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FORM 10-K

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549

|    |  |                                                                                         
|--- |  | ----------------------------------------------------------------------------------------
|[X] |  | Annual report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934

For the fiscal year ended September 30, 2002

Commission File Number: 0-10691

DELPHAX TECHNOLOGIES INC.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Minnesota                                                      |  | 41-1392000                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|12500 Whitewater Drive, Minnetonka, Minnesota                  |  | 55343-9420                          
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (952) 939-9000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock ($.10 par value)
Preferred Stock Purchase Rights
(Title of Class)



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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 last 60 days.
YES  X     NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $18,218,899 at December 16, 2002 when the closing
price of such stock, as reported by NASDAQ, was $2.95.

There were 6,175,898 shares outstanding of Registrants $.10 par value Common
Stock as of December 16, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Commission in
January 2003 for the Companys Annual Meeting of Shareholders scheduled for
March 20, 2003 are incorporated by reference into Part III.

This Form 10-K consists of 166 pages (including exhibits). The index is set
forth on page 2.

1



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TABLE OF CONTENTS



|                                               |                                                                                                  |  |  |  |  |  |  | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I                                        
|                                               | Item 1. Business                                                                                
|                                               | Item 2. Properties                                                                              
|                                               | Item 3. Legal Proceedings                                                                       
|                                               | Item 4. Submission of Matters to a Vote of Security Holders                                     
|PART II                                       
|                                               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                   
|                                               | Item 6. Selected Financial Data                                                                 
|                                               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations   
|                                               | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                             
|                                               | Item 8. Financial Statements and Supplementary Data                                             
|                                               | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    
|PART III                                      
|                                               | Item 10. Directors and Executive Officers of the Registrant                                     
|                                               | Item 11. Executive Compensation                                                                 
|                                               | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
|                                               | Item 13. Certain Relationships and Related Transactions                                         
|                                               | Item 14. Controls and Procedures                                                                
|                                               | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                        
|SIGNATURES                                    
|CERTIFICATIONS                                
|EX-3.1 Restated Articles of Incorporation     
|EX-3.2 Amended Bylaws                         
|EX-4.1 Specimen of Common Stock Certificate   
|EX-10.2.1 First Amendment to Credit Agreement 
|EX-10.4 Form of Indemnification Agreement     
|EX-10.13 Timberlea Boulevard Lease            
|EX-10.14 Tomken Road Lease                    
|EX-10.15 Sub-lease of Timberlea Boulevard     
|EX-21 List of Subsidiaries                    
|EX-23.1 Consent of Independent Auditors       
|EX-99.1 Certificate Pursuant to 18 U.S.C. 1350



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INDEX

|               |  |                                                                                                |  |   
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I         |  |                                                                                                |  |   
|               |  |                                                                                                |  |   
|Item 1.        |  | Business                                                                                       |  | 3 
|Item 2.        |  | Properties                                                                                     |  | 8 
|Item 3.        |  | Legal Proceedings                                                                              |  | 9 
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                            |  | 9 
|               |  |                                                                                                |  |   
|PART II        |  |                                                                                                |  |   
|               |  |                                                                                                |  |   
|Item 5.        |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 11
|Item 6.        |  | Selected Financial Data                                                                        |  | 13
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 14
|Item 7A.       |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 20
|Item 8.        |  | Financial Statements and Supplementary Data                                                    |  | 20
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 20
|               |  |                                                                                                |  |   
|PART III       |  |                                                                                                |  |   
|               |  |                                                                                                |  |   
|Item 10.       |  | Directors and Executive Officers of the Registrant                                             |  | 20
|Item 11.       |  | Executive Compensation                                                                         |  | 20
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 20
|Item 13.       |  | Certain Relationships and Related Transactions                                                 |  | 20
|               |  |                                                                                                |  |   
|Item 14.       |  | Controls and Procedures                                                                        |  | 20
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 21
|               |  |                                                                                                |  |   
|SIGNATURES     |  | 24                                                                                            
|               |  |                                                                                                |  |   
|CERTIFICATIONS |  | 25                                                                                            

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PART I




Item 1. Business

Company Background

Delphax Technologies Inc., formerly Check
Technology Corporation, (the Company) designs, manufactures, sells and
services advanced print-production systems based on its exclusive electron beam
imaging (EBI) technology. The Company also derives a substantial portion of its
revenues from the sale of maintenance contracts, spare parts, supplies and
consumable items. The Companys printing systems personalize, encode, print
and collate documents for publishing, direct mail, legal, financial, security,
forms and other commercial printing applications. The Company was formed in
1981 and began to ship its first system, the Model 2000 Checktronic®,in 1983.
The original product concept for the Company was a computerized financial
document production system, which integrated (i) automatic collation of
checkbook components, (ii) high quality alphanumeric and graphics printing for
customer personalization and bank address and (iii) consistent Magnetic Ink
Character Recognition (MICR) printing for the electronic processing of checks.

Within a short time after the introduction of the Checktronicsystem, the
Company recognized the products applicability in such areas as insurance claim
production and centralized funds disbursements. The latter includes payroll
and accounts payable checks. The Company calls these Checkwriting
applications. Checkwriting typically requires a high level of security (e.g.,
secure operator access and the ability to produce an audit trail after a batch
of checks is produced). The Company developed sophisticated control
software/hardware, which met these stringent operating requirements. This
security capability is offered as an option on many of the Companys systems
and differentiates the Companys products from many competitors products.

The Company has had a significant presence in the international check
production marketplace since 1983. The integration of the check production
functions described above allowed lower cost production of small check orders
(25 to 100 checks) that are typical in most markets outside the United States.
This and an improvement in printing quality created a demand for the Companys
systems in many international markets. The Company opened its first subsidiary
in England in 1983 and a subsidiary in France in 1987.

During 1998, the Company launched the Imaggia® MG20system in response to the
changing demands of security printers and on-demand printing applications
worldwide. The Imaggia MG20system utilizes state-of-the-art digital,
non-impact technology, offering print quality that is visually
indistinguishable from offset print. The Company markets the Imaggiasystem to
customers with high volume folio production and print-on-demand (POD)
applications.

In April 1999, the Company completed an agreement with Océ Printing Systems
GmbH for worldwide exclusive rights to sell (on a private label basis) and
service the PS75 MICRproduct manufactured by Océ. In addition, the Company
obtained certain non-exclusive rights to sell and service other
high-performance sheet-fed MICR printing systems (PS MICRsystems) and non-MICR
printing systems manufactured by Océ.

In July 2001, the Company announced introduction of the Imaggia IIsystem.
Faster, easier to use and supporting a larger media size than the Imaggia MG20
system, the Imaggia IIsystem features a new flat-screen operator interface
with the front-end data processing capacity to support production of truly
variable data from sheet to sheet. The Company began shipping the Imaggia II
system in the second quarter of fiscal 2002.

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 was engaged in the development, manufacture and distribution of print
engines, print management software and a range of digital printing systems
incorporating the Acquired Companys proprietary EBI technology. The Acquired
Company was the supplier of the print engines used in a number of the Companys
products and was additionally the supplier of print engines for a number of
non-competing original equipment manufacturers (OEM).

In April 2002, the Company announced the introduction of the CR Seriesof
high-volume, roll-fed print production systems. The CR900and CR1300systems
deliver 200 feet per minute throughput, and 300 feet per minute throughput,
respectively, and feature high quality image and wide-format, duplex production
at full 600 DPI print quality for publishers, direct mailers, bill and
statement printers, in-house data and document centers and service bureaus.
The Company completed its first sale of the CR Seriesin June 2002.

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In April 2002, the Company also introduced the RS Seriesof roll-fed,
sheet-output print production systems. The RS Seriessystems feature fast
throughput, duplex production with a variety of built in finishing options for
data and document centers, education, public utilities and the financial
industry. The Company completed its first sale of the RS Seriesin June 2002.

As of September 30, 2002, the Company had an installed base of approximately
4,000 EBI systems located in more than 60 countries.

Products

Digital printing systems are classified as either cut-sheet or
continuous-feed printers, depending on their paper-handling capabilities.
Cut-sheet printers require the input of individual pre-cut sheets of paper, or
base stock. Continuous-feed printers use rolls of paper or fan-folded stacks
of paper, and are also known as roll-fed printers. Since the unbroken path
of paper running through a roll-fed printer is known as a web, they are also
frequently called continuous-web printers or simply web printers.

Roll-fed printers are ideal for high volume printing applications. It is not
uncommon for a single roll of base stock to exceed 40,000 feet. Roll-fed print
systems are limited to a single base stock per print job and often require more
extensive post-print finishing processes.

Cut-sheet printers are generally not as fast as roll-fed printers as they are
limited by the process of moving individual sheets of paper through the print
engine at high speeds. Cut-sheet printers are designed for applications that
require multiple base stock sources or variable overprint on pre-printed
stocks, or where volume per print job is comparatively small.

The Company sells both cut-sheet and roll-fed printing systems that are
currently used in a number of commercial printing applications: folio
production, insurance claims, fulfillments, disbursements, publishing, direct
mail and transactional processing. Folio production applications include the
printing of checkbooks and financial payment coupon books. Insurance claims
applications consist of explanation of benefit forms and insurance claim
checks. Fulfillment applications include coupons and rebate checks.
Disbursement applications include accounts payable checks and payroll checks.
Publishing applications include the printing of books and manuals. Direct mail
applications include the printing of personalized and mass-market mailings.
Transactional processing applications include the printing of invoices and
statements. These advanced print-production systems enable customers to
utilize the speed, flexibility and efficiency advantages of EBI technology to
easily and quickly transform various paper stocks into fully collated books,
letters, checks and forms.

The Companys digital print systems are based upon its exclusive EBI
technology. Its flagship products, the CR Seriesand the Imaggiasystem,
deliver industry-leading throughput for both roll-fed and cut-sheet printing
environments. The systems are extremely versatile, providing unparalleled
ability to handle a wide range of substrates, from ultra lightweight paper to
heavy stock.

Cut-Sheet Print Production Systems.Currently, the Companys premier cut-sheet
printing system is the Imaggia, which offers best-in-class speed of 150 feet
per minute at 600 DPI print quality. The Imaggiasystem utilizes
state-of-the-art digital, non-impact technology, offering print quality that is
visually indistinguishable from offset print. The Imaggiaprint quality also
meets the highest worldwide standards for MICR encoding on secure documents.
The Company markets two models of the Imaggiasystem to customers for the high
volume production of checks, financial documents, business forms and customized
direct mail applications. The Imaggiasystem accommodates a wide range of
substrates, from ultra lightweight paper to heavy stock and varying paper sizes
up to 18.75 inches in width and 26 inches in length. The Imaggiasystem can be
purchased with various input and output paper handling options and provides a
high level of flexibility, reliability and the consistency required to produce
high quality documents while reducing production costs.

The Companys other manufactured cut-sheet system is the Checktronicsystem.
The Checktronicsystem uses a combination of EBI and impact technology. The
Company markets four models of the Checktronicsystem to customers with medium
to high volume folio production, insurance claim, fulfillment and disbursement
applications. The Checktronicsystem operates at rated speeds of up to 120
pages per minute and can be purchased with advanced security/audit capability.
It is now sold principally as a system upgrade or refurbished product in Latin
America, Asia and Africa.

The Company has an agreement with Océ Printing Systems GmbH for certain
non-exclusive rights to sell (on a private label basis) and service two
high-performance sheet-fed MICR and non-MICR printing systems manufactured by
Océ. The

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Companys PS MICRsystems line of products utilize electrophotography imaging
technology, suitable for customers with medium to high volume folio production,
insurance claim, fulfillment, disbursement and print-on-demand applications.
The Model PS75 MICR operates at a rated speed of 75 pages per minute, while the
Model PS155 operates at 155 pages per minute and has highlight color
capabilities. The two PS MICRsystems have both simplex and duplex operating
modes.

Roll-Fed Print Production Systems.The Companys premier roll-fed printing
system is the CR Serieshigh-volume, roll-fed production system which delivers
an industry leading 300 feet per minute throughput and features high quality
image and wide-format, duplex production at full 600 DPI print quality. The
Company markets two models of the CR Seriessystem to publishers, direct
mailers, bill and statement printers, in-house data and document centers and
service bureaus. The CR Seriesaccommodates a wide range of substrates, from
ultra lightweight paper to heavy stock and can be purchased with various output
paper handling options. The CR Series of printers provides a high degree of
flexibility, reliability and the consistency required to produce high quality
printed output while reducing production costs.

The Companys other manufactured roll-fed print system is the RS Series. The
RS Seriesutilizes the Companys EBI print technology to provide roll-fed
duplex production at rated speeds of up to 330 pages per minute. The Company
markets three models of the RS Seriesto customers that require quality,
short-run, quick-turnaround printing. The system is well suited for the
production of statements and transaction documents, coupons and tags, student
information, explanation of benefits pamphlets and letter checks.

Finishing Units.In addition to document production systems, the Company
manufactures a finishing system to complement its cut-sheet product line. The
Foliotronic® system consists of a guillotine and stitcher/binder module. Its
rated throughput is up to 2,000 books per hour. When used with the Companys
print production systems, the Foliotronicsystem enables customers with folio
production applications to transform blank paper stock into finished books.

Additional finishing systems are offered in conjunction with the Companys
cut-sheet and roll-fed products through various external supplier partnerships
established by the Company in order to provide a complete printing solution to
its customers when necessary. These additional finishing systems may provide
such post-printing activities as batching, stacking, slitting, cutting, folding
and binding depending upon the type of equipment and the application.
Suppliers of finishing systems are required to meet stringent standards for
quality, reliability and interoperability with the Companys print production
systems.

Service and Maintenance.Service and maintenance revenues result from the sale
of maintenance contracts, proprietary consumable and supply items and spare parts to customers who have purchased the Companys print engines and
print-production equipment. Supplies are operating materials that are consumed
during normal operation of the Companys systems. Examples of these supplies
are EBI print heads, which are consumed in creating the electronic image, erase
rods, which are consumed in removing the electronic image, and toner, which is
consumed in the printing of each document.

The Company employs customer engineers at each of its major service locations.
For customers who purchase maintenance contracts after the warranty period,
which is typically 90 days from customer acceptance of a system, the Company
provides ongoing customer support through its service network, for which it
charges for time and materials on an annual service contract basis. Some
customers elect to provide their own maintenance and service on the systems
they have purchased. Historically, warranty service expense has not been
significant to the Company after the initial units of a new product have been
placed with customers.

Sales and Marketing

Organization.The Companys system sales are made predominantly through direct
sales personnel based in the United States and Europe. Marketing activities
for the Company and its subsidiaries are centralized at the Companys
headquarters in Minnetonka, Minnesota, USA. These activities include the
development and implementation of product pricing, advertising and public
relations strategies. In addition, the Company utilizes market research and
market development resources to anticipate changes in the Companys competitive
environment.

United States Market.The Companys traditional market for its products has
been primarily the production of checks and other financial documents. With
the expansion of its product offering as a result of the Canadian acquisition,
the markets for the Companys products has increased to include additional
segments of the publishing, direct mail, and transactional processing markets.

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The publishing market in the United States is comprised of two major segments;
(i) long-run printing applications, and (ii) short-run printing applications
referred to as POD applications. Long-run printing applications include
newspapers, magazines, first edition book printing, consumer catalogs and
greeting cards. POD applications include the production of checks and other
financial documents, coursework textbooks, forms, newsletters, second edition
paperback books, personalized catalogs, policy manuals, product catalogs and
product manuals. The direct mail market is comprised of variable data printing
applications including post cards, self-mailers, letters, flyers and
personalized newsletters. The transactional processing market is comprised of
variable data printing applications including bill and statement production,
check writing, policy printing and security documents. The Company maintains
an installed base of both cut-sheet and roll-fed print equipment in these
markets.

The market in the United States for checks and other financial documents is the
largest in the world, notwithstanding the fact that the annual consumption of
checks has shown a slowing growth rate over the last several years. The
Company believes alternatives to the check document, such as debit and credit
cards, will eventually reduce the number of checks used, although the size and
rate of reduction are difficult to predict. Company studies have shown that
other documents produced by the Companys systems have exhibited higher growth
rates over the same period. These documents include payment coupons, tax
payment and other installment payment products.

Checkwriting activities have been affected by alternative payment technologies.
These substitutes include Electronic Funds Transfer (EFT) and Electronic Data
Interchange (EDI). Although these alternatives comprise only a small
percentage of total payment transactions in the United States, they are
expected to have an increasingly significant impact on United States
disbursement activities over the next several years.

Historically, the Companys cut-sheet systems have been sold in the United
States primarily to check printers, payment coupon producers, service bureaus
and large corporations. These organizations all have requirements for the
production of personalized encoded document packages such as small personal
check orders, installment payment books, payroll, accounts payable and
insurance claims checks. The Companys roll-fed systems have been sold to
publishers, direct mail printers, governments, service bureaus and commercial
printers with POD and transactional processing applications. The Company
expects to continue to increase its installed system base in the United States.

International Market.The market for the Companys products outside the United
States has been primarily in personalized check production. The average
personalized check order size in most international markets is between 25 and
100 checks. These small order sizes are produced cost effectively on the
Companys products because of their automatic collation capabilities.
Stringent MICR quality standards, enforced by the major clearing banks in most
international markets, are also met by the Companys high quality MICR printing
capabilities. As a result of these market factors, the Company has had success
in penetrating the largest personal check production markets outside of the
United States. These include Brazil, France, Mexico, Philippines, Spain and
the United Kingdom. The Company believes additional opportunities exist for
its products outside of the United States in the publishing, direct mail and
transactional processing markets.

Competition

The Companys products are sold into a number of different market segments.
Competition will differ depending on the segment and application in which the
Company competes. Many of the Companys competitors are well established and
have significantly greater access to financial, technical and personnel
resources. The Company believes sales of the CR Seriesand Imaggiasystems are
critical to its ability to remain competitive in the markets it serves, and is
continuing to invest in the future success of these products with improved
speed and print quality enhancements. See Research and Development.

Folio production involves the manufacture of checkbooks and payment coupon
books. In the United States, check production is dominated by a small number
of companies such as Deluxe Corporation (St. Paul, Minnesota), John H. Harland
Company (Decatur, Georgia), Liberty Enterprises (St. Paul, Minnesota) and Clarke American (San Antonio, Texas), all of
which are customers of the Company. These major customers establish
competitive standards for alphanumeric print quality, MICR print quality and
delivery time that must be met or surpassed in order to compete effectively in
the United States personal check market. With the Checktronicsystem product
line, the Company was able to establish itself only in the production of new
account kits, money market checkbooks and other applications that do not
require offset or letterpress quality. The Imaggiasystem was designed to
provide entry into the United States check production market. The Companys
major competitors in the manufacture of checkbooks in the United States are
Xerox (United States) and Océ (Germany).

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The Company has had success in the segment of the United States folio
production segment that involves the production of personalized payment books
such as installment loan and tax payment books. This market is dominated by a
small number of companies such as NCP (Birmingham, Alabama), Cummins Allison
(Indianapolis, Indiana) and Venture Encoding (Dallas, Texas). The predominant
personal checkbook manufacturers discussed above also produce payment books.
The Companys products have found market acceptance in this segment because
they provide the efficiency, reliability and production flexibility sought by
this segment. Xerox and Océ are presently the Companys major competition for
the production of payment books.

International folio production markets, like the United States payment book
production market, are also driven more by cost and production efficiency
factors than by alphanumeric print quality standards. In addition, enforcement
of high MICR standards by the clearing banks in most international markets
makes MICR printing quality an extremely important competitive factor. The
Companys Checktronicsystem product line has found a high degree of acceptance
in the international market segments because these systems provide the
efficiency, production flexibility and MICR quality sought by the major check
producers. The Company competes in the international marketplace with Troy
(United States), Xerox, Océ and Nipson (France).

The centralized high volume production of insurance claims and check
disbursements does not require extensive collation. For this reason, the
Company finds many competitors in this market segment. Specific competitors
include Xerox, Océ, Troy and IBM (United States). The Companys products offer
security and audit control, which for companies that generate many checks is a
significant advantage as it restricts unauthorized access to data printed on
the Companys systems. The Companys security/audit capability also physically
tracks the total number of documents printed and maintains a running total of
the dollar amounts printed in each run.

The publishing market, with its varied applications and specialized
requirements, is highly competitive. Heidelberg (Germany), Nipson, Océ, IBM,
Hitachi (Japan) and Xerox are currently the Companys major competitors in the
publishing market. The direct mail market is focused on high volume, low cost
production. The Companys major competitors in this market are IBM, Océ, Xerox
and Scitex (United States). The transactional processing market demands high
volume, low cost production and the capability to process variable data. IBM,
Océ and Xerox are the Companys major competitors in the transactional
processing market.

Backlog

At December 9, 2002, the Company had a backlog of approximately $8.7 million,
compared with a backlog of $9.9 million at December 3, 2001. The Company
defines its backlog as purchase orders which are unfilled. Because of customer
changes in delivery schedules and potential cancellation of orders, the
Companys backlog as of any particular date may not be representative of the
Companys actual sales for any succeeding fiscal period. During most of fiscal
2001, the Company had a significant backlog due to the January 2000 acceptance
of a three-year Imaggiasystem and service contract, valued at approximately
$40.0 million. Backlog declined throughout the year as scheduled deliveries
were met and rebounded modestly with a follow-on contract with the customer in
September 2001.

The Companys equipment is manufactured to orders received, and to date, the
Company has never been unable to meet a scheduled shipment date because of
excessive order backlog. The Company expects that, from time to time, it will
continue to have periods during which there may be little or no backlog.

Manufacturing and Sources of Supply

The Company has adopted a manufacturing process to enable it to produce a
platform version of its major products that can be quickly configured to a
customers specific order without rework. This process has enabled the Company
to begin manufacturing without firm final orders. As a result, the Company has
been able to reduce manufacturing parts and material inventories, and respond quickly to new orders.

The Company has begun consolidating all of its manufacturing and engineering
operations at its facility in Mississauga, Ontario, and expects to complete the process
in calendar 2003. Some of the components of the Companys print production
systems are manufactured by outside vendors, tested and then incorporated into
the systems by Company employees. Most of the components are available from
multiple sources, however, many of the critical components of the Companys
print systems would require redesign if new suppliers were used.

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Research and Development

Since its formation, the Companys research and development activities have
been focused on the development of digital printing systems capable of
producing, on a precision basis, financial documents at required speeds and
volumes. The Company is continuing to develop the CR Seriesof roll-fed
systems, which is targeted at customers with high volume publishing POD and
direct mail applications. Development activities for the CR Seriesare focused
on increasing throughput speed and enhancing print quality. The Company also
continues to develop features for the Imaggiasystem, which is targeted at
customers with high volume folio production and POD applications and has
achieved its greatest success to date in the high volume United States check
printing market. Software enhancements to improve the front-end data
processing and serviceability of both the CR Seriesand Imaggiasystems in the
field are also important. In keeping with the Companys philosophy of
providing continuous improvement to the units operating in the field, most of
the new capabilities of both the CR Seriesand the Imaggiacan also be offered
to existing customers in the field as upgrades. The Company expects that
product-engineering efforts seeking further improvements and enhancements will
be ongoing. The Company has also continued product engineering on its legacy
product lines. The Companys research and development expenditures were $5.7
million in fiscal 2002, $2.6 million in fiscal 2001 and $2.7 million in fiscal
2000.

Patents

In July 1997, the Company received a patent covering certain aspects of its
Imaggiasystem. In prior years, the Company has received patents covering the
Model 2000 Checktronicsystem, its fusing process and the autotaper for the
Foliotronicsystem. With its Canadian acquisition in December 2001, the
Company acquired a number of patents relating to EBI print technology, its
print systems and components of such systems. In addition, the Company
received certain rights to patents held by others for EBI print technology, its
print systems and components of such systems. There is no assurance that such
patents and rights to patents will afford the Company any competitive
advantage. The Company believes that its future success will depend primarily
upon the technical competence and creative skills of its employees rather than
on patents. Patents held by others may cover the Companys printing systems,
or components of such systems, in whole or part. Although the Company is not
presently aware of any such patents, it could be required to obtain patent
licenses in order to conduct its business.

Employees

As of December 16, 2002, the Company had 417 full-time and 8 part-time
employees. Many of the Companys employees are highly skilled, and the
Companys future success will depend, in part, upon its ability to attract and
retain such employees. The Company is not subject to any collective bargaining
agreement and considers its employee relations to be good.




Item 2. Properties

The Companys corporate offices are located in Minnetonka, a suburb of
Minneapolis, Minnesota. The Company leases a 75,000 square foot building under
a lease that expires on September 15, 2010. The annual rent is $420,000,
increasing to $481,000 on September 15, 2005 and thereafter, plus operating
expenses and real estate taxes incurred by the landlord.

The Companys Canadian subsidiary leases two facilities totaling 202,916 square
feet of office and manufacturing space in Mississauga, a suburb of Toronto,
Canada, a portion of which is subleased to another tenant. The combined gross
annual rent is $667,465, increasing to $712,549 in September 2003. The related
lease agreements expire in 2005 and 2006, with various renewal options.

In addition, the Company leases office space for its European sales and service
center in Crawley, England, under a lease which expires in 2013 and provides
for annual lease payments of $180,000, subject to adjustment every five years,
plus a pro rata portion of the operating expenses incurred by the landlord.
The Company leases smaller office premises for its operations in France.

The Company believes that its current arrangements for facilities are more than
adequate to meet its present needs and those for the foreseeable future. With
the planned consolidation of the North American manufacturing and engineering
operations at its Canadian subsidiary, the Company expects to have excess space
available at its Minnetonka location and will be reviewing it options for
bringing its facilities in line with current and projected needs.

8



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Item 3. Legal Proceedings

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, 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 a material effect on the Companys consolidated financial position,
results of operations or liquidity.




Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2002.

The names and ages of all of the Companys executive officers and the positions
held as of the date of this report are:

Executive Officers of the
Company

|                    |  |                                         |  |    
|------------------- |  | --------------------------------------- |  | ---
|Name                |  | Position                                |  | Age
|Jay A. Herman       |  | Chairman and Chief Executive Officer    |  | 55 
|Robert M. Barniskis |  | Vice President, Chief Financial Officer |  | 39 
|M. H. (Bill) Kuhn   |  | Vice President, Customer Service        |  | 61 
|Bruce H. Malmgren   |  | Vice President, Sales                   |  | 58 
|Kevin R. Mitchell   |  | Vice President, Sales and Marketing     |  | 53 
|Dieter P. Schilling |  | Vice President, Operations              |  | 47 
|Peter J. Wood       |  | Vice President, Engineering             |  | 60 

Officers of the Company are elected annually by the Board of Directors and
serve until their successors are duly elected and qualified. There are no
family relationships among the Companys officers and directors.

Set forth below is a summary of the business experience of each of the
executive officers of the Company:

Jay A. Herman joined the Company as Executive Vice President and Chief
Financial Officer in May 1988, was promoted to President in June 1989 and
elected Chairman of the Board in October 2001. Prior to joining the Company,
Mr. Herman was Vice President and Chief Financial Officer of Gelco
Corporations International Division. He held that post from 1986 to 1988.
Between 1979 and 1986, Mr. Herman held positions of Vice President of
Administrative Services for Gelco Corporation and Director of Planning and
Budgets for Gelcos Fleet Leasing Division. Before joining Gelco, Mr. Herman
held several positions with General Mills.

Robert M. Barniskis joined the Company as Vice President, Chief Financial
Officer in November 1999. Prior to joining the Company, Mr. Barniskis spent 14
years in various financial roles within Rosemount Inc., a wholly owned
subsidiary of Emerson Electric Company. He was Finance Director, Americas, of
Rosemounts Measurement Division from 1998 to 1999. Between 1996 and 1998, Mr.
Barniskis was Finance Director, Asia Pacific, for Fisher-Rosemount Systems,
Inc., based in Singapore. Previous to this, Mr. Barniskis was Director of
Finance and MIS for Kay-Ray/Sensall, Inc., a wholly owned subsidiary of
Rosemount Inc., from 1993 to 1995.

M. H. (Bill) Kuhn joined the Company as Vice President, Customer Service in
November 2000. Mr. Kuhns previous experience in management and customer
service, largely focused on the capital goods market, spans over 30 years, most
recently, from 1997 to 2000 as Vice President, Global Customer Support for
Grove Worldwide. Earlier in his career, Mr. Kuhn held increasingly more
responsible roles with Hogue Equipment from 1986 to 1996, A. K. Equipment from
1980 to 1986 and Caterpillar from 1969 to 1980.

Bruce H. Malmgren was named Vice President, Sales in January 2002 after having
held the position of Vice President, Sales and Marketing since November 2000.
Since 1966, Mr. Malmgren served in successively more responsible sales and
marketing positions, and sales and marketing management roles at various
companies, most notably, Xerox Corporation from 1968 to 1990. Just prior to
joining the Company, from 1995 to 2000, Mr. Malmgren was President of National
Independent Billing, Inc. and Senior Vice President and National Sales Manager
for Dataserv, Inc. from 1992 to 1994. Mr. Malmgren has announced his intention
to leave the Company in February 2003.

9



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Kevin R. Mitchell joined the Company in January 2002 as Vice President,
Marketing. In December 2002, in addition to his marketing responsibilities,
Mr. Mitchell assumed responsibility for worldwide sales and was named Vice
President Sales and Marketing. Mr. Mitchell has over 30 years experience in
developing and managing high-growth businesses with special expertise in
creating effective marketing and branding strategies for growing companies with
strong technology components. Prior to joining the Company, Mr. Mitchell was
president and chief executive officer of HealthTechnics, Inc., an innovative
provider of information and decision support solutions for the healthcare
industry, and over his career has held various executive positions in sales and
marketing.

Dieter P. Schilling was named Vice President, Operations in November 2000 after
having held the position of Vice President of Operations and Customer Service
since October 1989. From October 1986 until October 1989, he held the position
of Vice President of Customer Service. Mr. Schilling joined the Company as
Director of Field Services in 1985 and was promoted to Director of Customer
Service in April of 1986. Previous to this, Mr. Schilling was a co-founder and
President of Southern California Telephone, a telecommunications interconnect
company, which was sold to American Telecommunications, Inc. in 1985.

Peter J. Wood joined the Company as Vice President, Engineering in July 1997.
Mr. Wood has over 30 years experience in the development and user application
of electronic digital product technology. Prior to joining the Company, Mr.
Wood served as Principal Consultant to Vivo Software, Inc. from 1996 to 1997,
as Vice President, Engineering and Technology, for Iris Graphics Inc. from 1995
to 1996 and as President of Vital Imaging Systems, Inc. from 1993 to 1995.

10



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PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters

The Companys Common Stock trades on the over-the-counter market and is quoted
on the National Association of Securities Dealers Automated Quotation System
(NASDAQ) under the symbol DLPX. The following table sets forth for the
periods indicated, the range of high and low closing prices per share as
reported by NASDAQ. The NASDAQ bid quotations represent inter-dealer prices,
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.

|                              |                |  |      |       |     |  |   |       | 
|----------------------------- | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|                              |                |  | High |       | Low
|                              |                |  |      |       |    
|Year ended September 30, 2002 |                |  |      |       |     |  |   |      
|                              | First quarter  |  | $    | 6.790 |     |  | $ | 3.050 | 
|                              | Second quarter |  |      | 7.500 |     |  |   | 4.600 | 
|                              | Third quarter  |  |      | 7.100 |     |  |   | 3.800 | 
|                              | Fourth quarter |  |      | 4.590 |     |  |   | 2.750 | 
|                              |                |  |      |       |     |  |   |      
|Year ended September 30, 2001 |                |  |      |       |     |  |   |      
|                              | First quarter  |  | $    | 4.563 |     |  | $ | 2.688 | 
|                              | Second quarter |  |      | 3.875 |     |  |   | 2.750 | 
|                              | Third quarter  |  |      | 3.500 |     |  |   | 2.250 | 
|                              | Fourth quarter |  |      | 3.620 |     |  |   | 2.800 | 

Stock Repurchase Program

In September 1998, the Company announced a stock repurchase program of up to
500,000 shares of Common Stock. In the fiscal year ended September 30, 2001,
the Company purchased 27,250 shares at a cost of $83,000, bringing the total
purchased under the program to 197,750 shares at a cost of approximately
$518,000. No shares were repurchased in fiscal 2002.

Holders

As of December 16, 2002, the Company had 285 holders of Common Stock of record.

Dividends

The holders of Common Stock are entitled to receive dividends when and as
declared by the Companys Board of Directors. Since its inception, the Company
has not paid any dividends and does not anticipate paying any dividends in the
foreseeable future. The Company intends to retain any earnings it may generate
to provide for the operation and projected expansion of its business.

11



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##### Table of Contents



Equity Compensation Plan Information

The following table sets forth certain information as regarding outstanding
options to purchase Common Stock as of September 30, 2002:

|                                                            |               |  |               |         |                   |   |                      |      |            |  |              |           | 
|----------------------------------------------------------- | ------------- |  | ------------- | ------- | ----------------- | - | -------------------- | ---- | ---------- |  | ------------ | --------- | 
|                                                            |               |  | Number of     |         | Weighted-average  |   | Number of securities
|                                                            |               |  | securities to |         | exercise price of |   | remaining           
|                                                            |               |  | be issued     |         | outstanding       |   | available for       
|                                                            |               |  | upon          |         | options, warrants |   | future issuance     
|                                                            |               |  | exercise of   |         | and rights        |   | under equity        
|                                                            |               |  | outstanding   |         |                   |   | compensation        
|                                                            |               |  | options       |         |                   |   |                      |      | plans     
|                                                            |               |  | warrants and  |         |                   |   |                      |      | (excluding
|                                                            |               |  | rights        |         |                   |   |                      |      | securities
|                                                            |               |  |               |         |                   |   |                      |      |            |  | reflected in
|                                                            |               |  |               |         |                   |   |                      |      |            |  | column (a)) 
|                                                            |               |  |               |         |                   |   |                      |      |            |  |             
|                                                            |               |  | (a)           |         | (b)               |   | (c)                 
|                                                            |               |  |               |         |                   |   |                     
|Equity compensation plans approved by
security holders:     |               |  |               |         |                   |   |                      |      |            |  |              |          
|                                                            | The 1986 Plan |  |               |        |                   |   | $                    |     |            |  |              | 188,660   | 
|                                                            | The 1991 Plan |  |               | 142,334 |                   |   |                      | 6.85 |            |  |              | 122,710   | 
|                                                            | The 1997 Plan |  |               | 670,950 |                   |   |                      | 3.28 |            |  |              | 41,417    | 
|                                                            | The 2000 Plan |  |               | 70,000  |                   |   |                      | 3.78 |            |  |              | 1,180,000 | 
|                                                            |               |  |               |         |                   |   |                      |      |            |  |              |          
|Equity compensation plans not approved by
security holders: |               |  |               |         |                   |   |                      |      |            |  |              |          
|                                                            | None          |  |               |        |                   |   |                      |     |            |  |              |          | 
|                                                            |               |  |               |         |                   |   |                      |      |            |  |              |          
|                                                            |               |  | 883,284       |         |                   | $ | 3.89                 |      |            |  | 1,532,787    |          
|                                                            |               |  |               |         |                   |   |                      |      |            |  |              |          

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Item 6. Selected Financial Data

|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |            | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------ |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | - | ---------- | 
|                                            |                                                                                                        |  | Year Ended September 30,
|                                            |                                                                                                        |  |                         
|                                            |                                                                                                        |  | 2002                     |            | 2001 |  | 2000 |            | 1999 |  | 1998
|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |     
|Consolidated
Statements of
Operations Data: |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|                                            | Net sales                                                                                              |  | $                        | 52,404,341 |      |  | $    | 43,078,427 |      |  | $    | 28,925,768 |   |  | $ | 22,308,000 |   |  | $ | 23,739,528 | 
|                                            | Net (loss) income                                                                                      |  |                          | (2,391,562 | )    |  |      | 2,149,869  |      |  |      | (290,437   | ) |  |   | (1,614,387 | ) |  |   | 198,862    | 
|                                            | (Loss) earnings per
common share - basic                                                               |  |                          | (0.39      | )    |  |      | 0.35       |      |  |      | (0.05      | ) |  |   | (0.26      | ) |  |   | 0.03       | 
|                                            | (Loss) earnings per
common share - diluted                                                             |  |                          | (0.39      | )    |  |      | 0.35       |      |  |      | (0.05      | ) |  |   | (0.26      | ) |  |   | 0.03       | 
|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|                                            | Weighted average
number of shares
outstanding during
the period (1)                                    |  |                          | 6,167,199  |      |  |      | 6,174,411  |      |  |      | 6,146,630  |   |  |   | 6,129,225  |   |  |   | 6,273,756  | 
|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|                                            | Weighted average
number of shares
and equivalents
outstanding during
the period,
assuming dilution (2) |  |                          | 6,167,199  |      |  |      | 6,227,724  |      |  |      | 6,146,630  |   |  |   | 6,129,225  |   |  |   | 6,289,872  | 
|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|Consolidated
Balance Sheets Data:           |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|                                            |                                                                                                        |  |                          |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           
|                                            | Working capital                                                                                        |  | $                        | 24,048,453 |      |  | $    | 16,944,815 |      |  | $    | 15,036,839 |   |  | $ | 15,736,047 |   |  | $ | 17,634,271 | 
|                                            | Total assets                                                                                           |  |                          | 39,667,390 |      |  |      | 25,786,616 |      |  |      | 24,365,873 |   |  |   | 20,455,869 |   |  |   | 22,319,507 | 
|                                            | Long-term liabilities                                                                                  |  |                          | 13,008,217 |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   | 35,059     | 
|                                            | Shareholders equity                                                                                   |  |                          | 15,799,623 |      |  |      | 17,982,624 |      |  |      | 15,923,236 |   |  |   | 16,706,060 |   |  |   | 18,567,126 | 



|(1) |  | Basic loss or earnings per share of Common Stock is computed by dividing the
net loss or income for the period by the weighted average number of
shares of Common Stock outstanding during the period.                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Diluted loss or earnings per share of Common Stock is
computed by dividing the net loss or income for the period by the
weighted average number of shares of Common Stock and equivalents
outstanding during the period.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of
Operations 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
inventory, income taxes, revenue recognition and restructuring
initiatives. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

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

Inventory

The Company reduces the stated value of its inventory for obsolescence or
impairment in an amount equal to the difference between the cost of the
inventory and the estimated market value, based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are less favorable than
those projected by management, additional reductions in stated value may be
required. 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. During the fiscal year ended September 30, 2002, the
Company fully reserved its net deferred tax assets totaling
$2,060,000,
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. Management evaluates the
realizability of the deferred tax assets and assesses the valuation allowance
quarterly.

Revenue Recognition

The Company recognizes revenue when systems are
shipped or services are rendered. For spare parts, supplies and
consumable items stored at customer sites, revenue is recognized when
the inventory is used by the customer. Amounts billed to customers
under maintenance contracts are recorded as deferred revenue and
recognized in income over the term of the maintenance agreement.
Customer billings in advance of system shipment are recorded as
deferred revenue and recognized upon shipment of the system. Revenue
on the Companys PS MICR systems product line, manufactured by
Océ and private-labeled by the Company, is recorded on a gross basis.
Freight revenue is recorded on a gross basis and recognized upon
shipment. The related freight costs are recorded as a cost of
sales.

Restructuring Initiatives

In April 2002, the Company effected a workforce reduction, eliminating
approximately 40 positions in the Canadian subsidiary. See Note E of
the Consolidated Financial Statements. As of
September 30, 2002, the accrued liability for benefits payable in the future
was $232,000. It is estimated that this balance will be sufficient to cover
the remaining obligation under the workforce reduction plan. In addition,
subsequent to fiscal yearend, the Company announced plans to consolidate its
North American manufacturing and engineering operations at its Canadian
subsidiary. See Note K of the Consolidated Financial Statements. Currently, these operations are divided between the
facilities in the United States and Canada. The Companys worldwide
headquarters and marketing function 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 $1.1 million in restructuring expenses over the course of the
consolidation, which is scheduled to be completed by the end of calendar 2003.

These restructuring expenses are wholly comprised of employee
severance costs unrelated to the acquisition of the Canadian
subsidiary and, therefore, will be properly charged to operating
expense in fiscal 2003.
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.

14



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##### Table of Contents



Results of Operations

The Consolidated Statements of Operations for fiscal 2002 include the
post-acquisition results of the business acquired by the Company on December
20, 2001. See Note E to the Consolidated 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 Consolidated
Financial Statements and notes thereto presented elsewhere in this report.

|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |      |  
|------------------------------------------- | ----------------------------------- |  | ------------------------ | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                            |                                     |  | Year Ended September 30,
|                                            |                                     |  |                         
|                                            |                                     |  | 2002                     |      | 2001 |  | 2000 
|                                            |                                     |  |                          |      |      |  |      
|Sales:                                      |                                     |  |                          |      |      |  |       |      |   |  |       |     
|                                            | Printing equipment                  |  |                          | 26.7 | %    |  |       | 64.5 | % |  |       | 54.0 | %
|                                            | Maintenance, spares and supplies    |  |                          | 73.3 |      |  |       | 35.5 |   |  |       | 46.0 |  
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|NET SALES                                   |                                     |  | 100.0                    |      |      |  | 100.0 |      |   |  | 100.0 |     
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|Costs and Expenses:                         |                                     |  |                          |      |      |  |       |      |   |  |       |     
|                                            | Cost of sales                       |  |                          | 48.7 |      |  |       | 50.8 |   |  |       | 49.3 |  
|                                            | Selling, general and administrative |  |                          | 41.9 |      |  |       | 35.1 |   |  |       | 42.3 |  
|                                            | Research and development            |  |                          | 11.0 |      |  |       | 6.1  |   |  |       | 9.4  |  
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|                                            |                                     |  | 101.6                    |      |      |  | 92.0  |      |   |  | 101.0 |     
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|(LOSS) INCOME FROM SYSTEM SALES AND SERVICE |                                     |  | (1.6                     | )    |      |  | 8.0   |      |   |  | (1.0  | )   
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|Interest expense                            |                                     |  | 1.5                      |      |      |  | 0.1   |      |   |  | 0.0   |     
|Interest income                             |                                     |  | (0.1                     | )    |      |  | (0.1  | )    |   |  | (0.4  | )   
|Realized exchange (gain) loss               |                                     |  | (0.4                     | )    |      |  | (1.3  | )    |   |  | 1.0   |     
|Unrealized
exchange (gain) loss             |                                     |  | (0.1                     | )    |      |  | 1.6   |      |   |  | 0.0   |     
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|(LOSS) INCOME BEFORE INCOME TAXES           |                                     |  | (2.5                     | )    |      |  | 7.7   |      |   |  | (1.6  | )   
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|Income tax expense (benefit)                |                                     |  | 2.1                      |      |      |  | 2.7   |      |   |  | (0.6  | )   
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     
|NET (LOSS) INCOME                           |                                     |  | (4.6                     | )%   |      |  | 5.0   | %    |   |  | (1.0  | )%  
|                                            |                                     |  |                          |      |      |  |       |      |   |  |       |     

The Companys revenues are from sales of (i) document production systems and
related equipment, and (ii) maintenance contracts, spare parts, supplies and
consumable items. For the year ended September 30, 2002 (fiscal 2002), sales
of document production equipment decreased 50% over the year ended September
30, 2001 (fiscal 2001), compared with an increase of 78% in fiscal 2001 over
the year ended September 30, 2000 (fiscal 2000). The decrease in fiscal 2002
compared with fiscal 2001 and the increase in fiscal 2001 compared with fiscal
2000 were primarily due to significantly higher Imaggiasales
in fiscal 2001 than in both fiscal 2002 and 2000. The Company sold 15 Imaggiasystems in
fiscal 2002, compared with 39 in fiscal 2001, and 22 in fiscal 2000. The
Company attributes lower document production systems sales in fiscal 2002
compared with 2001 to uncertain economic conditions, which led customers to
postpone capital equipment purchases. With the acquisition of the Canadian
subsidiary in December 2001, the Company expanded its product lines to include
the CR Seriesand the RS Seriesof roll-fed print systems. In June 2002,
the Company reached an agreement with LexisNexis Matthew Bender for the
establishment of the first major reference site for the Delphax high-speed CR
Seriespublishing system. This installation, which currently includes two
CR900Proll-fed digital publishing systems capable of producing 900 pages per
minute, is significant in that it represents the Companys initial step into
the publishing market.

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##### Table of Contents



For some time, the Company has held a dominant position in many of the
international markets in which its Checktronicequipment is sold. Demand for
the Checktronicsystem product line has softened in these international markets
and revenues from this product line are now largely dependent on sales of
system upgrades and refurbished Checktronics, rather than new Checktronics, to
emerging markets such as Latin America, Asia and Africa. The present uncertain
economic environment in many of the countries within these emerging markets has
limited the Companys current opportunities to sell high-end capital equipment
into those regions. Combined sales of all other product lines, including the
Checktronic, were flat in fiscal 2002, compared with fiscal 2001 and fiscal
2000.

Revenues from maintenance contracts, spare parts, supplies and consumable items
increased 152% in fiscal 2002 over fiscal 2001, compared with a 15% increase in
fiscal 2001 over fiscal 2000. The significant increase in fiscal 2002,
compared with 2001, was due primarily to incremental revenues from the fiscal
2002 acquisition of the Canadian subsidiary, which contributed $17.7 million of
the $23.2 million total increase in revenues from maintenance contracts, spare
parts, supplies and consumable items. The other $5.4 million increase in
fiscal 2002 over fiscal 2001 and the $2.0 million increase in fiscal 2001 over
fiscal 2000 were primarily due to the significant increases in the installed
base of Imaggiasystems year to year. The Company expects revenues from
maintenance contracts, spare parts, supplies and consumable items to increase
in fiscal 2003 consistent with expected additions to the installed
base, and to include
the effect of owning the Canadian subsidiary for the full fiscal 2003.

The Companys gross margin percentage in fiscal 2002 was 51%, compared with 49%
and 51% in fiscal 2001 and fiscal 2000, respectively. The increase in gross
margin percentage for fiscal 2002, compared with fiscal 2001, was primarily due
to the increase in revenues from maintenance contracts, spares parts, supplies
and consumable items generated by the Canadian acquisition. The decrease in gross margin percentage for fiscal
2001, compared with fiscal 2000, was primarily due to the shift in the product
mix from the Checktronicsystem product line to the Imaggiasystem product
line, coupled with lower margins on the increased level of service revenues.
In addition, in the fourth quarter of fiscal 2001, the Company recorded a
non-recurring supplier price adjustment, which for the quarter added
approximately 4 points to gross margin. 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 total revenues in fiscal 2003.

Selling, general and administrative expenses increased $6.9 million in fiscal
2002, compared with fiscal 2001, and were $2.9 million higher in fiscal 2001
than in fiscal 2000. As a percentage of net sales, these expenses were 41% for
fiscal 2002, 35% for fiscal 2001 and 42% for fiscal 2000. Increased expense
levels in fiscal 2002 compared with fiscal 2001 were due to the acquisition of
the Canadian subsidiary and an increase in employees, principally in customer
service, to support the larger installed base. Similarly, for fiscal 2001
compared with fiscal 2000, higher expense levels, though a smaller percentage
of net sales, were due to the increase in employees and associated expenses
required to support the increase in total revenues. For fiscal 2001,
approximately $1.3 million of the total increase was due to expansion of the
field force supporting the higher installed base of the Imaggiasystem. The
Company anticipates that its selling, general and administrative expenses in
fiscal 2003 may continue to increase to support the projected growth in total
revenues, but at a rate less than the projected total revenue rate of growth.

Research and development expenses increased significantly, to $5.7 million in
fiscal 2002, from $2.6 million in 2001, and increased as a percentage
of net sales from 6% to 11%. The increase is primarily due to the acquisition
of the Canadian subsidiary in fiscal 2002. Research and development expenses
in fiscal 2001 were only slightly lower, compared with fiscal 2000, and
decreased year to year as a percentage of net sales. Research and development
expenses are expected to increase in fiscal 2003.

Interest expense in fiscal 2002 was $769,000, compared with $53,000 in fiscal
2001, due to the Company borrowing to finance the acquisition of the Canadian
subsidiary and, to a lesser extent, to fund increases in inventory in fiscal
2002. Net interest expense was $13,000 in fiscal 2001, compared with
net interest income of $117,000 in fiscal 2000. The significant shift to a net
interest expense position in fiscal 2001 was due to current fiscal year
borrowing against the bank credit facility to fund operating
activities in fiscal 2001, which
was not necessary in fiscal 2000.

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 gain for fiscal year 2002 was
$252,000. The net transactional exchange losses for fiscal years
2001 and 2000 were $110,000 and $293,000, respectively. The Company
experiences translational foreign currency gains and losses, which are
reflected on the Companys Statements of Shareholder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 Company anticipates that it will continue to have
transactional and translational foreign exchange gains or losses from
foreign operations in the future, although strategies to reduce the
size of the gains or losses will be reviewed and implemented whenever
economical and practical.

16



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The Company recorded an income tax expense of $1.1 million on a loss before
income taxes of $1.3 million. The income tax expense for fiscal 2002 reflects
the estimated annual effective tax rate of 35% and an increase in the
valuation allowance to fully reserve the net
deferred tax assets. The Company fully reserved its net deferred tax assets
totaling $2,060,000, 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. The Company recorded an income tax expense of 35% in fiscal
2001, compared with an income tax benefit of 37% in fiscal 2000. The income
tax expense for fiscal 2001 compared with fiscal 2000 changed as a percentage
primarily because the Company generated pre-tax earnings in fiscal 2001 and
incurred pre-tax losses in fiscal 2000.

Net loss for fiscal 2002 was $0.39 per share, compared with net income of $0.35
per share for fiscal 2001 and net loss of $0.05 per share for fiscal 2000. The
net loss for fiscal 2002, compared with net income for fiscal 2001, was due to
significantly lower equipment sales and significantly higher expense levels
primarily due to the acquisition of the Canadian subsidiary, only partially
offset by the significantly higher revenues from maintenance contracts, spare
parts, supplies and consumable items, also primarily due to the Canadian
acquisition. The fiscal 2002 net loss was exacerbated by the fiscal 2002
income tax expense due to the Company recording a full valuation allowance
against its net deferred tax assets. The Company was profitable in fiscal
2001, compared with fiscal 2000, due to the increase in document production
systems revenues and lower foreign exchange losses, offset by the effect of reduced gross margins, increased
selling, general and administrative expenses and fiscal 2001 interest expense
versus fiscal 2000 interest income.

In fiscal 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 as of September 30, 2001 and recorded a
one-time charge to $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 ceased as of December 31,
2001.

On December 4, 2002, the Company announced plans to consolidate its North
American manufacturing and engineering operations at its Canadian subsidiary.
Currently, these operations are divided between the facilities in the United
States and Canada. The Company's worldwide headquarters and marketing
function 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 $1.1 million in
restructuring expenses over the course of the consolidation, which is scheduled
to be completed by the end of calendar 2003. These restructuring
expenses are wholly comprised of employee severance costs unrelated
to the acquisition of the Canadian subsidiary and, therefore, will be
properly charged to operating expense in fiscal 2003. 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.

Market Risk

The Company has foreign subsidiaries in Canada, the United Kingdom and France.
The Company does business in more than 60 countries and generates approximately
25% of its revenues from outside North America. The Companys ability to sell
its products in these foreign markets may be affected by changes in economic,
political or market conditions in the foreign markets in which it does
business.

The Companys net investment in its foreign subsidiaries was $7.2 million and
$5.7 million at September 30, 2002 and 2001, 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 dollar against foreign currencies was not
material in the fiscal year ended September 30, 2002. The
functional currency of the Canadian subsidiary is the U.S. dollar.

17



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From time to time, the Company has entered into foreign exchange contracts as a
hedge against specific foreign currency receivables. In fiscal 2002 and 2001,
the Company did not enter into any foreign exchange contracts and does not
currently anticipate entering into any such contracts.

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 fiscal 2002 and
fiscal 2001 of approximately $118,000 and $9,000, 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 affect 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. In June 2002, the Company reached an agreement with
LexisNexis Matthew Bender for the establishment of the first major reference
site for the Delphax high-speed CR Seriespublishing system.
To date, 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.

In January 2000, the Company entered into a three-year equipment and service
contract with a significant customer. Equipment deliveries under the contract
began in the second quarter of fiscal 2000 and concluded in the third quarter
of fiscal 2001. In the fourth quarter of fiscal 2001, the Company executed a
new equipment and service contract with this customer. Equipment deliveries
under the most recent contract concluded in the second quarter of fiscal 2002.
Revenues from this customer have been significant, representing 28%, 57% and
32% of total revenues for fiscal 2002, 2001 and 2000, respectively. 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 agreed to purchase a minimum
number of PS75 MICRunits from Océ to maintain the exclusive right to sell the
PS75 MICRproduct. The Company purchased less than the minimum, and as a
result, the Company incurred a penalty and forfeited certain rights of
exclusivity. 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.

18



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Liquidity and Capital Resources

Working capital was $24.0 million at September 30, 2002, compared with $16.9
million at September 30, 2001. The $7.1 million increase, was primarily due to
the acquisition of the assets and certain liabilities of the Canadian
subsidiary, partially offset by an increase in the current portion of debt,
also due to the acquisition. The Companys inventory levels increased to $20.9
million at September 30, 2002, from $11.8 million at September 30, 2001.
Inventory acquired from acquisition of the Canadian subsidiary comprised
approximately $8.7 million of the increase. Accounts receivable increased to
$10.7 million at September 30, 2002, from $10.1 million at September 30, 2001,
with approximately $4.1 million of the increase due to the Canadian
acquisition, offset by collection of receivables and lower fiscal 2002
equipment sales. Cash and short-term investments amounted to $1.8 million at
September 30, 2002, compared with $592,000 at September 30, 2001. The increase
in cash and short-term investments was primarily due to the timing of borrowing
and repaying amounts under the Companys credit facility. Deferred revenue was
$490,000 at September 30, 2002, compared with $1.1 million at September 30,
2001. This decrease was principally due to completion of deliveries under the
equipment portion of the contract with the significant customer that
is described above and the recognition of the related deferred revenue. As of
September 30, 2002, deferred revenue was comprised primarily of unearned
maintenance contract revenues.

The Company has undertaken no significant investing activities. No significant
capital investment has been undertaken or is planned, and at September 30,
2002, the Company had no material commitments for capital expenditures.
Short-term investments are purchased as cash is available and sold as they
mature.

To finance the acquisition of the Canadian subsidiary on 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, $3.5 million of which remained outstanding as of
September 30, 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. The revolving credit
commitment was $14.5 million as of September 30, 2002, and in December 2002 was
reduced to $12.5 million. It is subject to a commitment fee of 0.5% per annum
on the unused portion of the commitment. As of September 30, 2002, revolving
loans outstanding were $11.8 million. Term loans and revolving loans, at the
Companys election, may be outstanding as base rate loans or Eurodollar loans,
provided that $3.0 million of the principal amount of the revolving loans bear
interest at the fixed rate of 7.35% per annum.

Outstanding base rate loans accrue interest at the banks prime rate plus 0.5%.
Outstanding Eurodollar loans accrue interest at adjusted LIBOR plus
3.0%. As of
September 30, 2002, $280,000 was outstanding as base rate loans and $15.0
million was outstanding as Eurodollar loans, at a weighted average interest
rate of approximately 6.5%. Effective December 18, 2002, the
applicable interest rates increased to prime plus 1.0% and to
adjusted LIBOR plus 4.0%.

As of September 30, 2002, the Company was not in compliance with certain
financial covenants of its credit agreement with its bank lender. The lender
entered into a forbearance agreement with the Company on September 9, 2002,
which was extended on October 18, 2002. On December 18, 2002, the lender and
the Company amended the agreement and the lender waived the prior defaults.
Under the amendment, installment payments of $250,000 are due on the term loan
on December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, and
the balance of the term loans will be due on December 31, 2003. The amendment
reduces the revolving credit commitment 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. As of December 31, 2002, the balance due on
the credit facility will be a current liability. The Company believes, but
cannot assure, that it will be able to fully meet the terms of the amended
credit agreement. The Companys ability to fund its future working capital
requirements beyond December 31, 2003 is dependent upon its ability to
extend or renegotiate financing at the end of that 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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Cautionary Statement

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

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




Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The qualitative and quantitative disclosures about market risk are included in
Item 7 of this report.




Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements of the Company and its subsidiaries are
included in a separate section of this report.




Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.




PART III




Item 10. Directors and Executive Officers of the Registrant

Reference is made to the section entitled Election of Directors included in
the Companys definitive proxy statement, to be filed with the Securities and
Exchange Commission in January 2003.

Pursuant to Section 16(a) under the Securities Exchange Act of 1934, executive
officers, directors and 10% shareholders of the Company are required to file
reports on Forms 3, 4 and 5 of their beneficial holdings and transactions in
the Companys Common Stock.




Item 11. Executive Compensation

Reference is made to the section entitled Executive Compensation included in
the Companys definitive proxy statement, to be filed with the Securities and
Exchange Commission in January 2003.




Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders

Reference is made to the section entitled Security Ownership of Principal
Shareholders and Management included in the Companys definitive proxy
statement, to be filed with the Securities and Exchange Commission in January
2003.




Item 13. Certain Relationships and Related Transactions

None.




Item 14. 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
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 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-K.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Financial Statements

The following consolidated financial statements of Delphax Technologies Inc. and
subsidiaries are submitted in a separate financial statement section of this
report.

|                                                                                                    |  |     
|--------------------------------------------------------------------------------------------------- |  | ----
|Description                                                                                         |  | Page
|                                                                                                    |  |     
|Report of Independent Auditors                                                                      |  | 29  
|                                                                                                    |  |     
|Consolidated Balance Sheets  September 30, 2002 and 2001                                           |  | 30  
|                                                                                                    |  |     
|Consolidated Statements of Operations  The years ended September 30, 2002, 2001 and 2000           |  | 32  
|                                                                                                    |  |     
|Consolidated Statements of Shareholders Equity  The years ended September 30, 2002, 2001 and 2000 |  | 33  
|                                                                                                    |  |     
|Consolidated Statements of Cash Flows  The years ended September 30, 2002, 2001 and 2000           |  | 34  
|                                                                                                    |  |     
|Notes to Consolidated Financial Statements  September 30, 2002                                     |  | 35  

Financial Statement Schedules

|            |  |                                                |  |     
|----------- |  | ---------------------------------------------- |  | ----
|Number      |  | Description                                    |  | Page
|            |  |                                                |  |     
|Schedule II |  | Valuation and Qualifying Accounts and Reserves |  | 47  

All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.

Reports on Form 8-K

The Company filed the following report on Form 8-K during the three months ended
September 30, 2002:



September 11, 2002  Form 8-K: Item 5. Other Events and Regulation FD
Disclosure  Notice of the Company entering into a forbearance agreement
with its bank lender related to a previously disclosed default under its
credit agreement with the bank




September 27, 2002  Form 8-K: Item 5. Other Events and Regulation FD
Disclosure  Agreement between the Company and Shareholders and Amendment
No. 1 dated September 23, 2002 to Rights Agreement between the Company and
Wells Fargo Bank Minnesota N.A.


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Exhibits

|       |  |                                                                                                                                                                                                                   |  |                                                                        
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                       |  | Page or Incorporated by Reference from                                 
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|3.1    |  | Restated Articles of Incorporation                                                                                                                                                                                |  | Exhibit 3.1 filed herewith                                             
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|3.2    |  | Amended Bylaws                                                                                                                                                                                                    |  | Exhibit 3.2 filed herewith                                             
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|4.1    |  | Specimen of the Companys Common Stock
Certificate                                                                                                                                                                |  | Exhibit 4.1 filed herewith                                             
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.1   |  | Lease for Offices in Crawley, England                                                                                                                                                                             |  | Exhibit 10.9 to Form 10-K for the eight months
ended September 30, 1985
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.2   |  | Credit Agreement dated December 20, 2001
among Check Technology Canada Ltd., Check
Check Technology Corporation and Harris Trust
and Savings Bank                                                                 |  | Exhibit 10.0 to Report on Form 8-K dated
January 3, 2002               
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.2.1 |  | First Amendment to Credit Agreement
among Delphax Technologies Canada Limited,
f/k/a Check Technology Canada Ltd., Delphax
Technologies Inc, f/k/a Check Technology
Corporation and Harris Trust and Savings Bank |  | Exhibit 10.2.1 filed herewith                                          
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.3   |  | 1986 Stock Option Plan                                                                                                                                                                                            |  | Exhibit 10.8 to Form 10-K for the fiscal year
ended September 30, 1986 
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.4   |  | Form of Indemnification Agreement that the
Company has entered into with officers and
directors.                                                                                                                  |  | Exhibit 10.4 filed herewith                                            
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.5   |  | Employment Agreement as of October 1, 2000
between the Company and Jay A. Herman                                                                                                                                  |  | Exhibit 10.5 for Form 10-K for the fiscal year
ended September 30, 2000
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.6   |  | 1991 Stock Plan                                                                                                                                                                                                   |  | Exhibit 10.10 to Form 10-K for the fiscal year
ended September 30, 1991
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.7   |  | Lease of Facilities in Minnetonka, Minnesota                                                                                                                                                                      |  | Exhibit 10.9 to Form 10-K for the fiscal year
ended September 30, 1994 
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.8   |  | 1997 Stock Plan                                                                                                                                                                                                   |  | Exhibit 10.8 to Form 10-K for the fiscal year
ended September 30, 1997 
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.9   |  | Executive Loan Program as Amended                                                                                                                                                                                 |  | Exhibit 10.9 to Form 10-K for the fiscal year
ended September 30, 1997 
|       |  |                                                                                                                                                                                                                   |  |                                                                        
|10.10  |  | 2000 Stock Plan                                                                                                                                                                                                   |  | Exhibit 10.10 to Form 10-K for the fiscal year
ended September 30, 2001

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|       |  |                                                                                                                      |  |                                                 
|------ |  | -------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------
|Number |  | Description                                                                                                          |  | Page or Incorporated by Reference from          
|       |  |                                                                                                                      |  |                                                 
|10.11  |  | Agreement between the Company and
Fred H. and Annette J. Brenner                                                     |  | Exhibit 99.1 to Form 8-K dated September 23,2002
|       |  |                                                                                                                      |  |                                                 
|10.12  |  | Amendment No. 1 dated September 23, 2002 to
Rights Agreement between the Company and
Wells Fargo Bank Minnesota N.A. |  | Exhibit 99.2 to Form 8-K dated September 23,2002
|       |  |                                                                                                                      |  |                                                 
|10.13  |  | Timberlea Boulevard Lease for facility in Mississauga, Ontario                                                       |  | Exhibit 10.13 filed herewith                    
|       |  |                                                                                                                      |  |                                                 
|10.14  |  | Tomken Road Lease for facility in Mississauga, Ontario                                                               |  | Exhibit 10.14 filed herewith                    
|       |  |                                                                                                                      |  |                                                 
|10.15  |  | Sub-lease of Timberlea Boulevard facility in Mississauga, Ontario                                                    |  | Exhibit 10.15
filed herewith                    
|       |  |                                                                                                                      |  |                                                 
|21     |  | List of Subsidiaries                                                                                                 |  | Exhibit 21 filed herewith                       
|       |  |                                                                                                                      |  |                                                 
|23.1   |  | Consent of Independent Auditors                                                                                      |  | Exhibit 23.1 filed herewith                     
|       |  |                                                                                                                      |  |                                                 
|99.1   |  | Certificate pursuant to 18 U.S.C. 1350                                                                               |  | Exhibit 99.1 filed herewith                     

23



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|       |  |                   |  |     |  |                                                               
|------ |  | ----------------- |  | --- |  | --------------------------------------------------------------
|Dated: |  | December 19, 2002 |  | By: |  | /s/ Jay A. Herman                                             
|       |  |                   |  |     |  |                                                               
|       |  |                   |  |     |  | Jay A. Herman
Chairman and Chief Executive Officer            
|       |  |                   |  |     |  |                                                               
|Dated: |  | December 19, 2002 |  | By: |  | /s/ Robert M. Barniskis                                       
|       |  |                   |  |     |  |                                                               
|       |  |                   |  |     |  | Robert M. Barniskis
Vice President and Chief Financial Officer

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

|                         |  |                                              |  |                  
|------------------------ |  | -------------------------------------------- |  | -----------------
|SIGNATURE                |  | TITLE                                        |  | DATE             
|                         |  |                                              |  |                  
|/s/ Jay A. Herman        |  | President, Chairman of the Board             |  | December 19, 2002
|                         |  | (Principal Executive Officer)                |  |                  
|Jay A. Herman            |  |                                              |  |                  
|                         |  |                                              |  |                  
|/s/ Robert M. Barniskis  |  | Vice President, Chief Financial Officer      |  | December 19, 2002
|                         |  | (Principal Financial and Accounting Officer) |  |                  
|Robert M. Barniskis      |  |                                              |  |                  
|                         |  |                                              |  |                  
|/s/ R. Stephen Armstrong |  | Director                                     |  | December 19, 2002
|                         |  |                                              |  |                  
|R. Stephen Armstrong     |  |                                              |  |                  
|                         |  |                                              |  |                  
|/s/ Gary R. Holland      |  | Director                                     |  | December 19, 2002
|                         |  |                                              |  |                  
|Gary R. Holland          |  |                                              |  |                  
|                         |  |                                              |  |                  
|/s/ Earl W. Rogers       |  | Director                                     |  | December 19, 2002
|                         |  |                                              |  |                  
|Earl W. Rogers           |  |                                              |  |                  

24



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##### Table of Contents






CERTIFICATIONS

I, Jay A. Herman, Chairman and Chief Executive Officer, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Delphax
Technologies Inc.                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual 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 annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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
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 annual 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 annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this annual 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):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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
annual 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|       |  |                   |  |     |  |                                                                    
|------ |  | ----------------- |  | --- |  | -------------------------------------------------------------------
|Dated: |  | December 27, 2002 |  | By: |  | /s/ Jay A. HermanJay A. Herman
Chairman and Chief Executive Officer

I, Robert M. Barniskis, Vice President and Chief Financial Officer certify
that:



|1. |  | I have reviewed this annual report on Form 10-K of Delphax Technologies
Inc.                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual 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 annual report;

25



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##### Table of Contents





|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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
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 annual 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 annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual 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):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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
annual 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.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|       |  |                   |  |     |  |                                                                                      
|------ |  | ----------------- |  | --- |  | -------------------------------------------------------------------------------------
|Dated: |  | December 27, 2002 |  | By: |  | /s/ Robert M. BarniskisRobert M. Barniskis
Vice President and Chief Financial Officer

26



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##### Table of Contents



Annual Report on Form 10-K

Item 8, Item 15(a)(1) and (2), (c), and (d)

List of Financial Statements and Financial Statement Schedule

Financial Statement Schedule

Certain Exhibits

Year Ended September 30, 2002

Delphax Technologies Inc.

Minnetonka, Minnesota

27



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##### Table of Contents



Form 10-K  Item 15(a)(1) and (2)

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

The following Consolidated Financial Statements of Delphax Technologies Inc.
and subsidiaries are included in Item 8:

Report of Independent Auditors

Consolidated Balance Sheets  September 30, 2002 and 2001

Consolidated Statements of Operations  The years ended September 30,
2002, 2001 and 2000

Consolidated Statements of Shareholders Equity  The years ended
September 30, 2002, 2001 and 2000

Consolidated Statements of Cash Flows  The years ended September 30,
2002, 2001 and 2000

Notes to Consolidated Financial Statements  September 30, 2002

The following Consolidated Financial Statement Schedule of Delphax
Technologies Inc. and subsidiaries is included in Item 15(d):

|            |  |                                               
|----------- |  | ----------------------------------------------
|Number      |  | Description                                   
|            |  |                                               
|Schedule II |  | Valuation and Qualifying Accounts and Reserves

All other financial statement schedules have been omitted because they are not
applicable, are not required, or the information is included in the financial
statements or notes thereto.

28



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

Board of Directors
Delphax Technologies Inc.

We have audited the accompanying consolidated balance sheets of Delphax
Technologies Inc. (formerly Check Technology Corporation) and subsidiaries as of September 30, 2002 and 2001, and the
related consolidated statements of operations, shareholders equity and cash
flows for each of the three years in the period ended September 30, 2002. Our
audits also included the financial statement schedule listed in the Index at
Item 15(d). These financial statements and schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Delphax Technologies Inc. and subsidiaries at September 30, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

|                                                                                                                     |  |                      
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------
|                                                                                                                     |  | /s/ Ernst & Young LLP
|                                                                                                                     |  |                      
|                                                                                                                     |  | Ernst & Young LLP    
|Minneapolis, Minnesota                                                                                               |  |                      
|November 18, 2002 (except
with respect to the
matter discussed in Note F, as to
which the date is December 18, 2002) |  |                      

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                       |                                                                                                                                   |                                   |            |               |            |      |            |            |           | 
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------------- | ---------- | ---- | ---------- | ---------- | --------- | 
|                       |                                                                                                                                   |                                   |            | September 30,
|                       |                                                                                                                                   |                                   |            |              
|                       |                                                                                                                                   |                                   |            | 2002          |            | 2001
|                       |                                                                                                                                   |                                   |            |               |            |     
|ASSETS                 |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|CURRENT ASSETS         |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       | Cash and cash equivalents                                                                                                         |                                   | $          | 1,717,973     |            |      | $          | 591,536    |          
|                       | Short-term investments                                                                                                            |                                   |            | 78,430        |            |      |            |           |          
|                       | Accounts receivable, less allowance for doubtful
accounts of $253,106 and $51,749 as of
September 30, 2002 and 2001, respectively |                                   |            | 10,712,889    |            |      |            | 10,129,470 |          
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       | Inventory:                                                                                                                        |                                   |            |               |            |      |            |            |          
|                       |                                                                                                                                   | Raw materials and component parts |            |               | 13,602,964 |      |            |            | 7,519,015 | 
|                       |                                                                                                                                   | Work-in-progress                  |            |               | 597,388    |      |            |            | 317,800   | 
|                       |                                                                                                                                   | Finished goods                    |            |               | 6,672,664  |      |            |            | 3,998,855 | 
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       |                                                                                                                                   |                                   | 20,873,016 |               |            |      | 11,835,670 |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       | Deferred income taxes                                                                                                             |                                   |            |              |            |      |            | 842,851    |          
|                       | Other current assets                                                                                                              |                                   |            | 1,525,695     |            |      |            | 1,349,280  |          
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|TOTAL CURRENT ASSETS   |                                                                                                                                   |                                   | 34,908,003 |               |            |      | 24,748,807 |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|EQUIPMENT AND FIXTURES |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       | Machinery and equipment                                                                                                           |                                   |            | 4,853,798     |            |      |            | 2,192,448  |          
|                       | Furniture and fixtures                                                                                                            |                                   |            | 3,057,896     |            |      |            | 2,440,243  |          
|                       | Leasehold improvements                                                                                                            |                                   |            | 2,386,996     |            |      |            | 309,932    |          
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       |                                                                                                                                   |                                   | 10,298,690 |               |            |      | 4,942,623  |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       | Less accumulated depreciation and
amortization                                                                                    |                                   |            | 5,539,303     |            |      |            | 3,904,814  |          
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|                       |                                                                                                                                   |                                   | 4,759,387  |               |            |      | 1,037,809  |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           
|TOTAL ASSETS           |                                                                                                                                   | $                                 | 39,667,390 |               |            | $    | 25,786,616 |           
|                       |                                                                                                                                   |                                   |            |               |            |      |            |           

See notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                 |                                                                         |            |               |         |      |            |            |         | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------- | ------------- | ------- | ---- | ---------- | ---------- | ------- | 
|                                           |                                                                                                 |                                                                         |            | September 30,
|                                           |                                                                                                 |                                                                         |            |              
|                                           |                                                                                                 |                                                                         |            | 2002          |         | 2001
|                                           |                                                                                                 |                                                                         |            |               |         |     
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                 |                                                                         |            |               |         |      |            |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|CURRENT LIABILITIES                        |                                                                                                 |                                                                         |            |               |         |      |            |           
|                                           | Accounts payable                                                                                |                                                                         | $          | 4,284,465     |         |      | $          | 4,333,400  |        
|                                           | Accrued expenses                                                                                |                                                                         |            | 3,269,531     |         |      |            | 1,573,567  |        
|                                           | Income taxes payable                                                                            |                                                                         |            | 482,197       |         |      |            | 248,132    |        
|                                           | Current portion of bank credit facility                                                         |                                                                         |            | 2,300,000     |         |      |            | 595,000    |        
|                                           | Current portion of capital leases                                                               |                                                                         |            | 33,361        |         |      |            |           |        
|                                           | Deferred revenue                                                                                |                                                                         |            | 489,996       |         |      |            | 1,053,893  |        
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|TOTAL CURRENT LIABILITIES                  |                                                                                                 |                                                                         | 10,859,550 |               |         |      | 7,803,992  |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|Long-term portion of bank credit facility  |                                                                                                 |                                                                         | 12,980,000 |               |         |      |           |           
|Long-term portion of capital leases        |                                                                                                 |                                                                         | 28,217     |               |         |      |           |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|TOTAL LIABILITIES                          |                                                                                                 |                                                                         | 23,867,767 |               |         |      | 7,803,992  |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|SHAREHOLDERS EQUITY                       |                                                                                                 |                                                                         |            |               |         |      |            |           
|                                           | Common stock  par value $.10 per share  authorized
50,000,000 shares; issued and outstanding: |                                                                         |            |               |         |      |            |            |        
|                                           |                                                                                                 | 6,175,898 and 6,161,138 as of September 30,
2002 and 2001, respectively |            |               | 617,590 |      |            |            | 616,114 | 
|                                           | Additional paid-in capital                                                                      |                                                                         |            | 17,039,945    |         |      |            | 17,010,008 |        
|                                           | Accumulated other comprehensive loss                                                            |                                                                         |            | (1,912,335    | )       |      |            | (2,089,483 | )      
|                                           | Retained earnings                                                                               |                                                                         |            | 54,423        |         |      |            | 2,445,985  |        
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|TOTAL SHAREHOLDERS EQUITY                 |                                                                                                 |                                                                         | 15,799,623 |               |         |      | 17,982,624 |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                 | $                                                                       | 39,667,390 |               |         | $    | 25,786,616 |           
|                                           |                                                                                                 |                                                                         |            |               |         |      |            |           

See notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |            | 
|-------------------------------------------------------------------------------------------------- | ----------------------------------- | - | ------------------------ | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                                   |                                     |   | Year Ended September 30,
|                                                                                                   |                                     |   |                         
|                                                                                                   |                                     |   | 2002                     |            | 2001 |   | 2000      
|                                                                                                   |                                     |   |                          |            |      |   |           
|Sales:                                                                                             |                                     |   |                          |            |      |   |            |            |  |   |            |           
|                                                                                                   | Printing equipment                  |   | $                        | 13,973,365 |      |   | $          | 27,803,639 |  |   | $          | 15,625,836 | 
|                                                                                                   | Maintenance, spares and supplies    |   |                          | 38,430,976 |      |   |            | 15,274,788 |  |   |            | 13,299,932 | 
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|NET SALES                                                                                          |                                     |   | 52,404,341               |            |      |   | 43,078,427 |            |  |   | 28,925,768 |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|Costs and Expenses:                                                                                |                                     |   |                          |            |      |   |            |            |  |   |            |           
|                                                                                                   | Cost of sales                       |   |                          | 25,518,803 |      |   |            | 21,917,827 |  |   |            | 14,250,568 | 
|                                                                                                   | Selling, general and administrative |   |                          | 21,963,686 |      |   |            | 15,100,284 |  |   |            | 12,235,438 | 
|                                                                                                   | Research and development            |   |                          | 5,736,140  |      |   |            | 2,635,198  |  |   |            | 2,722,404  | 
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|                                                                                                   |                                     |   | 53,218,629               |            |      |   | 39,653,309 |            |  |   | 29,208,410 |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|(LOSS) INCOME FROM SYSTEM SALES AND SERVICE                                                        |                                     |   | (814,288                 | )          |      |   | 3,425,118  |            |  |   | (282,642   | )         
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|Interest expense                                                                                   |                                     |   | 768,843                  |            |      |   | 52,564     |            |  |   | 8,214      |           
|Interest income                                                                                    |                                     |   | (50,780                  | )          |      |   | (39,328    | )          |  |   | (125,243   | )         
|Realized exchange (gain) loss                                                                      |                                     |   | (220,699                 | )          |      |   | (542,623   | )          |  |   | 279,068    |           
|Unrealized exchange (gain) loss                                                                    |                                     |   | (31,090                  | )          |      |   | 652,636    |            |  |   | 13,756     |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|(LOSS) INCOME BEFORE INCOME TAXES                                                                  |                                     |   | (1,280,562               | )          |      |   | 3,301,869  |            |  |   | (458,437   | )         
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|Income tax expense (benefit)                                                                       |                                     |   | 1,111,000                |            |      |   | 1,152,000  |            |  |   | (168,000   | )         
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|NET (LOSS) INCOME                                                                                  |                                     | $ | (2,391,562               | )          |      | $ | 2,149,869  |            |  | $ | (290,437   | )         
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|Basic and diluted (loss) earnings per common share                                                 |                                     | $ | (0.39                    | )          |      | $ | 0.35       |            |  | $ | (0.05      | )         
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|Weighted average number of shares outstanding
during the period                                    |                                     |   | 6,167,199                |            |      |   | 6,174,411  |            |  |   | 6,146,630  |           
|                                                                                                   |                                     |   |                          |            |      |   |            |            |  |   |            |           
|Weighted average number of shares and equivalents
outstanding during the period, assuming dilution |                                     |   | 6,167,199                |            |      |   | 6,227,724  |            |  |   | 6,146,630  |           

See notes to consolidated financial statements.

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |            |  
|------------------------------------------------------------------- | ---------------------- |  | ------------ | - | ---------- | - | ------------- | - | -------- | - | ---------- | - | ----- | - | ----------- | -------- | - | - | --------- | ---------- | - | - | ---------- | ---------- | -
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   | Accumulated |          |   |   |           |            |   |   |           
|                                                                    |                        |  | Common Stock |   | Additional |   | Other         |   |          |   |            |   |       |   |            
|                                                                    |                        |  |              |   | Paid-in    |   | Comprehensive |   | Retained |   |            |   |      
|                                                                    |                        |  | Shares       |   | Amount     |   | Capital       |   | Income   |   | Earnings   |   | Total
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |      
|Balance, September 30, 1999                                         |                        |  | 6,154,157    |   |            | $ | 615,416       |   |          | $ | 16,861,417 |   |       | $ | (1,184,070  | )        |   | $ | 413,297   |            |   | $ | 16,706,060 |           
|Comprehensive loss:                                                 |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                                    | Net loss               |  |              |  |            |   |               |  |          |   |            |  |       |   |             |         |   |   |           | (290,437   | ) |   |            | (290,437   | )
|                                                                    | Translation adjustment |  |              |  |            |   |               |  |          |   |            |  |       |   |             | (784,666 | ) |   |           |           |   |   |            | (784,666   | )
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Total comprehensive loss                                            |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   | (1,075,103 | )         
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Exercise of stock options,
including tax benefit of $13,761         |                        |  | 37,983       |   |            |   | 3,798         |   |          |   | 138,449    |   |       |   |            |          |   |   |          |            |   |   | 142,247    |           
|Issuance
of common stock                                            |                        |  | 5,838        |   |            |   | 584           |   |          |   | 15,106     |   |       |   |            |          |   |   |          |            |   |   | 15,690     |           
|Vesting of restricted stock                                         |                        |  |             |   |            |   |              |   |          |   |           |   |       |   |            |          |   |   | 86,630    |            |   |   | 86,630     |           
|Cancellation of restricted stock
including a tax expense of $23,289 |                        |  | (7,000       | ) |            |   | (700          | ) |          |   | (41,402    | ) |       |   |            |          |   |   |          |            |   |   | (42,102    | )         
|Forgiveness of executive officer note                               |                        |  |             |   |            |   |              |   |          |   | 89,814     |   |       |   |            |          |   |   |          |            |   |   | 89,814     |           
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Balance, September 30, 2000                                         |                        |  | 6,190,978    |   |            |   | 619,098       |   |          |   | 17,063,384 |   |       |   | (1,968,736  | )        |   |   | 209,490   |            |   |   | 15,923,236 |           
|Comprehensive income:                                               |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                                    | Net income             |  |              |  |            |   |               |  |          |   |            |  |       |   |             |         |   |   |           | 2,149,869  |   |   |            | 2,149,869  |  
|                                                                    | Translation adjustment |  |              |  |            |   |               |  |          |   |            |  |       |   |             | (120,747 | ) |   |           |           |   |   |            | (120,747   | )
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Total comprehensive income                                          |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   | 2,029,122  |           
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Issuance
of common stock                                            |                        |  | 4,410        |   |            |   | 441           |   |          |   | 17,750     |   |       |   |            |          |   |   |          |            |   |   | 18,191     |           
|Cancellation of stock                                               |                        |  | (27,250      | ) |            |   | (2,725        | ) |          |   | (80,520    | ) |       |   |            |          |   |   |          |            |   |   | (83,245    | )         
|Tax benefit related to exercise
of stock options                    |                        |  |             |   |            |   |              |   |          |   | 31,885     |   |       |   |            |          |   |   |          |            |   |   | 31,885     |           
|Vesting of restricted stock                                         |                        |  |             |   |            |   |              |   |          |   |           |   |       |   |            |          |   |   | 86,626    |            |   |   | 86,626     |           
|Cancellation of restricted stock
including a tax expense of $36,927 |                        |  | (7,000       | ) |            |   | (700          | ) |          |   | (65,100    | ) |       |   |            |          |   |   |          |            |   |   | (65,800    | )         
|Forgiveness of executive officer note                               |                        |  |             |   |            |   |              |   |          |   | 42,609     |   |       |   |            |          |   |   |          |            |   |   | 42,609     |           
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Balance, September 30, 2001                                         |                        |  | 6,161,138    |   |            |   | 616,114       |   |          |   | 17,010,008 |   |       |   | (2,089,483  | )        |   |   | 2,445,985 |            |   |   | 17,982,624 |           
|Comprehensive income:                                               |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|                                                                    | Net loss               |  |              |  |            |   |               |  |          |   |            |  |       |   |             |         |   |   |           | (2,391,562 | ) |   |            | (2,391,562 | )
|                                                                    | Translation adjustment |  |              |  |            |   |               |  |          |   |            |  |       |   |             | 177,148  |   |   |           |           |   |   |            | 177,148    |  
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Total comprehensive loss                                            |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   | (2,214,414 | )         
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Issuance
of common stock                                            |                        |  | 4,410        |   |            |   | 441           |   |          |   | 13,450     |   |       |   |            |          |   |   |          |            |   |   | 13,891     |           
|Exercise of stock options,
including tax benefit of $4,649          |                        |  | 17,350       |   |            |   | 1,735         |   |          |   | 37,837     |   |       |   |            |          |   |   |          |            |   |   | 39,572     |           
|Cancellation of restricted stock                                    |                        |  | (7,000       | ) |            |   | (700          | ) |          |   | (21,350    | ) |       |   |            |          |   |   |          |            |   |   | (22,050    | )         
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           
|Balance, September 30, 2002                                         |                        |  | 6,175,898    |   |            | $ | 617,590       |   |          | $ | 17,039,945 |   |       | $ | (1,912,335  | )        |   | $ | 54,423    |            |   | $ | 15,799,623 |           
|                                                                    |                        |  |              |   |            |   |               |   |          |   |            |   |       |   |             |          |   |   |           |            |   |   |            |           

See notes to consolidated financial statements.

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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |            |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------- | - | ------------------------ | --------- | ---- | - | ---------- | ---------- | - | - | --------- | ---------- | -
|                                                                                                   |                                                   |   | Year Ended September 30,
|                                                                                                   |                                                   |   |                         
|                                                                                                   |                                                   |   | 2002                     |           | 2001 |   | 2000      
|                                                                                                   |                                                   |   |                          |           |      |   |           
|OPERATING ACTIVITIES                                                                               |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|Net (loss) income                                                                                  |                                                   | $ | (2,391,562               | )         |      | $ | 2,149,869  |            |   | $ | (290,437  | )         
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|                                                                                                   | Depreciation and amortization                     |   |                          | 1,898,142 |      |   |            | 343,870    |   |   |           | 388,145    |  
|                                                                                                   | Loss
(gain) on disposal of equipment and fixtures |   |                          | 20,104    |      |   |            | (4,171     | ) |   |           | 35,423     |  
|                                                                                                   | Forgiveness of executive officer note             |   |                          |          |      |   |            | 135,186    |   |   |           | 89,814     |  
|                                                                                                   | Other                                             |   |                          | (4,720    | )    |   |            | 82,564     |   |   |           | 71,313     |  
|Changes in operating assets and liabilities:                                                       |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|                                                                                                   | Accounts receivable, net                          |   |                          | 3,507,432 |      |   |            | (4,718,577 | ) |   |           | (2,285,884 | )
|                                                                                                   | Inventory                                         |   |                          | (737,868  | )    |   |            | (91,073    | ) |   |           | (1,494,726 | )
|                                                                                                   | Other current assets                              |   |                          | 740,731   |      |   |            | 868,221    |   |   |           | (889,700   | )
|                                                                                                   | Accounts payable and accrued expenses             |   |                          | 1,365,168 |      |   |            | 1,033,774  |   |   |           | 2,070,076  |  
|                                                                                                   | Deferred revenue                                  |   |                          | (566,989  | )    |   |            | (2,261,056 | ) |   |           | 2,884,708  |  
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES                                                |                                                   |   | 3,830,438                |           |      |   | (2,461,393 | )          |   |   | 578,732   |           
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|INVESTING ACTIVITIES                                                                               |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|Business
acquisition                                                                               |                                                   |   | (16,673,000              | )         |      |   |           |            |   |   |          |           
|Purchase of equipment and fixtures                                                                 |                                                   |   | (642,531                 | )         |      |   | (526,349   | )          |   |   | (394,533  | )         
|Proceeds
from sale of equipment and fixtures                                                       |                                                   |   |                         |           |      |   | 27,492     |            |   |   | 24,964    |           
|Purchase of short-term investments                                                                 |                                                   |   | (146,817                 | )         |      |   | (132,563   | )          |   |   | (718,519  | )         
|Proceeds from sale of short-term investments                                                       |                                                   |   | 68,387                   |           |      |   | 248,663    |            |   |   | 781,252   |           
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|NET CASH USED IN INVESTING ACTIVITIES                                                              |                                                   |   | (17,393,961              | )         |      |   | (382,757   | )          |   |   | (306,836  | )         
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|FINANCING ACTIVITIES                                                                               |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|Issuance of common stock                                                                           |                                                   |   | 53,463                   |           |      |   | 18,191     |            |   |   | 157,938   |           
|Repurchase of common stock                                                                         |                                                   |   | (22,050                  | )         |      |   | (149,045   | )          |   |   | (52,497   | )         
|Repayment of note receivable from stock sale                                                       |                                                   |   |                         |           |      |   | 11,028     |            |   |   | 10,394    |           
|Borrowing
on bank credit facility, net                                                             |                                                   |   | 14,685,000               |           |      |   | 595,000    |            |   |   |          |           
|Principal
payments on capital lease obligations                                                    |                                                   |   | (6,203                   | )         |      |   |           |            |   |   | (36,156   | )         
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                          |                                                   |   | 14,710,210               |           |      |   | 475,174    |            |   |   | 79,679    |           
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                            |                                                   |   | (20,250                  | )         |      |   | (83,242    | )          |   |   | (190,439  | )         
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                                        |                                                   |   | 1,126,437                |           |      |   | (2,452,218 | )          |   |   | 161,136   |           
|CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR                                                     |                                                   |   | 591,536                  |           |      |   | 3,043,754  |            |   |   | 2,882,618 |           
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|CASH AND CASH EQUIVALENTS AT
END OF YEAR                                                           |                                                   | $ | 1,717,973                |           |      | $ | 591,536    |            |   | $ | 3,043,754 |           
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|                                                                                                   |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|Supplemental
disclosure of non-cash activities                                                     |                                                   |   |                          |           |      |   |            |            |   |   |           |           
|Forgiveness of executive officer note                                                              |                                                   | $ |                         |           |      | $ | 135,186    |            |   | $ | 89,814    |           
|Purchase
of equipment through capital lease obligations                                            |                                                   |   | 67,781                   |           |      |   |           |            |   |   |          |           

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

September 30, 2002

Note A  Summary of Significant Accounting Policies

Nature of Operations: Delphax Technologies Inc.s business is the design,
manufacture and sale of document production systems and the sale of maintenance
contracts, spare parts, supplies and consumable items. The systems can
collate, personalize and encode documents into packages tailored to the
customers requirements. The systems are sold through the Company and its
subsidiaries in the United Kingdom and France. A significant portion of the
total revenues of the Company is related to service and support provided after
the sale. The Company has a significant presence in the international check
production marketplace in Europe, Latin America, Asia and the Middle East.

Principles of Consolidation: The financial statements include the accounts of
the Company and its wholly owned subsidiaries, Delphax Technologies Canada
Ltd., Delphax Technologies Limited, Delphax Technologies S.A. and Check
Technology Pty Limited (which ceased operations as of December 31, 2001). All
significant intercompany accounts and transactions have been eliminated.

Use of Estimates: The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.

Cash Equivalents and Short-term Investments: The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Short-term investments consist principally of
held-to-maturity debt securities. The Company determines the appropriate
classification of debt securities at the time of purchase. Debt securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost, adjusted for amortization of premiums and accretion
of discounts to maturity. Cash equivalents and short-term investments are
carried at amounts that approximate market value. Interest on securities is
included in interest income.

Inventories: Inventories are carried at the lower of cost or market determined
under the first-in, first-out (FIFO) method.

Equipment and Fixtures: Equipment and fixtures are stated on the basis of cost
and include the cost of assets held under capital lease obligations.
Demonstration equipment not expected to be resold is carried in equipment on a
cost basis. Depreciation is provided on the straight-line method over estimated
useful lives of 3 to 5 years for machinery and equipment and furniture and
fixtures, and over 10 years or the expected term of the lease, if shorter, for
leasehold improvements. Amortization expense of items under capital lease is
included in depreciation expense.

Revenue Recognition: Revenue is recognized when systems are shipped or
services are rendered. For spare parts, supplies and consumable items stored
at customer sites, revenue is recognized when the inventory is used by the
customer. Amounts billed to customers under maintenance contracts are recorded
as deferred revenue and recognized in income over the term of the maintenance
agreement. Customer billings in advance of system shipment are recorded as
deferred revenue and recognized upon shipment of the system. Revenue on the
Companys PS MICRsystems product line, manufactured by Océ and private-labeled
by the Company, is recorded on a gross basis. Freight revenue is recorded on a
gross basis and recognized upon shipment. The related freight costs are recorded as a cost of sales.

Foreign Currency Translation: The financial statements of the Companys wholly
owned subsidiaries in the United Kingdom and France are measured in their
respective functional currencies before translating to U.S. dollars. Gains and
losses resulting from the translation are recorded as a component of
shareholders equity. The functional currency of the Canadian
subsidiary is the U.S. dollar.

Income Taxes: The liability method is used to account for income tax expense.
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax bases of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. The deferred
tax asset is reduced by a valuation allowance to a net amount which the Company
believes it more likely than not will realize, based on the Companys estimates
of its future taxable

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income and the expected timing of temporary difference reversals. Investment
tax credits are accounted for under the flow-through method, thereby reducing
income taxes in the year in which the credits are realized.

Stock-Based Compensation: The Company follows Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No.123, Accounting for Stock-Based
Compensation(SFAS 123).

Earnings or Loss per Share: Basic earnings or loss per share amounts are
determined based on the weighted average common shares outstanding, while the
diluted earnings per share amounts also give effect to the common shares
dilutive potential. A reconciliation of the denominator in the basic and
diluted earnings or loss per share calculation is as follows:

|                                                                             |                        |  |           |   |      |  |           |        |  |  |           |   | 
|---------------------------------------------------------------------------- | ---------------------- |  | --------- | - | ---- |  | --------- | ------ |  |  | --------- | - | 
|                                                                             |                        |  | 2002      |   | 2001 |  | 2000     
|                                                                             |                        |  |           |   |      |  |          
|Denominator for basic earnings per share,
weighted average shares            |                        |  | 6,167,199 |   |      |  | 6,174,411 |        |  |  | 6,146,630 |  
|                                                                             |                        |  |           |   |      |  |           |        |  |  |           |  
|Effect of dilutive securities:                                               |                        |  |           |   |      |  |           |        |  |  |           |  
|                                                                             | Employee stock options |  |           |  |      |  |           | 53,313 |  |  |           |  | 
|                                                                             |                        |  |           |   |      |  |           |        |  |  |           |  
|Dilutive potential common shares                                             |                        |  |          |   |      |  | 53,313    |        |  |  |          |  
|                                                                             |                        |  |           |   |      |  |           |        |  |  |           |  
|Denominator for diluted earnings per share,
adjusted weighted average shares |                        |  | 6,167,199 |   |      |  | 6,227,724 |        |  |  | 6,146,630 |  
|                                                                             |                        |  |           |   |      |  |           |        |  |  |           |  

Employee stock options totaling 162,508 and 139,006 in 2002 and 2000,
respectively, were excluded from diluted weighted average shares because their
impact would be antidilutive.

Derivatives and Hedging Activities: As of October 1, 2000, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivatives
and Similar Financial Instruments and Hedging Activities. The Statement
requires companies to account for derivatives and hedging activities, including
the following two elements: (i) all derivatives are measured at fair value and
recognized in the balance sheets as assets or liabilities, and (ii) derivatives
meeting certain criteria could be specifically designated as a hedge. The
adoption of this Statement had no impact on the Companys operating results or
financial position.

Revenue Recognition in Financial Statements: On December 3, 1999, the
Securities and Exchange Commission issued SEC Staff Accounting Bulletin Number
101, Revenue Recognition in Financial Statements(SAB 101). SAB 101 summarizes
certain of the staffs views on applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 was
effective for the Company in the fourth quarter of fiscal 2001 and had no
material impact on the Companys operating results or financial position.

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 in Note E. SFAS 142 had no material effect on the Companys results of operations or
financial position.

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 Operations
for a disposal of a segment of a business.

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SFAS 144 is effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. The adoption of this Statement had no impact
on the Companys operating results or financial position.

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).
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. The statement is
effective for exit or disposal activities initiated after
December 31, 2002. The Company is in the process of determining
the impact of adopting SFAS 146 in connection with its December
2002 restructuring activities.

Reclassification: Certain items in the 2001 and 2000 Consolidated Financial
Statements have been reclassified to conform to the 2002 presentation.

Note B  Income Taxes

Income tax expense or benefit was based on loss or income before income taxes
as follows:

|                                  |  |                          |            |      |  |      |           |  |  |   |            |  
|--------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | --------- |  |  | - | ---------- | -
|                                  |  | Year Ended September 30,
|                                  |  |                         
|                                  |  | 2002                     |            | 2001 |  | 2000
|                                  |  |                          |            |      |  |     
|Domestic                          |  | $                        | (3,666,923 | )    |  | $    | 2,968,919 |  |  | $ | 575,232    |  
|Foreign                           |  |                          | 2,386,361  |      |  |      | 332,950   |  |  |   | (1,033,669 | )
|                                  |  |                          |            |      |  |      |           |  |  |   |            |  
|(Loss) income before income taxes |  | $                        | (1,280,562 | )    |  | $    | 3,301,869 |  |  | $ | (458,437   | )
|                                  |  |                          |            |      |  |      |           |  |  |   |            |  

The components of income tax expense or benefit recorded by the Company are as
follows:

|                                   |         |   |                          |         |      |   |           |          |   |   |          |          |  
|---------------------------------- | ------- | - | ------------------------ | ------- | ---- | - | --------- | -------- | - | - | -------- | -------- | -
|                                   |         |   | Year Ended September 30,
|                                   |         |   |                         
|                                   |         |   | 2002                     |         | 2001 |   | 2000     
|                                   |         |   |                          |         |      |   |          
|Current:                           |         |   |                          |         |      |   |           |          |   |   |          |         
|                                   | Federal |   | $                        |        |      |   | $         | 893,000  |   |   | $        |         |  
|                                   | State   |   |                          | 14,000  |      |   |           | 163,000  |   |   |          | 6,000    |  
|                                   | Foreign |   |                          | 254,000 |      |   |           | (805,000 | ) |   |          |         |  
|                                   |         |   |                          |         |      |   |           |          |   |   |          |         
|                                   |         |   | 268,000                  |         |      |   | 251,000   |          |   |   | 6,000    |         
|                                   |         |   |                          |         |      |   |           |          |   |   |          |         
|                                   |         |   |                          |         |      |   |           |          |   |   |          |         
|Deferred:                          |         |   |                          |         |      |   |           |          |   |   |          |         
|                                   | Federal |   |                          | 760,000 |      |   |           | 203,000  |   |   |          | 145,000  |  
|                                   | State   |   |                          | 74,000  |      |   |           | 20,000   |   |   |          | 14,000   |  
|                                   | Foreign |   |                          | 9,000   |      |   |           | 678,000  |   |   |          | (333,000 | )
|                                   |         |   |                          |         |      |   |           |          |   |   |          |         
|                                   |         |   | 843,000                  |         |      |   | 901,000   |          |   |   | (174,000 | )       
|                                   |         |   |                          |         |      |   |           |          |   |   |          |         
|Total income tax expense (benefit) |         | $ | 1,111,000                |         |      | $ | 1,152,000 |          |   | $ | (168,000 | )       
|                                   |         |   |                          |         |      |   |           |          |   |   |          |         

A reconciliation of income tax expense or benefit to the statutory rate of 34%
is as follows:

|                                                |  |                          |           |      |  |      |           |   |  |   |          |  
|----------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | -------- | -
|                                                |  | Year Ended September 30,
|                                                |  |                         
|                                                |  | 2002                     |           | 2001 |  | 2000
|                                                |  |                          |           |      |  |     
|Statutory rate applied to pre-tax (loss) income |  | $                        | (435,000  | )    |  | $    | 1,123,000 |   |  | $ | (156,000 | )
|Tax credits                                     |  |                          | 47,000    |      |  |      | 125,000   |   |  |   | (72,000  | )
|Change in valuation allowance                   |  |                          | 1,513,000 |      |  |      | (251,000  | ) |  |   | 36,000   |  
|Other                                           |  |                          | (14,000   | )    |  |      | 155,000   |   |  |   | 24,000   |  
|                                                |  |                          |           |      |  |      |           |   |  |   |          |  
|Total income tax expense (benefit)              |  | $                        | 1,111,000 |      |  | $    | 1,152,000 |   |  | $ | (168,000 | )
|                                                |  |                          |           |      |  |      |           |   |  |   |          |  

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Significant components of federal and state deferred tax assets as of September
30 are as follows:

|                          |                                                                   |   |               |           |      |   |           |         | 
|------------------------- | ----------------------------------------------------------------- | - | ------------- | --------- | ---- | - | --------- | ------- | 
|                          |                                                                   |   | September 30,
|                          |                                                                   |   |              
|                          |                                                                   |   | 2002          |           | 2001
|                          |                                                                   |   |               |           |     
|Deferred tax assets:      |                                                                   |   |               |           |      |   |           |        
|                          | Net operating loss                                                |   | $             | 1,123,000 |      |   | $         | 477,000 | 
|                          | Business credit carryforwards and
alternative minimum tax credits |   |               | 666,000   |      |   |           | 557,000 | 
|                          | Inventory valuation reserves                                      |   |               | 223,000   |      |   |           | 203,000 | 
|                          | Other domestic and foreign differences                            |   |               | 48,000    |      |   |           | 153,000 | 
|                          |                                                                   |   |               |           |      |   |           |        
|Gross deferred tax assets |                                                                   |   | 2,060,000     |           |      |   | 1,390,000 |        
|Valuation allowances      |                                                                   |   | (2,060,000    | )         |      |   | (547,000  | )      
|                          |                                                                   |   |               |           |      |   |           |        
|Net deferred tax assets   |                                                                   | $ |              |           |      | $ | 843,000   |        
|                          |                                                                   |   |               |           |      |   |           |        

At September 30, 2002, the Company has domestic tax loss carryforwards of
approximately $3,010,000, which expire in 2016. In addition, the Company had
domestic investment tax credits and research and development credit
carryforwards of approximately $523,000, which are available to offset future
income tax. The credits expire in varying amounts through September 2020.
Domestic alternative minimum tax credits of approximately $143,000 are
available to offset future income tax with no expiration date. These tax
benefits, together with future tax deductions from the reversal of temporary
differences, comprise the net deferred tax assets. Deferred tax assets have
been offset by a valuation allowance as deemed necessary based on the Companys
estimates of its future sources of taxable income and the expected timing of
temporary difference reversals.

Undistributed earnings of the Companys foreign subsidiaries amounted to
approximately $3,478,000 at September 30, 2002. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. and state
income taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical because of the
complexities of the calculation.

Cash tax payments for the years ended September 30, 2002, 2001 and 2000 were
$226,000, $20,000 and $58,000, respectively.

Note C  Business, Operations and Geographic Information

Based on the Companys organizational structure and the manner in which
performance is assessed and operating decisions are made, the Company operates
in one worldwide business segment  the sale of printing equipment and related
maintenance contracts, spare parts, supplies and consumable items. The Company
has developed digital printing systems to produce a variety of
documents for the publishing, direct mail, legal, financial services
and commercial printing industries. Its primary products provide
operating flexibility and efficiency through sophisticated software and paper
handling mechanisms and produce quality alphanumeric and machine-readable
print.

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Currently, the Companys manufacturing operations are located in the United
States and Canada, and its sales and service operations are located in the
United States, the United Kingdom and France. Subsequent to yearend, the
Company announced plans to consolidate its manufacturing and engineering
operations in Canada. See Note K. The Companys products are marketed
worldwide. The following is a summary of the Companys revenues and long-lived
assets for the geographic areas in which the Company has operations:

|                      |                |   |                               |            |      |   |            |            |  |   |            |            | 
|--------------------- | -------------- | - | ----------------------------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                      |                |   | Year Ended September 30, 2000
|                      |                |   |                              
|                      |                |   | 2002                          |            | 2001 |   | 2000      
|                      |                |   |                               |            |      |   |           
|Total revenues (a):   |                |   |                               |            |      |   |            |            |  |   |            |           
|                      | United States  |   | $                             | 42,523,182 |      |   | $          | 31,601,106 |  |   | $          | 16,399,764 | 
|                      | United Kingdom |   |                               | 6,170,228  |      |   |            | 6,950,380  |  |   |            | 6,669,297  | 
|                      | France         |   |                               | 3,344,684  |      |   |            | 3,597,398  |  |   |            | 4,139,429  | 
|                      | Canada         |   |                               | 121,688    |      |   |            |           |  |   |            |           | 
|                      | Australia      |   |                               | 244,559    |      |   |            | 929,543    |  |   |            | 1,717,278  | 
|                      |                |   |                               |            |      |   |            |            |  |   |            |           
|Consolidated revenues |                | $ | 52,404,341                    |            |      | $ | 43,078,427 |            |  | $ | 28,925,768 |           
|                      |                |   |                               |            |      |   |            |            |  |   |            |           

|                               |                |   |                    |           |      |   |           |         |  |   |         |         | 
|------------------------------ | -------------- | - | ------------------ | --------- | ---- | - | --------- | ------- |  | - | ------- | ------- | 
|                               |                |   | September 30, 2000
|                               |                |   |                   
|                               |                |   | 2002               |           | 2001 |   | 2000     
|                               |                |   |                    |           |      |   |          
|Long-lived assets:             |                |   |                    |           |      |   |           |         |  |   |         |        
|                               | United States  |   | $                  | 1,148,636 |      |   | $         | 915,905 |  |   | $       | 684,185 | 
|                               | United Kingdom |   |                    | 44,284    |      |   |           | 74,086  |  |   |         | 98,543  | 
|                               | France         |   |                    | 28,878    |      |   |           | 27,931  |  |   |         | 25,254  | 
|                               | Canada         |   |                    | 3,537,589 |      |   |           |        |  |   |         |        | 
|                               | Australia      |   |                    |          |      |   |           | 19,887  |  |   |         | 78,415  | 
|                               |                |   |                    |           |      |   |           |         |  |   |         |        
|Consolidated long-lived assets |                | $ | 4,759,387          |           |      | $ | 1,037,809 |         |  | $ | 886,397 |        
|                               |                |   |                    |           |      |   |           |         |  |   |         |        

(a)  Revenues are attributed to countries based on the location of each countrys operations.

Export sales to customers were $4,186,000, $2,396,000 and $2,963,000 for the
years ended September 30, 2002, 2001 and 2000, respectively.

In fiscal 2002, 2001 and 2000, sales to one customer were $14,461,000,
$24,261,000 and $9,265,000, 28%, 57% and 32%, respectively, of total sales for
the fiscal year. At September 30, 2002 and 2001, accounts receivable from this
customer totaled $1,946,000 and $5,857,000, 18% and 58%, respectively, of total
trade accounts receivable as of that date. In addition, as of September 30,
2001, the Company had deferred revenue of $632,000 related to this customer.

Note D  Stock Options and Benefit Plans

During fiscal 2002, the Company had four stock option programs, the 1986 Stock
Option Plan (the 1986 Plan), the 1991 Stock Plan (the 1991 Plan), the 1997
Stock Plan (the 1997 Plan) and the 2000 Stock Plan (the 2000 Plan) for its key
employees and non-employee directors. The 1986 Plan was adopted in October
1986, the 1991 Plan in March 1991, the 1997 Plan in June 1997 and the 2000 Plan
in March 2001. Stock options under the 1986 Plan are non-qualified, while
those under the 1991 Plan, the 1997 Plan and the 2000 Plan can be granted as
either non-qualified or incentive stock options. The 1991 Plan, the 1997 Plan
and the 2000 Plan also authorize the granting of awards in the forms of stock
appreciation rights, restricted stock or deferred stock. In all cases, subject
to the provisions of the plans, the board of directors has complete discretion
in establishing the terms and conditions of each option granted to the
employees of the Company. During fiscal 1995, an executive officer exercised
stock options for a $148,966 interest-bearing note, collateralized by the
underlying stock, described in detail in Note H.

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A summary of outstanding options and shares reserved under each plan for the
last three fiscal years is as follows:

The 1986 Plan

At September 30, 2002, 2001 and 2000, there were no options outstanding under
the 1986 Plan, with 188,660 shares reserved for future grants.

The 1991 Plan

|                            |                   |  |            |        |             |  |           |         |          |   |          |      | 
|--------------------------- | ----------------- |  | ---------- | ------ | ----------- |  | --------- | ------- | -------- | - | -------- | ---- | 
|                            |                   |  |            |        |             |  |           |         |          |   | Weighted
|                            |                   |  | Shares     |        |             |  |           |         | Average 
|                            |                   |  | Reserved   |        |             |  |           |         | Exercise
|                            |                   |  | for Future |        | Options     |  | Price    
|                            |                   |  | Grants     |        | Outstanding |  | per Share
|                            |                   |  |            |        |             |  |          
|Balance, September 30, 1999 |                   |  | 70,050     |        |             |  | 212,694   |         |          | $ | 6.71     |     
|                            | Options exercised |  |            |       |             |  |           | (17,700 | )        |   |          | 3.65 | 
|                            | Options canceled  |  |            | 47,160 |             |  |           | (47,160 | )        |   |          | 7.26 | 
|                            |                   |  |            |        |             |  |           |         |          |   |          |     
|                            |                   |  |            |        |             |  |           |         |          |   |          |     
|Balance, September 30, 2000 |                   |  | 117,210    |        |             |  | 147,834   |         |          |   | 6.91     |     
|                            | Options canceled  |  |            | 3,000  |             |  |           | (3,000  | )        |   |          | 8.88 | 
|                            |                   |  |            |        |             |  |           |         |          |   |          |     
|                            |                   |  |            |        |             |  |           |         |          |   |          |     
|Balance, September 30, 2001 |                   |  | 120,210    |        |             |  | 144,834   |         |          |   | 6.87     |     
|                            | Options canceled  |  |            | 2,500  |             |  |           | (2,500  | )        |   |          | 7.75 | 
|                            |                   |  |            |        |             |  |           |         |          |   |          |     
|                            |                   |  |            |        |             |  |           |         |          |   |          |     
|Balance, September 30, 2002 |                   |  | 122,710    |        |             |  | 142,334   |         |          | $ | 6.85     |     
|                            |                   |  |            |        |             |  |           |         |          |   |          |     

At September 30, 2002, 2001 and 2000, there were 142,334, 144,834 and 140,709
options, respectively, currently exercisable under the 1991 Plan at prices of
$4.38 to $9.63 per share. No options were granted under the 1991 Plan in 2002,
2001 or 2000.

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The 1997 Plan

|                            |                   |  |            |          |             |  |           |         |          |   |          |      | 
|--------------------------- | ----------------- |  | ---------- | -------- | ----------- |  | --------- | ------- | -------- | - | -------- | ---- | 
|                            |                   |  |            |          |             |  |           |         |          |   | Weighted
|                            |                   |  | Shares     |          |             |  |           |         | Average 
|                            |                   |  | Reserved   |          |             |  |           |         | Exercise
|                            |                   |  | for Future |          | Options     |  | Price    
|                            |                   |  | Grants     |          | Outstanding |  | per Share
|                            |                   |  |            |          |             |  |          
|Balance, September 30, 1999 |                   |  | 316,300    |          |             |  | 433,700   |         |          | $ | 3.00     |     
|                            | Options exercised |  |            |         |             |  |           | (20,283 | )        |   |          | 3.15 | 
|                            | Options granted   |  |            | (108,500 | )           |  |           | 108,500 |          |   |          | 2.77 | 
|                            | Options canceled  |  |            | 75,167   |             |  |           | (75,167 | )        |   |          | 2.78 | 
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|Balance, September 30, 2000 |                   |  | 282,967    |          |             |  | 446,750   |         |          |   | 2.99     |     
|                            | Options granted   |  |            | (182,700 | )           |  |           | 182,700 |          |   |          | 4.01 | 
|                            | Options canceled  |  |            | 4,100    |             |  |           | (4,100  | )        |   |          | 3.39 | 
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|Balance, September 30, 2001 |                   |  | 104,367    |          |             |  | 625,350   |         |          |   | 3.28     |     
|                            | Options exercised |  |            |         |             |  |           | (17,350 | )        |   |          | 3.27 | 
|                            | Options granted   |  |            | (100,000 | )           |  |           | 100,000 |          |   |          | 3.15 | 
|                            | Options canceled  |  |            | 37,050   |             |  |           | (37,050 | )        |   |          | 3.06 | 
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|                            |                   |  |            |          |             |  |           |         |          |   |          |     
|Balance, September 30, 2002 |                   |  | 41,417     |          |             |  | 670,950   |         |          | $ | 3.28     |     
|                            |                   |  |            |          |             |  |           |         |          |   |          |     

At September 30, 2002, 2001 and 2000, there were 266,858, 237,858 and 70,767
options, respectively, currently exercisable under the 1997 Plan, at prices of
$2.13 to $6.50 per share.

The 2000 Plan

|                            |                 |  |            |         |             |  |           |        |          |   |          |      | 
|--------------------------- | --------------- |  | ---------- | ------- | ----------- |  | --------- | ------ | -------- | - | -------- | ---- | 
|                            |                 |  |            |         |             |  |           |        |          |   | Weighted
|                            |                 |  | Shares     |         |             |  |           |        | Average 
|                            |                 |  | Reserved   |         |             |  |           |        | Exercise
|                            |                 |  | for Future |         | Options     |  | Price    
|                            |                 |  | Grants     |         | Outstanding |  | per Share
|                            |                 |  |            |         |             |  |          
|Balance, September 30, 2001 |                 |  | 1,250,000  |         |             |  |          |        |          | $ |         |     
|                            | Options granted |  |            | (70,000 | )           |  |           | 70,000 |          |   |          | 3.78 | 
|                            |                 |  |            |         |             |  |           |        |          |   |          |     
|                            |                 |  |            |         |             |  |           |        |          |   |          |     
|Balance, September 30, 2002 |                 |  | 1,180,000  |         |             |  | 70,000    |        |          | $ | 3.78     |     
|                            |                 |  |            |         |             |  |           |        |          |   |          |     

As of September 30, 2002, no options were currently exercisable under the 2000
Plan.

Total shares under all plans reserved for options and restricted stock are
1,532,787 shares. Total compensation expense for stock-based compensation was $0,
$86,626 and $86,630 in each of the three years, respectively.

Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement.

The fair value of each option grant is established on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 2002, 2001 and 2000:

|                                |  |         |     |         |  |         |     |   |  |  |     |  
|------------------------------- |  | ------- | --- | ------- |  | ------- | --- | - |  |  | --- | -
|                                |  | 2002    |     | 2001    |  | 2000   
|                                |  |         |     |         |  |        
|Expected dividend yield         |  |         | 0   | %       |  |         | 0   | % |  |  | 0   | %
|Expected stock price volatility |  |         | 53  |         |  |         | 49  |   |  |  | 50  |  
|Risk-free interest rate         |  |         | 5.0 |         |  |         | 6.6 |   |  |  | 5.9 |  
|Expected life of options        |  | 7 years |     | 7 years |  | 7 years

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The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting periods. The Companys pro
forma net loss or income, and net loss or earnings per share, for each of the
three years ended September 30, 2002, 2001 and 2000, respectively, were as
follows:

|                                                               |  |                          |  |  |  |      |            |      |  |      |           |  |  |   |          |  
|-------------------------------------------------------------- |  | ------------------------ |  |  |  | ---- | ---------- | ---- |  | ---- | --------- |  |  | - | -------- | -
|                                                               |  | Year Ended September 30,
|                                                               |  |                         
|                                                               |  |                          |  |  |  | 2002 |            | 2001 |  | 2000
|                                                               |  |                          |  |  |  |      |            |      |  |     
|Net (loss) income, pro forma                                   |  |                          |  |  |  | $    | (2,595,303 | )    |  | $    | 1,916,402 |  |  | $ | (400,180 | )
|Basic and diluted (loss) earnings per share, pro forma         |  |                          |  |  |  |      | (0.42      | )    |  |      | 0.31      |  |  |   | (0.07    | )
|Weighted average fair value of options
granted during the year |  |                          |  |  |  |      | 2.04       |      |  |      | 2.40      |  |  |   | 1.68     |  

The following table summarizes information concerning currently outstanding and
exercisable options:

|                |                |               |  |                     |         |                     |  |             |      |           |   |      |      |  |  |          |         |  |   |      |      | 
|--------------- | -------------- | ------------- |  | ------------------- | ------- | ------------------- |  | ----------- | ---- | --------- | - | ---- | ---- |  |  | -------- | ------- |  | - | ---- | ---- | 
|                |                |               |  | Options Outstanding |         | Options Exercisable
|                |                |               |  |                     |         |                    
|                |                |               |  |                     |         |                     |  | Weighted    |      | Weighted  |   |      |      |  |  | Weighted
|                |                |               |  |                     |         |                     |  | Average     |      | Average   |   |      |      |  |  | Average 
|                |                |               |  |                     |         |                     |  | Remaining   |      | Exercise  |   |      |      |  |  | Exercise
|Range of        |                | Number        |  | Contractual         |         | Price               |  | Number      |      | Price    
|Exercise Prices |                | Outstanding   |  | Life in Years       |         | per Share           |  | Outstanding |      | per Share
|                |                |               |  |                     |         |                     |  |             |      |          
|                | $1.750 - 4.750 |               |  | 723,284             |         |                     |  | 4.72        |      |           | $ | 3.23 |      |  |  | 266,192  |         |  | $ | 3.31 |     
|                |                | 5.063 - 7.750 |  |                     | 119,500 |                     |  |             | 2.65 |           |   |      | 6.07 |  |  |          | 102,500 |  |   |      | 6.08 | 
|                |                | 8.125 - 9.625 |  |                     | 40,500  |                     |  |             | 2.37 |           |   |      | 9.34 |  |  |          | 40,500  |  |   |      | 9.34 | 
|                |                |               |  |                     |         |                     |  |             |      |           |   |      |      |  |  |          |         |  |   |     
|                | $1.750 - 9.625 |               |  | 883,284             |         |                     |  | 4.33        |      |           | $ | 3.89 |      |  |  | 409,192  |         |  | $ | 4.60 |     

Defined Contribution Plans

The Company has a defined contribution salary deferral plan covering
substantially all United States employees under Section 401(k) of the Internal
Revenue Code. The plan allows eligible employees to make contributions up to
the maximum amount provided under the Code. The Company makes an annual
minimum contribution equal to 50% of the participants before-tax contributions
up to 6% of base salary. The expenses related to the plan were $182,000,
$127,000 and $120,000, for the years ended September 30, 2002, 2001 and 2000,
respectively.

The Company has a defined contribution plan covering substantially all Canadian
employees. The expense related to the plan for fiscal 2002 was $173,000.
Similarly, the Company also has defined contribution plans for employees in the
United Kingdom and France. For the years ended September 30, 2002, 2001 and
2000, respectively, the expenses related to the plan for employees in the
United Kingdom were $74,000, $69,000 and $64,000, and for the employees in
France were $23,000, $28,000 and $21,000.

Note E  Acquisition of Delphax Systems, Name Change and Workforce Reduction

On December 20, 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 is engaged in the
development, manufacture and distribution of print engines, print management
software and a range of digital printing systems incorporating the Acquired
Companys proprietary electron-beam imaging technology. The Acquired Company
was the supplier of the print engines used in a number of the Companys
products and was additionally the supplier of print engines for a
number of non-competing original equipment manufacturers.

The acquisition purchase price consisted of
approximately $15.8 million in cash and approximately $835,000
in acquisition related expenses. The Company acquired
approximately $14.9 million in current assets,
approximately $4.9 million in equipment and fixtures,
approximately $3.1 million in current liabilities and did not
generate any goodwill. 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

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shareholder vote at the March 21, 2002 annual meeting of shareholders, the
Company changed its name from Check Technology Corporation to Delphax
Technologies Inc. The wholly owned subsidiaries of the Company have also been
renamed. New and former names are as follows:

|                                                                                                                  |  |                                                                                                                 |  |                                           
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------
|New Name                                                                                                          |  | Former Name                                                                                                     |  | Country                                   
|                                                                                                                  |  |                                                                                                                 |  |                                           
|Delphax Technologies Inc.
Delphax Technologies Canada Ltd.
Delphax Technologies Limited
Delphax Technologies S.A. |  | Check Technology Corporation
Check Technology Canada Ltd.
Check Technology Limited
Check Technology France S.A. |  | United States
Canada
United Kingdom
France

The Company has continued to use the purchased assets in substantially
the same manner as used by the Acquired Company. As part of the acquisition,
the Company anticipated that efficiencies could be achieved in integrating the
two companies, and, as a result, included in accrued expenses in the
Consolidated Balance Sheets and in the cost of the acquisition $875,000 for
restructuring in accordance with SFAS 141. On April 23, 2002, the Company
effected a workforce reduction, eliminating approximately 40 positions in the
Canadian subsidiary. Benefits were paid on either a lump-sum basis or over
time. As of September 30, 2002, the accrued liability for benefits payable in
the future was $232,000. It is estimated that this balance will be sufficient
to cover the remaining obligation under the workforce reduction plan.

The following unaudited pro forma combined summary statements of operations for
the three-month period and year ended September 30, 2002 and 2001 were prepared
in accordance with SFAS 141 and SFAS 142 and assumes the acquisition had
occurred at the beginning of the year periods presented. The following pro
forma data reflects adjustments for interest expense in both periods, and the
year ended September 30, 2001 includes an expense of approximately $13.1
million for inventory reserves and an expense of approximately $2.0 million for
write-down of equipment and fixtures recorded by the Acquired Company
prior to the acquisition. 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 September 30, |            | Year Ended September. 30,
|                                        |  |                                  |            |                          
|                                        |  | 2002                             |            | 2001                      |  | 2002 |            | 2001
|                                        |  |                                  |            |                           |  |      |            |     
|Net sales                               |  | $                                | 14,028,746 |                           |  | $    | 17,311,829 |      |  | $ | 58,088,597 |   |  | $ | 73,054,074  |  
|                                        |  |                                  |            |                           |  |      |            |      |  |   |            |   |  |   |             |  
|Net loss                                |  |                                  | (2,441,564 | )                         |  |      | (3,589,158 | )    |  |   | (2,759,639 | ) |  |   | (14,096,016 | )
|                                        |  |                                  |            |                           |  |      |            |      |  |   |            |   |  |   |             |  
|Basic and diluted loss per common share |  |                                  | (0.40      | )                         |  |      | (0.58      | )    |  |   | (0.45      | ) |  |   | (2.28       | )

Note F  Bank Notes Payable

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, $3.5 million of which
remained outstanding as of September 30, 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. The
revolving credit commitment was $14.5 million as of September 30, 2002, and in
December 2002 was reduced to $12.5 million. It is subject to a commitment fee
of 0.5% per annum on the unused portion of the commitment. As of September 30,
2002, revolving loans outstanding were $11.8 million. Term loans and revolving
loans, at the Companys election, may be outstanding as base rate loans or
Eurodollar loans, provided that $3.0 million of the principal amount of the
revolving loans bear interest at the fixed rate of 7.35% per annum.

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Outstanding base rate loans accrue interest at the banks prime rate plus 0.5%.
Outstanding Eurodollar loans accrue interest at adjusted LIBOR plus
3.0%. As of
September 30, 2002, $280,000 was outstanding as base rate loans and $15.0
million was outstanding as Eurodollar loans, at a weighted average interest
rate of approximately 6.5%. Effective December 18, 2002, the
applicable interest rates increased to prime plus 1.0% and to
adjusted LIBOR plus 4.0%.

As of September 30, 2002, the Company was not in compliance with certain
financial covenants of its credit agreement with its bank lender. The lender
entered into a forbearance agreement with the Company on September 9, 2002,
which was extended on October 18, 2002. On December 18, 2002, the lender and
the Company amended the agreement and the lender waived the prior defaults.
Under the amendment, installment payments of $250,000 are due on the term loan
on December, 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, and
the balance of the term loans will be due on December 31, 2003. The amendment
reduces the revolving credit commitment 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. As of December 31, 2002, the balance due on
the credit facility will be a current liability. The Company believes, but
cannot assure, that it will be able to fully meet the terms of the amended
credit agreement. The Companys ability to fund its future working capital
requirements beyond December 31, 2003 is dependent upon its ability to
extend or renegotiate financing at the end of that 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.

In addition to the credit facility, the Companys
United Kingdom subsidiary has a guarantee facility with a bank to
provide a VAT Deferred Bond. These is no security deposit required
under the agreement.

Cash interest payments, principally comprised of
interest on the credit facility, but including interest on capital
leases included in Note G below, for the years ended September 30,
2002 and 2001, and facility fees on the credit facility for the year
ended September 30, 2000, were $636,484, $50,175 and $6,421,
respectively.

Note G  Capital Leases

|                                                                                                                                            |  |               |        | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | 
|                                                                                                                                            |  | September 30,
|                                                                                                                                            |  | 2002         
|                                                                                                                                            |  |              
|Capital lease obligations on computer equipment,
due over 24 months in monthly installments of
$3,629, including interest at 21.4% to 22.1% |  | $             | 61,578 | 
|Less current portion of lease obligations                                                                                                   |  |               | 33,361 | 
|                                                                                                                                            |  |               |        | 
|Long-term portion of lease obligations                                                                                                      |  | $             | 28,217 | 
|                                                                                                                                            |  |               |        | 

Cash payment of interest in fiscal 2002 was $3,018. As of September 30, 2002,
future payments for capital lease obligations, including interest, were as
follows:

|                          |      |                                    |   |             |         |  
|------------------------- | ---- | ---------------------------------- | - | ----------- | ------- | -
|                          |      |                                    |   | Capital    
|                          |      |                                    |   | Lease      
|                          |      |                                    |   | Obligations
|                          |      |                                    |   |            
|Year ending September 30: |      |                                    |   |            
|                          | 2003 |                                    | $ | 43,545      |        
|                          | 2004 |                                    |   | 30,698      |        
|                          |      |                                    |   |            
|                          |      | Total payments                     |   |             | 74,243  |  
|                          |      | Less amounts representing interest |   |             | (12,665 | )
|                          |      |                                    |   |            
|                          |      | Present value of lease payments    |   | $           | 61,578  |  
|                          |      |                                    |   |            

Note H  Executive Loan

During fiscal 1995, the President and Chief Executive Officer exercised 40,000
options to purchase common stock at $2.00 per share, by executing a $148,996,
five-year, full recourse note, bearing interest at a floating rate, under the
Executive Loan Program. The purpose of the loan was to provide cash for the
exercise of the options and to pay the related income taxes. When exercised,
the Companys stock had a market value of $6.375 per share. In 1998, the loan
terms were amended to change the loan from full recourse to non-recourse, and
the floating rate was fixed at 5.25%. In May of fiscal 2000, the Company
extended the term of the loan to May 2001 and granted forgiveness of the loan
ratably over the extension period. These modifications resulted in the options
being treated as a fixed stock award. The Company recognized the fair market
value of the stock award of $225,000 over the extension period, which concluded
in the third quarter of fiscal 2001. As a result, no expense was incurred in
fiscal 2002; $135,186 was recognized as compensation expense related to the
stock award in fiscal 2001. Over the life of the loan, total principal
payments made by the executive were $54,671.

Note I  Closure of the Companys Australian Subsidiary

In February 2001, the Company committed to a plan to close its subsidiary in
Australia, developed a formal exit plan to cease operations effective September
30, 2001, and communicated the plan to all 14 full- and part-time employees of
the subsidiary.

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The Company determined that operations in the market served by the Australian
subsidiary could be more profitably served by alternative means, including
independent distributors and sales agents. At the commitment date, exit costs
were estimated at $115,000, comprised solely of termination benefits, which
were included with selling, general and administrative expenses in the
Consolidated Statements of Operations and with accrued expenses in the
Consolidated Balance Sheets. Customer service and transition issues delayed
the office closing until the first quarter of fiscal 2002. As a result of this
delay and refinement of closing cost estimates, an additional charge of
$100,000 was recorded in the fourth quarter of fiscal 2001, bringing the total
one-time charge to $215,000. As of December 31, 2001, operations of the
subsidiary had ceased and all employees were terminated.

Summary financial activity related to the closure was as follows:

|                                     |  |                   |         |               |  |            |         |         |  |                    |         |           |  |                    |         |           |  |   |         |  |  |   |          |   |  |   |   | 
|------------------------------------ |  | ----------------- | ------- | ------------- |  | ---------- | ------- | ------- |  | ------------------ | ------- | --------- |  | ------------------ | ------- | --------- |  | - | ------- |  |  | - | -------- | - |  | - | - | 
|                                     |  |                   |         |               |  | Additional |         |         |  |                    |         |           |  |                    |         |           |  |   |         |  |  |   |          |   |  |  
|                                     |  | Initial           |         | Fiscal 2001   |  | Charges    |         |         |  |                    |         | Remaining |  | Charges            |         | Remaining
|                                     |  | Reserve           |         | Restructuring |  | Against    |         | Asset   |  | Reserve            |         | Against   |  | Reserve           
|                                     |  | February 19, 2001 |         | Charges       |  | Reserve    |         | Reserve |  | September 30, 2001 |         | Reserve   |  | September 30, 2002
|                                     |  |                   |         |               |  |            |         |         |  |                    |         |           |  |                   
|Severance                            |  | $                 | 115,000 |               |  | $          | 56,000  |         |  | $                  | (22,000 | )         |  | $                  |        |           |  | $ | 149,000 |  |  | $ | (149,000 | ) |  | $ |  | 
|Lease termination
and other
expenses |  |                   |        |               |  |            | 28,000  |         |  |                    |        |           |  |                    |        |           |  |   | 28,000  |  |  |   | (28,000  | ) |  |   |  | 
|Loss on disposal
of fixed assets     |  |                   |        |               |  |            | 16,000  |         |  |                    |        |           |  |                    | (16,000 | )         |  |   |        |  |  |   |         |   |  |   |  | 
|                                     |  |                   |         |               |  |            |         |         |  |                    |         |           |  |                    |         |           |  |   |         |  |  |   |          |   |  |   |   | 
|                                     |  | $                 | 115,000 |               |  | $          | 100,000 |         |  | $                  | (22,000 | )         |  | $                  | (16,000 | )         |  | $ | 177,000 |  |  | $ | (177,000 | ) |  | $ |  | 
|                                     |  |                   |         |               |  |            |         |         |  |                    |         |           |  |                    |         |           |  |   |         |  |  |   |          |   |  |   |   | 

Note J  Commitments and Contingencies

Building, equipment and automobile rentals under operating leases were
$1,602,412, $1,033,956 and $1,235,598 for the years ended September 30, 2002,
2001 and 2000, respectively.

The Company leases its corporate offices under a fifteen-year agreement
expiring on September 15, 2010. Annual rental under the lease is $420,000,
increasing to $481,000 in the eleventh year and thereafter. The Company is
obligated to pay operating expenses and real estate taxes incurred by the
landlord. The Company has the right to terminate such lease at the end of the
tenth lease year, subject to a termination fee.

The Companys Canadian subsidiary leases two facilities totaling 202,916 square
feet of office and manufacturing space in Mississauga, a suburb of Toronto,
Canada, a portion of which is subleased to another tenant. The combined gross
annual rent is $667,465, increasing to $712,549 in September 2003. The related
lease agreements expire in 2005 and 2006, with various renewal options. The
sublease agreement, at a gross annual rent of $118,835, expires in December 2003, with an option to renew.

The Companys subsidiary in the United Kingdom leases office space under a
lease expiring in 2013. Annual rental under the lease is $180,000, subject to
adjustment every five years, plus a pro rata share of operating expenses
incurred by the landlord.

Total future minimum rental commitments for operating leases of facilities,
sales offices, equipment and automobiles are
$10,495,037 and are due as follows: fiscal years ending September 30, 2003 
$1,759,252; 2004  $1,744,232; 2005  $1,637,435; 2006  $1,472,421; 2007 
$874,450; thereafter  $3,007,247.

Note K  Subsequent Event

On December 4, 2002, the Company announced plans to consolidate its North
American manufacturing and engineering operations at its Canadian subsidiary.
Currently, these operations are divided between the facilities in the United
States and Canada. The Company's worldwide headquarters and marketing
function 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 $1.1 million in
restructuring expenses over the course of the consolidation, which is scheduled
to be completed by the end of calendar 2003. These restructuring
expenses are wholly comprised of employee severance costs unrelated
to the acquisition of the Canadian subsidiary and, therefore, will be
properly charged to operating expense in fiscal 2003.

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.

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Note L  Summarized Quarterly Financial Information (Unaudited)

|                                  |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|--------------------------------- |  | ------------- | ---------- | -------- |  | ------- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                  |  | Quarter Ended
|                                  |  |              
|                                  |  | December 31   |            | March 31 |  | June 30 |            | September 30
|                                  |  |               |            |          |  |         |            |             
|Fiscal 2002                       |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Net sales                         |  | $             | 11,777,542 |          |  | $       | 13,067,039 |              |  | $ | 13,531,014 |   |  | $ | 14,028,746 |  
|Gross profit                      |  |               | 5,628,281  |          |  |         | 6,781,380  |              |  |   | 7,585,343  |   |  |   | 6,890,534  |  
|Income (loss) before income taxes |  |               | 981,761    |          |  |         | (889,658   | )            |  |   | (126,601   | ) |  |   | (1,246,064 | )
|Net income (loss)                 |  |               | 638,761    |          |  |         | (578,958   | )            |  |   | (9,801     | ) |  |   | (2,441,564 | )
|                                  |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Basic earnings (loss) per share   |  |               | 0.10       |          |  |         | (0.09      | )            |  |   | (0.00      | ) |  |   | (0.40      | )
|Diluted earnings (loss) per share |  |               | 0.10       |          |  |         | (0.09      | )            |  |   | (0.00      | ) |  |   | (0.40      | )
|                                  |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Fiscal 2001                       |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Net sales                         |  | $             | 10,945,853 |          |  | $       | 10,861,551 |              |  | $ | 11,015,222 |   |  | $ | 10,255,801 |  
|Gross profit                      |  |               | 5,051,592  |          |  |         | 5,425,819  |              |  |   | 5,258,110  |   |  |   | 5,425,079  |  
|Income before income taxes        |  |               | 722,507    |          |  |         | 388,431    |              |  |   | 740,346    |   |  |   | 1,450,585  |  
|Net income                        |  |               | 510,559    |          |  |         | 178,222    |              |  |   | 452,016    |   |  |   | 1,009,072  |  
|                                  |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Basic earnings per share          |  |               | 0.08       |          |  |         | 0.03       |              |  |   | 0.07       |   |  |   | 0.16       |  
|Diluted earnings per share        |  |               | 0.08       |          |  |         | 0.03       |              |  |   | 0.07       |   |  |   | 0.16       |  

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES

SCHEDULE II   VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|----------- | -- | ---------------------------------------------- |  | ------------------------------- | ----------------------------- | -------- | ---------- | ------------ | ---------- | --------- | ---------- | --------- |  |  |  | ------- | ---------- |  |  | ---------- | - |  | - | --------- | 
|            |    |                                                |  |                                 |                               |          | Balance at |              | Charged to |           | Charged to |           |  |  |  |         | Balance at
|            |    |                                                |  |                                 |                               |          | Beginning  |              | Costs and  |           | Other      |           |  |  |  |         | End       
|Description |    | of Period                                      |  | Expenses                        |                               | Accounts |            | (Deductions) |            | of Period
|            |    |                                                |  |                                 |                               |          |            |              |            |          
|            | I. |                                                |  | Allowance for doubtful accounts |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |          
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|            |    |                                                |  |                                 | Year ended September 30, 2002 |          | $          | 51,749       |            |           |            | 200,906   |  |  |  | 451     | (a)        |  |  |           |   |  | $ | 253,106   | 
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|            |    |                                                |  |                                 | Year ended September 30, 2001 |          | $          | 51,697       |            |           |            |          |  |  |  | 52      | (a)        |  |  |           |   |  | $ | 51,749    | 
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|            |    |                                                |  |                                 | Year ended September 30, 2000 |          | $          | 50,000       |            |           |            | 1,697     |  |  |  |        |            |  |  |           |   |  | $ | 51,697    | 
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|II.         |    | Reserve for obsolete and slow
moving inventory |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   | 
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|            |    |                                                |  |                                 | Year ended September 30, 2002 |          | $          | 804,000      |            |           |            | 2,285,638 |  |  |  | (47,000 | )(a)       |  |  | (1,669,000 | ) |  | $ | 1,373,638 | 
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|            |    |                                                |  |                                 | Year ended September 30, 2001 |          | $          | 495,000      |            |           |            | 302,000   |  |  |  | 7,000   | (a)        |  |  |           |   |  | $ | 804,000   | 
|            |    |                                                |  |                                 |                               |          |            |              |            |           |            |           |  |  |  |         |            |  |  |            |   |  |   |           | 
|            |    |                                                |  |                                 | Year ended September 30, 2000 |          | $          | 480,000      |            |           |            | 1,000     |  |  |  | 61,000  | (a)        |  |  | (47,000    | ) |  | $ | 495,000   | 



---

|(a) |  | Reflects the effects of foreign currency fluctuations.
|--- |  | ------------------------------------------------------

47