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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,
    2004                                                

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)




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

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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined by Exchange Act
Rule 12b-2).     Yes o          No þ

The aggregate market value of the voting stock
held by nonaffiliates of the Registrant was approximately
$23,579,137 at December 20, 2004 when the closing price of
such stock, as reported by NASDAQ, was $3.76.

There were 6,271,047 shares outstanding of
Registrants $.10 par value Common Stock as of
December 20, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be
filed with the Commission in January 2005 for the Companys
Annual Meeting of Shareholders scheduled for March 17, 2005
are incorporated by reference into Part III.



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INDEX

|                                                         |  |                                                                                           |    |  |    | 
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I                                                  
|Item 1.                                                  |  | Business                                                                                  |    |  | 3  | 
|Item 2.                                                  |  | Properties                                                                                |    |  | 9  | 
|Item 3.                                                  |  | Legal Proceedings                                                                         |    |  | 9  | 
|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                            |    |  | 21 | 
|Item 8.                                                  |  | Financial Statements and
    Supplementary Data                                           |    |  | 21 | 
|Item 9.                                                  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |    |  | 22 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                   |    |  | 22 | 
|PART III                                                
|Item 10.                                                 |  | Directors and Executive
    Officers of the Registrant                                    |    |  | 22 | 
|Item 11.                                                 |  | Executive Compensation                                                                    |    |  | 23 | 
|Item 12.                                                 |  | Security Ownership of
    Certain Beneficial Owners and Management                        |    |  | 23 | 
|Item 13.                                                 |  | Certain Relationships and
    Related Transactions                                        |    |  | 23 | 
|Item 14.                                                 |  | Principal Accountant Fees
    and Services                                                |    |  | 23 | 
|PART IV                                                 
|Item 15.                                                 |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |    |  | 23 | 
|SIGNATURES                                               |  |                                                                                           | 27 | 
|Amendment No. 2 to Loan and Security Agreement          
|Amendment No. 3 to Loan and Security Agreement          
|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



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PART I

This Form 10-K contains certain
forward-looking statements. For this purpose, any statements
contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as may,
will, expect, believe,
anticipate, estimate or
continue or comparable terminology are intended to
identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, and actual
results may differ materially depending on a variety of factors,
including those set forth in the section below entitled
Risk Factors.






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

Company Background

Delphax Technologies Inc. (the Company) designs,
manufactures, sells and services advanced digital
print-production equipment based on its patented electron beam
imaging (EBI) technology. The Company derives the majority
of its revenues from the sale of maintenance contracts, spare
parts and supplies that are used with this equipment. The
Companys printing equipment provides customers with the
capability to personalize, encode, print and collate documents
for publishing, direct mail, legal, financial, security, forms
and other commercial printing applications. The Company was
formed in 1981 and shipped its first digital printing system for
the production of checks and other financial documents, the
Model 2000 Checktronic®, in 1983.

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

During 1998, the Company launched the
Imaggia® MG20digital press in response to
the changing demands of security printers and on-demand printing
applications worldwide. The Imaggia MG20system utilizes
state-of-the-art digital, non-impact technology, offering print
quality that is visually indistinguishable from offset print.
The Company markets the Imaggiasystem to customers with
high-volume folio production and print-on-demand
(POD) applications.

In April 1999, the Company entered into an
agreement with Océ Printing Systems GmbH for rights to sell
(on a private label basis) and service the PS75 MICR and
other high-performance sheet-fed MICR printing systems (PS
MICRsystems) and non-MICR printing systems manufactured by
Océ. This agreement terminated effective October 13,
2003, with delivery of spare parts and consumable items
continuing, as per the agreement, through October 13, 2008.

In July 2001, the Company announced the
introduction of the Imaggia IIdigital press.
Faster, easier to use and supporting a larger media size than
the Imaggia MG20system, the Imaggia IIfeatures a flat-screen operator interface with the front-end
data processing capacity to support production of truly variable
data from sheet to sheet. The Company began shipping the
Imaggia II system in the second quarter of fiscal
2002.

In December 2001, the Company, through a newly
organized Canadian subsidiary, acquired substantially all of the
North American business assets of Delphax Systems and Delphax
Systems, Inc. (collectively, the Delphax Business).
The Delphax Business developed, manufactured and distributed
print engines, print management software and a range of digital
printing systems incorporating the Delphax Businesss
proprietary EBI technology. It was the supplier of the print
engines used in a number of the Companys products and also
supplied print engines to a number of non-competing original
equipment manufacturers (OEM). The acquisition was significant
in that it provided the Company with the patented EBI technology
for the print engines used in the Companys products.
Shortly after the acquisition, the Company changed its name to
Delphax Technologies Inc.

The Company has maintained supply and license
arrangements with the OEM customers of the Delphax Business.
These OEM customers provide an important non-competing channel
for distributing EBI technology-based products to additional
commercial printing markets.

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In April 2002, the Company announced the
introduction of the CR Seriesof high-volume, roll-fed
digital printing presses. The CR900and CR1300digital presses deliver 200 and 300 feet per minute
throughput, respectively. Both digital presses feature
wide-format, duplex production at full
600 X 600 DPI (dots per inch) print quality for
publishers, direct mailers, bill and statement printers,
in-house data and document centers and service bureaus. The
Company sold its first CR Seriesdigital press in June
2002.

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

During fiscal 2003, the Company consolidated its
manufacturing and engineering operations with those of the
Delphax Business in suburban Toronto, Canada.

In May 2004, the CR2000was successfully
introduced at the Drupa 2004 tradeshow in Germany. This product
features a throughput of 450 feet per minute and includes
substantial print quality improvements and the same paper
processing capabilities as the CR Seriesdigital presses.

As of September 30, 2004, the Company had
approximately 4,000 installations using its EBI technology in
more than 60 countries.

Products

Digital printing equipment is classified as
either sheet-fed or roll-fed printers or
presses, depending on their paper-handling characteristics.
Sheet-fed printing equipment requires the input of individual
pre-cut sheets of paper, or base stock, and may also be called
cut-sheet printing equipment. Roll-fed printing
equipment uses rolls of paper, or fan-folded stacks of paper,
and may also be called web printing equipment.

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

Sheet-fed printing equipment is generally not as
fast as roll-fed printing equipment as it is limited by the
process of moving individual sheets of paper through the print
engine at high speeds. Sheet-fed printing equipment is designed
to handle applications that require multiple paper stocks in a
single job, variable overprint on pre-printed stocks, or where
volume per print job is comparatively small.

The Company sells both sheet-fed and roll-fed
printing equipment that is currently used in a number of
commercial printing applications: folio production, insurance
claims, fulfillments, disbursements, publishing, direct mail and
transaction processing. Folio production applications include
the printing of checkbooks and financial payment coupon books.
Insurance claims applications consist of explanation of benefit
forms and insurance claim checks. Fulfillment applications
include coupons and rebate checks. Disbursement applications
include accounts payable checks and payroll checks. Publishing
applications include the printing of books, legal and financial
documents and manuals. Direct mail applications include the
printing of personalized and mass-market mailings. Transaction
processing applications include the printing of invoices and
statements. The Companys advanced digital print-production
equipment enables its customers to cost-effectively produce
applications of these types. The Company also licenses and
manufactures EBI technology for OEM partners that create
differentiated product solutions for additional markets.

The Companys digital presses employ its
patented EBI technology. Its flagship products, the CR Seriesand the Imaggia IIsystem, deliver
industry-leading throughput for high-volume roll-fed and
sheet-fed printing environments. The systems are durable and
reliable for 24 hours a day, 7 days a week, operation,
and are able to handle a wide range of substrates, from ultra
lightweight paper to heavy stock.

Sheet-fed Printing
Equipment.Currently, the
Companys premier sheet-fed digital presses are in the
Imaggia II Series, which offer best-in-class
throughput of up to 300 pages (8 1/2 X 11) per
minute at 600 X 600 DPI print quality. The
Imaggia IIsystem utilizes state-of-the-art digital,
non-impact technology, offering print quality that is visually
indistinguishable from offset print. The Imaggia IIprint quality also meets

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worldwide standards for MICR encoding on secure
documents. The Company markets two models of the
Imaggia IISeries, the IM220and the
IM300, to customers for the high-volume production of
checks, financial documents, business forms, calendars and
customized direct mail applications. The Imaggia IIsystem accommodates a wide range of substrates, from ultra
lightweight paper to heavy stock, and varying paper sizes up to
18.75 in width and 26 in length. The
Imaggia IIsystem can be purchased with various
input and output paper handling options and provides a high
level of flexibility, reliability and print consistency. The
Company estimates that approximately 60% of the consumer
checkbooks that are printed digitally in North America are
printed on an Imaggiasystem.


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

Roll-fed Printing
Equipment.The Companys premier
roll-fed digital press is the CR2000high-volume, web
production system, which delivers 450 feet per minute
throughput and features wide-format, duplex production at full
600 X 600 DPI print quality. The Company markets
three models of the CR Seriessystem to publishers,
direct mailers, bill and statement printers, in-house data and
document centers and service bureaus. The CR Seriesaccommodates a wide range of substrates, from ultra
lightweight paper to heavy stock, and can be purchased with
various output paper handling options. The CR Seriesdigital presses provide a high degree of flexibility,
reliability and the consistency required to produce high quality
printed output while reducing production costs.

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

Finishing Systems.In addition to document production systems, the Company
manufactures a finishing system to complement its sheet-fed
printing equipment. The Foliotronic® Plussystem consists of a guillotine and stitcher/binder module.
Its rated throughput is up to 2,000 books per hour. When used
with the Companys print equipment, the Foliotronic Plussystem enables customers with folio production applications
to transform various paper stocks into finished books.

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

Pre-press Software and
Hardware.The Company provides various
pre-press software and hardware solutions for use with its
printing equipment. When used with the Companys printing
equipment, pre-press software and hardware solutions provide the
data integration tools necessary to manage the print production
process. The Company has developed some of these pre-press
software and hardware solutions while others are provided
through various external supplier partnerships established by
the Company. Suppliers of pre-press software and hardware
solutions are required to meet stringent standards for quality,
reliability and interoperability with the Companys print
equipment.

Maintenance, spare parts and
supplies.Maintenance, spare parts and
supplies revenues result from the sale of maintenance contracts,
spare parts and proprietary items to customers using printing
equipment made by the Company. Maintenance contracts were sold
for the majority of equipment systems sold by the Company in
fiscal 2004. These contracts typically are for one-year
renewable terms, beginning after expiration of the warranty

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period (typically 90 days from customer
acceptance of a system), and can be terminated by either party
with notice. The contract provides for the customer to pay
charges for time and materials on an annual service contract
basis. The maintenance services are provided through the
Companys service network, which uses customer engineers
that are employed by the Company and based in the Companys
major service locations. Some customers elect to provide their
own maintenance and service on the equipment they have
purchased. Historically, warranty service expense has not been
significant to the Company after the initial units of a new
product have been placed with customers.


Supplies are operating materials that are
consumed during normal operation of the Companys equipment
systems, such as EBI print heads that are consumed in creating
the electronic image, erase rods that are consumed in removing
the electronic image, and toner, which is consumed in the
printing process. The Companys printing equipment is
designed to operate with spare parts and supply items provided
by the Company, and the Company believes that it supplies the
vast majority of the spare parts and supplies used with Delphax
equipment.

Sales and Marketing

Organization.The
Companys sales of printing equipment and of maintenance,
spare parts and supplies are made predominantly through direct
sales personnel based in the United States and Europe. The
Company also utilizes licensed distributors and resellers to
supplement its sales coverage of the commercial printing
marketplace. Marketing activities for the Company and its
subsidiaries are centralized at the Companys headquarters
in Minnetonka, Minnesota, USA. Key marketing activities include
market and product direction, product life cycle planning,
system pricing, execution of promotional plans (including major
industry events), creation and implementation of advertising and
public relations strategies, development of collateral materials
and sales support. In addition, the Company utilizes market
research and market development resources to anticipate changes
in its competitive environment.

United States
Market.Historically, the
Companys market for its products has been primarily the
production of checks and other financial documents. The market
for the Companys products has increased to include
additional segments of the publishing, direct mail and
transaction processing markets.

The publishing market in the United States is
comprised of two major segments: (i) long-run printing
applications, and (ii) short-run printing applications
referred to as POD applications. Long-run printing applications
include newspapers, magazines, first edition book printing,
consumer catalogs and greeting cards. POD applications include
the production of checks and other financial documents,
coursework textbooks, forms, newsletters, second edition
paperback books, personalized catalogs, policy manuals, product
catalogs and product manuals. The Company markets its
CR Seriesdigital web presses in both segments of
the publishing market.

The direct mail market is comprised of variable
data printing applications including postcards, self-mailers,
letters, flyers and personalized newsletters. The transaction
processing market is comprised of variable data printing
applications including bill and statement production, check
writing, policy printing and security documents. The Company has
an installed base in both these markets where it offers both
sheet-fed and roll-fed printing equipment.

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

International
Market.Historically, the market for
the Companys products outside of the United States has
been primarily in personalized check production. The average
personalized check order size in most international markets is
between 25 and 100 checks. These small order sizes are produced
cost effectively on the Companys

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products because of their automatic collation
capabilities. Stringent MICR quality standards, enforced by the
major clearing banks in most international markets, are also met
by the Companys high quality MICR printing capabilities.
As a result of these market factors, the Company has had success
in penetrating the largest personal check production markets
outside of the United States. These include France, Mexico,
Philippines, Spain and the United Kingdom. With the relatively
recent addition of the CR Series digital web
presses, the Company has significant new international
opportunities in book publishing, direct mail, financial
printing, packaging inserts and other print applications.


Significant Customers

The Company has been party to a multi-year
equipment and service contract with a significant equipment and
service customer. Equipment deliveries under the contract
concluded in the second quarter of fiscal 2002. The service
contract, as renewed effective January 1, 2003, will
continue through December 2005. Total equipment and service
revenues from this customer have been significant, representing
20%, 19% and 28% of net sales for fiscal 2004, 2003 and 2002,
respectively. The Company anticipates but cannot assure that
revenues from this customer will also be significant in fiscal
2005.

The Company also has a significant OEM customer
for whom it manufactures equipment that is sold under the
customers name. Revenues from this customer were 20%, 14%
and 13% of net sales for fiscal 2004, 2003 and 2002,
respectively. The Company anticipates but cannot assure that
revenues from this customer will also be significant in fiscal
2005.

Competition

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

Folio production involves the manufacture of
checkbooks and payment coupon books. In North America, check
production is dominated by a small number of companies: Deluxe
Corporation (St. Paul, Minnesota); John H. Harland
Company (Decatur, Georgia); Liberty Enterprises (St. Paul,
Minnesota); Davis + Henderson Intercheques (Toronto,
Ontario); and Clarke American (San Antonio, Texas); all are
customers of the Company. These major customers establish
competitive standards for alphanumeric print quality, MICR print
quality and delivery time that must be met or surpassed in order
to compete effectively in the United States personal check
market. With the Checktronicsystem product line, the
Company was able to establish itself only in the production of
new account kits, money market checkbooks and other applications
that do not require offset or letterpress quality. The
Imaggiasystem was designed to provide entry into the
North American check production market. The Company has
successfully penetrated this market with approximately a 60%
market share of the consumer checkbooks printed digitally in
North America. The Companys major competitors in the
digital printing and manufacture of checkbooks in North America
are Xerox (United States) and Océ (Germany).

International folio production markets, like the
North American payment book production market, are also driven
more by cost and production efficiency factors than by
alphanumeric print quality standards. In addition, enforcement
of high MICR standards by the clearing banks in most
international markets makes MICR printing quality an extremely
important competitive factor.

The Companys Checktronicsystem
product line has found a high degree of acceptance in the
international market segments because it provides the
efficiency, production flexibility and MICR quality sought by
the major check producers. The Company competes in the
international marketplace with Xerox, Océ and Nipson
(France).

The publishing market, with its varied
applications and specialized requirements, is highly
competitive. Heidelberg (Germany), Nipson, Océ, IBM,
Hitachi (Japan), Kodak (United States) and Xerox are currently
the Companys major competitors in the publishing market.
Printing for the direct mail market is focused on high-

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volume, low cost production. The Companys
major competitors in this market are IBM, Océ, Xerox and
Kodak. The transaction document printing market demands
high-volume, low cost production and the capability to process
variable data. IBM (United States), Océ and Xerox are the
Companys major competitors in the transaction document
printing market.


The Company has not faced extensive direct
competition from third parties in providing maintenance, spare
parts and supplies for its printing equipment. The cost and
availability from the Company of maintenance, spare parts and
supplies are typically carefully considered by customers in
evaluating a purchase of the Companys printing equipment,
and this has an important competitive effect in the
Companys pricing for maintenance, spare parts and
supplies. Some customers elect to provide their own maintenance
services.

Backlog

At December 10, 2004, the Company had a
backlog of approximately $10.0 million, compared with a
backlog of $9.8 million at December 8, 2003, comprised
of maintenance, spare parts and supplies at both dates. The
Company defines its backlog as purchase orders which are
unfilled. Because of customer changes in delivery schedules and
potential cancellation of orders, the Companys backlog as
of any particular date may not be representative of the
Companys actual sales for any succeeding fiscal period.

The Companys equipment is manufactured to
orders received, and to date, the Company has never been unable
to meet a scheduled shipment date because of excessive order
backlog. Absent a multi-unit order with varying scheduled ship
dates, the Company would only rarely expect to have a
significant backlog of equipment orders.

Manufacturing and Sources of Supply

The Companys manufacturing process enables
it to produce a platform version of its primary printing presses
that can be quickly configured to a customers specific
order without rework. This process has enabled the Company to
begin manufacturing without firm final orders. As a result, the
Company can better manage parts and material inventories and
respond quickly to new orders.

In fiscal 2003, the Company consolidated its
manufacturing and engineering operations at its facility in
Mississauga, a suburb of Toronto, Canada. Some of the components
of the Companys printing equipment are manufactured by
outside vendors, tested and then incorporated into the systems
by Company employees. Most of the components are available from
multiple sources; however, many of the critical components of
the Companys print systems would require redesign if new
suppliers were used.

Research and Development

Since its formation, the Company has focused its
research and development activities on the development of
digital printing equipment capable of producing, on a precision
basis, financial documents at required speeds and volumes. The
Company is continuing to develop the CR Seriesof
roll-fed equipment, which is targeted at customers with
high-volume publishing POD and direct mail applications.
Development activities for the CR Seriesare focused
on increasing throughput speed and enhancing print quality. The
Company also continues to develop features for the Imaggiaprint system, which is targeted at customers with
high-volume folio production and POD applications, and has
achieved its greatest success to date in the high-volume United
States check printing market. Software enhancements to improve
the pre-press capabilities and front-end data processing and
serviceability of both the CR Seriesand Imaggiasystems in the field are also important. In keeping with the
Companys philosophy of providing continuous improvement to
the units operating at customer sites, most of the new
capabilities of both the CR Seriesand the
Imaggiacan also be offered to existing customers in the
field as upgrades. The Company expects that product-engineering
efforts seeking further improvements and enhancements will be
ongoing. The Company has also continued product engineering on
its legacy product lines. The Companys research and
development expenditures were $5.0 million in fiscal 2004,
$4.7 million in fiscal 2003 and $5.7 million in fiscal
2002.

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Patents

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

Employees

As of December 8, 2004, the Company had
386 full-time and 3 part-time employees. Many of the
Companys employees are highly skilled, and the
Companys future success will depend, in part, on its
ability to attract and retain such employees. The Company is not
subject to any collective bargaining agreement and considers its
employee relations to be good.

Website

We maintain a website at www.delphax.com.
Our annual reports on Form 10-K, our quarterly reports on
Form 10-Q and our periodic reports on Form 8-K (and
any amendments to these reports) are available free of charge on
our website as soon as reasonably practical after we file these
reports with the SEC. To obtain copies of these reports, go to
the website, enter the Investor Relations section
and click on SEC Filings.






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

The Companys corporate offices are located
in Minnetonka, a suburb of Minneapolis, Minnesota. The Company
leases a 75,000 square foot building under a lease that
expires on September 15, 2010. Annual rent under the lease
was $420,000, plus operating expenses and real estate taxes
incurred by the landlord. With the consolidation of the North
American manufacturing and engineering operations at its
Canadian subsidiary during fiscal 2003, the Company has excess
space available at its Minnetonka location. On August 30,
2004, the Company exercised its right under the lease to
terminate the lease by August 31, 2005 and vacate the
facility. The Company is currently exploring the lease of other
facilities in Minnesota that are more suited to its current and
projected needs.

The Companys Canadian subsidiary leases two
facilities totaling 202,916 square feet of office and
manufacturing space in Mississauga, a suburb of Toronto, Canada,
a portion of which is subleased to another tenant. The combined
gross annual rent under the leases was $667,000 and increased to
$713,000 in September 2003. The related lease agreements expire
in 2005 and 2006, with various renewal options.

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

The Company believes that its current
arrangements for facilities are more than adequate to meet its
present needs and those for the foreseeable future.






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

The Company is involved in legal proceedings,
which are routine litigation incident to its business. While it
is impossible to estimate with certainty the ultimate legal and
financial result of such litigation, management is of the
opinion that while such litigation may have an impact on results
of a particular reporting period, the ultimate disposition of
such litigation will not have a material effect on the
Companys consolidated financial position, results of
operations or liquidity.

9



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##### Table of Contents








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

There were no matters submitted to a vote of
security holders during the fourth quarter of the fiscal year
ended September 30, 2004.

10



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##### Table of Contents






PART II






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

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

|                              |                |      |   |       |  |  |   |       | 
|----------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                              |                | High |   | Low  
|                              |                |      |   |      
|Year ended September 30, 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 | 
|Year ended September 30, 2003 |                |      |   |       |  |  |   |      
|                              | First quarter  |      | $ | 3.300 |  |  | $ | 2.850 | 
|                              | Second quarter |      |   | 2.990 |  |  |   | 2.350 | 
|                              | Third quarter  |      |   | 3.750 |  |  |   | 2.700 | 
|                              | Fourth quarter |      |   | 3.950 |  |  |   | 2.490 | 

Stock Repurchase Program

In September 1998, the Company announced a stock
repurchase program of up to 500,000 shares of Common Stock.
Under the program, 197,750 shares have been repurchased at
a cost of approximately $518,000. No shares were repurchased in
fiscal 2004, 2003 or 2002.

Holders

As of December 20, 2004, the Company had 272
holders of Common Stock of record.

Dividends

The holders of Common Stock are entitled to
receive dividends when and as declared by the Companys
Board of Directors. Since its inception, the Company has not
paid any dividends and does not anticipate paying any dividends
in the foreseeable future. The Companys agreement with its
lender prohibits the payment of dividends.

11



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##### Table of Contents



Equity Compensation Plan Information

The following table sets forth certain
information regarding outstanding options to purchase Common
Stock as of September 30, 2004:

|                                                                |               |                                       |     |                      |  |                          |      |      |  |  |       |     | 
|--------------------------------------------------------------- | ------------- | ------------------------------------- | --- | -------------------- |  | ------------------------ | ---- | ---- |  |  | ----- | --- | 
|                                                                |               |                                       |     |                      |  | 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 |                                       |     | 440                  |  |                          |      | 3.27 |  |  |       | 209 | 
|                                                                | The 2000 Plan |                                       |     | 427                  |  |                          |      | 3.56 |  |  |       | 818 | 
|Equity compensation plans not approved by
    security holders: |               |                                       |     |                      |  |                          |      |      |  |  |       |    
|                                                                | None          |                                       |     |                     |  |                          |      |     |  |  |       |    | 
|                                                                |               |                                       |     |                      |  |                          |      |      |  |  |       |    
|                                                                |               |                                       | 885 |                      |  | $                        | 3.54 |      |  |  | 1,243 |    
|                                                                |               |                                       |     |                      |  |                          |      |      |  |  |       |    






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

The following financial data for the fiscal years
ended September 30, 2004, 2003 and 2002 reflects the
post-acquisition results of acquiring the Delphax Business in
December 2001.

|                                            |                                                                                                           |                                       |   |        |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |       |  
|------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------- | - | ------ | ----- | ---- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ---- |  | - | ------ | ----- | -
|                                            |                                                                                                           |                                      
|                                            |                                                                                                           | Year Ended September 30,             
|                                            |                                                                                                           |                                      
|                                            |                                                                                                           | 2004                                  |   | 2003   |       | 2002 |   | 2001   |       | 2000
|                                            |                                                                                                           |                                       |   |        |       |      |   |        |       |     
|                                            |                                                                                                           |                                      
|                                            |                                                                                                           | (In thousands, except per share data)
|Consolidated Statements of Operations Data: |                                                                                                           |                                       |   |        |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |       
|                                            | Net sales                                                                                                 |                                       | $ | 53,622 |       |      | $ | 57,979 |       |      | $ | 52,404 |       |   | $ | 43,078 |      |  | $ | 28,926 |      
|                                            | Net (loss) income                                                                                         |                                       |   | (389   | )     |      |   | (1,835 | )     |      |   | (2,392 | )     |   |   | 2,150  |      |  |   | (290   | )    
|                                            | (Loss) earnings per common share:                                                                         |                                       |   |        |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |      
|                                            |                                                                                                           |  basic                               |   |        | (0.06 | )    |   |        | (0.30 | )    |   |        | (0.39 | ) |   |        | 0.35 |  |   |        | (0.05 | )
|                                            |                                                                                                           |  diluted                             |   |        | (0.06 | )    |   |        | (0.30 | )    |   |        | (0.39 | ) |   |        | 0.35 |  |   |        | (0.05 | )
|                                            | Weighted average number of shares outstanding
    during the period(1)                                    |                                       |   | 6,238  |       |      |   | 6,189  |       |      |   | 6,167  |       |   |   | 6,174  |      |  |   | 6,147  |      
|                                            | Weighted average number of shares and equivalents
    outstanding during the period, assuming dilution(2) |                                       |   | 6,238  |       |      |   | 6,189  |       |      |   | 6,167  |       |   |   | 6,228  |      |  |   | 6,147  |      
|Consolidated Balance Sheets Data:           |                                                                                                           |                                       |   |        |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |       
|                                            | Working capital                                                                                           |                                       | $ | 22,070 |       |      | $ | 11,393 |       |      | $ | 24,048 |       |   | $ | 16,945 |      |  | $ | 15,037 |      
|                                            | Total assets                                                                                              |                                       |   | 35,678 |       |      |   | 37,072 |       |      |   | 39,667 |       |   |   | 25,787 |      |  |   | 24,366 |      
|                                            | Long-term liabilities                                                                                     |                                       |   | 7,917  |       |      |   | 648    |       |      |   | 13,008 |       |   |   |       |      |  |   |       |      
|                                            | Shareholders equity                                                                                      |                                       |   | 16,521 |       |      |   | 14,820 |       |      |   | 15,800 |       |   |   | 17,983 |      |  |   | 15,923 |      



---



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

12



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##### Table of Contents






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

Overview

The Companys total revenues declined by 8%
in fiscal 2004, after strong growth in each of the four
prior fiscal years. The decline in fiscal 2004 was
primarily due to lower equipment sales, which have decreased in
each of the last three fiscal years due to a continued tight
capital equipment market in the printing industry. Revenue from
maintenance, spare parts and supplies decreased 2% in fiscal
2004 because the fall-off in maintenance, spare parts and
supplies revenues arising from the Companys legacy
equipment (principally the Checktronic) was not replaced
by maintenance, spare parts and supplies revenues from new
equipment installations.

The Company increased its research and
development expenditures to $5.0 million in
fiscal 2004 (9% of net sales), primarily to enhance the
speed and print quality of its new CR2000system. Despite
the decline in revenue and increased investment in product
development, the Company reduced its net loss in
fiscal 2004 to $389,000, compared with losses of
$1.8 million in fiscal 2003 and $2.4 million in
fiscal 2002.

In February 2004 the Company refinanced its
borrowings, all of which were then short-term, with new
long-term loans from new senior and subordinated lenders. This
shift in the maturity of most of these loans from short to long
term increased the Companys working capital. During
fiscal 2004, the level of outstanding borrowings declined
from $13.9 million on September 30, 2003 to
$9.0 million on September 30, 2004. This
$4.9 million reduction in outstanding borrowings was
accomplished primarily through operating cash flows, the
reduction of customer receivables and increased vendor payables,
partially offset by increased inventories.

The Company anticipates increased revenue in
fiscal 2005 from CR Seriesand Imaggiaequipment
sales, and believes that increases in revenues from maintenance,
spare parts and supplies for this equipment will more than
offset anticipated declines in maintenance, spare parts and
supplies revenues from the legacy Checktronicequipment.

Critical Accounting Policies

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

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



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

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

13



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##### Table of Contents



gross basis. Freight revenue is recorded on a
gross basis and recognized upon shipment. The related freight
costs are recorded as a cost of sales.




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

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



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

The Company records an allowance for doubtful
accounts based on identification of specific accounts
receivable, supplemented by a general allowance of 20% of
accounts aged greater than 90 days. Specific identification
of doubtful accounts and determination of the amount of the
required allowance involves a degree of judgment based on
discussion with our customer support and sales organization,
examination of the financial stability of our customers and
review of their payment history. There can be no assurance that
our estimates will match actual amounts ultimately written off.
During periods of downturn in the market for printed materials
or economic recession, a greater degree of risk exists
concerning the ultimate collectability of accounts receivable
due to the impact that these conditions might have on our
customer base.



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

In determining the carrying value of the
Companys net deferred tax assets, the Company must assess
the likelihood of sufficient future taxable income in certain
tax jurisdictions, based on estimates and assumptions, to
realize the benefit of these assets. The Company fully reserved
its net deferred tax assets, totaling $3.0 million as of
September 30, 2004 and 2003, recognizing that the Company
has incurred losses in four of the last five fiscal years and
there is no assurance that future years will be profitable. If
these estimates and assumptions change in the future, the
Company may record a reduction in the valuation allowance,
resulting in an income tax benefit in the Companys
Consolidated Statements of Operations. Management evaluates the
realizability of the deferred tax assets and assesses the
valuation allowance quarterly.



| |                          
| | -------------------------
| | Restructuring Initiatives

No restructuring activities were initiated in
fiscal 2004. During the three fiscal years ended
September 30, 2004, three initiatives were completed. See
Note H to the Consolidated Financial Statements. At the end
of each quarter, management evaluates its estimates of costs to
complete the restructuring initiatives. Differences, if any,
between previous and revised cost estimates many result in a
charge or credit to the Companys results of operations.

Results of Operations

The Consolidated Statements of Operations for
fiscal 2004, 2003 and 2002 include the post-acquisition results
of the Delphax Business acquired by the Company in December
2001. See Note E to the Consolidated Financial Statements.

14



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##### Table of Contents



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

|                                |                                     |                          |       |      |   |      |       |      |   |  |       |      |  
|------------------------------- | ----------------------------------- | ------------------------ | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|                                |                                     |                         
|                                |                                     | Year Ended September 30,
|                                |                                     |                         
|                                |                                     | 2004                     |       | 2003 |   | 2002
|                                |                                     |                          |       |      |   |     
|Sales:                          |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                | Maintenance, spares and supplies    |                          |       | 89.4 | % |      |       | 84.3 | % |  |       | 73.3 | %
|                                | Printing equipment                  |                          |       | 10.6 |   |      |       | 15.7 |   |  |       | 26.7 |  
|                                |                                     |                          |       |      |   |      |       |      |   |  |       |     
|NET SALES                       |                                     |                          | 100.0 |      |   |      | 100.0 |      |   |  | 100.0 |     
|Costs and Expenses:             |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                | Cost of sales                       |                          |       | 44.3 |   |      |       | 48.0 |   |  |       | 48.7 |  
|                                | Selling, general and administrative |                          |       | 45.2 |   |      |       | 42.9 |   |  |       | 41.9 |  
|                                | Research and development            |                          |       | 9.3  |   |      |       | 8.1  |   |  |       | 11.0 |  
|                                | Restructuring costs                 |                          |       | 0.0  |   |      |       | 1.9  |   |  |       | 0.0  |  
|                                |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                |                                     |                          | 98.8  |      |   |      | 100.9 |      |   |  | 101.6 |     
|                                |                                     |                          |       |      |   |      |       |      |   |  |       |     
|INCOME (LOSS) FROM OPERATIONS   |                                     |                          | 1.2   |      |   |      | (0.9  | )    |   |  | (1.6  | )   
|Interest expense                |                                     |                          | 1.8   |      |   |      | 1.3   |      |   |  | 1.5   |     
|Interest income                 |                                     |                          | (0.1  | )    |   |      | (0.1  | )    |   |  | (0.1  | )   
|Realized exchange loss (gain)   |                                     |                          | 0.3   |      |   |      | 0.2   |      |   |  | (0.4  | )   
|Unrealized exchange (gain) loss |                                     |                          | (0.1  | )    |   |      | 0.3   |      |   |  | (0.1  | )   
|                                |                                     |                          |       |      |   |      |       |      |   |  |       |     
|LOSS BEFORE INCOME TAXES        |                                     |                          | (0.7  | )    |   |      | (2.6  | )    |   |  | (2.5  | )   
|Income tax expense              |                                     |                          | 0.0   |      |   |      | 0.6   |      |   |  | 2.1   |     
|                                |                                     |                          |       |      |   |      |       |      |   |  |       |     
|NET LOSS                        |                                     |                          | (0.7  | )%   |   |      | (3.2  | )%   |   |  | (4.6  | )%  
|                                |                                     |                          |       |      |   |      |       |      |   |  |       |     

Net Sales.The
Companys revenues are from sales of: (i) maintenance,
spare parts and supplies, and (ii) digital printing
equipment. For fiscal 2004, revenues from maintenance, spare
parts and supplies decreased 2% from fiscal 2003, and in fiscal
2003 increased 27% over fiscal 2002. The dollar amounts of these
revenues for fiscal 2004, 2003 and 2002 were $47.9 million,
$48.9 million and $38.4 million, respectively. The
increase between fiscal 2002 and fiscal 2003 was due in part to
acquisition of the Delphax Business, which contributed to fiscal
2003 results for the entire fiscal year, but to fiscal 2002
results for only about nine months. Revenues from maintenance
contracts, spare parts and supplies also increased in fiscal
2003 from fiscal 2002 due to the larger installed base of
Imaggiaand to the addition of CR Seriessystems
to the installed base. The decrease in these revenues in fiscal
2004, compared with fiscal 2003, was primarily because the
reduction in maintenance, spare parts and supplies revenue from
the Companys legacy equipment products (primarily the
Checktronic) was only partially offset by new
maintenance, spare parts and supplies revenue from the
Companys newer equipment (the CR Series and
Imaggia systems).

Sales of digital printing equipment decreased 38%
in fiscal 2004, compared with fiscal 2003, and decreased 35% in
fiscal 2003, compared with fiscal 2002. In general, the Company
attributes these decreases to poor economic conditions for
capital equipment purchases, which have led customers to decide
against or postpone purchases of capital equipment for printing.
The decreases in both fiscal 2004 and fiscal 2003 were due to
significantly lower sales of Imaggia systems and legacy
products, partially offset by improved sales of roll-fed
presses. The Company sold two Imaggiasystems in fiscal
2004, compared with five in fiscal 2003 and 15 in fiscal 2002.
Unit-sales for the CR Seriessystem were four systems in
fiscal 2004, five in fiscal 2003 and two in fiscal 2002 when the
first CR Seriessystem was sold.

The Company anticipates increased revenue from
CR Seriesand Imaggiaequipment sales in fiscal
2005, compared with fiscal 2004.

15



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##### Table of Contents



Gross Margin.The
Companys gross margin percentage in fiscal 2004 was 56%,
compared with 52% and 51% in fiscal 2003 and 2002, respectively.
The increase in gross margin percentage for fiscal 2004 was
primarily due to the sales mix, with a greater proportion of
fiscal 2004 revenues derived from sale of maintenance contracts,
spare parts and supplies, which typically have a higher gross
margin than equipment. The gross margin percentage benefited
more in fiscal 2003 than in fiscal 2004 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 the Company would normally expect to achieve from its
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. However, partially offsetting this
favorable effect on the fiscal 2003 gross margin percentage,
were the costs of consolidating the manufacturing operations in
Canada and discontinuing the manufacturing operations in the
United States. The increase in gross margin percentage for
fiscal 2003, compared with fiscal 2002, was primarily due to
efforts made by the Company to reduce its costs to improve
margins on revenues from maintenance, spare parts and supplies.
In addition, as described above, the margin for fiscal 2003,
compared with fiscal 2002, was positively affected by the sale
of inventory acquired with the Delphax Business in December
2001, at values in excess of those originally assigned in the
final purchase accounting for the acquisition and negatively
affected by the costs of consolidating the manufacturing
operations in Canada and discontinuing the manufacturing
operations in the United States. In general, the Company
anticipates that its gross margin percentage for fiscal 2005
will be lower than for fiscal 2004 as the Company expects to
derive a greater proportion of fiscal 2005 revenues from the
sale of equipment.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses decreased $607,000 in fiscal 2004,
compared with fiscal 2003, and were $2.9 million higher in
fiscal 2003 than in fiscal 2002. As a percentage of net sales in
fiscal 2004, 2003 and 2002, these expenses were 45%, 43% and
42%, respectively. The decrease in the amount of these expenses
in fiscal 2004 was primarily due to cost reduction efforts and
lower sales volume. The increase in fiscal 2003 from fiscal 2002
was primarily due to the acquisition of the Delphax Business,
which added expense to fiscal 2003 for the entire year, but to
fiscal 2002 for only about nine months. Bad debt expense also
increased in fiscal 2003 to $535,000, compared with $201,000 in
fiscal 2002. Expense levels were also higher in fiscal 2003 than
in fiscal 2002 as a result of an increased focus on marketing
the Companys products. In addition, the strengthening of
foreign currencies against the U.S. dollar caused all
expenses paid in those currencies and translated into
U.S. dollars to be significantly higher than the expenses
paid in the equivalent local currencies in fiscal 2002.
Partially offsetting these increases was a reduction in customer
support expenses as the Company optimized use of in-house
support resources and third-party support services over the
course of fiscal 2003. The Company anticipates that its selling,
general and administrative expenses in fiscal 2005 may continue
to increase to support the projected growth in total revenues,
but at a rate less than the projected total revenue rate of
growth.

Research and Development
Expenses.Research and development
expenses in fiscal 2004 increased to $5.0 million from
$4.7 million in fiscal 2003. As a percentage of net sales,
they increased to 9% from 8%. The increase was primarily due to
purchased materials and components related to speed and print
quality enhancements introduced in the CR2000. Research
and development expenses decreased significantly in fiscal 2003
to $4.7 million from $5.7 million in fiscal 2002, also
decreasing as a percent of net sales to 8% from 11%. In fiscal
2003, as part of an overall restructuring of the North American
activities, the research and development function, which had
been split between the United States and Canadian facilities,
was combined in Canada. The additional expenses in Canada were
less than the expenses eliminated in the United States,
resulting in an overall reduction in research and development
costs for fiscal 2003, compared with fiscal 2002. This reduction
was partially offset by the strengthening of the Canadian dollar
against the U.S. dollar, which caused expenses paid in
Canadian dollars and translated into U.S. dollars to be
significantly higher than equivalent Canadian dollar expenses
paid in fiscal 2002.

Interest Expense.Interest expense in fiscal 2004 was $954,000, compared with
$808,000 in fiscal 2003 and $769,000 in fiscal 2002. Although on
average the total debt outstanding in fiscal 2004 was lower than
in fiscal 2003, fiscal 2004 interest expense included $408,000
of non-cash interest on the 7% convertible subordinated
notes (Convertible Notes) issued by the Company in February 2004
as part of a refinancing of the Companys

16



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##### Table of Contents



debt. The interest on the Convertible Notes is
paid in the form of newly issued shares of Company Common Stock,
which is expensed at the average market price of the Common
Stock over the interest period along with amortization of
original issue discount. See Liquidity and Capital Resources and
Note F to the Consolidated Financial Statement for more
details on the Companys debt. Interest expense for fiscal
2003 was $39,000 higher than for fiscal 2002. The interest rate
in fiscal 2003 was higher than in fiscal 2002, but applied to a
lower average balance because the loan balance was paid down to
$13.9 million as of September 30, 2003, from
$15.3 million as of September 30, 2002. Interest
related to the credit facility was incurred throughout fiscal
2003, but in fiscal 2002 for only the period following the
December 20, 2001 acquisition date.


Foreign Exchange Gains and
Losses.The Company incurs realized
and unrealized transactional foreign exchange gains and losses
on currency conversion transactions that are reflected on the
Companys Statements of Operations. Realized and unrealized
transactional exchange gains and losses reflect actual and
anticipated, respectively, gains or losses recognized as the
result of transactions between entities with different
functional currencies. The net transactional exchange losses for
fiscal 2004 and fiscal 2003 were $146,000 and $282,000,
respectively. The net transactional exchange gain for fiscal
2002 was $252,000. The Company experiences translational foreign
currency gains and losses, which are reflected on the
Companys Statements of Shareholders Equity, with
gains due to the weakening, and losses due to the strengthening,
of the U.S. dollar against the currencies of the
Companys foreign subsidiaries and the resulting effect of
currency translation on the valuation of the intercompany
accounts and certain assets of the subsidiaries, which are
denominated in U.S. dollars. The Company anticipates that
it will continue to have transactional and translational foreign
exchange gains or losses from foreign operations in the future,
although strategies to reduce the size of the gains or losses
will be reviewed and implemented whenever economical and
practical.

Income Taxes.For
fiscal 2004, the Company recorded income tax expense of $15,000
due to applicable minimum taxes. For fiscal 2003, the Company
recorded an income tax expense of $300,000 as a result of
foreign sourced income. The Company recorded an income tax
expense of $1.1 million on a loss before income taxes of
$1.3 million for fiscal 2002. The income tax expense for
fiscal 2002 reflected the estimated annual effective tax rate of
35% and an increase in the valuation allowance to fully reserve
the net deferred tax assets. The Company fully reserved its net
deferred tax assets, totaling $3.0 million as of
September 30, 2004 and 2003, recognizing that the Company
has incurred losses in four of the last five fiscal years and
there is no assurance that future years will be profitable.

Net Loss.The
Company incurred a net loss of $389,000 or $0.06 per share
in fiscal 2004, compared with net losses of $1.8 million or
$0.30 per share in fiscal 2003 and $2.4 million or
$0.39 per share in fiscal 2002. Operating expenses in total
were approximately $331,000 lower in fiscal 2004 than in fiscal
2003 when the Company also incurred a $1.1 million expense
associated with the December 2002 restructuring. In addition,
the significantly lower net loss in fiscal 2004 was the result
of the higher gross margin percentage for fiscal 2004. The
reduction in the net loss in fiscal 2003 compared with fiscal
2002 was due to higher overall sales levels at slightly improved
margins. Operating expenses were higher primarily due to the
acquisition of the Delphax Business, which added expense to
fiscal 2003 for the entire year, but to fiscal 2002 for only
about nine months from the acquisition date to the end of the
fiscal year. In addition, the expense associated with the
December 2002 restructuring added $1.1 million to fiscal
2003 operating expenses, with the cost reductions associated
with the restructuring only beginning to be realized over the
course of the year. Fiscal 2003 operating expenses were also
higher than for fiscal 2002 due to the effects of paying expense
in foreign currencies significantly stronger against the
U.S. dollar in fiscal 2003 than in fiscal 2002. The weaker
U.S. dollar in fiscal 2003, compared with fiscal 2002, also
resulted in net realized and unrealized losses in fiscal 2003,
compared with net realized and unrealized gains in fiscal 2002.

Restructuring
Initiatives.No restructuring
activities were initiated in fiscal 2004. Since fiscal 2001, the
Company has effected three restructuring initiatives for the
purpose of improving operating efficiency and cost-effective use
of Company resources. By incurring a one-time charge for each
initiative, the Company expected to achieve future cost savings
specific to the restructuring. However, the savings realized
were not expected to be directly incremental to net income, but
rather were reinvested in the Company, supporting growth and
product research and development. The restructuring initiatives
are summarized below. See Note H to the Consolidated
Financial Statements for more detail.

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In February 2001, the Company closed its
Australian subsidiary and recorded a one-time charge of
$215,000. By closing the subsidiary, the Company anticipated
eliminating annual operating expenses of approximately $500,000,
beginning in fiscal 2002, with no further loss of revenues from
Pacific Rim customers as a result of this change.

In April 2002, the Company reduced its workforce
by eliminating approximately 40 positions in the Canadian
subsidiary. The cost of terminating the employees in these
positions, approximately $875,000, was included in the cost of
the acquisition in accordance with SFAS 141. By taking this
action, the Company anticipated eliminating annual operating
expenses of approximately $1.3 million without affecting
its ability to fulfill future orders.

In December 2002, the Company announced plans to
consolidate its North American manufacturing and engineering
operations at its Canadian subsidiary. These operations were
divided between the facilities in the United States and Canada.

The Companys worldwide headquarters and
marketing function continued to be based in the United States.
The selling and customer support functions continued unchanged
in the United States, as well as in the subsidiaries in the
United Kingdom and France. The Company incurred approximately
$1.1 million in restructuring expenses over the course of
the consolidation. These restructuring expenses were wholly
comprised of employee severance costs unrelated to the
acquisition of the Delphax Business and, therefore, were
properly charged to operating expense in fiscal 2003. This
action was estimated to eliminate annual operating expenses of
$1.6 million while improving the Companys ability to
provide customer service and fulfill future orders.

Market Risk

The Company has foreign subsidiaries in Canada,
the United Kingdom and France. The Company does business in more
than 60 countries and generates approximately 20% to 30% of its
revenues from outside North America. The Companys ability
to sell its products in foreign markets may be affected by
changes in economic, political or market conditions in the
foreign markets in which the Company does business.

The Companys net investment in its foreign
subsidiaries was $7.3 million and $7.2 million at
September 30, 2004 and 2003, respectively, translated into
U.S. dollars at the closing exchange rates. The potential
loss based on end-of-period balances and prevailing exchange
rates resulting from a hypothetical 10% strengthening of the
dollar against foreign currencies was not material in the fiscal
year ended September 30, 2004. The functional currency of
the Canadian subsidiary is the U.S. dollar.

From time to time, the Company has entered into
foreign exchange contracts as a hedge against specific foreign
currency receivables. In fiscal 2004 and 2003, the Company did
not enter into any foreign exchange contracts.

Interest Rate Risk

Substantially all of the Companys senior
debt and the associated interest expense are sensitive to
changes in the level of interest rates. A hypothetical
100 basis point (one percentage point) increase in interest
rates would result in incremental interest expense in fiscal
2004, 2003 and 2002 of approximately $95,000, $119,000 and
$118,000, respectively.

Interest on the Companys $3.0 million
of outstanding Convertible Notes is determined by dividing the
monetary value of the accrued interest at a fixed 7% rate by the
initial conversion price of $3.20 per common share, or
16,406 shares of Common Stock. Interest expense on the
Convertible Notes is recorded quarterly based on the fair value
of the 16,406 shares issued quarterly in payment of
interest, measured at the average closing price of the Common
Stock over the period. Accordingly, interest expense on the
Convertible Notes may fluctuate from quarter to quarter but is
not subject to interest rate risk.

18



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Risk Related to Operations

The Companys operations are subject to a
number of risks, which include but are not limited the following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Limited sales of our new product
    lines.Acquisition of the Delphax
    Business in December 2001 significantly expanded the
    Companys product lines to include the CR Seriesand
    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.The Company has had two
    significant customers that each accounted for 20% of revenue in
    fiscal 2004. The Company anticipates, but cannot assure, that
    these customers will continue to be significant in fiscal 2005.
    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.The Company depends on its
    revolving credit facilities for working capital. The lender has
    a security interest in substantially all of the Companys
    assets. The Companys ability to borrow under the credit
    facilities depends on the Company 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.
|
| | Substantial operations in foreign
    markets.The Company 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 revenues 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.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Revenues are subject to fluctuations, which
    may be material.The Companys
    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 the Companys operating
    expenses are based on anticipated revenue 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.                                                         

Liquidity and Capital Resources

The Company entered into a credit agreement with
a bank in December 2001 to finance the acquisition of the
Delphax Business. The remaining balance of this debt was
$11.9 million in February 2004 when it was refinanced. The
refinancing consisted of new three-year senior secured credit
facilities with a new lender under which $8.1 million was
borrowed at the time of the refinancing, and $3.0 million
in 7% convertible subordinated notes (the Convertible
Notes) accompanied by warrants to purchase Company Common Stock.
The Convertible Notes have a four-year maturity and bear
interest at a fixed rate of 7% per annum, which is paid by
the Company issuing quarterly 16,406 shares of Common
Stock. The number of shares issued each quarter is fixed, but
the recorded interest expense for the issuance of these shares
varies from quarter to quarter because it is measured at the
average closing price of Company Common Stock during the
quarter. See Note F to the Consolidated Financial Statement
for more details on the Companys debt. The senior credit
facilities are secured by substantially all the assets of the
Company and the Convertible Notes are unsecured.

The refinancing in February 2004 increased the
Companys working capital, because the debt which was being
repaid was all short-term, and most of the new debt was
long-term. During fiscal 2004 the level of outstanding debt for
borrowed money declined from $13.9 million on
September 30, 2003 to $9.0 million on
September 30, 2004. This $4.9 million reduction in
outstanding borrowings was accomplished primarily through

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operating cash flows, the reduction of customer
receivables and increased vendor payables, partially offset by
increased inventories.


The Companys senior credit agreement was
amended in July 2004 to delete a provision that made a
material adverse change in the Company an event of default. The
senior credit agreement was also amended in December 2004.
The original terms provided for an increase, starting
September 20, 2004, in the required level of tangible net
worth, that the Company did not meet. The amendment changed the
required levels of tangible net worth at that date and into the
future, and as of the date of this filing, the Company is in
compliance with this and the other requirements of the credit
agreement.

The Companys ability to borrow under the
senior 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
facility and could have a serious adverse effect on the Company.

Accounts receivable decreased to
$7.9 million at September 30, 2004 from
$11.0 million at September 30, 2003, primarily due to
the lower sales level in fiscal 2004, compared with fiscal 2003,
particularly in the latter half of fiscal 2004. This decrease
was partially offset by a decrease in the allowance for doubtful
accounts. Inventory levels increased to $21.7 million at
September 30, 2004 from $17.9 million at
September 30, 2003, primarily due to an increase in
finished goods inventory, related to the introduction of the
CR Series systems. Several units were produced for
placement at customer sites for purchase evaluation.

As of September 30, 2003, the allowance for
doubtful accounts was $737,000. During fiscal 2004, $781,000 was
written off against that allowance and the allowance was
increased by $291,000 to cover estimated credit exposures. The
balance of the allowance for doubtful accounts as of
September 30, 2004 was $247,000.

Cash and short-term investments decreased to
$1.3 million at September 30, 2004, from
$2.7 million at September 30, 2003. The decrease in
cash and short-term investments was primarily due to a change in
the way revolving loans are repaid. Previously the Company had a
degree of discretion as to timing of principal payments on
revolving loans. Under the new credit facility all cash receipts
are automatically applied to pay down outstanding revolving
loans and the Company re-borrows to obtain working capital. In
addition, as of September 30, 2003, cash levels were higher
to meet anticipated near-term cash requirements, including
payroll funding by October 3, 2003.

Deferred revenue totaled $468,000 as of
September 30, 2004, compared with $1.1 million as of
September 30, 2003 (of which $506,000 was current and
$614,000 was long-term). The decrease was primarily due to
cancellation of a long-term note receivable from a customer.
Prior to cancellation, deferred revenue related to the note
receivable was recognized in monthly installments, matched
against proportionate cost of sales.

The Company has undertaken no significant
investing activities. No significant capital investment has been
undertaken or is planned, and at September 30, 2004, the
Company had no material commitments for capital expenditures.
Short-term investments are purchased as cash is available and
sold as they mature.

The Company expects higher equipment sales levels
in fiscal 2005, compared with 2004, led by the introduction of
the CR2000digital printing system. Revenue from
maintenance, spare parts and supplies in fiscal 2005, relative
to fiscal 2004, is anticipated to exceed the erosion in
maintenance, spare parts and supplies sales for the
Companys legacy equipment products. In general, the
Company anticipates that its gross margin percentage for fiscal
2005 will be lower than for fiscal 2004 as the Company expects
to derive a greater proportion of fiscal 2005 revenues from the
sale of equipment. The Company anticipates, but cannot assure,
that fiscal 2005 cash flow from operations will be higher than
the $2.4 million achieved for fiscal 2004, and that a
substantial portion of that cash flow, if achieved, would be
used to reduce trade accounts payable and repay debt.

20



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New Pronouncements

The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment(SFAS 123(R)), on December 16, 2004. This
statement requires the compensation cost relating to share-based
payment transactions to be recognized in a companys
financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued.
SFAS 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and
employee share purchase plans.

The Company will be required to adopt
SFAS 123(R) as of its first interim reporting period that
begins after June 15, 2005 or the fourth quarter of fiscal
year 2005. The Company has not completed its evaluation of
SFAS 123(R).

Contractual Obligations and Commercial
Commitments

The Company is obligated to make future payments
under various contracts. The following table summarizes the
contractual cash obligations of the Company as of
September 30, 2004:

|                               |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |     | 
|------------------------------ |  | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- |  |  | - | --- | 
|                               |  |                       
|                               |  | Payments Due by Period
|                               |  |                       
|                               |  |                        |        | Less than |  |           |       | More than
|                               |  | Total                  |        | 1 Year    |  | 1-3 Years |       | 3-5 Years |  | 5 Years
|                               |  |                        |        |           |  |           |       |           |  |        
|Senior credit facilities       |  | $                      | 6,659  |           |  | $         | 724   |           |  | $       | 5,935 |  |  | $ |      |  |  | $ |    | 
|Convertible subordinated notes |  |                        | 3,000  |           |  |           |      |           |  |         |      |  |  |   | 3,000 |  |  |   |    | 
|Line of discount               |  |                        | 541    |           |  |           | 541   |           |  |         |      |  |  |   |      |  |  |   |    | 
|Operating leases               |  |                        | 6,019  |           |  |           | 2,166 |           |  |         | 2,587 |  |  |   | 506   |  |  |   | 760 | 
|Capital leases                 |  |                        | 354    |           |  |           | 134   |           |  |         | 132   |  |  |   | 88    |  |  |   |    | 
|                               |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |     | 
|                               |  | $                      | 16,573 |           |  | $         | 3,565 |           |  | $       | 8,654 |  |  | $ | 3,594 |  |  | $ | 760 | 
|                               |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |     | 

See Notes F, G and I to the Consolidated
Financial Statements for additional information regarding these
obligations.

Caution Regarding Forward-Looking
Statements

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

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






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

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






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

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

21



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##### Table of Contents








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

On August 31, 2004, Ernst & Young
LLP (Ernst & Young) resigned as the independent public
accountants for the Company. The Audit Committee of the Board of
Directors accepted the resignation.

Ernst & Young performed audits of the
Companys consolidated financial statements for the years
ended September 30, 2003 and 2002. Ernst &
Youngs reports, included in the Company Amendment
No. 1 to the 2003 Form 10-K filed February 25,
2004, did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.

In connection with the audits of the
Companys financial statements for each of the two years
ended September 30, 2003, and through August 31, 2004,
the effective date of Ernst & Youngs resignation,
there were no disagreements between the Company and
Ernst & Young on any matter of accounting principles or
practice, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the
satisfaction of Ernst & Young, would have caused
Ernst & Young to make reference to the subject matter
of such disagreements in connection with the Form 8-K filed
on September 3, 2004 to announce Ernst &
Youngs resignation as the Companys independent
public accountants.

On September 24, 2004, the Audit Committee
of the Board of Directors engaged Grant Thornton LLP (Grant
Thornton) to audit the Companys financial statements.
During the Companys two most recent fiscal years ended
September 30, 2003 and 2004, and through September 24,
2004, the Company did not consult with Grant Thornton regarding
either: (i) the application of accounting principles to a
specific transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Companys
consolidated financial statements; or (ii) any matter that
was either the subject of a disagreement (as that term is
defined in paragraph 304(a)(1)(iv) of Regulation S-K
and the related instructions to that item) or a reportable event
(as that term is defined in paragraph 304(a)(1)(v) of
Regulation S-K).




Item 9A.     Controls
and Procedures

(a) The Companys Chief Executive
Officer and Chief Financial Officer have evaluated the
Companys disclosure controls and procedures as of the end
of the period covered by this report. Based upon that review,
they have concluded that these controls and procedures are
effective in informing them of material information relating to
the Company that is required to be disclosed in the periodic
reports which the Company files under the Securities Exchange
Act of 1934, as amended.

(b) There have been no changes in the
Companys internal control over financial reporting during
the period covered by this report that have materially affected,
or are reasonably likely to materially affect, internal control
over financial reporting.




PART III





|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Reference is made to the sections entitled
Election of Directors and Executive
Compensation included in the Companys definitive
proxy statement, to be filed with the Securities and Exchange
Commission in January 2005.

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

In April 2004, to comply with the code of
ethics outlined in Section 406(c) of the
Sarbanes-Oxley Act of 2002, the Company adopted a formal Code of
Conduct. A copy of the Code of Conduct is available without
charge, by request to: Controller, Delphax Technologies, Inc.,
12500 Whitewater Drive, Minnetonka, MN 55343-9420.

22



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##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Reference is made to the section entitled
Executive Compensation included in the
Companys definitive proxy statement, to be filed with the
Securities and Exchange Commission in January 2005.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Reference is made to the section entitled
Security Ownership of Principal Shareholders and
Management included in the Companys definitive proxy
statement, to be filed with the Securities and Exchange
Commission in January 2005.






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

Reference is made to the section entitled
Certain Relationships and Related Transactions
included in the Companys definitive proxy statement, to be
filed with the Securities and Exchange Commission in January
2005.






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

Reference is made to the section entitled
Approval of Auditors included in the Companys
definitive proxy statement, to be filed with the Securities and
Exchange Commission in January 2005.




PART IV





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

Financial Statements

The following Consolidated Financial Statements
of Delphax Technologies Inc. and subsidiaries are submitted in a
separate financial statement section of this report.

|                                                                                                        |  |      |    | 
|------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Description                                                                                             |  | Page
|                                                                                                        |  |     
|Report of Independent Registered Public
    Accounting Firm                                             |  |      | 30 | 
|Report of Independent Auditors                                                                          |  |      | 31 | 
|Consolidated Balance Sheets 
    September 30, 2004 and 2003                                           |  |      | 32 | 
|Consolidated Statements of Operations 
    Years ended September 30, 2004, 2003 and 2002               |  |      | 33 | 
|Consolidated Statements of Shareholders
    Equity  Years ended September 30, 2004, 2003 and
    2002 |  |      | 34 | 
|Consolidated Statements of Cash Flows 
    Years ended September 30, 2004, 2003 and 2002               |  |      | 35 | 
|Notes to Consolidated Financial Statements                                                              |  |      | 36 | 

Financial Statement Schedules

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

Reports on Form 8-K

The Company filed or furnished the following
reports on Form 8-K during the three months ended
September 30, 2004:

August 4, 2004



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Item 12. Disclosure of results of Operations
    and Financial Condition  Earnings release issued
    August 4, 2004 for the quarter ended June 30, 2004.

23



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##### Table of Contents



August 31, 2004



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Item 4.01 Changes in Registrants
    Certifying Accountant  Announce resignation of
    Ernst & Young as the independent public accountants for
    Delphax Technologies Inc.

September 24, 2004



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Item 4.01 Changes in Registrants
    Certifying Accountant  Announce audit committee of
    the board of directors engagement of Grant Thornton LLP as
    independent accountant to audit the Companys financial
    statements.

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  |             |  | Credit Agreement dated December 20, 2001
    among Check Technology Canada Ltd., Check Technology Corporation
    and Harris Trust and Savings Bank                                                                                                                                    |  | Exhibit 10.0 to Form 8-K dated
    January 3, 2002                          
|       | 10.2. | 1           |  | First Amendment to Credit Agreement among Delphax
    Technologies Canada Limited, f/k/a Check Technology Canada Ltd.,
    Delphax Technologies Inc, f/k/a Check Technology Corporation and
    Harris Trust and Savings Bank                                                          |  | Exhibit 10.2.1 to Form 10-K for the fiscal
    year ended September 30, 2002
|       | 10.2. | 2           |  | Second Amendment to Credit Agreement among
    Delphax Technologies Canada Limited, f/k/a Check Technology
    Canada Ltd., Delphax Technologies Inc, f/k/a Check Technology
    Corporation and Harris Trust and Savings Bank                                                         |  | Exhibit 10.1 to Form 8-K dated
    August 11, 2003                          
|       | 10.2. | 3           |  | Third Amendment to Credit Agreement among Delphax
    Technologies Canada Limited, f/k/a Check Technology Canada Ltd.,
    Delphax Technologies Inc, f/k/a Check Technology Corporation and
    Harris Trust and Savings Bank                                                          |  | Exhibit 10.2.3 to Form 10-K for the fiscal
    year ended September 30, 2003
|       | 10.2. | 4           |  | Forebearance Agreement made as of the 9th day of
    January 2004, by and among Delphax Technologies Canada Limited,
    f/k/a Check Technology Canada Ltd., Delphax Technologies Inc.,
    f/k/a Check Technology Corporation, Harris Trust and Savings
    Bank and Bank of Montreal |  | Exhibit 10.2.4 to Form 10-K for the fiscal
    year ended September 30, 2003
|       | 10.2. | 5           |  | 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. | 6           |  | Form of 7% Convertible Subordinated Note                                                                                                                                                                                                                                               |  | Exhibit 4.2 to Form 8-K dated
    February 5, 2004                          
|       | 10.2. | 7           |  | Form of Stock Purchase Warrant to Purchase Shares
    of Common Stock                                                                                                                                                                                                                  |  | Exhibit 4.3 to Form 8-K dated
    February 5, 2004                          

24



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##### Table of Contents



|       |       |             |  |                                                                                                                                                                                                                                                                                                         |  |                                                                                                 
|------ | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|Number |       | Description |  | Page or Incorporated by Reference from                                                                                                                                                                                                                                                                 
|       |       |             |  |                                                                                                                                                                                                                                                                                                        
|       | 10.2. | 8           |  | 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. | 9           |  | 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. | 10          |  | 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. | 11          |  | 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. | 12          |  | 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. | 13          |  | 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 filed herewith                                                                  
|       | 10.2. | 14          |  | 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 filed herewith                                                                  
|       | 10.3  |             |  | 1986 Stock Option Plan                                                                                                                                                                                                                                                                                  |  | Exhibit 10.8 to Form 10-K for the
    fiscal year ended September 30, 1986                      
|       | 10.4  |             |  | Form of Indemnification Agreement that the
    Company has entered into with officers and directors                                                                                                                                                                                                     |  | Exhibit 10.4 to Form 10-K for the
    fiscal year ended September 30, 2002                      
|       | 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 10.13 to Form 10-K for the
    fiscal year ended September 30, 2002                     

25



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##### Table of Contents



|       |       |             |  |                                                                                   |  |                                                                            
|------ | ----- | ----------- |  | --------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|Number |       | Description |  | Page or Incorporated by Reference from                                           
|       |       |             |  |                                                                                  
|       | 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
|       | 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                                                

26



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                          
| | -------------------------
| | DELPHAX TECHNOLOGIES INC.



| |     |                  
| | --- | -----------------
| | By: | /s/ JAY A. HERMAN

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

Dated: December 27, 2004



| |     |                         
| | --- | ------------------------
| | By: | /s/ JEFFREY S. MATHIESEN

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

Dated: December 27, 2004

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

|                                               |  |                                                                                             |  |                   |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                               |  |                                                                                             |  |                  
|Signature                                      |  | Title                                                                                       |  | Date             
|                                               |  |                                                                                             |  |                  
|                                              
|/s/ JAY A. HERMANJay A. Herman                 |  | Chairman and Chief Executive Officer (Principal
    Executive Officer)                      |  | December 27, 2004
|                                              
|/s/ JEFFREY S. MATHIESENJeffrey S. Mathiesen   |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | December 27, 2004
|                                              
|/s/ R. STEPHEN ARMSTRONGR. Stephen Armstrong   |  | Director                                                                                    |  | December 27, 2004
|                                              
|/s/ GARY R. HOLLANDGary R. Holland             |  | Director                                                                                    |  | December 27, 2004
|                                              
|/s/ KENNETH E. OVERSTREETKenneth E. Overstreet |  | Director                                                                                    |  | December 27, 2004
|                                              
|/s/ EARL W. ROGERSEarl W. Rogers               |  | Director                                                                                    |  | December 27, 2004

27



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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, 2004

DELPHAX TECHNOLOGIES INC.


Minnetonka, Minnesota


28



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##### Table of Contents



FORM 10-K  ITEM 15(a)(1)
AND (2)

DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES

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

Report
of Independent Registered Public Accounting Firm

Report
of Independent Auditors

Consolidated
Balance Sheets  September 30, 2004 and 2003

Consolidated
Statements of Operations  Years ended
September 30, 2004, 2003 and 2002

Consolidated
Statements of Shareholders Equity  Years ended
September 30, 2004, 2003 and 2002

Consolidated
Statements of Cash Flows  Years ended
September 30, 2004, 2003 and 2002

Notes
to Consolidated Financial Statements

29



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors and Shareholders

Delphax Technologies Inc.


We have audited the accompanying consolidated
balance sheet of Delphax Technologies Inc. and subsidiaries (the
Company) as of September 30, 2004 and the related
consolidated statements of operations, shareholders equity
and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Delphax
Technologies Inc. and subsidiaries as of September 30, 2004
and the consolidated results of their operation and their
consolidated cash flows for the year then ended in conformity
with accounting principles generally accepted in the United
States of America.



| |                       
| | ----------------------
| | /s/ GRANT THORNTON LLP
| |                       
| | Grant Thornton LLP    

Minneapolis, Minnesota

December 15, 2004, except for Note F as


to which the date is December 21, 2004


30



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##### Table of Contents





Report of Independent Auditors


The Board of Directors and Shareholders

Delphax Technologies Inc.


We have audited the accompanying consolidated
balance sheets of Delphax Technologies Inc. and subsidiaries as
of September 30, 2003, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the two years in the period ended
September 30, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 15(d). These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

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

Since the date of completion of our audit of the
accompanying financial statements and initial issuance of our
report thereon dated November 14, 2003, which report
contained an explanatory paragraph regarding the Companys
ability to continue as a going concern, the Company, as
discussed in Note K, has completed new financings, including a
bank credit agreement and issuance of $3,000,000 of subordinated
notes. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no
longer exist.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Delphax
Technologies Inc. and subsidiaries at September 30, 2003,
and the consolidated results of their operations and their cash
flows for each of the two years in the period ended
September 30, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth herein.



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

Minneapolis, Minnesota

November 14, 2003, except for Note K,


as to which the date is February 24, 2004


31



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |        |        | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                                  |                                                                                                                                                                         |                                  
|                                                                                  |                                                                                                                                                                         | September 30,                    
|                                                                                  |                                                                                                                                                                         |                                  
|                                                                                  |                                                                                                                                                                         | 2004                              |        | 2003  
|                                                                                  |                                                                                                                                                                         |                                   |        |       
|                                                                                  |                                                                                                                                                                         |                                  
|                                                                                  |                                                                                                                                                                         | (In thousands)                   
|ASSETS                                                                           
|CURRENT ASSETS                                                                    |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  | Cash and cash equivalents                                                                                                                                               |                                   | $      | 1,314  |        |   | $      | 2,670  |       
|                                                                                  | Short-term investments                                                                                                                                                  |                                   |        |       |        |   |        | 42     |       
|                                                                                  | Accounts receivable, less allowance for doubtful
    accounts of $247 and $737 as of September 30, 2004 and
    2003, respectively                                      |                                   |        | 7,897  |        |   |        | 11,038 |       
|                                                                                  | Current portion of notes receivable from customers                                                                                                                      |                                   |        | 39     |        |   |        | 105    |       
|                                                                                  | Inventory:                                                                                                                                                              |                                   |        |        |        |   |        |        |       
|                                                                                  |                                                                                                                                                                         | Raw materials and component parts |        |        | 11,887 |   |        |        | 11,321 | 
|                                                                                  |                                                                                                                                                                         | Work-in-progress                  |        |        | 1,156  |   |        |        | 1,057  | 
|                                                                                  |                                                                                                                                                                         | Finished goods                    |        |        | 8,667  |   |        |        | 5,480  | 
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  |                                                                                                                                                                         |                                   | 21,710 |        |        |   | 17,858 |       
|                                                                                  | Other current assets                                                                                                                                                    |                                   |        | 2,350  |        |   |        | 1,284  |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|TOTAL CURRENT ASSETS                                                              |                                                                                                                                                                         |                                   | 33,310 |        |        |   | 32,997 |       
|Long-term portion of notes receivable from
    customers                          |                                                                                                                                                                         |                                   |       |        |        |   | 614    |       
|EQUIPMENT AND FIXTURES                                                            |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  | Machinery and equipment                                                                                                                                                 |                                   |        | 4,579  |        |   |        | 4,570  |       
|                                                                                  | Furniture and fixtures                                                                                                                                                  |                                   |        | 4,152  |        |   |        | 3,748  |       
|                                                                                  | Leasehold improvements                                                                                                                                                  |                                   |        | 2,355  |        |   |        | 2,343  |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  |                                                                                                                                                                         |                                   | 11,086 |        |        |   | 10,661 |       
|                                                                                  | Less accumulated depreciation and amortization                                                                                                                          |                                   |        | 8,718  |        |   |        | 7,200  |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  |                                                                                                                                                                         |                                   | 2,368  |        |        |   | 3,461  |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|TOTAL ASSETS                                                                      |                                                                                                                                                                         | $                                 | 35,678 |        |        | $ | 37,072 |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                 
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                         
|CURRENT LIABILITIES                                                               |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  | Accounts payable                                                                                                                                                        |                                   | $      | 5,609  |        |   | $      | 3,422  |       
|                                                                                  | Accrued expenses                                                                                                                                                        |                                   |        | 3,534  |        |   |        | 3,357  |       
|                                                                                  | Income taxes payable                                                                                                                                                    |                                   |        | 264    |        |   |        | 375    |       
|                                                                                  | Current portion of bank credit facilities                                                                                                                               |                                   |        | 1,266  |        |   |        | 13,900 |       
|                                                                                  | Current portion of capital leases                                                                                                                                       |                                   |        | 99     |        |   |        | 44     |       
|                                                                                  | Current portion of deferred revenue                                                                                                                                     |                                   |        | 468    |        |   |        | 506    |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|TOTAL CURRENT LIABILITIES                                                         |                                                                                                                                                                         |                                   | 11,240 |        |        |   | 21,604 |       
|Long-term portion of bank credit facilities and
    subordinated convertible debt |                                                                                                                                                                         |                                   | 7,738  |        |        |   |       |       
|Long-term portion of deferred revenue                                             |                                                                                                                                                                         |                                   |       |        |        |   | 614    |       
|Long-term portion of capital leases                                               |                                                                                                                                                                         |                                   | 179    |        |        |   | 34     |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|TOTAL LIABILITIES                                                                 |                                                                                                                                                                         |                                   | 19,157 |        |        |   | 22,252 |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|SHAREHOLDERS EQUITY                                                              |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|                                                                                  | Common stock  par value $.10 per
    share  authorized 50,000 shares; issued and
    outstanding: 6,271 and 6,215 as of September 30, 2004 and
    2003, respectively |                                   |        | 627    |        |   |        | 621    |       
|                                                                                  | Additional paid-in capital                                                                                                                                              |                                   |        | 18,774 |        |   |        | 17,151 |       
|                                                                                  | Accumulated other comprehensive loss                                                                                                                                    |                                   |        | (711   | )      |   |        | (1,172 | )     
|                                                                                  | Accumulated deficit                                                                                                                                                     |                                   |        | (2,169 | )      |   |        | (1,780 | )     
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|TOTAL SHAREHOLDERS EQUITY                                                        |                                                                                                                                                                         |                                   | 16,521 |        |        |   | 14,820 |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                        |                                                                                                                                                                         | $                                 | 35,678 |        |        | $ | 37,072 |       
|                                                                                  |                                                                                                                                                                         |                                   |        |        |        |   |        |       

See notes to consolidated financial statements.

32



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |        | 
|-------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                       |                                     |                                      
|                                                                                       |                                     | Year Ended September 30,             
|                                                                                       |                                     |                                      
|                                                                                       |                                     | 2004                                  |        | 2003   |  | 2002
|                                                                                       |                                     |                                       |        |        |  |     
|                                                                                       |                                     |                                      
|                                                                                       |                                     | (In thousands, except per share data)
|Sales:                                                                                 |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|                                                                                       | Maintenance, spares and supplies    |                                       | $      | 47,932 |  |      | $      | 48,856 |  |   | $      | 38,431 | 
|                                                                                       | Printing equipment                  |                                       |        | 5,690  |  |      |        | 9,123  |  |   |        | 13,973 | 
|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|NET SALES                                                                              |                                     |                                       | 53,622 |        |  |      | 57,979 |        |  |   | 52,404 |       
|Costs and Expenses:                                                                    |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|                                                                                       | Cost of sales                       |                                       |        | 23,744 |  |      |        | 27,821 |  |   |        | 25,519 | 
|                                                                                       | Selling, general and administrative |                                       |        | 24,252 |  |      |        | 24,859 |  |   |        | 21,964 | 
|                                                                                       | Research and development            |                                       |        | 4,970  |  |      |        | 4,694  |  |   |        | 5,736  | 
|                                                                                       | Restructuring costs                 |                                       |        |       |  |      |        | 1,102  |  |   |        |       | 
|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|                                                                                       |                                     |                                       | 52,966 |        |  |      | 58,476 |        |  |   | 53,219 |       
|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|INCOME (LOSS) FROM OPERATIONS                                                          |                                     |                                       | 656    |        |  |      | (497   | )      |  |   | (815   | )     
|Interest expense                                                                       |                                     |                                       | 954    |        |  |      | 808    |        |  |   | 769    |       
|Interest income                                                                        |                                     |                                       | (70    | )      |  |      | (53    | )      |  |   | (51    | )     
|Realized exchange loss (gain)                                                          |                                     |                                       | 207    |        |  |      | 110    |        |  |   | (221   | )     
|Unrealized exchange (gain) loss                                                        |                                     |                                       | (61    | )      |  |      | 172    |        |  |   | (31    | )     
|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|LOSS BEFORE INCOME TAXES                                                               |                                     |                                       | (374   | )      |  |      | (1,534 | )      |  |   | (1,281 | )     
|Income tax expense                                                                     |                                     |                                       | 15     |        |  |      | 300    |        |  |   | 1,111  |       
|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|NET LOSS                                                                               |                                     | $                                     | (389   | )      |  | $    | (1,834 | )      |  | $ | (2,392 | )     
|                                                                                       |                                     |                                       |        |        |  |      |        |        |  |   |        |       
|Basic and diluted loss per common share                                                |                                     | $                                     | (0.06  | )      |  | $    | (0.30  | )      |  | $ | (0.39  | )     
|Weighted average number of shares outstanding
    during the period, basic and diluted |                                     |                                       | 6,238  |        |  |      | 6,189  |        |  |   | 6,167  |       

See notes to consolidated financial statements.

33



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##### Table of Contents



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, 2001                                 |                        |                | 6,161 |            |  | $             | 616 |              |  | $        | 17,010 |       |  | $ | (2,089 | )   |  | $ | 2,446  |        |   | $ | 17,983 |       
|Comprehensive loss:                                         |                        |                |       |            |  |               |     |              |  |          |        |       |  |   |        |     |  |   |        |        |   |   |        |       
|                                                            | Net loss               |                |       |           |  |               |     |             |  |          |        |      |  |   |        |    |  |   |        | (2,392 | ) |   |        | (2,392 | )
|                                                            | Translation adjustment |                |       |           |  |               |     |             |  |          |        |      |  |   |        | 177 |  |   |        |       |   |   |        | 177    |  
|                                                            |                        |                |       |            |  |               |     |              |  |          |        |       |  |   |        |     |  |   |        |        |   |   |        |       
|Total comprehensive loss                                    |                        |                |       |            |  |               |     |              |  |          |        |       |  |   |        |     |  |   |        |        |   |   | (2,215 | )     
|                                                            |                        |                |       |            |  |               |     |              |  |          |        |       |  |   |        |     |  |   |        |        |   |   |        |       
|Issuance of common stock                                    |                        |                | 5     |            |  |               | 1   |              |  |          | 13     |       |  |   |       |     |  |   |       |        |   |   | 14     |       
|Exercise of stock options, including tax benefit
    of $5  |                        |                | 17    |            |  |               | 2   |              |  |          | 38     |       |  |   |       |     |  |   |       |        |   |   | 40     |       
|Cancellation of restricted stock                            |                        |                | (7    | )          |  |               | (1  | )            |  |          | (21    | )     |  |   |       |     |  |   |       |        |   |   | (22    | )     
|                                                            |                        |                |       |            |  |               |     |              |  |          |        |       |  |   |        |     |  |   |        |        |   |   |        |       
|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 F)                            |                        |                |      |            |  |               |    |              |  |          | 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 |       
|                                                            |                        |                |       |            |  |               |     |              |  |          |        |       |  |   |        |     |  |   |        |        |   |   |        |       

See notes to consolidated financial statements.

34



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |       |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ | - | - | ------- | ----- | -
|                                                                                              |                                                            |                         
|                                                                                              |                                                            | Year Ended September 30,
|                                                                                              |                                                            |                         
|                                                                                              |                                                            | 2004                     |        | 2003   |   | 2002
|                                                                                              |                                                            |                          |        |        |   |     
|                                                                                              |                                                            |                         
|                                                                                              |                                                            | (In thousands)          
|OPERATING ACTIVITIES                                                                          |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|Net loss                                                                                      |                                                            | $                        | (389   | )      |   | $    | (1,834 | )      |   | $ | (2,392  | )    
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|                                                                                              | Depreciation and amortization                              |                          |        | 1,351  |   |      |        | 1,722  |   |   |         | 1,898 |  
|                                                                                              | Non-cash interest on 7% convertible
    subordinated notes |                          |        | 408    |   |      |        |       |   |   |         |      |  
|                                                                                              | Loss on disposal of equipment and fixtures                 |                          |        | 137    |   |      |        |       |   |   |         | 20    |  
|                                                                                              | Other                                                      |                          |        | 75     |   |      |        | 85     |   |   |         | (5    | )
|Changes in operating assets and liabilities:                                                  |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|                                                                                              | Accounts receivable, net                                   |                          |        | 3,357  |   |      |        | (57    | ) |   |         | 3,508 |  
|                                                                                              | Inventory                                                  |                          |        | (3,626 | ) |      |        | 3,471  |   |   |         | (738  | )
|                                                                                              | Other current assets                                       |                          |        | (1,061 | ) |      |        | 285    |   |   |         | 741   |  
|                                                                                              | Notes receivable from customers                            |                          |        | 711    |   |      |        | (720   | ) |   |         |      |  
|                                                                                              | Accounts payable and accrued expenses                      |                          |        | 2,131  |   |      |        | (1,043 | ) |   |         | 1,365 |  
|                                                                                              | Deferred revenue                                           |                          |        | (655   | ) |      |        | 627    |   |   |         | (567  | )
|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                     |                                                            |                          | 2,439  |        |   |      | 2,536  |        |   |   | 3,830   |      
|INVESTING ACTIVITIES                                                                          |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|Business acquisition                                                                          |                                                            |                          |       |        |   |      |       |        |   |   | (16,673 | )    
|Purchase of equipment and fixtures                                                            |                                                            |                          | (391   | )      |   |      | (713   | )      |   |   | (642    | )    
|Purchase of short-term investments                                                            |                                                            |                          |       |        |   |      | (40    | )      |   |   | (147    | )    
|Proceeds from sale of short-term investments                                                  |                                                            |                          | 45     |        |   |      | 80     |        |   |   | 68      |      
|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|NET CASH USED IN INVESTING ACTIVITIES                                                         |                                                            |                          | (346   | )      |   |      | (673   | )      |   |   | (17,394 | )    
|FINANCING ACTIVITIES                                                                          |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|Issuance of 7% convertible subordinated notes                                                 |                                                            |                          | 3,000  |        |   |      |       |        |   |   |        |      
|Issuance of common stock:                                                                     |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|                                                                                              | For interest paid on 7% convertible
    subordinated notes |                          |        | 125    |   |      |        |       |   |   |         |      |  
|                                                                                              | On exercise of stock options                               |                          |        | 76     |   |      |        | 105    |   |   |         | 35    |  
|Repurchase of common stock                                                                    |                                                            |                          |       |        |   |      |       |        |   |   | (22     | )    
|(Payment) borrowing on bank credit facilities, net                                            |                                                            |                          | (6,913 | )      |   |      | (1,380 | )      |   |   | 14,685  |      
|Borrowing on capital lease obligation                                                         |                                                            |                          | 262    |        |   |      |       |        |   |   |        |      
|Principal payments on capital lease obligations                                               |                                                            |                          | (61    | )      |   |      | (30    | )      |   |   | (6      | )    
|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|NET CASH (USED IN) PROVIDED BY FINANCING
    ACTIVITIES                                       |                                                            |                          | (3,511 | )      |   |      | (1,305 | )      |   |   | 14,692  |      
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                       |                                                            |                          | 62     |        |   |      | 394    |        |   |   | (2      | )    
|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|(DECREASE) INCREASE IN CASH AND EQUIVALENTS                                                   |                                                            |                          | (1,356 | )      |   |      | 952    |        |   |   | 1,126   |      
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                  |                                                            |                          | 2,670  |        |   |      | 1,718  |        |   |   | 592     |      
|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                        |                                                            | $                        | 1,314  |        |   | $    | 2,670  |        |   | $ | 1,718   |      
|                                                                                              |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|Supplemental disclosure of non-cash activities:                                               |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|Related to the 7% convertible subordinated
    notes:                                         |                                                            |                          |        |        |   |      |        |        |   |   |         |      
|                                                                                              | Non-cash interest expense                                  |                          | $      | 408    |   |      | $      |       |   |   | $       |      |  
|                                                                                              | Common stock issued in payment of interest                 |                          |        | 125    |   |      |        |       |   |   |         |      |  
|                                                                                              | Beneficial conversion feature                              |                          |        | 852    |   |      |        |       |   |   |         |      |  
|                                                                                              | Issuance of warrants                                       |                          |        | 561    |   |      |        |       |   |   |         |      |  
|Purchase of equipment through capital lease
    obligations                                   |                                                            |                          |       |        |   |      | 49     |        |   |   | 68      |      

See notes to consolidated financial statements.

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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2004


Note A  Summary of Significant
Accounting Policies

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

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

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

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

Accounts Receivable, Less Allowance for
Doubtful Accounts:The Company records
an allowance for doubtful accounts based on identification of
specific accounts receivable, supplemented by a general
allowance of 20% of accounts aged greater than 90 days.
Specific identification of doubtful accounts and determination
of the amount of the required allowance involves a degree of
judgment based on discussion with our customer support and sales
organization, examination of the financial stability of our
customers and review of their payment history. There can be no
assurance that our estimates will match actual amounts
ultimately written off. During periods of downturn in the market
for printed materials or economic recession, a greater degree of
risk exists concerning the ultimate collectability of accounts
receivable due to the impact that these conditions might have on
our customer base. As of September 30, 2004, 2003, and 2002
and for the fiscal years then ended, the activity in the
allowance for doubtful accounts was as follows:

|                  |  |                |      |      |  |      |     |   |  |   |     | 
|----------------- |  | -------------- | ---- | ---- |  | ---- | --- | - |  | - | --- | 
|                  |  |               
|                  |  | September 30, 
|                  |  |               
|                  |  | 2004           |      | 2003 |  | 2002
|                  |  |                |      |      |  |     
|                  |  |               
|                  |  | (In thousands)
|Beginning balance |  | $              | 737  |      |  | $    | 253 |   |  | $ | 52  | 
|Provisions        |  |                | 291  |      |  |      | 536 |   |  |   | 201 | 
|Write-offs        |  |                | (781 | )    |  |      | (52 | ) |  |   |    | 
|                  |  |                |      |      |  |      |     |   |  |   |     | 
|Ending balance    |  | $              | 247  |      |  | $    | 737 |   |  | $ | 253 | 
|                  |  |                |      |      |  |      |     |   |  |   |     | 

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

36



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Equipment and
Fixtures:Equipment and fixtures are
stated on the basis of cost and include the cost of assets held
under capital lease obligations. Demonstration equipment not
expected to be resold is carried in equipment on a cost basis.
Repair and maintenance costs that are considered not to extend
the useful life of equipment and fixtures are expensed as
incurred. Depreciation is provided on the straight-line method
for machinery and equipment and furniture and fixtures, which
includes computer equipment, over useful lives appropriate to
the specific asset class of 3 to 10 years, and for
leasehold improvements over various terms appropriate to the
nature of the improvement, up to the term of the lease plus one
renewal option. Amortization expense of items under capital
lease is included in depreciation expense.

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

Foreign Currency
Translation:The financial statements
of the Companys wholly owned subsidiaries in the United
Kingdom and France are measured in their respective functional
currencies before translating to U.S. dollars. Balance
sheets are translated using exchange rates in effect as of the
balance sheet dates. Statements of operations are translated
using rates to approximate the average exchange rates for the
applicable period. Gains and losses resulting from the
translation are recorded as a component of shareholders
equity. The functional currency of the Canadian subsidiary is
the U.S. dollar.

Income Taxes:The
liability method is used to account for income tax expense.
Deferred tax assets and liabilities are recorded based on the
differences between financial statement and tax bases of assets
and liabilities and the tax rates in effect when these
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance to a net amount which the
Company believes it more likely than not will realize, based on
the Companys estimates of its future taxable income and
the expected timing of temporary difference reversals.
Investment tax credits are accounted for under the flow-through
method, thereby reducing income taxes in the year in which the
credits are realized.

Stock-Based
Compensation:The Company follows
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees(APB 25), and related
interpretations in accounting for its employee stock options.
Under APB 25, when the exercise price of employee stock
options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. The
Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation(SFAS 123), as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for

37



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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock-Based Compensation Transition and
Disclosure(SFAS 148). Had the
Company elected to adopt the fair value recognition provisions
of SFAS 123, pro forma net loss and net loss per share
would be as follows:

|                                                                                     |  |                        |       |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ---------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                     |  |                       
|                                                                                     |  | For the Year Ended    
|                                                                                     |  | September 30,         
|                                                                                     |  |                       
|                                                                                     |  | 2004                   |       | 2003 |  | 2002
|                                                                                     |  |                        |       |      |  |     
|                                                                                     |  |                       
|                                                                                     |  | (In thousands,        
|                                                                                     |  | except per share data)
|Net loss, as reported                                                                |  | $                      | (389  | )    |  | $    | (1,834 | ) |  | $ | (2,392 | )
|Stock-based compensation determined under fair
    value based method for all awards |  |                        | (236  | )    |  |      | (178   | ) |  |   | (203   | )
|                                                                                     |  |                        |       |      |  |      |        |   |  |   |        |  
|Pro forma net loss, assuming fair value method
    for all stock-based awards        |  | $                      | (625  | )    |  | $    | (2,012 | ) |  | $ | (2,595 | )
|                                                                                     |  |                        |       |      |  |      |        |   |  |   |        |  
|Basic loss per share, as reported                                                    |  | $                      | (0.06 | )    |  | $    | (0.30  | ) |  | $ | (0.39  | )
|Diluted loss per share, as reported                                                  |  |                        | (0.06 | )    |  |      | (0.30  | ) |  |   | (0.39  | )
|Basic loss per share, pro forma                                                      |  |                        | (0.10 | )    |  |      | (0.33  | ) |  |   | (0.42  | )
|Diluted loss per share, pro forma                                                    |  |                        | (0.10 | )    |  |      | (0.33  | ) |  |   | (0.42  | )

The fair value of each option grant was estimated
at the date of grant using the BlackScholes option pricing
model with the following weighted-average assumptions for fiscal
2004, 2003 and 2002:

|                                |  |                          |          |      |  |      |          |   |  |  |          |  
|------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                                |  |                         
|                                |  | Year Ended September 30,
|                                |  |                         
|                                |  | 2004                     |          | 2003 |  | 2002
|                                |  |                          |          |      |  |     
|Expected dividend yield         |  |                          | 0        | %    |  |      | 0        | % |  |  | 0        | %
|Expected stock price volatility |  |                          | 51       |      |  |      | 52       |   |  |  | 53       |  
|Risk-free interest rate         |  |                          | 3.1      |      |  |      | 2.7      |   |  |  | 5.0      |  
|Expected life of options        |  |                          | 7  years |      |  |      | 7  years |   |  |  | 7  years |  

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

Earnings or Loss per
Share:Basic earnings or loss per
share is determined based on the weighted average common shares
outstanding, while the diluted earnings per share also give
effect to the common shares dilutive

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

potential. A reconciliation of the denominator in
the basic and diluted earnings or loss per share calculation is
as follows:

|                                       |                                                                       |                        |       |       |   |      |       |        |   |  |       |        |   | 
|-------------------------------------- | --------------------------------------------------------------------- | ---------------------- | ----- | ----- | - | ---- | ----- | ------ | - |  | ----- | ------ | - | 
|                                       |                                                                       | 2004                   |       | 2003  |   | 2002
|                                       |                                                                       |                        |       |       |   |     
|                                       |                                                                       |                       
|                                       |                                                                       | (In thousands)        
|Numerator:                             |                                                                       |                        |       |       |   |      |       |        |   |  |       |       
|                                       | Numerator for basic earnings per share, net loss                      |                        | $     | (389  | ) |      | $     | (1,835 | ) |  | $     | (2,392 | )
|                                       | Dilutive potential loss, Convertible Notes                            |                        |       |      |   |      |       |       |   |  |       |       |  
|                                       |                                                                       |                        |       |       |   |      |       |        |   |  |       |       
|                                       | Numerator for diluted loss per share                                  |                        | $     | (389  | ) |      | $     | (1,835 | ) |  | $     | (2,392 | )
|                                       |                                                                       |                        |       |       |   |      |       |        |   |  |       |       
|Denominator:                           |                                                                       |                        |       |       |   |      |       |        |   |  |       |       
|                                       | Denominator for basic earnings per share,
    weighted average shares |                        |       | 6,238 |   |      |       | 6,189  |   |  |       | 6,167  |  
|                                       | Dilutive potential common shares:                                     |                        |       |       |   |      |       |        |   |  |       |        |  
|                                       |                                                                       | Employee stock options |       |       |  |      |       |        |  |  |       |        |  | 
|                                       |                                                                       | Warrants               |       |       |  |      |       |        |  |  |       |        |  | 
|                                       |                                                                       | Convertible Notes      |       |       |  |      |       |        |  |  |       |        |  | 
|                                       |                                                                       |                        |       |       |   |      |       |        |   |  |       |       
|Dilutive potential common shares       |                                                                       |                        |      |       |   |      |      |        |   |  |      |       
|Denominator for diluted loss per share |                                                                       |                        | 6,238 |       |   |      | 6,189 |        |   |  | 6,167 |       
|                                       |                                                                       |                        |       |       |   |      |       |        |   |  |       |       

For fiscal 2004, a dilutive potential loss of
$126,000 related to Convertible Notes, and dilutive potential
common shares related to employee stock options of 89,000,
warrants of 45,000 and Convertible Notes of 622,000 were all
excluded because their effect would be antidilutive. For the
same reason, dilutive potential shares related to employee stock
options of 32,000 and 163,000 for fiscal 2003 and 2002,
respectively, warrants and Convertible Notes not being
applicable for those years, were excluded.

Reclassification:Certain items in the fiscal 2003 and 2002 Consolidated Financial
Statements have been reclassified to conform to the fiscal 2004
presentation.

New Pronouncements

On December 16, 2004, the FASB issued SFAS
123(R). This statement requires the compensation cost relating
to share-based payment transactions to be recognized in a
companys financial statements. That cost will be measured
based on the fair value of the equity or liability instruments
issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation
rights, and employee share purchase plans.

The Company will be required to adopt SFAS 123(R)
as of its first interim reporting period that begins after
June 15, 2005 or the fourth quarter of fiscal year 2005.
The Company has not completed its evaluation of SFAS 123(R).

39



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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note B  Income Taxes

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

|                         |  |                          |      |      |  |      |        |   |  |   |        |  
|------------------------ |  | ------------------------ | ---- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                         |  |                         
|                         |  | Year Ended September 30,
|                         |  |                         
|                         |  | 2004                     |      | 2003 |  | 2002
|                         |  |                          |      |      |  |     
|                         |  |                         
|                         |  | (In thousands)          
|Domestic                 |  | $                        | 398  |      |  | $    | (1,693 | ) |  | $ | (3,667 | )
|Foreign                  |  |                          | (772 | )    |  |      | 159    |   |  |   | 2,386  |  
|                         |  |                          |      |      |  |      |        |   |  |   |        |  
|Loss before income taxes |  | $                        | (374 | )    |  | $    | (1,534 | ) |  | $ | (1,281 | )
|                         |  |                          |      |      |  |      |        |   |  |   |        |  

The components of income tax expense recorded by
the Company were as follows:

|                         |         |                          |    |      |  |      |     |     |  |   |       |     | 
|------------------------ | ------- | ------------------------ | -- | ---- |  | ---- | --- | --- |  | - | ----- | --- | 
|                         |         |                         
|                         |         | Year Ended September 30,
|                         |         |                         
|                         |         | 2004                     |    | 2003 |  | 2002
|                         |         |                          |    |      |  |     
|                         |         |                         
|                         |         | (In thousands)          
|Current:                 |         |                          |    |      |  |      |     |     |  |   |       |    
|                         | Federal |                          | $  |     |  |      | $   |    |  |   | $     |    | 
|                         | State   |                          |    | 15   |  |      |     | 12  |  |   |       | 14  | 
|                         | Foreign |                          |    |     |  |      |     | 288 |  |   |       | 254 | 
|                         |         |                          |    |      |  |      |     |     |  |   |       |    
|                         |         |                          | 15 |      |  |      | 300 |     |  |   | 268   |    
|                         |         |                          |    |      |  |      |     |     |  |   |       |    
|Deferred:                |         |                          |    |      |  |      |     |     |  |   |       |    
|                         | Federal |                          |    |     |  |      |     |    |  |   |       | 760 | 
|                         | State   |                          |    |     |  |      |     |    |  |   |       | 74  | 
|                         | Foreign |                          |    |     |  |      |     |    |  |   |       | 9   | 
|                         |         |                          |    |      |  |      |     |     |  |   |       |    
|                         |         |                          |   |      |  |      |    |     |  |   | 843   |    
|                         |         |                          |    |      |  |      |     |     |  |   |       |    
|Total income tax expense |         | $                        | 15 |      |  | $    | 300 |     |  | $ | 1,111 |    
|                         |         |                          |    |      |  |      |     |     |  |   |       |    

The reconciliation of income tax expense to the
statutory rate of 34% was as follows:

|                                                   |  |                          |      |      |  |      |      |   |  |   |       |  
|-------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | ----- | -
|                                                   |  |                         
|                                                   |  | Year Ended September 30,
|                                                   |  |                         
|                                                   |  | 2004                     |      | 2003 |  | 2002
|                                                   |  |                          |      |      |  |     
|                                                   |  |                         
|                                                   |  | (In thousands)          
|Statutory rate applied to loss before income taxes |  | $                        | (117 | )    |  | $    | (522 | ) |  | $ | (435  | )
|Tax credits                                        |  |                          |     |      |  |      |     |   |  |   | 47    |  
|Change in valuation allowance                      |  |                          | 13   |      |  |      | 931  |   |  |   | 1,513 |  
|Other                                              |  |                          | 119  |      |  |      | (109 | ) |  |   | (14   | )
|                                                   |  |                          |      |      |  |      |      |   |  |   |       |  
|Total income tax expense                           |  | $                        | 15   |      |  | $    | 300  |   |  | $ | 1,111 |  
|                                                   |  |                          |      |      |  |      |      |   |  |   |       |  

40



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Significant components of federal and state
deferred tax assets were as follows:

|                          |                                                                       |                |        |       |  |   |        |       | 
|------------------------- | --------------------------------------------------------------------- | -------------- | ------ | ----- |  | - | ------ | ----- | 
|                          |                                                                       |               
|                          |                                                                       | September 30, 
|                          |                                                                       |               
|                          |                                                                       | 2004           |        | 2003 
|                          |                                                                       |                |        |      
|                          |                                                                       |               
|                          |                                                                       | (In thousands)
|Deferred tax assets:      |                                                                       |                |        |       |  |   |        |      
|                          | Net operating loss                                                    |                | $      | 1,477 |  |   | $      | 1,883 | 
|                          | Business credit carryforwards and alternative
    minimum tax credits |                |        | 642   |  |   |        | 642   | 
|                          | Inventory valuation reserves                                          |                |        | 573   |  |   |        | 320   | 
|                          | Other domestic and foreign differences                                |                |        | 312   |  |   |        | 146   | 
|                          |                                                                       |                |        |       |  |   |        |      
|Gross deferred tax assets |                                                                       |                | 3,004  |       |  |   | 2,991  |      
|Valuation allowance       |                                                                       |                | (3,004 | )     |  |   | (2,991 | )    
|                          |                                                                       |                |        |       |  |   |        |      
|Net deferred tax assets   |                                                                       | $              |       |       |  | $ |       |      
|                          |                                                                       |                |        |       |  |   |        |      

At September 30, 2004, the Company had
domestic tax loss carryforwards of approximately
$3.2 million, which expire in varying amounts through 2019.
In addition, the Company had domestic research and development
credit carryforwards of approximately $499,000, which are
available to offset future income tax. The credits expire in
varying amounts through September 2021. Domestic alternative
minimum tax credits of approximately $143,000 are available to
offset future income tax with no expiration date. These tax
benefits, together with future tax deductions from the reversal
of temporary differences, comprise the net deferred tax assets.
Deferred tax assets have been offset by a valuation allowance as
deemed necessary based on the Companys estimates of its
future sources of taxable income and the expected timing of
temporary difference reversals.

Undistributed earnings of the Companys
foreign subsidiaries amounted to approximately $3.6 million
at September 30, 2004. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes has been provided
thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both
U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practical because of the
complexities of the calculation.

The cash tax payments for the years ended
September 30, 2004, 2003 and 2002 were $294,000, $150,000
and $226,000, respectively.

Note C  Business, Operations
and Geographic Information

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

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Companys products are marketed
worldwide. The following summarizes the Companys revenues
and long-lived assets for the geographic areas in which the
Company has operations:

|                       |                |                          |        |        |  |      |        |        |  |   |        |        | 
|---------------------- | -------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                       |                |                         
|                       |                | Year Ended September 30,
|                       |                |                         
|                       |                | 2004                     |        | 2003   |  | 2002
|                       |                |                          |        |        |  |     
|                       |                |                         
|                       |                | (In thousands)          
|Net sales(a):          |                |                          |        |        |  |      |        |        |  |   |        |       
|                       | United States  |                          | $      | 41,757 |  |      | $      | 45,230 |  |   | $      | 42,523 | 
|                       | United Kingdom |                          |        | 7,382  |  |      |        | 7,933  |  |   |        | 6,170  | 
|                       | France         |                          |        | 4,483  |  |      |        | 4,816  |  |   |        | 3,345  | 
|                       | Canada         |                          |        |       |  |      |        |       |  |   |        | 122    | 
|                       | Australia      |                          |        |       |  |      |        |       |  |   |        | 244    | 
|                       |                |                          |        |        |  |      |        |        |  |   |        |       
|Consolidated net sales |                | $                        | 53,622 |        |  | $    | 57,979 |        |  | $ | 52,404 |       
|                       |                |                          |        |        |  |      |        |        |  |   |        |       

|                               |                |                |       |       |  |      |       |       |  |   |       |       | 
|------------------------------ | -------------- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                               |                |               
|                               |                | September 30, 
|                               |                |               
|                               |                | 2004           |       | 2003  |  | 2002
|                               |                |                |       |       |  |     
|                               |                |               
|                               |                | (In thousands)
|Long-lived assets:             |                |                |       |       |  |      |       |       |  |   |       |      
|                               | United States  |                | $     | 505   |  |      | $     | 899   |  |   | $     | 1,149 | 
|                               | United Kingdom |                |       | 22    |  |      |       | 35    |  |   |       | 44    | 
|                               | France         |                |       | 20    |  |      |       | 24    |  |   |       | 29    | 
|                               | Canada         |                |       | 1,821 |  |      |       | 2,503 |  |   |       | 3,537 | 
|                               | Australia      |                |       |      |  |      |       |      |  |   |       |      | 
|                               |                |                |       |       |  |      |       |       |  |   |       |      
|Consolidated long-lived assets |                | $              | 2,368 |       |  | $    | 3,461 |       |  | $ | 4,759 |      
|                               |                |                |       |       |  |      |       |       |  |   |       |      



---



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

Export sales to customers were $4.2 million,
$7.8 million and $4.2 million for the fiscal years
ended September 30, 2004, 2003 and 2002, respectively.

In fiscal 2004, 2003 and 2002, net sales to the
Companys largest non-OEM customer were $10.6 million,
$10.9 million and $14.5 million, 20%, 19% and 28%,
respectively, of total net sales for the fiscal year. At
September 30, 2004 and 2003, accounts receivable from this
customer totaled $1.2 million and $1.0 million, 16%
and 9%, respectively, of total accounts receivable as of those
dates. Net sales to the Companys largest OEM customer were
$10.9 million, $8.2 million and $6.8 million in
fiscal 2004, 2003 and 2002, respectively, 20%, 14% and 13%,
respectively, of total net sales for those years. Accounts
receivable from this OEM customer were $1.1 million and
$1.2 million as of September 20, 3004 and 2003,
respectively, comprising 14% and 11% of total accounts
receivable as of those dates.

Note D  Stock Options and
Benefit Plans

During fiscal 2004, the Company had in effect
four stock option programs, the 1986 Stock Option Plan (the 1986
Plan), the 1991 Stock Plan (the 1991 Plan), the 1997 Stock Plan
(the 1997 Plan) and the 2000 Stock Plan (the 2000 Plan) for its
key employees and non-employee directors. The 1986 Plan was
adopted in October 1986, the 1991 Plan in March 1991, the 1997
Plan in June 1997 and the 2000 Plan in March 2001. Stock options
under the 1986 Plan are non-qualified, while those under the
1991 Plan, the 1997 Plan and the 2000 Plan can be granted as
either non-qualified or incentive stock options. The 1991 Plan,
the 1997 Plan and the 2000 Plan also authorize the granting of
awards in the forms of stock appreciation rights, restricted
stock or deferred stock. In

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

all cases, subject to the provisions of the
plans, the Board of Directors has complete discretion in
establishing the terms and conditions of each option granted to
the employees of the Company.

Options outstanding as of September 30, 2004
were granted with vesting periods of two to ten years and lives
of seven to ten years. A summary of outstanding options and
shares reserved under each plan for the last three fiscal years
is as follows:



| |              
| | -------------
| | The 1986 Plan

The 1986 Plan was terminated in fiscal 2003; as
of September 30, 2004 and 2003, there were no options
outstanding or reserved for future grants. At September 30,
2002, there were no options outstanding under the 1986 Plan,
with 189,000 shares then reserved for future grants.



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

As of September 30, 2004, 18,000 options
were exercisable under the 1991 Plan. As of September 30,
2003, and 2002, respectively, 89,000 and 143,000 options were
exercisable under the 1991 Plan. Options are exercisable under
the 1991 Plan at prices of $4.38 to $9.63 per share. No
options were granted under the 1991 Plan in fiscal 2004, 2003 or
2002.

|                            |                  |                                       |     |             |  |           |     |     |   |   |      |      | 
|--------------------------- | ---------------- | ------------------------------------- | --- | ----------- |  | --------- | --- | --- | - | - | ---- | ---- | 
|                            |                  |                                       |     |             |  | Weighted 
|                            |                  | Shares                                |     |             |  | Average  
|                            |                  | Reserved                              |     |             |  | Exercise 
|                            |                  | for Future                            |     | Options     |  | Price    
|                            |                  | Grants                                |     | Outstanding |  | per Share
|                            |                  |                                       |     |             |  |          
|                            |                  |                                      
|                            |                  | (In thousands, except per share data)
|Balance, September 30, 2001 |                  |                                       | 89  |             |  |           | 145 |     |   | $ | 6.87 |     
|                            | Options canceled |                                       |     | 2           |  |           |     | (2  | ) |   |      | 7.75 | 
|                            |                  |                                       |     |             |  |           |     |     |   |   |      |     
|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 |                  |                                       | 216 |             |  |           | 18  |     |   | $ | 9.63 |     
|                            |                  |                                       |     |             |  |           |     |     |   |   |      |     

43



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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

As of September 30, 2004, 307,000 options were
exercisable under the 1997 Plan. As of September 30, 2003,
and 2002, respectively, 296,000 and 267,000 options were
exercisable under the 1997 Plan. Options are exercisable under
the 1997 Plan at prices of $2.13 to $6.50 per share. No
options were granted under the 1997 Plan in fiscal 2004 or
fiscal 2003.

|                            |                   |                                       |     |             |   |           |     |      |   |   |      |      | 
|--------------------------- | ----------------- | ------------------------------------- | --- | ----------- | - | --------- | --- | ---- | - | - | ---- | ---- | 
|                            |                   |                                       |     |             |   | Weighted 
|                            |                   | Shares                                |     |             |   | Average  
|                            |                   | Reserved                              |     |             |   | Exercise 
|                            |                   | for Future                            |     | Options     |   | Price    
|                            |                   | Grants                                |     | Outstanding |   | per Share
|                            |                   |                                       |     |             |   |          
|                            |                   |                                      
|                            |                   | (In thousands, except per share data)
|Balance, September 30, 2001 |                   |                                       | 105 |             |   |           | 625 |      |   | $ | 3.28 |     
|                            | Options exercised |                                       |     |            |   |           |     | (17  | ) |   |      | 3.27 | 
|                            | Options granted   |                                       |     | (100        | ) |           |     | 100  |   |   |      | 3.15 | 
|                            | Options canceled  |                                       |     | 37          |   |           |     | (37  | ) |   |      | 3.06 | 
|                            |                   |                                       |     |             |   |           |     |      |   |   |      |     
|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 |     
|                            |                   |                                       |     |             |   |           |     |      |   |   |      |     



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

At September 30, 2004 and 2003, there were
85,000 and 7,000 options, respectively, exercisable under
the 2000 Plan, at prices of $2.70 to $6.28 per share. No
options were exercisable under the 2000 Plan as of
September 30, 2002.

|                            |                   |                                       |       |             |   |           |     |     |   |   |      |      | 
|--------------------------- | ----------------- | ------------------------------------- | ----- | ----------- | - | --------- | --- | --- | - | - | ---- | ---- | 
|                            |                   |                                       |       |             |   | Weighted 
|                            |                   | Shares                                |       |             |   | Average  
|                            |                   | Reserved                              |       |             |   | Exercise 
|                            |                   | for Future                            |       | Options     |   | Price    
|                            |                   | Grants                                |       | Outstanding |   | per Share
|                            |                   |                                       |       |             |   |          
|                            |                   |                                      
|                            |                   | (In thousands, except per share data)
|Balance, September 30, 2001 |                   |                                       | 1,250 |             |   |           |    |     |   | $ |     |     
|                            | Options granted   |                                       |       | (94         | ) |           |     | 94  |   |   |      | 3.78 | 
|                            |                   |                                       |       |             |   |           |     |     |   |   |      |     
|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 |     
|                            |                   |                                       |       |             |   |           |     |     |   |   |      |     

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Total shares under all plans reserved for options
and restricted stock were 1,243,000 shares as of
September 30, 2004. Total compensation expense for
stock-based compensation was $0 in fiscal 2004, 2003 and 2002,
respectively.

For options granted under all plans in fiscal
2004, 2003 and 2002, the weighted average fair value of options
granted was $1.93, $1.71 and $2.04, respectively.

The following table summarizes information
concerning options outstanding and exercisable as of
September 30, 2004:

|                         |  |                                       |     |                     |  |           |      |             |  |           |      |  |  |  |     |  |  |   |      | 
|------------------------ |  | ------------------------------------- | --- | ------------------- |  | --------- | ---- | ----------- |  | --------- | ---- |  |  |  | --- |  |  | - | ---- | 
|                         |  |                                       |     |                    
|                         |  | 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
|                         |  |                                       |     |                     |  |           |      |             |  |          
|                         |  |                                      
|                         |  | (In thousands, except per share data)
|$1.750-4.800             |  |                                       | 822 |                     |  |           | 3.85 |             |  | $         | 3.26 |  |  |  | 367 |  |  | $ | 3.32 | 
|5.063-7.750              |  |                                       | 46  |                     |  |           | 4.56 |             |  |           | 6.09 |  |  |  | 26  |  |  |   | 5.99 | 
|8.125-9.625              |  |                                       | 17  |                     |  |           | 1.57 |             |  |           | 9.63 |  |  |  | 17  |  |  |   | 9.63 | 
|                         |  |                                       |     |                     |  |           |      |             |  |           |      |  |  |  |     |  |  |   |      | 
|$1.750-9.625             |  |                                       | 885 |                     |  |           | 3.84 |             |  | $         | 3.54 |  |  |  | 410 |  |  | $ | 3.76 | 



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

The Company has a defined contribution plan
covering substantially all Canadian employees. Employees
contribute 2% of gross salary to the plan and the Company makes
a contribution to the plan of 3% or 4% of gross salary depending
on employee classification. The employer contribution vests over
2 years. The expenses related to the plan for the fiscal
years ended September 30, 2004, 2003 and 2002 were
$256,000, $228,000 and $173,000, respectively.

The Company also has a defined contribution
salary deferral plan covering substantially all
U.S. employees under Section 401(k) of the Internal
Revenue Code. The plan allows eligible employees to make
contributions up to the maximum amount provided under the Code.
The Company makes an annual minimum contribution equal to 50% of
the participants before-tax contributions up to 6% of base
salary. The expenses related to the plan were $143,000,
$184,000, and $182,000, for the fiscal years ended
September 30, 2004, 2003 and 2002, respectively.

Similarly, the Company also has defined
contribution plans for employees in the United Kingdom and
France. For the fiscal years ended September 30, 2004, 2003
and 2002, respectively, the expenses related to the plan for
employees in the United Kingdom were $86,000, $82,000 and
$74,000, and for the employees in France were $26,000, $21,000
and $23,000.

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

On December 20, 2001, the Company, through a
newly organized Canadian subsidiary located in suburban Toronto,
Ontario, acquired substantially all of the North American
business assets of Delphax Systems, a Massachusetts general
partnership, and Delphax Systems, Inc., a Delaware corporation
(collectively, the Delphax Business). The Delphax
Business engaged in the development, manufacture and
distribution of print engines, print management software and a
range of digital printing equipment incorporating its
proprietary electron-beam imaging technology. The Delphax
Business was the supplier of the print engines used in a number
of the Companys products and also supplied print engines
to a number of non-competing original equipment manufacturers.
The acquisition was significant in that it provided the Company
with the patented EBI technology for the print engines used in
the Companys products.

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The acquisition purchase price consisted of
approximately $15.8 million in cash and approximately
$835,000 in acquisition related expenses. The Company acquired
approximately $14.9 million in current assets,
approximately $4.9 million in equipment and fixtures,
approximately $3.1 million in current liabilities and did
not generate any goodwill. The property acquired included fixed
assets, inventory, accounts receivable, contract rights, various
intellectual property and intangibles, including rights to the
name Delphax. Effective April 1, 2002,
following an affirmative shareholder vote at the
March  21, 2002 Annual Meeting of Shareholders, the
Company changed its name from Check Technology Corporation to
Delphax Technologies Inc. Wholly owned subsidiaries of the
Company were also renamed.

The Company has continued to use the purchased
assets in substantially the same manner as used by the Delphax
Business. As part of the acquisition, the Company anticipated
that efficiencies could be achieved in integrating the two
companies, and, as a result, included in accrued expenses in the
Consolidated Balance Sheets and in the cost of the acquisition
$875,000 for restructuring in accordance with SFAS 141. See
Note H.

The following unaudited pro forma combined
summary statement of operations for the fiscal year ended
September 30, 2002 was prepared in accordance with
SFAS 141 and SFAS 142 and assumes the acquisition had
occurred at the beginning of fiscal 2002 and, accordingly,
reflects an adjustment for interest expense. The unaudited pro
forma financial information is provided for informational
purposes only and does not purport to be indicative of future
results of the Company.

Unaudited Pro Forma Combined Summary Statement
of Operations

|                                        |  |                        |        |  
|--------------------------------------- |  | ---------------------- | ------ | -
|                                        |  | Year Ended            
|                                        |  | September 30,         
|                                        |  | 2002                  
|                                        |  |                       
|                                        |  | (In thousands,        
|                                        |  | except per share data)
|Net sales                               |  | $                      | 58,089 |  
|Net loss                                |  |                        | (2,760 | )
|Basic and diluted loss per common share |  |                        | (0.45  | )

Note F  Senior Credit
Facilities and Convertible Subordinated Debt

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

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

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

value of the accrued interest by the initial
conversion price of $3.20 per common share, or
16,406 shares per quarter. Interest expense is recorded
quarterly based on the fair value of the common shares issued
based on the average market price of the Common Stock over the
interest period. Accordingly, interest expense may fluctuate
from quarter to quarter. The Convertible Notes are unsecured.
The Warrants issued in connection with the Convertible Notes
were exercisable anytime after August 5, 2004 and expire on
February 4, 2008. The conversion price of the Convertible
Notes and the exercise price of the Warrants are subject to
adjustment in the event of stock splits, dividends and in
certain other circumstances affecting the capitalization of the
Company. The relative fair value of the Warrants on
February 5, 2004 was estimated to be approximately
$561,000. Furthermore, the Convertible Notes contained a
beneficial conversion feature representing an effective initial
conversion price that was less than the fair value of the
underlying Common Stock on February 5, 2004. The fair value
of the beneficial conversion feature was estimated to be
approximately $852,000. Both the relative fair value of the
Warrants and the fair value of the beneficial conversion feature
were recorded as an increase in additional paid-in capital and
as original issue discount on the underlying debt. The total
original issue discount of approximately $1.4 million is
being amortized to interest expense over the four-year life of
the Convertible Notes. Anytime after February 4, 2006, if
the average closing price of the Companys Common Stock has
been above $7.00 per share for the preceding 15 trading
days and certain other conditions are met, the Company may issue
a notice to redeem the Convertible Notes. Holders of the
Convertible Notes would then be required to either convert the
Convertible Notes to Common Stock or accept payment of 120% of
the outstanding unpaid principal.

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

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

The Companys senior credit agreement was
amended in July 2004 to delete a provision that made a
material adverse change in the Company an event of default. The
senior credit agreement was also amended in December 2004.
The original terms provided for an increase, starting
September 20, 2004, in the required level of tangible net
worth, that the Company did not meet. The amendment changed the
required levels of tangible net worth at that date and into the
future, and as of the date of this filing, the Company is in
compliance with this and the other requirements of the credit
agreement.

Availability under the senior credit facilities
is based primarily on the Companys accounts receivable and
inventory levels, but also on compliance with certain covenants,
one of which is a tangible net worth covenant requiring improved
tangible net worth at specific measurement dates. The Company
believes that the tangible net worth covenant is the most
restrictive covenant due to its reliance on the improvement in
the Companys net income over the course of the fiscal
year. It is the Companys intent to meet this and all the
covenants of the agreements, and the Company monitors
prospective compliance with the bank covenants. If the Company
determined that revenue shortfalls or other operating results
indicate it may not meet the tangible net worth covenant or any
other covenant, the Company will initiate expense reduction
plans to achieve compliance with

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the covenants. The Company has developed specific
plans to reduce certain expenses in the event of covenant
non-compliance, and the plans include, but may not be limited
to, reductions in research and development costs and personnel
costs. The Company believes that its plans to reduce expenses,
if required to do so, will be sufficient in order to meet the
covenants at all scheduled measurement dates through
September 30, 2005.

In France, the Company had a bank line of
discount totaling $541,000 as of September 30, 2004. This
obligation is secured by specific customer bank drafts. In
addition, the Companys United Kingdom subsidiary has a
guarantee facility with a bank to provide a VAT Deferred Bond.
There is no security deposit required under the agreement.

As of September 30, 2004, indebtedness under
the bank credit facilities was $6.7 million, outstanding at
an estimated average annual interest rate of 5.0%. The $541,000
bank line of discount in France was outstanding at an estimated
average annual interest rate of 5.3%. The weighted average
interest rate on all of the Companys debt was
approximately 9.5%, which gives effect to the bank credit
facilities, the bank line of discount in France and the
$3.0 million of Convertible Notes. Total interest expense
on all debt includes both the amortization of the original issue
discount of approximately $1.4 million over the four-year
term of the Convertible Notes and the value of the
Companys Common Stock issued in payment of interest and
expensed at the average market price of the stock over the
interest period.

Cash interest payments, principally comprised of
interest on the credit facilities, but including interest on
capital leases included in Note G below, for the fiscal
years ended September 30, 2004, 2003 and 2002, were
$556,000, $876,000 and $636,000, respectively.

Note G  Capital
Leases

|                                          |                                                                                                                |                   |     |      |     |   |    |    |    | 
|----------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ----------------- | --- | ---- | --- | - | -- | -- | -- | 
|                                          |                                                                                                                |                  
|                                          |                                                                                                                | September 30,    
|                                          |                                                                                                                |                  
|                                          |                                                                                                                | 2004              |     | 2003
|                                          |                                                                                                                |                   |     |     
|                                          |                                                                                                                |                  
|                                          |                                                                                                                | (In thousands)   
|Capital lease obligations on:             |                                                                                                                |                   |     |      |     |   |    |   
|                                          | Computer software, due over 36 months in
    monthly installments of $9, including interest of 8.8%            |                   | $   | 242  |     |   | $  |   |   
|                                          | Computer software, due over 36 months in
    monthly installments of $2, including interest at 9.1%            |                   |     | 36   |     |   |    | 50 |   
|                                          | Computer equipment, due over 24 months in
    monthly installments of $4, including interest at 21.4% to 22.1% |                   |     |     |     |   |    | 28 |   
|                                          |                                                                                                                |                   |     |      |     |   |    |   
|                                          |                                                                                                                | Total obligations |     |      | 278 |   |    |    | 78 | 
|Less current portion of lease obligations |                                                                                                                |                   | 99  |      |     |   | 44 |   
|                                          |                                                                                                                |                   |     |      |     |   |    |   
|Long-term portion of lease obligations    |                                                                                                                | $                 | 179 |      |     | $ | 34 |   
|                                          |                                                                                                                |                   |     |      |     |   |    |   

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Cash payments of interest on capital leases in
fiscal 2004, 2003 and 2002 were $8,000, $11,000 and $3,000,
respectively. As of September 30, 2004, future payments for
capital lease obligations, including interest, were as follows:

|                          |      |                                    |   |     |     |  
|------------------------- | ---- | ---------------------------------- | - | --- | --- | -
|                          |      | Capital Lease                     
|                          |      | Obligations                       
|                          |      |                                   
|                          |      | (In thousands)                    
|Year ending September 30: |      |                                    |   |    
|                          | 2005 |                                    | $ | 135 |    
|                          | 2006 |                                    |   | 131 |    
|                          | 2007 |                                    |   | 88  |    
|                          |      |                                    |   |    
|                          |      | Total payments                     |   |     | 354 |  
|                          |      | Less amounts representing interest |   |     | (76 | )
|                          |      |                                    |   |    
|                          |      | Present value of lease payments    |   | $   | 278 |  
|                          |      |                                    |   |    

Note H  Restructuring
Initiatives

No restructuring activities were initiated in
fiscal 2004. During the three fiscal years ended
September 30, 2004, three initiatives were completed.

In February 2001, the Company committed to a plan
to close its subsidiary in Australia, developed a formal exit
plan to cease operations and communicated the plan to all 14
full- and part-time employees of the subsidiary. The Company
determined that operations in the market served by the
Australian subsidiary could be more profitably served by
alternative means, including independent distributors and sales
agents. A one-time charge of $215,000 was recognized in
accordance with EITF 94-3. Operations of the subsidiary had
ceased and all employees had been terminated as of
December 31, 2001.

In April 2002, the Company effected a workforce
reduction, eliminating approximately 40 positions in the
Canadian subsidiary. Benefits were paid on either a lump-sum
basis or over time. The total estimated cost of the
restructuring of $875,000, comprised entirely of employee
severance costs, was accounted for as a cost of acquisition in
accordance with SFAS 141. As of September 30, 2003,
the restructuring was completed at approximately the original
cost estimate.

In December 2002, the Company announced plans to
consolidate its North American manufacturing and engineering
operations at its Canadian subsidiary. Previously, these
operations were divided between the facilities in the United
States and Canada. The Companys worldwide headquarters and
marketing functions continued to be based in the United States.
The selling and customer support functions continued unchanged
in the United States, as well as in the subsidiaries in the
United Kingdom and France. The Company incurred approximately
$1.1 million in restructuring expenses over the course of
the consolidation. These restructuring expenses were wholly
comprised of employee severance costs unrelated to the
acquisition of the Canadian subsidiary and, therefore, were
properly charged to operating expense in fiscal 2003, in
accordance with EITF 94-3. As of September 30, 2003,
the accrued liability for benefits payable in the future was
$344,000, all of which was paid in the first quarter of fiscal
2004.

Note I  Commitments and
Contingencies

Building, equipment and automobile rentals under
operating leases were $2,369,000, $2,221,000 and $1,602,000 for
the fiscal years ended September 30, 2004, 2003 and 2002,
respectively.

The Company leases its corporate offices under a
fifteen-year agreement expiring on September 15, 2010.
Annual rent under the lease was $420,000. The Company is
obligated to pay operating expenses and real estate

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

taxes incurred by the landlord. The lease
agreement grants the Company the right to terminate the lease at
the end of the tenth lease year. The Company exercised that
right in August 2004 and notified the landlord of its intent to
terminate the lease in September 2005.

The Companys Canadian subsidiary leases two
facilities totaling 202,916 square feet of office and
manufacturing space in Mississauga, a suburb of Toronto, Canada,
a portion of which is subleased to another tenant. The combined
gross annual rent was $667,000 and increased to $713,000 in
September 2003. The related lease agreements expire in 2005 and
2006, with various renewal options. The sublease agreement, at a
gross annual rent of $144,000, expires in December 2005, with an
option to renew.

The Companys subsidiary in the United
Kingdom leases office space under a lease expiring in 2012.
Annual rental under the lease was $180,000, subject to
adjustment every five years, plus a pro rata share of operating
expenses incurred by the landlord.

Total future minimum rental commitments for
operating leases of facilities, sales offices, equipment and
automobiles are $6,019,000 and are due as follows: fiscal years
ending September 30, 2005  $2,166,000;
2006  $1,362,000; 2007  $1,225,000;
2008  $253,000; 2009  $253,000;
thereafter  $760,000.

Note J  Summarized Quarterly
Financial Information (Unaudited)

|                                  |  |                                       |        |          |  |         |        |              |  |   |        |   |  |   |        |  
|--------------------------------- |  | ------------------------------------- | ------ | -------- |  | ------- | ------ | ------------ |  | - | ------ | - |  | - | ------ | -
|                                  |  |                                      
|                                  |  | Quarter Ended                        
|                                  |  |                                      
|                                  |  | December 31                           |        | March 31 |  | June 30 |        | September 30
|                                  |  |                                       |        |          |  |         |        |             
|                                  |  |                                      
|                                  |  | (In thousands, except per share data)
|Fiscal 2004                       |  |                                       |        |          |  |         |        |              |  |   |        |   |  |   |        |  
|Net sales                         |  | $                                     | 14,243 |          |  | $       | 14,674 |              |  | $ | 12,581 |   |  | $ | 12,124 |  
|Gross profit                      |  |                                       | 7,532  |          |  |         | 8,554  |              |  |   | 7,306  |   |  |   | 6,486  |  
|Income (loss) before income taxes |  |                                       | 435    |          |  |         | 456    |              |  |   | (432   | ) |  |   | (833   | )
|Net income (loss)                 |  |                                       | 360    |          |  |         | 380    |              |  |   | (451   | ) |  |   | (678   | )
|Basic income (loss) per share     |  |                                       | 0.06   |          |  |         | 0.06   |              |  |   | (0.07  | ) |  |   | (0.11  | )
|Diluted income (loss) per share   |  |                                       | 0.06   |          |  |         | 0.06   |              |  |   | (0.07  | ) |  |   | (0.11  | )
|Fiscal 2003                       |  |                                       |        |          |  |         |        |              |  |   |        |   |  |   |        |  
|Net sales                         |  | $                                     | 15,475 |          |  | $       | 14,230 |              |  | $ | 14,805 |   |  | $ | 13,469 |  
|Gross profit                      |  |                                       | 7,659  |          |  |         | 7,906  |              |  |   | 7,698  |   |  |   | 6,895  |  
|Loss before income taxes          |  |                                       | (1,137 | )        |  |         | (9     | )            |  |   | (105   | ) |  |   | (283   | )
|Net loss                          |  |                                       | (1,137 | )        |  |         | (9     | )            |  |   | (105   | ) |  |   | (583   | )
|Basic loss per share              |  |                                       | (0.18  | )        |  |         | (0.00  | )            |  |   | (0.02  | ) |  |   | (0.09  | )
|Diluted loss per share            |  |                                       | (0.18  | )        |  |         | (0.00  | )            |  |   | (0.02  | ) |  |   | (0.09  | )

50