##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES AND EXCHANGE ACT OF 1934
| 
|  |  | For the fiscal year ended September 30, 2005                                                

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,                                            |  | 55343-9420                              
|Minnetonka, Minnesota(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)





o þ


o þ


þ o


þ


o þ


o þ






DOCUMENTS INCORPORATED BY REFERENCE












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##### 










INDEX


|                                                         |  |                                                                                           |    |  |    | 
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I                                                  
|Item 1.                                                  |  | Business                                                                                  |    |  | 3  | 
|Item 1A.                                                 |  | Risk Factors                                                                              |    |  | 9  | 
|Item 2.                                                  |  | Properties                                                                                |    |  | 10 | 
|Item 3.                                                  |  | Legal Proceedings                                                                         |    |  | 10 | 
|Item 4.                                                  |  | Submission of Matters to a Vote of Security
    Holders                                   |    |  | 10 | 
|                                                        
|PART II                                                 
|Item 5.                                                  |  | Market for Registrants Common Equity
    and Related Stockholder Matters                 |    |  | 11 | 
|Item 6.                                                  |  | Selected Financial Data                                                                   |    |  | 12 | 
|Item 7.                                                  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |  | 13 | 
|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 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                   |    |  | 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                        |    |  | 20 | 
|Item 13.                                                 |  | Certain Relationships and Related
    Transactions                                        |    |  | 20 | 
|Item 14.                                                 |  | Principal Accountant Fees and Services                                                    |    |  | 21 | 
|                                                        
|PART IV                                                 
|Item 15.                                                 |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |  | 21 | 
|SIGNATURES                                               |  |                                                                                           | 24 | 
|Third Amendment to Lease - Whitewater Properties I, LLC 
|List of Subsidiaries                                    
|Consent of Grant Thornton LLP                           
|Consent of Ernst & Young LLP                            
|Section 302 Certification of Principal Executive Officer
|Section 302 Certification of Principal Financial Officer
|Section 906 Certification of Principal Executive Officer
|Section 906 Certification of Principal Financial Officer



2



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PART I









|        |         
|------- | --------
|Item 1. | Business

Company Background


Checktronic®


Checktronic


Imaggia MG20 Imaggia MG20 Imaggia


Imaggia II Imaggia MG20 Imaggia II Imaggia II






CR
Series CR900 CR1300 CR Series


3



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CR2000 CR Series




Products










CR Series Imaggia II


Roll-fed Printing Equipment. CR2000 CR Series CR Series CR Series


RS Series RS Series RS Series


Sheet-fed Printing Equipment. Imaggia II
Series, 1 2


4



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Imaggia II Imaggia II Imaggia II IM220 IM300 Imaggia II Imaggia II Imaggia


Checktronic Checktronic Checktronic Checktronic


Finishing Systems. Foliotronic Plus Foliotronic Plus




Pre-press Software and Hardware.


Maintenance, Spare Parts and Supplies.




5



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Sales and Marketing


Organization.


United States Market.


CR Series






International Market. CR Series


Significant Customers




6



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Competition


CR Series Imaggia


Checktronic Imaggia Imaggia




Checktronic






Backlog


Foliotronic.




7



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Manufacturing and Sources of Supply






Research and Development


CR Series CR Series Imaggia CR Series Imaggia CR Series Imaggia


Patents




Employees




Website


www.delphax.com.


8



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|         |             
|-------- | ------------
|Item 1A. | Risk Factors

Market Risk








Interest Rate Risk






Risk Related to Operations






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Limited sales of our new product lines. Acquisition of
    the Delphax Business in December 2001 significantly expanded our
    product lines to include the CR Series and RS Seriesof roll-fed printing equipment. To date, a limited number of
    CR Seriespresses and RS Seriesprint system
    have been sold and there can be no assurance that these products
    can be sold in meaningful numbers in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Reliance on two significant customers. In fiscal 2005, we
    had two significant customers that individually accounted for
    27% and 18% of net sales. We anticipate, but cannot assure, that
    these customers will continue to be significant in fiscal 2006.
    The loss of, or a significant decrease in sales to, either of
    these customers could have a material adverse effect on the
    Companys financial condition and results of operation.                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Requirements for availability of working capital. We
    depend on our revolving credit facilities for working capital.
    The lender has a security interest in substantially all of the
    Companys assets. Our ability to borrow under the credit
    facilities depends on maintaining a borrowing base of eligible
    accounts receivable and, to a lesser extent, eligible inventory
    and complying with financial covenants concerning tangible net
    worth, debt service coverage, interest coverage and maximum
    capital expenditures. If the Company is unable to generate a
    sufficient borrowing base and comply with the financial
    covenants and other requirements of the credit facilities, it
    will limit or prevent borrowing under the credit facilities and
    could have a serious adverse effect on the Company.

9



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Substantial operations in foreign markets. Delphax has
    foreign subsidiaries in Canada, the United Kingdom and France,
    does business in more than 60 countries and generates
    approximately 20% to 30% of its net sales from outside North
    America. The ability to sell products in foreign markets may be
    affected by changes in economic, political or market conditions
    in those foreign markets that are outside the Companys
    control.                                                                                                                                                                                                                                                                                                                                             
|
| | Net sales are subject to fluctuations, which may be
    material. Our net sales and operating results may fluctuate
    from quarter to quarter because the sales cycle is relatively
    long, the size of orders may vary significantly, the
    availability of financing for customers in some countries is
    variable, customers may postpone or cancel orders, and economic,
    political and market conditions in some markets change with
    minimal notice and affect the timing and size of orders. Because
    operating expenses are based on anticipated net sales levels and
    a high percentage of the operating costs are relatively fixed,
    variations in the timing of revenue recognition could result in
    significant fluctuations in operating results from period to
    period.






|        |           
|------- | ----------
|Item 2. | Properties
















|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








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



10



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PART II







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



|                              |                |      |   |       |     |  |   |       | 
|----------------------------- | -------------- | ---- | - | ----- | --- |  | - | ----- | 
|                              |                | High |   |       | Low | 
|                              |                |      |   |       |     | 
|Year ended September 30, 2005 |                |      |   |       |     |  |   |      
|                              | First quarter  |      | $ | 4.350 |     |  | $ | 3.300 | 
|                              | Second quarter |      |   | 4.090 |     |  |   | 2.750 | 
|                              | Third quarter  |      |   | 3.990 |     |  |   | 2.750 | 
|                              | Fourth quarter |      |   | 3.500 |     |  |   | 2.480 | 
|Year ended September 30, 2004 |                |      |   |       |     |  |   |      
|                              | First quarter  |      | $ | 3.640 |     |  | $ | 3.040 | 
|                              | Second quarter |      |   | 5.000 |     |  |   | 2.550 | 
|                              | Third quarter  |      |   | 7.000 |     |  |   | 3.570 | 
|                              | Fourth quarter |      |   | 5.440 |     |  |   | 3.230 | 

Holders




Dividends




Equity Compensation Plan Information




|                                                            |               |                                       |     |     |                      |                      |                     |                          |  |  |       |     | 
|----------------------------------------------------------- | ------------- | ------------------------------------- | --- | --- | -------------------- | -------------------- | ------------------- | ------------------------ |  |  | ----- | --- | 
|                                                            |               |                                       |     |     |                      | Number of securities |                    
|                                                            |               |                                       |     |     |                      | remaining available  |                    
|                                                            |               | Number of securities                  |     |     |                      |                      | for future issuance |                         
|                                                            |               | to be issued                          |     |     | Weighted average     |                      |                     | under equity             | 
|                                                            |               | upon exercise of                      |     |     | exercise price of    |                      |                     | compensation plans       | 
|                                                            |               | outstanding options,                  |     |     | outstanding options, |                      |                     | (excluding securities    | 
|                                                            |               | warrants and rights                   |     |     | warrants and rights  |                      |                     | reflected in column (a)) | 
|                                                            |               | (a)                                   |     |     | (b)                  |                      |                     | (c)                      | 
|                                                            |               |                                       |     |     |                      |                      |                     |                          | 
|                                                            |               | (In thousands, except per share data) |    
|Equity compensation plans approved by security holders:     |               |                                       |     |     |                      |                      |                     |                          |  |  |       |    
|                                                            | The 1991 Plan |                                       |     | 18  |                      |                      | $                   | 9.63                     |  |  |       | 216 | 
|                                                            | The 1997 Plan |                                       |     | 392 |                      |                      |                     | 3.10                     |  |  |       | 257 | 
|                                                            | The 2000 Plan |                                       |     | 462 |                      |                      |                     | 3.50                     |  |  |       | 780 | 
|Equity compensation plans not approved by security holders: |               |                                       |     |     |                      |                      |                     |                          |  |  |       |    
|                                                            | None          |                                       |     |    |                      |                      |                     |                         |  |  |       |    | 
|                                                            |               |                                       |     |     |                      |                      |                     |                          | 
|                                                            |               |                                       | 872 |     |                      | $                    | 3.44                |                          |  |  | 1,253 |    
|                                                            |               |                                       |     |     |                      |                      |                     |                          | 

11



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                            |                                                                                                           |                                       |   |        |      |  |   |        |       |   |      |        |       |      |   |        |       |   |   |        |      | 
|------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------- | - | ------ | ---- |  | - | ------ | ----- | - | ---- | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ---- | 
|                                            |                                                                                                           | Year Ended September 30,              |  
|                                            |                                                                                                           |                                       |  
|                                            |                                                                                                           | 2005                                  |   |        | 2004 |  |   | 2003   |       |   | 2002 |        |       | 2001 |  
|                                            |                                                                                                           |                                       |   |        |      |  |   |        |       |   |      |        |       |      |  
|                                            |                                                                                                           | (In thousands, except per share data) |  
|Consolidated Statements of Operations Data: |                                                                                                           |                                       |   |        |      |  |   |        |       |   |      |        |       |      |   |        |       |   |   |       
|                                            | Net sales                                                                                                 |                                       | $ | 51,627 |      |  | $ | 53,622 |       |   | $    | 57,979 |       |      | $ | 52,404 |       |   | $ | 43,078 |     
|                                            | Net income (loss)                                                                                         |                                       |   | 306    |      |  |   | (389   | )     |   |      | (1,834 | )     |      |   | (2,392 | )     |   |   | 2,150  |     
|                                            | Earnings (loss) per share:                                                                                |                                       |   |        |      |  |   |        |       |   |      |        |       |      |   |        |       |   |   |        |     
|                                            |                                                                                                           |  basic                               |   |        | 0.05 |  |   |        | (0.06 | ) |      |        | (0.30 | )    |   |        | (0.39 | ) |   |        | 0.35 | 
|                                            |                                                                                                           |  diluted                             |   |        | 0.05 |  |   |        | (0.06 | ) |      |        | (0.30 | )    |   |        | (0.39 | ) |   |        | 0.35 | 
|                                            | Weighted average number of shares outstanding during the
    period(1)                                    |                                       |   | 6,314  |      |  |   | 6,238  |       |   |      | 6,189  |       |      |   | 6,167  |       |   |   | 6,174  |     
|                                            | Weighted average number of shares and equivalents outstanding
    during the period, assuming dilution(2) |                                       |   | 6,359  |      |  |   | 6,238  |       |   |      | 6,189  |       |      |   | 6,167  |       |   |   | 6,228  |     
|Consolidated Balance Sheets Data:           |                                                                                                           |                                       |   |        |      |  |   |        |       |   |      |        |       |      |   |        |       |   |   |       
|                                            | Working capital                                                                                           |                                       | $ | 21,556 |      |  | $ | 22,031 |       |   | $    | 11,393 | (3)   |      | $ | 24,048 |       |   | $ | 16,945 |     
|                                            | Total assets                                                                                              |                                       |   | 30,400 |      |  |   | 35,492 |       |   |      | 37,072 |       |      |   | 39,667 |       |   |   | 25,787 |     
|                                            | Long-term liabilities(3)                                                                                  |                                       |   | 6,063  |      |  |   | 7,917  |       |   |      | 648    |       |      |   | 13,008 |       |   |   |       |     
|                                            | Shareholders equity                                                                                      |                                       |   | 17,072 |      |  |   | 16,521 |       |   |      | 14,820 |       |      |   | 15,800 |       |   |   | 17,983 |     






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Basic earnings or loss per share of Common Stock was computed by
    dividing the net income or loss for the period by the weighted
    average number of shares of Common Stock outstanding during the
    period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Diluted earnings or loss per share of Common Stock was computed
    by dividing the net income or loss for the period by the
    weighted average number of shares of Common Stock and
    equivalents outstanding during the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) | Long-term liabilities have varied year to year. In fiscal 2002,
    multi-year credit facilities were established to finance
    acquisition of the Delphax Business. These credit facilities
    were classified as entirely current in fiscal 2003 consistent
    with amendments to the credit agreements which advanced the
    expiration date of the facilities. As a result, working capital
    in fiscal 2003 was reduced by the amount of the debt
    reclassified as a current liability. In fiscal 2004, we replaced
    our expiring credit facilities with three-year credit facilities
    and four-year 7% convertible subordinated notes. (See
    Note 4 to the Consolidated Financial Statements.)

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



Overview




CR Series Imaggia


CR2000


CR
Series Imaggia


Critical Accounting Policies








| |                    
| | -------------------
| | Revenue Recognition



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Revenue Recognition Reporting Revenue Gross as a
Principal verses Net as an Agent




| |                   
| | ------------------
| | Product Warranties





| |          
| | ---------
| | Inventory





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |             
| | ------------
| | Income Taxes



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Results of Operations




|                                  |                                     |                          |       |      |      |  |       |      |   |  |       |      |  
|--------------------------------- | ----------------------------------- | ------------------------ | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                  |                                     | Year Ended September 30, |      
|                                  |                                     |                          |      
|                                  |                                     | 2005                     |       |      | 2004 |  |       | 2003 |  
|                                  |                                     |                          |       |      |      |  |       |      |  
|Sales:                            |                                     |                          |       |      |      |  |       |      |   |  |       |     
|                                  | Maintenance, spares and supplies    |                          |       | 90.6 | %    |  |       | 89.4 | % |  |       | 84.3 | %
|                                  | Printing equipment                  |                          |       | 9.4  |      |  |       | 10.6 |   |  |       | 15.7 |  
|                                  |                                     |                          |       |      |      |  |       |      |  
|NET SALES                         |                                     |                          | 100.0 |      |      |  | 100.0 |      |   |  | 100.0 |     
|                                  | Cost of sales                       |                          |       | 44.9 |      |  |       | 44.3 |   |  |       | 48.0 |  
|                                  |                                     |                          |       |      |      |  |       |      |  
|GROSS PROFIT                      |                                     |                          | 55.1  |      |      |  | 55.7  |      |   |  | 52.0  |     
|Operating Expenses:               |                                     |                          |       |      |      |  |       |      |   |  |       |     
|                                  | Selling, general and administrative |                          |       | 43.5 |      |  |       | 45.2 |   |  |       | 42.9 |  
|                                  | Research and development            |                          |       | 8.6  |      |  |       | 9.3  |   |  |       | 8.1  |  
|                                  | Restructuring costs                 |                          |       | 0.0  |      |  |       | 0.0  |   |  |       | 1.9  |  
|                                  |                                     |                          |       |      |      |  |       |      |  
|                                  |                                     |                          | 52.1  |      |      |  | 54.5  |      |   |  | 52.9  |     
|                                  |                                     |                          |       |      |      |  |       |      |  
|INCOME (LOSS) FROM OPERATIONS     |                                     |                          | 3.0   |      |      |  | 1.2   |      |   |  | (0.9  | )   
|Interest expense                  |                                     |                          | 2.1   |      |      |  | 1.7   |      |   |  | 1.4   |     
|Interest income                   |                                     |                          | (0.0  | )    |      |  | (0.1  | )    |   |  | (0.1  | )   
|Realized exchange loss            |                                     |                          | 0.6   |      |      |  | 0.4   |      |   |  | 0.2   |     
|Unrealized exchange loss (gain)   |                                     |                          | 0.0   |      |      |  | (0.1  | )    |   |  | 0.3   |     
|                                  |                                     |                          |       |      |      |  |       |      |  
|INCOME (LOSS) BEFORE INCOME TAXES |                                     |                          | 0.3   |      |      |  | (0.7  | )    |   |  | (2.7  | )   
|Income tax (benefit) expense      |                                     |                          | (0.3  | )    |      |  | 0.0   |      |   |  | 0.5   |     
|                                  |                                     |                          |       |      |      |  |       |      |  
|NET INCOME (LOSS)                 |                                     |                          | 0.6   | %    |      |  | (0.7  | )%   |   |  | (3.2  | )%  
|                                  |                                     |                          |       |      |      |  |       |      |  

Net Sales. CR Series Imaggia


CR Series Imaggia Imaggia CR Series


CR
Series Imaggia


Gross Margin.


15



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The proportion of total net sales derived from sale of
    maintenance, spare parts and supplies was greater in fiscal 2005
    than in fiscal 2004, and greater in fiscal 2004 than in fiscal
    2003. As a result of this and the improvement in margins
    realized on the sale of maintenance, spare parts and supplies,
    the gross margin percentage trend improved year-to-year over the
    three-year period.                                                                                                                                                                                                                                                                                                                                         
|
| |  | The gross margin percentage benefited more in fiscal 2003 than
    in fiscal 2004, and more in fiscal 2004 than in fiscal 2005,
    from the sale of equipment inventory that was acquired with the
    Delphax Business in December 2001 at values in excess of those
    originally assigned in the final purchase accounting for the
    acquisition. The sale of this acquired inventory resulted in
    margins higher than we would normally expect to achieve from our
    on-going business. As cited above under Critical Accounting
    Policies  Inventory, actual future demand or market
    conditions for inventory may be more or less favorable than
    projected by management, resulting in more or less favorable
    margins than projected.
|
| |  | We incurred significant unabsorbed overhead cost in all three
    years, approximately $3.5 million, $1.4 million and
    $2.7 million in fiscal 2005, 2004 and 2003, respectively.
    In fiscal 2003, we incurred significant unabsorbed overhead cost
    as a result of winding-down the U.S. manufacturing
    operation and consolidating the manufacturing operation at the
    Canadian facility. Unabsorbed overhead cost in fiscal 2004 and
    2005 resulted from reduced inventory build levels needed to meet
    demand.                                                                                                                                                                                                                             

Selling, General and Administrative Expenses.


Research and Development Expenses. CR2000


Interest Expense.


Foreign Exchange Gains and Losses.


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Income Taxes.


Net Income (Loss).


Restructuring Initiative. Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)


Liquidity and Capital Resources




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|                                                                                                                           |                                      |                                      |       |       |                    |  |   |             |       |  |           |       |       |  |   |       |       | 
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ----- | ----- | ------------------ |  | - | ----------- | ----- |  | --------- | ----- | ----- |  | - | ----- | ----- | 
|                                                                                                                           |                                      | September 30, 2005                   |       |       | September 30, 2004 | 
|                                                                                                                           |                                      |                                      |       |       |                    | 
|                                                                                                                           |                                      | Balance                              |       |       | Available          |  |   | Balance     |       |  | Available |      
|                                                                                                                           |                                      | Outstanding                          |       |       | Credit             |  |   | Outstanding |       |  | Credit    |      
|                                                                                                                           |                                      |                                      |       |       |                    |  |   |             |       |  |           |      
|                                                                                                                           |                                      | (In thousands)                       |      
|Senior credit facilities:                                                                                                  |                                      |                                      |       |       |                    |  |   |             |       |  |           |       |       |  |   |      
|                                                                                                                           | Term loans                           |                                      | $     | 836   |                    |  | $ |            |       |  | $         | 1,028 |       |  | $ |      |      
|                                                                                                                           | Revolving loans, $12.5 million limit |                                      |       | 3,203 |                    |  |   | 5,592       |       |  |           | 5,631 |       |  |   | 1,917 |      
|Lines of credit:                                                                                                           |                                      |                                      |       |       |                    |  |   |             |       |  |           |       |       |  |   |      
|                                                                                                                           | United Kingdom                       |                                      |       |      |                    |  |   | 176         |       |  |           |      |       |  |   |      |      
|                                                                                                                           | France                               |                                      |       |      |                    |  |   |            |       |  |           | 541   |       |  |   |      |      
|                                                                                                                           |                                      |                                      |       |       |                    |  |   |             |       |  |           |      
|                                                                                                                           |                                      | Total bank credit facilities         |       |       | 4,039              |  |   |             | 5,768 |  |           |       | 7,200 |  |   |       | 1,917 | 
|7% Convertible Notes, $3.0 million issued at a
    discount of $1.4 million amortized over the 4-year term of
    the loan |                                      |                                      | 2,143 |       |                    |  |  |             |       |  | 1,804     |       |       |  |  |      
|                                                                                                                           |                                      |                                      |       |       |                    |  |   |             |       |  |           |      
|                                                                                                                           |                                      | Total debt, excluding capital leases |       | $     | 6,182              |  |   | $           | 5,768 |  |           | $     | 9,004 |  |   | $     | 1,917 | 
|                                                                                                                           |                                      |                                      |       |       |                    |  |   |             |       |  |           |      











CR Series


18



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New Pronouncements


Share-Based Payment




Inventory Costs


Contractual Obligations and Commercial Commitments




|                         |  |                        |        |           |        |   |       |           |           |   |           |  |  |         |       |  |  |   |       | 
|------------------------ |  | ---------------------- | ------ | --------- | ------ | - | ----- | --------- | --------- | - | --------- |  |  | ------- | ----- |  |  | - | ----- | 
|                         |  | Payments Due by Period |       
|                         |  |                        |       
|                         |  |                        |        | Less than |        |   |       |           | More than |  
|                         |  | Total                  |        |           | 1 Year |   |       | 1-3 Years |           |   | 3-5 Years |  |  | 5 Years |      
|                         |  |                        |        |           |        |   |       |           |           |   |           |  |  |         |      
|Senior credit facilities |  | $                      | 4,039  |           |        | $ | 193   |           |           | $ | 3,846     |  |  | $       |      |  |  | $ |      | 
|Convertible Notes        |  |                        | 3,000  |           |        |   |      |           |           |   | 3,000     |  |  |         |      |  |  |   |      | 
|Operating leases         |  |                        | 12,762 |           |        |   | 1,802 |           |           |   | 3,483     |  |  |         | 3,454 |  |  |   | 4,023 | 
|Capital leases           |  |                        | 194    |           |        |   | 118   |           |           |   | 76        |  |  |         |      |  |  |   |      | 
|                         |  |                        |        |           |        |   |       |           |           |   |           |  |  |         |      
|                         |  | $                      | 19,995 |           |        | $ | 2,113 |           |           | $ | 10,405    |  |  | $       | 3,454 |  |  | $ | 4,023 | 
|                         |  |                        |        |           |        |   |       |           |           |   |           |  |  |         |      



Caution Regarding Forward-Looking Statements






19



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##### Table of Contents








|         |                                                               
|-------- | --------------------------------------------------------------
|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






Item 9A.     Controls and
Procedures









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








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions



20



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##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







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

Financial Statements




|                                                                                                    |  |      |    | 
|--------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Description                                                                                         |  | Page |   
|                                                                                                    |  |      |   
|Report of Independent Registered Public Accounting Firm                                             |  |      | 27 | 
|Report of Independent Registered Public Accounting Firm                                             |  |      | 28 | 
|Consolidated Balance Sheets  September 30, 2005
    and 2004                                       |  |      | 29 | 
|Consolidated Statements of Operations  Years ended
    September 30, 2005, 2004 and 2003           |  |      | 30 | 
|Consolidated Statements of Shareholders Equity 
    Years ended September 30, 2005, 2004 and 2003 |  |      | 31 | 
|Consolidated Statements of Cash Flows  Years ended
    September 30, 2005, 2004 and 2003           |  |      | 32 | 
|Notes to Consolidated Financial Statements                                                          |  |      | 33 | 

Financial Statement Schedules




21



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##### Table of Contents



Exhibits


|       |       |    |             |                                                                                                                                                                                                                                                                                                     |                                        |                                                                                                 
|------ | ----- | -- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------------------------------------------------------------
|Number |       |    | Description |                                                                                                                                                                                                                                                                                                     | Page or Incorporated by Reference from
|       |       |    |             |                                                                                                                                                                                                                                                                                                     |                                       
|       | 3.1   |    |             | Restated Articles of Incorporation                                                                                                                                                                                                                                                                  |                                        | Exhibit 3.1 to Form 10-K for the fiscal year ended
    September 30, 2002                       
|       | 3.2   |    |             | Amended Bylaws                                                                                                                                                                                                                                                                                      |                                        | Exhibit 3.2 to Form 10-K for the fiscal year ended
    September 30, 2002                       
|       | 4.1   |    |             | Specimen of the Companys Common Stock Certificate                                                                                                                                                                                                                                                  |                                        | Exhibit 4.1 to Form 10-K for the fiscal year ended
    September 30, 2002                       
|       | 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. | 1  |             | Securities Purchase Agreement dated February 4, 2004,
    between Delphax Technologies Inc. and the Investors                                                                                                                                                                                       |                                        | Exhibit 4.1 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 2  |             | Form of 7% Convertible Subordinated Note                                                                                                                                                                                                                                                            |                                        | Exhibit 4.2 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 3  |             | Form of Stock Purchase Warrant to Purchase Shares of Common Stock                                                                                                                                                                                                                                   |                                        | Exhibit 4.3 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 4  |             | Registration Rights Agreement dated February 4, 2004,
    between Delphax Technologies Inc. and the Investors                                                                                                                                                                                       |                                        | Exhibit 4.4 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 5  |             | Amendment No. 2 dated February 5, 2004, to Rights
    Agreement between the Company and Wells Fargo Bank Minnesota N.A.                                                                                                                                                                             |                                        | Exhibit 4.5 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 6  |             | Loan and Security Agreement dated February 4, 2004, between
    Delphax Technologies Inc. and LaSalle Business Credit, LLC                                                                                                                                                                          |                                        | Exhibit 4.6 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 7  |             | Credit Agreement dated February 4, 2004, between Delphax
    Technologies Canada Limited and ABN AMRO Bank, N.V., Canada
    Branch                                                                                                                                                                 |                                        | Exhibit 4.7 to Form 8-K dated February 5, 2004                                                  
|       | 10.2. | 8  |             | Amendment No. 1 to (i) Loan and Security Agreement
    dated February 4, 2004, between Delphax Technologies Inc.
    and LaSalle Business Credit, LLC, and (ii) Credit Agreement
    dated February 4, 2004, between Delphax Technologies Canada
    Limited and ABN AMRO Bank, N.V., Canada Branch |                                        | Exhibit 10.2.12 to Amendment No. 1 of Form 10-K
    for the fiscal year ended September 30, 2003
|       | 10.2. | 9  |             | Amendment No. 2 to Loan and Security Agreement dated
    February 4, 2004, between Delphax Technologies Inc. and
    LaSalle Business Credit, LLC                                                                                                                                                   |                                        | Exhibit 10.2.13 to Form 10-K for the fiscal year ended
    September 30, 2004                   
|       | 10.2. | 10 |             | Amendment No. 3 to Loan and Security Agreement dated
    February 4, 2004, between Delphax Technologies Inc. and
    LaSalle Business Credit, LLC and Waiver of Defaults                                                                                                                            |                                        | Exhibit 10.2.14 to Form 10-K for the fiscal year ended
    September 30, 2004                   
|       | 10.2. | 11 |             | Amendment No. 4 to Loan and Security Agreement dated
    February 4, 2004, between Delphax Technologies Inc. and
    LaSalle Business Credit, LLC                                                                                                                                                   |                                        | Exhibit 10.1 to Form 10-Q for the quarter ended
    December 31, 2004                           
|       | 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 to Form 10-K for the fiscal year ended
    September 30, 2002                      

22



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|       |       |  |             |                                                                                                                              |                                        |                                                                            
|------ | ----- |  | ----------- | ---------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---------------------------------------------------------------------------
|Number |       |  | Description |                                                                                                                              | Page or Incorporated by Reference from
|       |       |  |             |                                                                                                                              |                                       
|       | 10.5  |  |             | Employment Agreement as of October 1, 2000 between the
    Company and Jay A. Herman                                         |                                        | Exhibit 10.5 to 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
|       | 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 10.1 to Form 8-K dated September 15, 2005                          
|       | 10.14 |  |             | Tomken Road Lease for Facility in Mississauga, Ontario                                                                       |                                        | Exhibit 10.14 to Form 10-K for the fiscal year ended
    September 30, 2002
|       | 10.15 |  |             | Sub-lease of Timberlea Boulevard Facility in Mississauga, Ontario                                                            |                                        | Exhibit 10.15 to Form 10-K for the fiscal year ended
    September 30, 2002
|       | 10.16 |  |             | Third Amendment to Lease between Whitewater Properties I,
    LLC and Delphax Technologies Inc.                              |                                        | Exhibit 10.16 filed herewith                                               
|       | 10.17 |  |             | Lease between Nesbitt Associates and Delphax Technologies Inc.
    for Facility at 6110 110th Street, Bloomington, Minnesota |                                        | Exhibit 10.1 to Form 8-K dated November 28, 2005                           
|       | 21    |  |             | List of Subsidiaries                                                                                                         |                                        | Exhibit 21 filed herewith                                                  
|       | 23.1  |  |             | Consent of Independent Registered Public Accounting
    Firm  Grant Thornton LLP                                            |                                        | Exhibit 23.1 filed herewith                                                
|       | 23.2  |  |             | Consent of Independent Auditors  Ernst &
    Young LLP                                                                      |                                        | Exhibit 23.2 filed herewith                                                
|       | 31.1  |  |             | Section 302 Certification of Principal Executive Officer                                                                     |                                        | Exhibit 31.1 filed herewith                                                
|       | 31.2  |  |             | Section 302 Certification of Principal Financial Officer                                                                     |                                        | Exhibit 31.2 filed herewith                                                
|       | 32.1  |  |             | Section 906 Certification of Principal Executive Officer                                                                     |                                        | Exhibit 32.1 filed herewith                                                
|       | 32.2  |  |             | Section 906 Certification of Principal Financial Officer                                                                     |                                        | Exhibit 32.2 filed herewith                                                

23



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##### Table of Contents






SIGNATURES






| |                          
| | -------------------------
| | Delphax Technologies Inc.



| |     |                  
| | --- | -----------------
| | By: | /s/ Jay A. Herman

| |                                     
| | ------------------------------------
| |                                     
| | Jay A. Herman                       
| | Chairman and Chief Executive Officer





| |     |                         
| | --- | ------------------------
| | By: | /s/ Jeffrey S. Mathiesen

| |                                           
| | ------------------------------------------
| |                                           
| | Jeffrey S. Mathiesen                      
| | Vice President and Chief Financial Officer





|                                                       |  |                                                                                             |  |                  |  | 
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | ---------------- |  | 
|Signature                                              |  | Title                                                                                       |  | Date            
|                                                       |  |                                                                                             |  |                 
|                                                      
|/s/ Jay A. HermanJay
    A. Herman                     |  | Chairman and Chief Executive Officer (Principal Executive
    Officer)                      |  | December 7, 2005
|                                                      
|/s/ Jeffrey S.
    MathiesenJeffrey
    S. Mathiesen   |  | Vice President and Chief Financial Officer (Principal Financial
    and Accounting Officer) |  | December 7, 2005
|                                                      
|/s/ R. Stephen
    ArmstrongR.
    Stephen Armstrong   |  | Director                                                                                    |  | December 7, 2005
|                                                      
|/s/ Gary R. HollandGary
    R. Holland                 |  | Director                                                                                    |  | December 7, 2005
|                                                      
|/s/ Kenneth E.
    OverstreetKenneth
    E. Overstreet |  | Director                                                                                    |  | December 7, 2005
|                                                      
|/s/ Earl W. RogersEarl
    W. Rogers                   |  | Director                                                                                    |  | December 7, 2005

24



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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
Schedules


Certain Exhibits


Year Ended September 30, 2005


Delphax Technologies Inc.


Minnetonka, Minnesota


25



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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


















26



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                       
| | ----------------------
| | /s/ Grant Thornton LLP
| |                       
| | Grant Thornton LLP    





27



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##### Table of Contents



Report of Independent Registered Public Accounting Firm














| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP
| |                          
| | Ernst & Young LLP        





28



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |   |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                                                                                                                                                        |                                                                                                                                             | September 30,         |       
|                                                                                                                                                                        |                                                                                                                                             |                       |       
|                                                                                                                                                                        |                                                                                                                                             | 2005                  |        |        | 2004 |  
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|                                                                                                                                                                        |                                                                                                                                             | (In thousands, except |       
|                                                                                                                                                                        |                                                                                                                                             | per share amounts)    |       
|ASSETS                                                                                                                                                                 
|CURRENT ASSETS                                                                                                                                                          |                                                                                                                                             |                       |        |        |      |   |        |       
|                                                                                                                                                                        | Cash and cash equivalents                                                                                                                   |                       | $      | 736    |      |   | $      | 1,314  | 
|                                                                                                                                                                        | Accounts receivable, less allowance for doubtful accounts of
    $174 and $247 as of September 30, 2005 and 2004,
    respectively (Note 2) |                       |        | 6,615  |      |   |        | 7,897  | 
|                                                                                                                                                                        | Inventory (Note 2)                                                                                                                          |                       |        | 19,470 |      |   |        | 21,710 | 
|                                                                                                                                                                        | Other current assets                                                                                                                        |                       |        | 2,000  |      |   |        | 2,164  | 
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|TOTAL CURRENT ASSETS                                                                                                                                                    |                                                                                                                                             |                       | 28,821 |        |      |   | 33,085 |       
|Equipment and fixtures, net (Note 2)                                                                                                                                    |                                                                                                                                             |                       | 1,454  |        |      |   | 2,368  |       
|Other non-current assets                                                                                                                                                |                                                                                                                                             |                       | 125    |        |      |   | 39     |       
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|TOTAL ASSETS                                                                                                                                                            |                                                                                                                                             | $                     | 30,400 |        |      | $ | 35,492 |       
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|                                                                                                                                                                       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                   
|CURRENT LIABILITIES                                                                                                                                                     |                                                                                                                                             |                       |        |        |      |   |        |       
|                                                                                                                                                                        | Accounts payable                                                                                                                            |                       | $      | 3,233  |      |   | $      | 5,609  | 
|                                                                                                                                                                        | Accrued compensation                                                                                                                        |                       |        | 1,512  |      |   |        | 2,025  | 
|                                                                                                                                                                        | Other accrued expenses                                                                                                                      |                       |        | 910    |      |   |        | 813    | 
|                                                                                                                                                                        | Income taxes payable                                                                                                                        |                       |        |       |      |   |        | 78     | 
|                                                                                                                                                                        | Current portion of bank credit facilities                                                                                                   |                       |        | 193    |      |   |        | 1,266  | 
|                                                                                                                                                                        | Deferred revenue                                                                                                                            |                       |        | 305    |      |   |        | 468    | 
|                                                                                                                                                                        | Customer deposits                                                                                                                           |                       |        | 1,006  |      |   |        | 696    | 
|                                                                                                                                                                        | Current portion of capital leases                                                                                                           |                       |        | 106    |      |   |        | 99     | 
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|TOTAL CURRENT LIABILITIES                                                                                                                                               |                                                                                                                                             |                       | 7,265  |        |      |   | 11,054 |       
|Long-term portion of bank credit facilities and subordinated
    convertible debt                                                                                       |                                                                                                                                             |                       | 5,989  |        |      |   | 7,738  |       
|Long-term portion of capital leases                                                                                                                                     |                                                                                                                                             |                       | 74     |        |      |   | 179    |       
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|TOTAL LIABILITIES                                                                                                                                                       |                                                                                                                                             |                       | 13,328 |        |      |   | 18,971 |       
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|SHAREHOLDERS EQUITY                                                                                                                                                    |                                                                                                                                             |                       |        |        |      |   |        |       
|Common stock  par value $.10 per
    share  authorized 50,000 shares; issued and
    outstanding: 6,339 and 6,271 as of September 30, 2005 and
    2004, respectively |                                                                                                                                             |                       | 634    |        |      |   | 627    |       
|Additional paid-in capital                                                                                                                                              |                                                                                                                                             |                       | 19,011 |        |      |   | 18,774 |       
|Accumulated other comprehensive loss                                                                                                                                    |                                                                                                                                             |                       | (710   | )      |      |   | (711   | )     
|Accumulated deficit                                                                                                                                                     |                                                                                                                                             |                       | (1,863 | )      |      |   | (2,169 | )     
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                              |                                                                                                                                             |                       | 17,072 |        |      |   | 16,521 |       
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |                                                                                                                                             | $                     | 30,400 |        |      | $ | 35,492 |       
|                                                                                                                                                                        |                                                                                                                                             |                       |        |        |      |  



29



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                 |                                     |                           |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------------------------- | ----------------------------------- | ------------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                 |                                     | Year Ended September 30,  |       
|                                                                 |                                     |                           |       
|                                                                 |                                     | 2005                      |        |        | 2004 |   |        | 2003   | 
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|                                                                 |                                     | (In thousands,            |       
|                                                                 |                                     | except per share amounts) |       
|Sales:                                                           |                                     |                           |        |        |      |   |        |        |  |   |        |       
|                                                                 | Maintenance, spares and supplies    |                           | $      | 46,753 |      |   | $      | 47,932 |  |   | $      | 48,856 | 
|                                                                 | Printing equipment                  |                           |        | 4,874  |      |   |        | 5,690  |  |   |        | 9,123  | 
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|NET SALES                                                        |                                     |                           | 51,627 |        |      |   | 53,622 |        |  |   | 57,979 |       
|                                                                 | Cost of sales                       |                           |        | 23,161 |      |   |        | 23,744 |  |   |        | 27,821 | 
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|GROSS PROFIT                                                     |                                     |                           | 28,466 |        |      |   | 29,878 |        |  |   | 30,158 |       
|Operating Expenses:                                              |                                     |                           |        |        |      |   |        |        |  |   |        |       
|                                                                 | Selling, general and administrative |                           |        | 22,464 |      |   |        | 24,252 |  |   |        | 24,859 | 
|                                                                 | Research and development            |                           |        | 4,450  |      |   |        | 4,970  |  |   |        | 4,694  | 
|                                                                 | Restructuring costs                 |                           |        |       |      |   |        |       |  |   |        | 1,102  | 
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|                                                                 |                                     |                           | 26,914 |        |      |   | 29,222 |        |  |   | 30,655 |       
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|INCOME (LOSS) FROM OPERATIONS                                    |                                     |                           | 1,552  |        |      |   | 656    |        |  |   | (497   | )     
|Interest expense                                                 |                                     |                           | 1,072  |        |      |   | 954    |        |  |   | 808    |       
|Interest income                                                  |                                     |                           | (23    | )      |      |   | (70    | )      |  |   | (53    | )     
|Realized exchange loss                                           |                                     |                           | 309    |        |      |   | 207    |        |  |   | 110    |       
|Unrealized exchange loss (gain)                                  |                                     |                           | 44     |        |      |   | (61    | )      |  |   | 172    |       
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|INCOME (LOSS) BEFORE INCOME TAXES                                |                                     |                           | 150    |        |      |   | (374   | )      |  |   | (1,534 | )     
|Income tax (benefit) expense                                     |                                     |                           | (156   | )      |      |   | 15     |        |  |   | 300    |       
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|NET INCOME (LOSS)                                                |                                     | $                         | 306    |        |      | $ | (389   | )      |  | $ | (1,834 | )     
|                                                                 |                                     |                           |        |        |      |   |        |        | 
|Basic and diluted earnings (loss) per share                      |                                     | $                         | 0.05   |        |      | $ | (0.06  | )      |  | $ | (0.30  | )     
|Weighted average number of shares outstanding during the period: |                                     |                           |        |        |      |   |        |        |  |   |        |       
|                                                                 | Basic                               |                           |        | 6,314  |      |   |        | 6,238  |  |   |        | 6,189  | 
|                                                                 | Diluted                             |                           |        | 6,359  |      |   |        | 6,238  |  |   |        | 6,189  | 



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   |        |        |  
|------------------------------------------------------------- | ---------------------- | -------------- | ----- | - | ---------- | ----------- | --- | ------------- | -------- | - | ------------ | - |  | -------- | ------ | --- | ----- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                              |                        |                |       |   |            | Accumulated |     |               | Retained |   |              |  
|                                                              |                        | Common Stock   |       |   | Additional |             |     | Other         |          |   | Earnings     |   |  |         
|                                                              |                        |                |       |   | Paid-in    |             |     | Comprehensive |          |   | (Accumulated |   |  |         
|                                                              |                        | Shares         |       |   | Amount     |             |     | Capital       |          |   | Loss         |   |  | Deficit) |        |     | Total |  
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|                                                              |                        | (In thousands) |      
|Balance, September 30, 2002                                   |                        |                | 6,176 |   |            | $           | 618 |               |          | $ | 17,040       |   |  | $        | (1,912 | )   |       | $ | 54     |        |   | $ | 15,800 |       
|Comprehensive loss:                                           |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   |        |       
|                                                              | Net loss               |                |       |  |            |             |     |              |          |   |              |  |  |          |        |    |       |   |        | (1,834 | ) |   |        | (1,834 | )
|                                                              | Translation adjustment |                |       |  |            |             |     |              |          |   |              |  |  |          |        | 740 |       |   |        |       |   |   |        | 740    |  
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Total comprehensive loss                                      |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   | (1,094 | )     
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Exercise of stock options, including tax benefit of $9        |                        |                | 39    |   |            |             | 3   |               |          |   | 111          |   |  |          |       |     |       |   |       |        |   |   | 114    |       
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Balance, September 30, 2003                                   |                        |                | 6,215 |   |            |             | 621 |               |          |   | 17,151       |   |  |          | (1,172 | )   |       |   | (1,780 | )      |   |   | 14,820 |       
|Comprehensive income:                                         |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   |        |       
|                                                              | Net loss               |                |       |  |            |             |     |              |          |   |              |  |  |          |        |    |       |   |        | (389   | ) |   |        | (389   | )
|                                                              | Translation adjustment |                |       |  |            |             |     |              |          |   |              |  |  |          |        | 461 |       |   |        |       |   |   |        | 461    |  
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Total comprehensive income                                    |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   | 72     |       
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Original issue discount (Note 4)                              |                        |                |      |   |            |             |    |               |          |   | 1,413        |   |  |          |       |     |       |   |       |        |   |   | 1,413  |       
|Interest paid in Common Stock                                 |                        |                | 26    |   |            |             | 3   |               |          |   | 122          |   |  |          |       |     |       |   |       |        |   |   | 125    |       
|Exercise of stock options, including tax benefit of $15       |                        |                | 30    |   |            |             | 3   |               |          |   | 88           |   |  |          |       |     |       |   |       |        |   |   | 91     |       
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Balance, September 30, 2004                                   |                        |                | 6,271 |   |            |             | 627 |               |          |   | 18,774       |   |  |          | (711   | )   |       |   | (2,169 | )      |   |   | 16,521 |       
|Comprehensive income:                                         |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   |        |       
|                                                              | Net income             |                |       |  |            |             |     |              |          |   |              |  |  |          |        |    |       |   |        | 306    |   |   |        | 306    |  
|                                                              | Translation adjustment |                |       |  |            |             |     |              |          |   |              |  |  |          |        | 1   |       |   |        |       |   |   |        | 1      |  
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Total comprehensive income                                    |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |   |        |        |   |   | 307    |       
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Interest paid in Common Stock                                 |                        |                | 66    |   |            |             | 7   |               |          |   | 231          |   |  |          |       |     |       |   |       |        |   |   | 238    |       
|Exercise of stock options, with no tax benefit to the Company |                        |                | 2     |   |            |             |    |               |          |   | 6            |   |  |          |       |     |       |   |       |        |   |   | 6      |       
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  
|Balance, September 30, 2005                                   |                        |                | 6,339 |   |            | $           | 634 |               |          | $ | 19,011       |   |  | $        | (710   | )   |       | $ | (1,863 | )      |   | $ | 17,072 |       
|                                                              |                        |                |       |   |            |             |     |               |          |   |              |   |  |          |        |     |       |  



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                             |                                            |                          |        |        |      |   |        |        |   |   |        |        |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------ | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                                             |                                            | Year Ended September 30, |       
|                                                                                             |                                            |                          |       
|                                                                                             |                                            | 2005                     |        |        | 2004 |   |        | 2003   |  
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|                                                                                             |                                            | (In thousands)           |       
|OPERATING ACTIVITIES                                                                         |                                            |                          |        |        |      |   |        |        |   |   |        |       
|Net income (loss)                                                                            |                                            | $                        | 306    |        |      | $ | (389   | )      |   | $ | (1,834 | )     
|Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                            |                          |        |        |      |   |        |        |   |   |        |       
|                                                                                             | Depreciation and amortization              |                          |        | 1,095  |      |   |        | 1,351  |   |   |        | 1,722  |  
|                                                                                             | Non-cash interest on Convertible Notes     |                          |        | 559    |      |   |        | 408    |   |   |        |       |  
|                                                                                             | Loss on disposal of equipment and fixtures |                          |        |       |      |   |        | 137    |   |   |        |       |  
|                                                                                             | Other                                      |                          |        | 76     |      |   |        | 75     |   |   |        | 85     |  
|Changes in operating assets and liabilities:                                                 |                                            |                          |        |        |      |   |        |        |   |   |        |       
|                                                                                             | Accounts receivable, net                   |                          |        | 1,252  |      |   |        | 3,357  |   |   |        | (57    | )
|                                                                                             | Inventory                                  |                          |        | 2,223  |      |   |        | (3,626 | ) |   |        | 3,471  |  
|                                                                                             | Other current assets                       |                          |        | 138    |      |   |        | (1,061 | ) |   |        | 285    |  
|                                                                                             | Notes receivable from customers            |                          |        | 87     |      |   |        | 711    |   |   |        | (720   | )
|                                                                                             | Accounts payable and accrued expenses      |                          |        | (2,725 | )    |   |        | 2,131  |   |   |        | (1,043 | )
|                                                                                             | Deferred revenue                           |                          |        | (160   | )    |   |        | (655   | ) |   |        | 627    |  
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                    |                                            |                          | 2,851  |        |      |   | 2,439  |        |   |   | 2,536  |       
|INVESTING ACTIVITIES                                                                         |                                            |                          |        |        |      |   |        |        |   |   |        |       
|Purchase of equipment and fixtures                                                           |                                            |                          | (180   | )      |      |   | (391   | )      |   |   | (713   | )     
|Purchase of short-term investments                                                           |                                            |                          |       |        |      |   |       |        |   |   | (40    | )     
|Proceeds from sale of short-term investments                                                 |                                            |                          |       |        |      |   | 45     |        |   |   | 80     |       
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|NET CASH USED IN INVESTING ACTIVITIES                                                        |                                            |                          | (180   | )      |      |   | (346   | )      |   |   | (673   | )     
|FINANCING ACTIVITIES                                                                         |                                            |                          |        |        |      |   |        |        |   |   |        |       
|Issuance of 7% convertible subordinated notes                                                |                                            |                          |       |        |      |   | 3,000  |        |   |   |       |       
|Issuance of Common Stock:                                                                    |                                            |                          |        |        |      |   |        |        |   |   |        |       
|                                                                                             | For interest paid on Convertible Notes     |                          |        | 238    |      |   |        | 125    |   |   |        |       |  
|                                                                                             | On exercise of stock options               |                          |        | 6      |      |   |        | 76     |   |   |        | 105    |  
|Payment on bank credit facilities, net                                                       |                                            |                          | (3,398 | )      |      |   | (6,913 | )      |   |   | (1,380 | )     
|Borrowing on capital lease obligation                                                        |                                            |                          |       |        |      |   | 262    |        |   |   |       |       
|Principal payments on capital lease obligations                                              |                                            |                          | (98    | )      |      |   | (61    | )      |   |   | (30    | )     
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|NET CASH USED IN FINANCING ACTIVITIES                                                        |                                            |                          | (3,252 | )      |      |   | (3,511 | )      |   |   | (1,305 | )     
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                      |                                            |                          | 3      |        |      |   | 62     |        |   |   | 394    |       
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                             |                                            |                          | (578   | )      |      |   | (1,356 | )      |   |   | 952    |       
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                 |                                            |                          | 1,314  |        |      |   | 2,670  |        |   |   | 1,718  |       
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                       |                                            | $                        | 736    |        |      | $ | 1,314  |        |   | $ | 2,670  |       
|                                                                                             |                                            |                          |        |        |      |   |        |        |  
|Supplemental disclosure of non-cash activities:                                              |                                            |                          |        |        |      |   |        |        |   |   |        |       
|Related to the Convertible Notes:                                                            |                                            |                          |        |        |      |   |        |        |   |   |        |       
|                                                                                             | Non-cash interest on Convertible Notes     |                          | $      | 559    |      |   | $      | 408    |   |   | $      |       |  
|                                                                                             | Common stock issued in payment of interest |                          |        | 238    |      |   |        | 125    |   |   |        |       |  
|                                                                                             | Beneficial conversion feature              |                          |        |       |      |   |        | 852    |   |   |        |       |  
|                                                                                             | Issuance of warrants                       |                          |        |       |      |   |        | 561    |   |   |        |       |  
|Purchase of equipment through capital lease obligations                                      |                                            |                          |       |        |      |   |       |        |   |   | 49     |       



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


September 30, 2005


Note 1  Summary of Significant Accounting
Policies


Nature of Operations:


Principles of Consolidation:


Use of Estimates:


Cash and Cash Equivalents:


Accounts Receivable, Less Allowance for Doubtful
Accounts:


Inventory:


Equipment and Fixtures:


Revenue Recognition: Revenue
Recognition


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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Reporting Revenue Gross as a
Principal verses Net as an Agent


Product Warranties:


Foreign Currency Translation:


Income Taxes:


Stock-Based Compensation: Accounting for Stock Issued to
Employees Accounting for Stock-Based
Compensation Accounting for
Stock-Based Compensation Transition and Disclosure


|                                                                                       |  |                        |      |   |      |   |       |      |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                       |  | For the Year Ended     |     
|                                                                                       |  | September 30,          |     
|                                                                                       |  |                        |     
|                                                                                       |  | 2005                   |      |   | 2004 |   |       | 2003 | 
|                                                                                       |  |                        |      |   |      |   |       |      | 
|                                                                                       |  | (In thousands,         |     
|                                                                                       |  | except per share data) |     
|Net income (loss), as reported                                                         |  | $                      | 306  |   |      | $ | (389  | )    |  | $ | (1,834 | )
|Stock-based compensation determined under fair value based
    method for all awards   |  |                        | (196 | ) |      |   | (236  | )    |  |   | (178   | )
|                                                                                       |  |                        |      |   |      |   |       |      | 
|Pro forma net income (loss), assuming fair value method for all
    stock-based awards |  | $                      | 110  |   |      | $ | (625  | )    |  | $ | (2,012 | )
|                                                                                       |  |                        |      |   |      |   |       |      | 
|Basic earnings (loss) per share, as reported                                           |  | $                      | 0.05 |   |      | $ | (0.06 | )    |  | $ | (0.30  | )
|Diluted earnings (loss) per share, as reported                                         |  |                        | 0.05 |   |      |   | (0.06 | )    |  |   | (0.30  | )
|Basic earnings (loss) per share, pro forma                                             |  |                        | 0.02 |   |      |   | (0.10 | )    |  |   | (0.33  | )
|Diluted earnings (loss) per share, pro forma                                           |  |                        | 0.02 |   |      |   | (0.10 | )    |  |   | (0.33  | )

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |  |                          |          |   |      |  |          |      |  |  |          |  
|------------------------------- |  | ------------------------ | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                                |  | Year Ended September 30, |         
|                                |  |                          |         
|                                |  | 2005                     |          |   | 2004 |  |          | 2003 | 
|                                |  |                          |          |   |      |  |          |      | 
|Expected dividend yield         |  |                          | 0        | % |      |  | 0        | %    |  |  | 0        | %
|Expected stock price volatility |  |                          | 50       |   |      |  | 51       |      |  |  | 52       |  
|Risk-free interest rate         |  |                          | 4.1      |   |      |  | 3.1      |      |  |  | 2.7      |  
|Expected life of options        |  |                          | 7  years |   |      |  | 7  years |      |  |  | 7  years |  



Earnings or Loss per Share:


|             |                                                                                  |                          |   |       |      |  |   |       |   |  |   |        |   | 
|------------ | -------------------------------------------------------------------------------- | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ------ | - | 
|             |                                                                                  | Year Ended September 30, |  
|             |                                                                                  |                          |  
|             |                                                                                  | 2005                     |   |       | 2004 |  |   | 2003  |  
|             |                                                                                  |                          |   |       |      |  |   |       |  
|             |                                                                                  | (In thousands,           |  
|             |                                                                                  | except per share data)   |  
|Numerator:   |                                                                                  |                          |   |       |      |  |   |       |   |  |   |       
|             | Numerator for basic earnings (loss) per share                                    |                          | $ | 306   |      |  | $ | (389  | ) |  | $ | (1,835 | )
|             | Dilutive potential loss, Convertible Notes                                       |                          |   |      |      |  |   |      |   |  |   |       |  
|             |                                                                                  |                          |   |       |      |  |   |       |  
|             | Numerator for diluted earnings (loss) per share                                  |                          | $ | 306   |      |  | $ | (389  | ) |  | $ | (1,835 | )
|             |                                                                                  |                          |   |       |      |  |   |       |  
|Denominator: |                                                                                  |                          |   |       |      |  |   |       |   |  |   |       
|             | Denominator for basic earnings and loss per share, weighted
    average shares   |                          |   | 6,314 |      |  |   | 6,238 |   |  |   | 6,189  |  
|             | Dilutive potential shares:                                                       |                          |   |       |      |  |   |       |   |  |   |        |  
|             |                                                                                  | Employee stock options   |   |       | 38   |  |   |       |  |  |   |        |  | 
|             |                                                                                  | Warrants                 |   |       | 7    |  |   |       |  |  |   |        |  | 
|             |                                                                                  | Convertible Notes        |   |       |     |  |   |       |  |  |   |        |  | 
|             |                                                                                  |                          |   |       |      |  |   |       |  
|             | Dilutive potential shares                                                        |                          |   | 45    |      |  |   |      |   |  |   |       |  
|             | Denominator for diluted earnings and loss per share, weighted
    average shares |                          |   | 6,359 |      |  |   | 6,238 |   |  |   | 6,189  |  
|             |                                                                                  |                          |   |       |      |  |   |       |  
|             | Earnings (loss) per share  basic                                                |                          | $ | 0.05  |      |  | $ | (0.06 | ) |  | $ | (0.30  | )
|             |                                                                                  |                          |   |       |      |  |   |       |  
|             | Earnings (loss) per share  diluted                                              |                          | $ | 0.05  |      |  | $ | (0.06 | ) |  | $ | (0.30  | )
|             |                                                                                  |                          |   |       |      |  |   |       |  



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Reclassification:


New Pronouncements


Stock-based Compensation: Share-Based Payment




Inventory Costs: Inventory Costs


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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 2  Balance Sheet Information




|                  |  |                |     |      |      |   |      |      |  |   |     |    
|----------------- |  | -------------- | --- | ---- | ---- | - | ---- | ---- |  | - | --- | ---
|                  |  | September 30,  |    
|                  |  |                |    
|                  |  | 2005           |     |      | 2004 |   |      | 2003 | 
|                  |  |                |     |      |      |   |      |      | 
|                  |  | (In thousands) |    
|Beginning balance |  | $              | 247 |      |      | $ | 737  |      |  | $ | 253 |    
|Provisions        |  |                | (92 | )(1) |      |   | 291  |      |  |   | 536 | (2)
|Write-offs        |  |                | (26 | )    |      |   | (781 | )(2) |  |   | (52 | )  
|Recoveries        |  |                | 45  |      |      |   |     |      |  |   |    |    
|                  |  |                |     |      |      |   |      |      | 
|Ending balance    |  | $              | 174 |      |      | $ | 247  |      |  | $ | 737 |    
|                  |  |                |     |      |      |   |      |      | 






|    |                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As a result of improvement in the portfolio of accounts
    receivable and recovery against accounts previously written off,
    in fiscal 2005, the allowance for doubtful accounts was reduced.                                                                                                                           
|   
|(2) | The provision for doubtful accounts in fiscal 2003 was the
    result of estimating collection of one significant customer
    account to be doubtful. In fiscal 2004, that account was written
    off, in addition to various other less significant, unrelated
    write-offs occurring in the normal course of business.



|                                  |  |                |        |  |      |   |        | 
|--------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                  |  | September 30,  |       
|                                  |  |                |       
|                                  |  | 2005           |        |  | 2004 |  
|                                  |  |                |        |  |      |  
|                                  |  | (In thousands) |       
|Raw materials and component parts |  | $              | 10,707 |  |      | $ | 11,887 | 
|Work-in-progress                  |  |                | 1,237  |  |      |   | 1,156  | 
|Finished goods                    |  |                | 7,526  |  |      |   | 8,667  | 
|                                  |  |                |        |  |      |  
|                                  |  | $              | 19,470 |  |      | $ | 21,710 | 
|                                  |  |                |        |  |      |  



|                              |  |                |        |  |      |   |        | 
|----------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                              |  | September 30,  |       
|                              |  |                |       
|                              |  | 2005           |        |  | 2004 |  
|                              |  |                |        |  |      |  
|                              |  | (In thousands) |       
|Machinery and equipment       |  | $              | 4,748  |  |      | $ | 4,579  | 
|Furniture and fixtures        |  |                | 3,603  |  |      |   | 4,152  | 
|Leasehold improvements        |  |                | 2,353  |  |      |   | 2,355  | 
|                              |  |                |        |  |      |  
|                              |  |                | 10,704 |  |      |   | 11,086 | 
|Less accumulated depreciation |  |                | 9,250  |  |      |   | 8,718  | 
|                              |  |                |        |  |      |  
|                              |  | $              | 1,454  |  |      | $ | 2,368  | 
|                              |  |                |        |  |      |  

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 3  Income Taxes




|                                  |  |                          |      |   |      |   |      |      |  |   |        |  
|--------------------------------- |  | ------------------------ | ---- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                  |  | Year Ended September 30, |     
|                                  |  |                          |     
|                                  |  | 2005                     |      |   | 2004 |   |      | 2003 | 
|                                  |  |                          |      |   |      |   |      |      | 
|                                  |  | (In thousands)           |     
|Domestic                          |  | $                        | 540  |   |      | $ | 398  |      |  | $ | (1,693 | )
|Foreign                           |  |                          | (390 | ) |      |   | (772 | )    |  |   | 159    |  
|                                  |  |                          |      |   |      |   |      |      | 
|Income (loss) before income taxes |  | $                        | 150  |   |      | $ | (374 | )    |  | $ | (1,534 | )
|                                  |  |                          |      |   |      |   |      |      | 



|                                   |         |                          |      |      |      |   |    |      |  |   |     |     | 
|---------------------------------- | ------- | ------------------------ | ---- | ---- | ---- | - | -- | ---- |  | - | --- | --- | 
|                                   |         | Year Ended September 30, |     
|                                   |         |                          |     
|                                   |         | 2005                     |      |      | 2004 |   |    | 2003 | 
|                                   |         |                          |      |      |      |   |    |      | 
|                                   |         | (In thousands)           |     
|Current:                           |         |                          |      |      |      |   |    |      |  |   |     |    
|                                   | Federal |                          | $    | 21   |      |   | $  |     |  |   | $   |    | 
|                                   | State   |                          |      | 59   |      |   |    | 15   |  |   |     | 12  | 
|                                   | Foreign |                          |      | (236 | )    |   |    |     |  |   |     | 288 | 
|                                   |         |                          |      |      |      |   |    |      | 
|                                   |         |                          | (156 | )    |      |   | 15 |      |  |   | 300 |    
|                                   |         |                          |      |      |      |   |    |      | 
|Deferred:                          |         |                          |      |      |      |   |    |      |  |   |     |    
|                                   | Federal |                          |      |      |      |   |    |     |  |   |     |    | 
|                                   | State   |                          |      |      |      |   |    |     |  |   |     |    | 
|                                   | Foreign |                          |      |      |      |   |    |     |  |   |     |    | 
|                                   |         |                          |      |      |      |   |    |      | 
|                                   |         |                          |     |      |      |   |   |      |  |   |    |    
|                                   |         |                          |      |      |      |   |    |      | 
|Total income tax (benefit) expense |         | $                        | (156 | )    |      | $ | 15 |      |  | $ | 300 |    
|                                   |         |                          |      |      |      |   |    |      | 



|                                                               |  |                          |        |   |      |   |      |      |  |   |      |  
|-------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                               |  | Year Ended September 30, |       
|                                                               |  |                          |       
|                                                               |  | 2005                     |        |   | 2004 |   |      | 2003 | 
|                                                               |  |                          |        |   |      |   |      |      | 
|                                                               |  | (In thousands)           |       
|Statutory rate applied to income (loss) before income taxes    |  | $                        | 51     |   |      | $ | (117 | )    |  | $ | (522 | )
|Use of and reclassification of net operating loss carryforward |  |                          | 1,077  |   |      |   |     |      |  |   |     |  
|Change in valuation allowance including reclassification       |  |                          | (1,360 | ) |      |   | 13   |      |  |   | 931  |  
|Refundable foreign income tax credit                           |  |                          | (237   | ) |      |   |     |      |  |   |     |  
|Non-deductible interest                                        |  |                          | 190    |   |      |   |     |      |  |   |     |  
|Other                                                          |  |                          | 123    |   |      |   | 119  |      |  |   | (109 | )
|                                                               |  |                          |        |   |      |   |      |      | 
|Total income tax (benefit) expense                             |  | $                        | (156   | ) |      | $ | 15   |      |  | $ | 300  |  
|                                                               |  |                          |        |   |      |   |      |      | 

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                          |                                                                   |                |        |     |      |   |        |       | 
|------------------------- | ----------------------------------------------------------------- | -------------- | ------ | --- | ---- | - | ------ | ----- | 
|                          |                                                                   | September 30,  |       
|                          |                                                                   |                |       
|                          |                                                                   | 2005           |        |     | 2004 |  
|                          |                                                                   |                |        |     |      |  
|                          |                                                                   | (In thousands) |       
|Deferred tax assets:      |                                                                   |                |        |     |      |   |        |      
|                          | Net operating loss                                                |                | $      | 463 |      |   | $      | 1,477 | 
|                          | Business credit carryforwards and alternative minimum tax credits |                |        | 566 |      |   |        | 642   | 
|                          | Inventory valuation reserves                                      |                |        | 492 |      |   |        | 573   | 
|                          | Other domestic and foreign differences                            |                |        | 123 |      |   |        | 312   | 
|                          |                                                                   |                |        |     |      |  
|Gross deferred tax assets |                                                                   |                | 1,644  |     |      |   | 3,004  |      
|Valuation allowance       |                                                                   |                | (1,644 | )   |      |   | (3,004 | )    
|                          |                                                                   |                |        |     |      |  
|Net deferred tax assets   |                                                                   | $              |       |     |      | $ |       |      
|                          |                                                                   |                |        |     |      |  







Note 4  Senior Credit Facilities and
Convertible Subordinated Debt






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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Note 5  Capital Leases


|                                          |                                                                                                         |                   |     |     |      |   |     |     |     | 
|----------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------- | --- | --- | ---- | - | --- | --- | --- | 
|                                          |                                                                                                         | September 30,     |    
|                                          |                                                                                                         |                   |    
|                                          |                                                                                                         | 2005              |     |     | 2004 |  
|                                          |                                                                                                         |                   |     |     |      |  
|                                          |                                                                                                         | (In thousands)    |    
|Capital lease obligations on:             |                                                                                                         |                   |     |     |      |   |     |    
|                                          | Computer software, due over 36 months in monthly
    installments of $8,233, including interest at 8.8% |                   | $   | 162 |      |   | $   | 242 |    
|                                          | Computer software, due over 36 months in monthly
    installments of $1,928, including interest at 9.1% |                   |     | 18  |      |   |     | 36  |    
|                                          |                                                                                                         |                   |     |     |      |  
|                                          |                                                                                                         | Total obligations |     |     | 180  |   |     |     | 278 | 
|Less current portion of lease obligations |                                                                                                         |                   | 106 |     |      |   | 99  |    
|                                          |                                                                                                         |                   |     |     |      |  
|Long-term portion of lease obligations    |                                                                                                         | $                 | 74  |     |      | $ | 179 |    
|                                          |                                                                                                         |                   |     |     |      |  



|                          |      |                                    |   |     |     | 
|------------------------- | ---- | ---------------------------------- | - | --- | --- | 
|                          |      | Capital                            |  
|                          |      | Lease                              |  
|                          |      | Obligations                        |  
|                          |      |                                    |  
|                          |      | (In thousands)                     |  
|Year ending September 30: |      |                                    |   |    
|                          | 2006 |                                    | $ | 118 |    
|                          | 2007 |                                    |   | 76  |    
|                          |      |                                    |  
|                          |      | Total payments                     |   |     | 194 | 
|                          |      | Less amounts representing interest |   |     | 14  | 
|                          |      |                                    |  
|                          |      | Present value of lease payments    |   | $   | 180 | 
|                          |      |                                    |  

Note 6  Restructuring Initiatives




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 7  Commitments and Contingencies














Note 8  Stock Options and Benefit Plans




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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |              
| | -------------
| | The 1991 Plan



|                                     |                  |                                          |     |    |             |          |          |           |   |   |      |      | 
|------------------------------------ | ---------------- | ---------------------------------------- | --- | -- | ----------- | -------- | -------- | --------- | - | - | ---- | ---- | 
|                                     |                  |                                          |     |    |             | Weighted |         
|                                     |                  | Shares                                   |     |    |             |          | Average  |          
|                                     |                  | Reserved                                 |     |    |             |          | Exercise |          
|                                     |                  | for Future                               |     |    | Options     |          |          | Price     |  
|                                     |                  | Grants                                   |     |    | Outstanding |          |          | per Share |  
|                                     |                  |                                          |     |    |             |          |          |           |  
|                                     |                  | (In thousands, except per share amounts) |    
|Balance, September 30, 2002          |                  |                                          | 91  |    |             |          | 143      |           |   | $ | 6.85 |     
|                                     | Options canceled |                                          |     | 54 |             |          |          | (54       | ) |   |      | 7.85 | 
|                                     |                  |                                          |     |    |             |          |          |           |  
|Balance, September 30, 2003          |                  |                                          | 145 |    |             |          | 89       |           |   |   | 6.44 |     
|                                     | Options canceled |                                          |     | 71 |             |          |          | (71       | ) |   |      | 5.64 | 
|                                     |                  |                                          |     |    |             |          |          |           |  
|Balance, September 30, 2004 and 2005 |                  |                                          | 216 |    |             |          | 18       |           |   | $ | 9.63 |     
|                                     |                  |                                          |     |    |             |          |          |           |  



| |              
| | -------------
| | The 1997 Plan



|                            |                   |                                          |     |     |             |          |          |           |   |   |      |      | 
|--------------------------- | ----------------- | ---------------------------------------- | --- | --- | ----------- | -------- | -------- | --------- | - | - | ---- | ---- | 
|                            |                   |                                          |     |     |             | Weighted |         
|                            |                   | Shares                                   |     |     |             |          | Average  |          
|                            |                   | Reserved                                 |     |     |             |          | Exercise |          
|                            |                   | for Future                               |     |     | Options     |          |          | Price     |  
|                            |                   | Grants                                   |     |     | Outstanding |          |          | per Share |  
|                            |                   |                                          |     |     |             |          |          |           |  
|                            |                   | (In thousands, except per share amounts) |    
|Balance, September 30, 2002 |                   |                                          | 42  |     |             |          | 671      |           |   | $ | 3.28 |     
|                            | Options exercised |                                          |     |    |             |          |          | (39       | ) |   |      | 2.73 | 
|                            | Options canceled  |                                          |     | 132 |             |          |          | (132      | ) |   |      | 3.50 | 
|                            |                   |                                          |     |     |             |          |          |           |  
|Balance, September 30, 2003 |                   |                                          | 174 |     |             |          | 500      |           |   |   | 3.26 |     
|                            | Options exercised |                                          |     |    |             |          |          | (25       | ) |   |      | 2.44 | 
|                            | Options canceled  |                                          |     | 35  |             |          |          | (35       | ) |   |      | 3.71 | 
|                            |                   |                                          |     |     |             |          |          |           |  
|Balance, September 30, 2004 |                   |                                          | 209 |     |             |          | 440      |           |   |   | 3.27 |     
|                            | Options canceled  |                                          |     | 48  |             |          |          | (48       | ) |   |      | 4.71 | 
|                            |                   |                                          |     |     |             |          |          |           |  
|Balance, September 30, 2005 |                   |                                          | 257 |     |             |          | 392      |           |   | $ | 3.10 |     
|                            |                   |                                          |     |     |             |          |          |           |  

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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |              
| | -------------
| | The 2000 Plan



|                            |                   |                                          |       |      |             |          |          |           |   |   |      |      | 
|--------------------------- | ----------------- | ---------------------------------------- | ----- | ---- | ----------- | -------- | -------- | --------- | - | - | ---- | ---- | 
|                            |                   |                                          |       |      |             | Weighted |         
|                            |                   | Shares                                   |       |      |             |          | Average  |          
|                            |                   | Reserved                                 |       |      |             |          | Exercise |          
|                            |                   | for Future                               |       |      | Options     |          |          | Price     |  
|                            |                   | Grants                                   |       |      | Outstanding |          |          | per Share |  
|                            |                   |                                          |       |      |             |          |          |           |  
|                            |                   | (In thousands, except per share amounts) |      
|Balance, September 30, 2002 |                   |                                          | 1,156 |      |             |          | 94       |           |   | $ | 3.78 |     
|                            | Options granted   |                                          |       | (210 | )           |          |          | 210       |   |   |      | 3.10 | 
|                            | Options canceled  |                                          |       | 40   |             |          |          | (40       | ) |   |      | 3.12 | 
|                            |                   |                                          |       |      |             |          |          |           |  
|Balance, September 30, 2003 |                   |                                          | 986   |      |             |          | 264      |           |   |   | 3.58 |     
|                            | Options granted   |                                          |       | (203 | )           |          |          | 203       |   |   |      | 3.48 | 
|                            | Options exercised |                                          |       |     |             |          |          | (5        | ) |   |      | 3.12 | 
|                            | Options canceled  |                                          |       | 35   |             |          |          | (35       | ) |   |      | 3.32 | 
|                            |                   |                                          |       |      |             |          |          |           |  
|Balance, September 30, 2004 |                   |                                          | 818   |      |             |          | 427      |           |   |   | 3.56 |     
|                            | Options granted   |                                          |       | (123 | )           |          |          | 123       |   |   |      | 3.71 | 
|                            | Options exercised |                                          |       |     |             |          |          | (3        | ) |   |      | 2.70 | 
|                            | Options canceled  |                                          |       | 85   |             |          |          | (85       | ) |   |      | 4.14 | 
|                            |                   |                                          |       |      |             |          |          |           |  
|Balance, September 30, 2005 |                   |                                          | 780   |      |             |          | 462      |           |   | $ | 3.50 |     
|                            |                   |                                          |       |      |             |          |          |           |  







|                         |  |                     |     |           |                     |  |          |           |  |   |             |          |  |           |     |  |  |   |      | 
|------------------------ |  | ------------------- | --- | --------- | ------------------- |  | -------- | --------- |  | - | ----------- | -------- |  | --------- | --- |  |  | - | ---- | 
|                         |  | Options Outstanding |     |           | Options Exercisable | 
|                         |  |                     |     |           |                     | 
|                         |  |                     |     | Weighted  |                     |  | Weighted |           |  |   |             | Weighted | 
|                         |  |                     |     | Average   |                     |  | Average  |           |  |   |             | Average  | 
|                         |  |                     |     | Remaining |                     |  | Exercise |           |  |   |             | Exercise | 
|                         |  | Number              |     |           | Contractual         |  |          | Price     |  |   | Number      |          |  | Price     |    
|Range of Exercise Prices |  | Outstanding         |     |           | Life in Years       |  |          | per Share |  |   | Outstanding |          |  | per Share |    
|                         |  |                     |     |           |                     |  |          |           |  |   |             |          |  |           |    
|$1.750-4.800             |  |                     | 834 |           |                     |  | 3.40     |           |  | $ | 3.24        |          |  |           | 425 |  |  | $ | 3.20 | 
|5.063-7.750              |  |                     | 20  |           |                     |  | 3.83     |           |  |   | 5.99        |          |  |           | 17  |  |  |   | 5.92 | 
|8.125-9.625              |  |                     | 18  |           |                     |  | 0.57     |           |  |   | 9.63        |          |  |           | 18  |  |  |   | 9.63 | 
|                         |  |                     |     |           |                     |  |          |           |  |   |             |          |  |           |    
|$1.750-9.625             |  |                     | 872 |           |                     |  | 3.36     |           |  | $ | 3.44        |          |  |           | 460 |  |  | $ | 3.55 | 



| |                           
| | --------------------------
| | Defined Contribution Plans



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Note 9  Business, Operations and Geographic
Information






|                       |                |                          |        |        |      |   |        |        |  |   |        |        | 
|---------------------- | -------------- | ------------------------ | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                       |                | Year Ended September 30, |       
|                       |                |                          |       
|                       |                | 2005                     |        |        | 2004 |   |        | 2003   | 
|                       |                |                          |        |        |      |   |        |        | 
|                       |                | (In thousands)           |       
|Net sales(1):          |                |                          |        |        |      |   |        |        |  |   |        |       
|                       | United States  |                          | $      | 40,273 |      |   | $      | 41,757 |  |   | $      | 45,230 | 
|                       | United Kingdom |                          |        | 5,130  |      |   |        | 7,382  |  |   |        | 7,933  | 
|                       | France         |                          |        | 6,224  |      |   |        | 4,483  |  |   |        | 4,816  | 
|                       | Canada         |                          |        |       |      |   |        |       |  |   |        |       | 
|                       |                |                          |        |        |      |   |        |        | 
|Consolidated net sales |                | $                        | 51,627 |        |      | $ | 53,622 |        |  | $ | 57,979 |       
|                       |                |                          |        |        |      |   |        |        | 

|                               |                |                |       |       |      |   |       |       |  |   |       |       | 
|------------------------------ | -------------- | -------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                               |                | September 30,  |      
|                               |                |                |      
|                               |                | 2005           |       |       | 2004 |   |       | 2003  | 
|                               |                |                |       |       |      |   |       |       | 
|                               |                | (In thousands) |      
|Long-lived assets:             |                |                |       |       |      |   |       |       |  |   |       |      
|                               | United States  |                | $     | 280   |      |   | $     | 505   |  |   | $     | 899   | 
|                               | United Kingdom |                |       | 12    |      |   |       | 22    |  |   |       | 35    | 
|                               | France         |                |       | 15    |      |   |       | 20    |  |   |       | 24    | 
|                               | Canada         |                |       | 1,147 |      |   |       | 1,821 |  |   |       | 2,503 | 
|                               |                |                |       |       |      |   |       |       | 
|Consolidated long-lived assets |                | $              | 1,454 |       |      | $ | 2,368 |       |  | $ | 3,461 |      
|                               |                |                |       |       |      |   |       |       | 






|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|(1) | Net sales are attributed to countries based on the location of
    each countrys operations.



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DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Note 10  Summarized Quarterly Financial
Information (Unaudited)


|                                  |  |                                          |        |   |          |   |        |         |  |   |              |   |  |   |        |    
|--------------------------------- |  | ---------------------------------------- | ------ | - | -------- | - | ------ | ------- |  | - | ------------ | - |  | - | ------ | ---
|                                  |  | Quarter Ended                            |       
|                                  |  |                                          |       
|                                  |  | December 31                              |        |   | March 31 |   |        | June 30 |  |   | September 30 |  
|                                  |  |                                          |        |   |          |   |        |         |  |   |              |  
|                                  |  | (In thousands, except per share amounts) |       
|Fiscal 2005                       |  |                                          |        |   |          |   |        |         |  |   |              |   |  |   |        |    
|Net sales                         |  | $                                        | 12,970 |   |          | $ | 12,847 |         |  | $ | 13,152       |   |  | $ | 12,658 |    
|Gross profit                      |  |                                          | 6,683  |   |          |   | 7,178  |         |  |   | 7,406        |   |  |   | 7,199  |    
|(Loss) income before income taxes |  |                                          | (507   | ) |          |   | 274    |         |  |   | 300          |   |  |   | 83     |    
|Net (loss) income                 |  |                                          | (519   | ) |          |   | 262    |         |  |   | 288          |   |  |   | 275    | (1)
|Basic (loss) earnings per share   |  |                                          | (0.08  | ) |          |   | 0.04   |         |  |   | 0.05         |   |  |   | 0.04   |    
|Diluted (loss) earnings per share |  |                                          | (0.08  | ) |          |   | 0.04   |         |  |   | 0.05         |   |  |   | 0.04   |    
|Fiscal 2004                       |  |                                          |        |   |          |   |        |         |  |   |              |   |  |   |        |    
|Net sales                         |  | $                                        | 14,243 |   |          | $ | 14,673 |         |  | $ | 12,581       |   |  | $ | 12,125 |    
|Gross profit                      |  |                                          | 7,532  |   |          |   | 8,553  |         |  |   | 7,306        |   |  |   | 6,487  |    
|Income (loss) before income taxes |  |                                          | 435    |   |          |   | 456    |         |  |   | (432         | ) |  |   | (833   | )  
|Net income (loss)                 |  |                                          | 360    |   |          |   | 380    |         |  |   | (451         | ) |  |   | (678   | )  
|Basic earnings (loss) per share   |  |                                          | 0.06   |   |          |   | 0.06   |         |  |   | (0.07        | ) |  |   | (0.11  | )  
|Diluted earnings (loss) per share |  |                                          | 0.06   |   |          |   | 0.06   |         |  |   | (0.07        | ) |  |   | (0.11  | )  






|    |                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | A $237,000 income tax credit against future income taxes
    incurred in France, refundable after five years if not utilized,
    was recognized in the fourth quarter of fiscal 2005.

46