarter. Total sales of
all other product lines were slightly higher in the first quarter of fiscal
2003 than in the first quarter of fiscal 2002. Imaggiasales were down quarter
to quarter due to completion of deliveries under a significant multi-unit
contract in the second quarter of fiscal 2002. In general, the Company
attributes lower revenues from printing equipment to continuing uncertain
economic conditions, which have led customers to postpone capital equipment
purchases.

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For the first quarter of fiscal 2003, revenues from maintenance contracts,
spare parts, supplies and consumable items increased 130%, from $5.3 million
for the first quarter of fiscal 2002, to $12.3 million for the most recent
fiscal quarter. The increase between quarters was due primarily to incremental
revenues from the fiscal 2002 acquisition of the Canadian subsidiary, which
contributed to first quarter fiscal 2002 results for only the period between
the December 20, 2001 acquisition date and December 31, 2001, and to first
quarter fiscal 2003 for the entire quarter. In addition, revenues from
maintenance contracts, spare parts, supplies and consumable items were also
higher due to the larger installed base of Imaggiaand the addition of CR
Seriessystems to the installed base. For these reasons, the Company expects
domestic revenues from maintenance contracts, spare parts, supplies and
consumable items to continue throughout fiscal 2003 at levels higher than in
fiscal 2002.

The Companys gross margin percentage for the first quarter of fiscal 2003 was
49%, compared with 48% for the first quarter of fiscal 2002. The improved
margins were primarily due to the increase in maintenance contracts, spare
parts, supplies and consumable items revenues generated by the Canadian
acquisition. In general, the Company anticipates that its gross margin
percentage in fiscal 2003 will be somewhat higher than in fiscal 2002 due to
programs in place to improve margins on revenues from maintenance contracts,
spare parts, supplies and consumable items, which are expected to comprise a
larger portion of revenues in fiscal 2003 than in fiscal 2002.

Selling, general and administrative expenses for the first quarter increased
59%, from $3.8 million in fiscal 2002, to $6.0 million in fiscal 2003, and
increased as a percentage of net sales from 32% to 39%. Research and
development expenses for the three-month periods ended December 31, 2002 and
2001 were $1.3 million and $742,000, respectively, higher by 73% year to year,
and increased as a percentage of net sales from 6% to 8% for the most recent
fiscal quarter. Expense levels were significantly higher in both categories,
primarily due to the acquisition of the Canadian subsidiary, which added costs
to the first quarter of fiscal 2002 for only the period between the December 20,
2001 acquisition date and December 31, 2001, and to the first quarter of fiscal
2003 for the entire quarter. Selling, general and administrative expenses were
also higher in the first quarter of fiscal 2003 due to the increase in customer
service staff and associated expenses required to support the increase in
revenues from maintenance contracts, spare parts, supplies and consumable
items. In conjunction with the Companys announced plans to consolidate its
North American manufacturing and engineering operations at its Canadian
subsidiary, the Company recognized $1.2 million in restructuring costs,
comprised of severance and related costs, in the first quarter of fiscal 2003.
The Company anticipates that its expense levels for fiscal
2003 will be higher than for fiscal 2002 as a result of these factors and because the costs savings
associated with the restructuring, estimated at approximately $1.6 million
annually, are not expected to begin to be realized until the third quarter of
fiscal 2003.

Net interest expense for the three months ended December 31, 2002 and 2001, was
$216,000 and $37,000, respectively. The increase in net interest expense
between periods was primarily due to the Company borrowing to finance the
acquisition of the Canadian subsidiary in late December 2001, incurring
significant interest in first quarter 2001 for only the period from the
December 20, 2001 acquisition date through December 31, 2001, but for the
entire quarter ended December 31, 2002.

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, 2002 and 2001 were $61,000 and $54,000,
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 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.

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For the first quarter of fiscal 2003, no income tax benefit was recognized on
the loss before income taxes; the Company has fully reserved its net deferred
tax assets, totaling $2.5 million as of December 31, 2002, recognizing that the
Company has incurred losses in three of the last four fiscal years and there is
no assurance that future years will be profitable. Income tax expense for the
three months ended December 31, 2001 was $343,000, reflecting an estimated
annual effective tax rate of 35%. Interim effective tax rates vary based on
sources of income or loss, estimates of the annual effective tax rate for the
fiscal year and estimated future taxable income.

For the first quarter of fiscal 2003, the Companys basic and diluted loss per
share was $0.18, compared with basic and diluted earnings per share of $0.10
for the comparable prior year period. The decline in earnings between periods
was primarily attributable to the significant decrease in equipment revenues
as customers postponed equipment purchases in a period of continued economic
uncertainty and to the recognition of a $1.2 million restructuring charge in the
first quarter of fiscal 2002.

In February 2001, the Company determined that the market served by its
Australian subsidiary could be served more profitably by alternative means,
including independent distributors and sales agents, developed a formal exit
plan to cease operations of the subsidiary and recorded a one-time charge of
$215,000. By closing the subsidiary, the Company anticipated eliminating
annual operating expenses of approximately $500,000, beginning in fiscal 2002,
with no further loss of revenues from Pacific Rim customers as a result of this
change. Operations of the subsidiary ceased as of December 31, 2001.

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. Benefits are
paid on either a lump-sum basis or over time. As of December 31, 2002, the
accrued liability for benefits payable in the future was $106,000. It is
estimated that this balance will be sufficient to cover the remaining
obligation under the workforce reduction plan. 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.
These operations have been divided between the facilities in the United Sates
and Canada. The Companys worldwide headquarters and marketing functions will
continue to be based in the United States. The selling and customer service
functions will remain unchanged in the United States, as well as in the
subsidiaries in the United Kingdom and France. The Company expects to incur
approximately $1.2 million in restructuring expenses over the course of the
consolidation, which is scheduled to be completed by the end of calendar 2003.
These restructuring costs are wholly comprised of employee severance costs
unrelated to the acquisition of the Canadian subsidiary and, therefore, were
properly charged to operating expense in the first quarter of fiscal 2003 in
accordance with EITF 94-3. No benefits under the restructuring initiative had
been paid as of December 31, 2002. This action is expected to eliminate
annual operating expenses of $1.6 million while improving the Companys ability
to provide customer service and fulfill current and future orders. The cost
savings could have an impact on operating results as early as the Companys
fiscal 2003 third quarter ending June 30, 2003.

The expense reductions realized and anticipated
from these three actions taken since February 2001 are being applied to other uses, such as expansion of customer service functions to support increases in the installed base and enhanced marketing efforts.

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 28%
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.

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The Companys net investment in its foreign subsidiaries was $7.6 million and
$7.3 million at December 31, 2002 and September 30, 2002, 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, 2002. 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 2003, the Company did not enter into any foreign exchange contracts
and does not anticipate entering into any such contracts in the near future.

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, 2002 and 2001 of approximately
$34,000 and $8,000, 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.

On December 20, 2001, the Company acquired substantially all of the North
American business assets of Delphax Systems, which is located in suburban
Toronto, Ontario, and is engaged in the development, manufacture and
distribution of print engines, print management software and a range of digital
printing systems incorporating proprietary EBI technology. It is the supplier
of the print engines used in a number of the Companys products. For fiscal
2002, the acquisition contributed approximately $17.7 million in incremental
revenues. While the Company expects the acquisition to provide increased
revenues and incremental operating income in the future, there is no assurance
that actual results will be as anticipated. In addition, the acquisition
expanded the Companys product lines to include the CR Seriesand RS Seriesof
roll-fed print systems. To date, only a limited number of CR Seriessystems
and only one RS Seriessystem have been sold and there can be no assurance that
such systems will be sold in the future.

The Company is party to a multi-year equipment and service contract with a
significant customer. Equipment deliveries under the contract concluded in the
second quarter of fiscal 2002. Revenues from this customer have been
significant, representing 28% of total revenues for fiscal 2002. The Company
anticipates that revenues from this customer will also be significant in fiscal
2003, but to a lesser extent than in fiscal 2002.

The Companys PS MICRsystems product line is marketed under an agreement with
Océ Printing Systems GmbH for the right to private label, sell and service the
PS75 MICRproduct and other high-performance sheet-fed MICR and non-MICR
printing systems manufactured by Océ. The Company plans to continue offering
the PS MICRsystems for sale, but there is no assurance that significant sales
will be made.

As discussed below under the heading Liquidity and Capital Resources, the
Company is dependent on its bank credit facility to fund its operations. That
facility currently matures on December 31, 2003. The Companys ability to
maintain working capital depends on its compliance with the amended credit
facility and on being able to extend or replace that facility when it matures.
The Company believes it has the ability to secure alternative forms of
financing to meet its working capital requirements. However, the pricing of
these alternative forms of financing may not be as favorable as the current
credit facility.

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Liquidity and Capital Resources

Working capital was $10.4 million at December 31, 2002, compared with $24.0
million at September 30, 2002. Of the $13.6 million decrease, approximately
$11.5 million was the result of classifying the entire balance of the credit
facility as of December 31, 2002, as a current liability under the terms of the
amended credit agreement. The Companys accounts receivable increased from
$10.7 million as of September 30, 2002, to $11.7 million as of December 31,
2002. The $1.0 million increase was due to timing. The Companys inventory
levels decreased to $19.2 million at December 31, 2002, from $20.9 million at
September 30, 2002, primarily due to sale of inventory in stock as of September
30, 2002, with no significant new-build of equipment inventory in the first
quarter of fiscal 2003. Deferred revenue was $1.1 million at December 31,
2002, compared with $490,000 at September 30, 2002. Deferred revenue was
comprised primarily of unearned revenues from maintenance contracts, spare
parts, supplies and consumable items.

The Company has undertaken no significant investing activities. No significant
capital investment has been undertaken or is planned, and at December 31, 2002,
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 agreement
provides two types of loans, term and revolving, including letters of credit.
The term loan portion of the credit facility was advanced as a single borrowing
on December 20, 2001, in the amount of $4.0 million, $3.3 million of which
remained outstanding as of December 31, 2002. No amount repaid or prepaid on
any term loan may be borrowed again. The Company may borrow on a revolving
loan basis up to the lesser of: (i) the revolving credit commitment in effect
at such time and (ii) the borrowing base as then determined and computed.

On December 18, 2002, the lender and the Company amended the agreement. Under
the amendment, an installment payment of $250,000 was due and was paid on the
term loan on December 31, 2002, with future installments of $250,000 due March
31, 2003, June 30, 2003 and September 30, 2003, with the balance of the term
loans due on December 31, 2003. The amendment reduced the revolving credit
commitment from $12.5 million as of December 31, 2002, to $11.5 million
effective on January 1, 2003, and $10.5 million effective on July 1, 2003, and
the facility matures and comes due on December 31, 2003. Therefore, as of
December 31, 2002, the balance due on the credit facility was a current
liability. The revolving credit commitment is subject to a commitment fee of
0.5% per annum on the unused portion of the commitment. As of December 31,
2002, revolving loans outstanding were $10.5 million. Term loans and revolving
loans, at the Companys election, may be outstanding at one of two rates, the
banks prime rate plus 1% or the banks adjusted LIBOR rate plus 4%, provided
that $3.0 million of the principal amount of the revolving loans bear interest
at the fixed rate of 7.35% per annum. As of December 31, 2002, $10.8 million
was outstanding at the banks adjusted LIBOR rate plus 4%, $3.0 million at
7.35%, and in total, at a weighted average interest rate of approximately 6.5%.

As of December 31, 2002, the Company was in compliance with all covenants of
its credit agreement. The Company believes, but cannot assure, that it will be
able to fully meet the terms of the amended agreement. The Companys ability
to fund its future working capital requirements is dependent upon its ability
to extend or renegotiate financing before the end of the current term of the
facility. The Company believes it has the ability to secure alternative forms
of financing to meet its working capital requirements. However, the pricing of
these alternative forms of financing may not be as favorable as the current
credit facility.

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

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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.




PART II. OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

(a)  The following exhibits are included herein:



| | 99.1 |  | Certificate pursuant to 18 U.S.C. § 1350
| | ---- |  | ----------------------------------------

(b)  The following report on Form 8-K was filed during the three months ended
December 31, 2002:



| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | October 17, 2002  Form 8-K: Item 5. Other Events and Regulation FD
Disclosure  Notice that the Company and its bank lender amended the
previously disclosed Forbearance Agreement dated September 9, 2002
to extend the forbearance period thereunder from October 18 to
December 18, 2002.

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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.Registrant                                                  
|    
|Date |  | February 14, 2003 |  | /s/  Jay A. HermanJay A. Herman
Chairman and Chief Executive Officer                 
|    
|Date |  | February 14, 2003 |  | /s/ Robert M. BarniskisRobert M. Barniskis
Vice President and Chief Financial Officer




CERTIFICATIONS

I, Jay A. Herman, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Delphax
Technologies Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



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

|      |  |                   |  |                                                                     
|----- |  | ----------------- |  | --------------------------------------------------------------------
|Date: |  | February 14, 2003 |  | /s/  Jay A. HermanJay A. Herman
Chairman and Chief Executive Officer

I, Robert M. Barniskis, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Delphax
Technologies Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



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

20



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| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



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

|      |  |                   |  |                                                                                      
|----- |  | ----------------- |  | -------------------------------------------------------------------------------------
|Date: |  | February 14, 2003 |  | /s/ Robert M. BarniskisRobert M. Barniskis
Vice President and Chief Financial Officer

21