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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K/A

Amendment No. 1 to 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,
    2003                                                

Commission File Number: 0-10691

Delphax Technologies Inc.

(Exact name of registrant as specified in its
charter)


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




---

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.
þ

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
$21,441,312 at December 15, 2003 when the closing price of
such stock, as reported by NASDAQ, was $3.45.

There were 6,214,873 shares outstanding of
Registrants $.10 par value Common Stock as of
December 15, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement filed
with the Commission on January 28, 2004 for the
Companys Annual Meeting of Shareholders scheduled for
March 18, 2004 are incorporated by reference into
Part III.

This Form 10-K consists of 58 pages
(including exhibits). The index is set forth on page 2.



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TABLE OF CONTENTS



|                                                                                                                                            |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                                                                                     
|                                                                                                                                            | Item 1. Business                                                                             
|                                                                                                                                            | Item 2. Properties                                                                           
|                                                                                                                                            | Item 3. Legal Proceedings                                                                    
|                                                                                                                                            | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                                                                                                    
|                                                                                                                                            | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                                                                                                            | Item 6. Selected Financial Data                                                              
|                                                                                                                                            | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                                                            | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                                                                                                                                            | Item 8. Financial Statements and Supplementary Data                                          
|                                                                                                                                            | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                                                                                                            | Item 9A. Controls and Procedures                                                             
|PART III                                                                                                                                   
|                                                                                                                                            | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                                                                                                            | Item 11. Executive Compensation                                                              
|                                                                                                                                            | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                                                                                            | Item 13. Certain Relationships and Related Transactions                                      
|                                                                                                                                            | Item 14. Principal Accountant Fees and Services                                              
|PART IV                                                                                                                                    
|                                                                                                                                            | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                                                                                                                 
|FORM 10-K -- ITEM 15(a)(1) AND (2) DELPHAX TECHNOLOGIES INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|REPORT OF INDEPENDENT AUDITORS                                                                                                             
|CONSOLIDATED BALANCE SHEETS                                                                                                                
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                                      
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                                                                                            
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                 
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES                                                                              
|Amend No. 1 to Loan & Security Agmt dated 2/4/04                                                                                           
|EX-23.1 Consent of Independent Auditors                                                                                                    
|EX-31.1 Section 302 Certification                                                                                                          
|EX-31.2 Section 302 Certification                                                                                                          
|EX-32.1 Section 906 Certification                                                                                                          
|EX-32.2 Section 906 Certification                                                                                                          



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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                                   |    |  | 9  | 
|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  |    |  | 21 | 
|Item 9A.   |  | Controls and Procedures                                                                   |    |  | 21 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |    |  | 21 | 
|Item 11.   |  | Executive Compensation                                                                    |    |  | 21 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |  | 21 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |  | 22 | 
|Item 14.   |  | Principal Accountant Fees and Services                                                    |    |  | 22 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |  | 22 | 
|SIGNATURES |  |                                                                                           | 25 | 

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PART I





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, supplies and consumable items 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 MICRand
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
IIsystem 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.

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.

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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.

In October 2002, the Company announced its
intention to demonstrate its next-generation of the CR Seriesproduct line, the CR2000, at the Drupa 2004 tradeshow
in Germany. This product will feature a throughput of 450 feet
per minute and retain all the print quality and paper processing
capabilities of the CR1300system.

During fiscal 2003, the Company consolidated its
manufacturing and engineering operations with those of the
Delphax Business in suburban Toronto, Canada. As of
September 30, 2003, the Company had approximately 4,000
installations using its EBI technology in more than 60 countries.

Products

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

Cut-sheet 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. Cut-sheet 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 cut-sheet 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 are based upon
its patented EBI technology. Its flagship products, the
CR Series and the Imaggia IIsystem,
deliver industry-leading throughput for high-volume roll-fed and
cut-sheet printing environments. The systems are extremely
durable, reliable and versatile, manufactured for production
environments that often utilize the equipment for ongoing 24/7
operations, providing unparalleled ability to handle a wide
range of substrates, from ultra lightweight paper to heavy stock.

Cut-sheet Printing
Equipment.Currently, the
Companys premier cut-sheet digital press is the
Imaggia II, which offers best-in-class throughput of
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 the highest worldwide standards for MICR encoding on
secure documents. The Company markets two models of the
Imaggia IIsystem 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.

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The Companys other notable brand of
cut-sheet 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 CR1300high-volume, web
production system, which delivers an industry leading 300 feet
per minute throughput and features wide-format, duplex
production at full 600 X 600 DPI print quality. The Company
markets two models of the CR Seriessystem to publishers,
direct mailers, bill and statement printers, in-house data and
document centers and service bureaus. The CR Seriesaccommodates a wide range of substrates, from ultra
lightweight paper to heavy stock, and can be purchased with
various output paper handling options. The CR 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 cut-sheet
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 cut-sheet 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, spares and
supplies.Maintenance, spares and
supplies revenues result from the sale of maintenance contracts,
proprietary consumable and supply items and spare parts to
customers who have purchased the Companys print equipment.
Supplies are operating materials that are consumed during normal
operation of the Companys systems. Examples of these
supplies include: (i) EBI print heads, which are consumed
in creating the electronic image, (ii) erase rods, which
are consumed in removing the electronic image, and
(iii) toner, which is consumed in the printing process.

The Company employs customer engineers at each of
its major service locations. For customers who purchase
maintenance contracts after the warranty period, which is
typically 90 days from customer acceptance of a system, the
Company provides ongoing customer support through its service
network, for which it charges for time and materials on an
annual service contract basis. Some customers elect to provide
their own maintenance and service on the 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.

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Sales and Marketing

Organization.The
Companys printing equipment sales 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 the Companys 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
cut-sheet 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 shown a slowing growth rate over the last several years. The
Company believes alternatives to the check document, such as
debit and credit cards, will eventually reduce the number of
checks used, although the size and rate of reduction are
difficult to predict. Company studies have shown that other
documents produced by the Companys 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.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 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. The Company believes additional opportunities exist for
its products outside of the United States in the publishing,
direct mail and transaction processing markets.

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
19%, 28% and 57% of total revenues for fiscal 2003, 2002 and
2001, respectively. The Company anticipates that revenues from
this

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customer will also be significant in fiscal 2004,
though to a lesser extent than in fiscal 2003. However, there is
no assurance that this will be the case.


The Company also has a significant OEM customer
as a result of the acquisition of the Delphax Business. Revenues
from this customer were 14% and 13% of total sales for fiscal
2003 and 2002, respectively. The Company anticipates but cannot
assure that revenues from this customer will also be significant
in fiscal 2004, at fiscal 2003 levels or higher.

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 Imaggiasystems are critical to its ability to remain competitive in
the markets it serves, and is continuing to invest in the future
success of these products with improved speed and print quality
enhancements. See Research and Development.

Folio production involves the manufacture of
checkbooks and payment coupon books. In 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).

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

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

The publishing market, with its varied
applications and specialized requirements, is highly
competitive. Heidelberg (Germany), Nipson, Océ, IBM,
Hitachi (Japan), Kodak (United States) and Xerox are currently
the

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Companys major competitors in the
publishing market. The direct mail market is focused on
high-volume, low cost production. The Companys major
competitors in this market are IBM, Océ, Xerox and Kodak.
The transaction processing market demands high-volume, low cost
production and the capability to process variable data. IBM,
Océ and Xerox are the Companys major competitors in
the transaction processing market.


Backlog

At December 8, 2003, the Company had a
backlog of approximately $9.8 million, compared with a
backlog of $8.7 million at December 9, 2002, comprised
of maintenance, spares 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 $4.7 million in fiscal 2003,
$5.7 million in fiscal 2002 and $2.6 million in fiscal
2001.

Patents

The Company has patented certain aspects of its
printing equipment. With 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.

8



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##### Table of Contents



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, 2003, the Company had 391
full-time and 2 part-time employees. Many of the Companys
employees are highly skilled, and the Companys future
success will depend, in part, upon its ability to attract and
retain such employees. The Company is not subject to any
collective bargaining agreement and considers its employee
relations to be good.

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, increasing to $481,000 on September 15, 2005 and
thereafter, plus operating expenses and real estate taxes
incurred by the landlord.

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

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

The Company believes that its current
arrangements for facilities are more than adequate to meet its
present needs and those for the foreseeable future. With the
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 and is considering options for bringing its facilities
requirements in line with current and projected needs.




Item 3.     Legal
Proceedings

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




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

There were no matters submitted to a vote of
security holders during the fourth quarter of the fiscal year
ended September 30, 2003.

9



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##### Table of Contents



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

Executive Officers of the Company

|                    |  |          |                                         |     |  |  |    | 
|------------------- |  | -------- | --------------------------------------- | --- |  |  | -- | 
|Name                |  | Position |                                         | Age
|                    |  |          |                                         |    
|Jay A. Herman       |  |          | Chairman and Chief Executive Officer    |     |  |  | 56 | 
|Robert M. Barniskis |  |          | Vice President, Chief Financial Officer |     |  |  | 40 | 
|M. H. (Bill) Kuhn   |  |          | Vice President, Customer Service        |     |  |  | 62 | 
|Kevin R. Mitchell   |  |          | Vice President, Sales and Marketing     |     |  |  | 54 | 
|Dieter P. Schilling |  |          | Vice President, Operations              |     |  |  | 48 | 

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

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

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

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

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

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

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

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, 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 | 
|Year ended September 30, 2002 |                |      |   |       |  |  |   |      
|                              | First quarter  |      | $ | 6.790 |  |  | $ | 3.050 | 
|                              | Second quarter |      |   | 7.500 |  |  |   | 4.600 | 
|                              | Third quarter  |      |   | 7.100 |  |  |   | 3.800 | 
|                              | Fourth quarter |      |   | 4.590 |  |  |   | 2.750 | 

Stock Repurchase Program

In September 1998, the Company announced a stock
repurchase program of up to 500,000 shares of Common Stock. In
the fiscal year ended September 30, 2001, the Company
purchased 27,250 shares at a cost of $83,000, bringing the total
purchased under the program to 197,750 shares at a cost of
approximately $518,000. No shares were repurchased in fiscal
2003 or 2002.

Holders

As of December 15, 2003, the Company had 287
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, 2003:

|                                                                |               |                |         |                   |  |                       |      |      |  |  |           |           | 
|--------------------------------------------------------------- | ------------- | -------------- | ------- | ----------------- |  | --------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                                |               | Number of      |         |                   |  | Number of securities 
|                                                                |               | securities to  |         |                   |  | remaining available  
|                                                                |               | be issued upon |         |                   |  | for future issuance  
|                                                                |               | exercise of    |         | Weighted average  |  | under equity         
|                                                                |               | outstanding    |         | exercise price of |  | compensation plans   
|                                                                |               | options,       |         | outstanding       |  | (excluding securities
|                                                                |               | warrants and   |         | options, warrants |  | reflected in         
|                                                                |               | rights         |         | and rights        |  | column (a))          
|                                                                |               | (a)            |         | (b)               |  | (c)                  
|                                                                |               |                |         |                   |  |                      
|Equity compensation plans approved by security
    holders:     |               |                |         |                   |  |                       |      |      |  |  |           |          
|                                                                | The 1991 Plan |                |         | 88,000            |  |                       | $    | 6.44 |  |  |           | 145,369   | 
|                                                                | The 1997 Plan |                |         | 499,775           |  |                       |      | 3.26 |  |  |           | 173,617   | 
|                                                                | The 2000 Plan |                |         | 240,000           |  |                       |      | 3.30 |  |  |           | 1,010,000 | 
|Equity compensation plans not approved by
    security holders: |               |                |         |                   |  |                       |      |      |  |  |           |          
|                                                                | None          |                |         |                  |  |                       |      |     |  |  |           |          | 
|                                                                |               |                |         |                   |  |                       |      |      |  |  |           |          
|                                                                |               |                | 827,775 |                   |  | $                     | 3.61 |      |  |  | 1,328,986 |          
|                                                                |               |                |         |                   |  |                       |      |      |  |  |           |          






Item 6.     Selected
Financial Data


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

|                                            |                                                                                                           |                          |   |            |   |      |   |            |   |      |   |            |  |  |   |            |   |  |   |            |  
|------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------ | - | ---------- | - | ---- | - | ---------- | - | ---- | - | ---------- |  |  | - | ---------- | - |  | - | ---------- | -
|                                            |                                                                                                           |                         
|                                            |                                                                                                           | Year Ended September 30,
|                                            |                                                                                                           |                         
|                                            |                                                                                                           | 2003                     |   | 2002       |   | 2001 |   | 2000       |   | 1999
|                                            |                                                                                                           |                          |   |            |   |      |   |            |   |     
|Consolidated Statements of Operations Data: |                                                                                                           |                          |   |            |   |      |   |            |   |      |   |            |  |  |   |            |   |  |   |           
|                                            | Net sales                                                                                                 |                          | $ | 57,979,233 |   |      | $ | 52,404,341 |   |      | $ | 43,078,427 |  |  | $ | 28,925,768 |   |  | $ | 22,308,000 |  
|                                            | Net (loss) income                                                                                         |                          |   | (1,834,799 | ) |      |   | (2,391,562 | ) |      |   | 2,149,869  |  |  |   | (290,437   | ) |  |   | (1,614,387 | )
|                                            | (Loss) earnings per common share  basic                                                                  |                          |   | (0.30      | ) |      |   | (0.39      | ) |      |   | 0.35       |  |  |   | (0.05      | ) |  |   | (0.26      | )
|                                            | (Loss) earnings per common share 
    diluted                                                            |                          |   | (0.30      | ) |      |   | (0.39      | ) |      |   | 0.35       |  |  |   | (0.05      | ) |  |   | (0.26      | )
|                                            | Weighted average number of shares outstanding
    during the period(1)                                    |                          |   | 6,189,328  |   |      |   | 6,167,199  |   |      |   | 6,174,411  |  |  |   | 6,146,630  |   |  |   | 6,129,225  |  
|                                            | Weighted average number of shares and equivalents
    outstanding during the period, assuming dilution(2) |                          |   | 6,189,328  |   |      |   | 6,167,199  |   |      |   | 6,227,724  |  |  |   | 6,146,630  |   |  |   | 6,129,225  |  
|Consolidated Balance Sheets Data:           |                                                                                                           |                          |   |            |   |      |   |            |   |      |   |            |  |  |   |            |   |  |   |           
|                                            | Working capital                                                                                           |                          | $ | 11,392,696 |   |      | $ | 24,048,453 |   |      | $ | 16,944,815 |  |  | $ | 15,036,839 |   |  | $ | 15,736,047 |  
|                                            | Total assets                                                                                              |                          |   | 37,072,248 |   |      |   | 39,667,390 |   |      |   | 25,786,616 |  |  |   | 24,365,873 |   |  |   | 20,455,869 |  
|                                            | Long-term liabilities                                                                                     |                          |   | 647,974    |   |      |   | 13,008,217 |   |      |   |           |  |  |   |           |   |  |   |           |  
|                                            | Shareholders equity                                                                                      |                          |   | 14,820,335 |   |      |   | 15,799,623 |   |      |   | 17,982,624 |  |  |   | 15,923,236 |   |  |   | 16,706,060 |  



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 net sales have grown
significantly in each of the past two fiscal years, from
$43.1 million in fiscal 2001, to $58.0 million in
fiscal 2003. During this period, the Company incurred a net
loss of $1.8 million (which included a restructuring charge
of $1.1 million), or $0.30 per share, in
fiscal 2003, and $2.4 million, or $0.39 per
share, in fiscal 2002. However, the Company generated
positive cash flow from operations of $2.5 million and
$3.8 million, in fiscal 2003 and 2002, respectively. This
positive cash flow was used to repay indebtedness under the
secured credit agreement which the Company entered into in
December 2001 to finance acquisition of the Delphax
Business. The Company paid down the outstanding loan balance
from a high of $17.2 million in May 2002, to
$13.9 million at September 30, 2003 and
$11.9 million as of December 31, 2003. During the time
up until the expiration and maturity of the credit facility on
December 31, 2003, the Company had paid all installments of
principal and interest when due, though the Company was not in
compliance with certain financial covenants. On February 5,
2004, the Company refinanced its indebtedness to the lender by:
(i) issuing at par $3.0 million of convertible
subordinated notes that were accompanied by warrants to purchase
Company Common Stock, and (ii) entering into new senior
credit agreements between the Company and a new senior lender
and between the Companys Canadian subsidiary and a
Canadian affiliate of the new lender to the Company. See
Note K to the Consolidated Financial Statements for details.

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

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



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

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



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

In determining the carrying value of the
Companys net deferred tax assets, the Company must assess
the likelihood of sufficient future taxable income in certain
tax jurisdictions, based on estimates and assumptions, to
realize the benefit of these assets. For the fiscal years ended
September 30, 2003 and 2002, the Company fully reserved its
net deferred tax assets totaling $2,991,000 and $2,060,000,
respectively, recognizing that the Company has incurred losses
in four of the last five fiscal years, and there is no assurance
that future years will be profitable. If these estimates and
assumptions change in the future, the Company may record a
reduction in the valuation allowance, resulting in an income tax
benefit in the Companys Consolidated Statements of
Operations. Management evaluates the realizability of the
deferred tax assets and assesses the valuation allowance
quarterly.

13



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##### Table of Contents





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

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



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

In April 2002, the Company effected a workforce
reduction, eliminating approximately 40 positions in the
Canadian subsidiary. In December 2002, the Company announced
plans to consolidate its North American manufacturing and
engineering operations at its Canadian subsidiary. See
Note I 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 2003 and 2002 include the post-acquisition results of the
business acquired by the Company on December 20, 2001. See
Note E to the Consolidated Financial Statements.

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,
|                                            |                                     |                         
|                                            |                                     | 2003                     |       | 2002 |   | 2001
|                                            |                                     |                          |       |      |   |     
|Sales:                                      |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                            | Maintenance, spares and supplies    |                          |       | 84.3 | % |      |       | 73.3 | % |  |       | 35.5 | %
|                                            | Printing equipment                  |                          |       | 15.7 |   |      |       | 26.7 |   |  |       | 64.5 |  
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|NET SALES                                   |                                     |                          | 100.0 |      |   |      | 100.0 |      |   |  | 100.0 |     
|Costs and Expenses:                         |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                            | Cost of sales                       |                          |       | 48.0 |   |      |       | 48.7 |   |  |       | 50.8 |  
|                                            | Selling, general and administrative |                          |       | 42.9 |   |      |       | 41.9 |   |  |       | 35.1 |  
|                                            | Research and development            |                          |       | 8.1  |   |      |       | 11.0 |   |  |       | 6.1  |  
|                                            | Restructuring costs                 |                          |       | 1.9  |   |      |       | 0.0  |   |  |       | 0.0  |  
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|                                            |                                     |                          | 100.9 |      |   |      | 101.6 |      |   |  | 92.0  |     
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|(LOSS) INCOME FROM SYSTEM SALES AND SERVICE |                                     |                          | (0.9  | )    |   |      | (1.6  | )    |   |  | 8.0   |     
|Interest expense                            |                                     |                          | 1.3   |      |   |      | 1.5   |      |   |  | 0.1   |     
|Interest income                             |                                     |                          | (0.1  | )    |   |      | (0.1  | )    |   |  | (0.1  | )   
|Realized exchange loss (gain)               |                                     |                          | 0.2   |      |   |      | (0.4  | )    |   |  | (1.3  | )   
|Unrealized exchange loss (gain)             |                                     |                          | 0.3   |      |   |      | (0.1  | )    |   |  | 1.6   |     
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|(LOSS) INCOME BEFORE INCOME TAXES           |                                     |                          | (2.6  | )    |   |      | (2.5  | )    |   |  | 7.7   |     
|Income tax expense                          |                                     |                          | 0.6   |      |   |      | 2.1   |      |   |  | 2.7   |     
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     
|NET (LOSS) INCOME                           |                                     |                          | (3.2  | )%   |   |      | (4.6  | )%   |   |  | 5.0   | %   
|                                            |                                     |                          |       |      |   |      |       |      |   |  |       |     

Net Sales.The
Companys revenues are from sales of: (i) maintenance
contracts, spare parts, supplies and consumable items, and
(ii) digital printing equipment. For the fiscal year ended
September 30, 2003 (fiscal 2003), revenues from maintenance
contracts, spare parts, supplies and consumable items increased
27% over the fiscal year ended September 30, 2002 (fiscal
2002), and 152% in fiscal 2002 over the fiscal year ended
September 30, 2001 (fiscal 2001). Revenues from maintenance
contracts, spare parts, supplies and consumable items increased
from $15.3 million in fiscal 2001, to $38.4 million in
fiscal 2002, to $48.9 million in fiscal 2003. The
significant increase in fiscal 2002, compared with 2001, was due
primarily to incremental revenues from the fiscal 2002
acquisition of the Delphax Business, which contributed
$17.7 million of the $23.1 million total increase in
revenues from maintenance contracts, spare parts, supplies and
consumable items. The increase between fiscal 2002 and fiscal
2003 was also due in part to the Canadian acquisition, which
contributed to fiscal 2003 results for the entire year, but to
fiscal 2002 results for only the period from the
December 20, 2001 acquisition date to the end of the fiscal
year. Revenues from maintenance contracts, spare parts, supplies
and consumable items also increased from fiscal 2002 to fiscal
2003 due to the larger installed base of Imaggia and to
the addition of CR Series systems to the installed base.
The Company expects revenues from maintenance contracts, spare
parts, supplies and consumable items to increase in fiscal 2004
consistent with expected additions to the installed base.

Sales of digital printing equipment decreased 35%
in fiscal 2003, compared with fiscal 2002, and 50% in fiscal
2002, compared with fiscal 2001. In general, the Company
attributes year-to-year lower sales of digital printing
equipment to poor economic conditions for capital equipment
purchases, which have led customers to decide against or
postpone capital equipment purchases. The decrease in fiscal
2002, compared with fiscal 2001, was primarily due to
significantly lower Imaggia sales in fiscal 2002 than in
fiscal 2001, primarily due to the completion of equipment
deliveries under a multi-unit contract in fiscal 2002. The
Company sold 5 Imaggia systems in fiscal 2003, compared
with 15 in fiscal 2002 and 39 in fiscal 2001. For fiscal 2003,
the decline in Imaggia sales was partially offset by
sales of the CR Series system, added to the
Companys product line with the acquisition of the Delphax
Business. The first CR Series system was sold in fiscal
2002. Five CR Series systems

15



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##### Table of Contents



were sold in fiscal 2003. Sales of all other
product lines combined were also lower in fiscal 2003 than in
fiscal 2002, and lower in fiscal 2002 than in fiscal 2001.


Gross Margin.The
Companys gross margin percentage in fiscal 2003 was 52%,
compared with 51% and 49% in fiscal 2002 and fiscal 2001,
respectively. The increase in gross margin percentage for fiscal
2003, compared with fiscal 2002, was primarily due to programs
in place to improve margins on revenues from maintenance
contracts, spare parts, supplies and consumable items. In
addition, the margin for fiscal 2003, compared with fiscal 2002,
was negatively affected by higher manufacturing variances due to
lower equipment production levels, and 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. 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. In general, the Company anticipates that
its gross margin percentage for fiscal 2004 will be slightly
higher than the Company would normally expect to achieve due to
the expected sale of acquired inventory. In addition, programs
continue in place to improve normal margins on revenues from
maintenance contracts, spare parts, supplies and consumable
items. The increase in gross margin percentage for fiscal 2002,
compared with fiscal 2001, was primarily due to the increase in
revenues from maintenance contracts, spares parts, supplies and
consumable items generated by the acquisition of the Delphax
Business at margins on proprietary spare parts, supplies and
consumable items higher than the Company experienced prior to
the acquisition.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses increased $2.9 million in fiscal 2003, compared
with fiscal 2002, and were $6.9 million higher in fiscal
2002 than in fiscal 2001. As a percentage of net sales, these
expenses were 43% for fiscal 2003, 42% for fiscal 2002 and 35%
for fiscal 2001. Selling, general and administrative expenses
increased from $22.0 million for fiscal 2002, to $24.9
million for fiscal 2003, 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 the period from the
December 20, 2001 acquisition date to the end of the fiscal
year. In fiscal 2003, the allowance for doubtful accounts was
increased by approximately $0.5 million. 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. Increased expense levels in fiscal 2002,
compared with fiscal 2001, were due to the acquisition of the
Delphax Business and an increase in employees, principally in
customer service, to support the larger installed base. For
fiscal 2002, compared with fiscal 2001, approximately
$1.3 million of the total increase was due to expansion of
the field force, both in-house and third-party, supporting the
higher installed base. The Company anticipates that its selling,
general and administrative expenses in fiscal 2004 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
decreased significantly, from $5.7 million in fiscal 2002,
to $4.7 million in fiscal 2003, also decreasing as a
percent of net sales from 11% to 8%. The $5.7 million of
research and development expense for fiscal 2002 was a
significant increase from $2.6 million in fiscal 2001. The
increase in research and development expenses for fiscal 2002
over fiscal 2001 was primarily due to the acquisition of the
Delphax Business in fiscal 2002. 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 incremental 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.

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Interest Expense.Interest expense in fiscal 2003 was
$808,000, compared with $769,000 in fiscal 2002, and $53,000 in
fiscal 2001. The significant increase between fiscal 2001 and
2002 was due to the Company borrowing to finance the acquisition
of the Delphax Business and, to a lesser extent, to fund
increases in inventory in fiscal 2002. Interest expense for
fiscal 2003 was $39,000 higher than for fiscal 2002. As a result
of amending the credit agreement in fiscal 2003, the stated
interest rates applied to the loan were 1/2% to 1% higher than
in fiscal 2002, resulting in a higher effective interest rate,
applied to a lower average balance as 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 2003 and 2001 were $282,000 and $110,000, 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
the fiscal year ended September 30, 2003, the Company
recorded an income tax expense of $300,000 on a loss before
income taxes of $1,535,000. The tax expense incurred for fiscal
2003 was the 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 reflects the estimated annual
effective tax rate of 35% and an increase in the valuation
allowance to fully reserve the net deferred tax assets. The
Company fully reserved its net deferred tax assets totaling
$2,991,000 and $2,060,000, as of September 30, 2003 and
2002, respectively, recognizing that the Company has incurred
losses in four of the last five fiscal years and there is no
assurance that future years will be profitable. The Company
recorded an income tax expense at 35% of income before income
taxes in fiscal 2001.

Net Loss or Income.The net loss for fiscal 2003 was $0.30
per share, compared with a net loss of $0.39 per share for
fiscal 2002. The lower fiscal 2003 net loss was due to higher
overall sales levels at margins slightly improved over fiscal
2002. 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 the
period from the December 20, 2001 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. The net
loss for fiscal 2002 was $0.39 per share, compared with net
income of $0.35 per share for fiscal 2001. The net loss for
fiscal 2002, compared with net income for fiscal 2001, was due
to significantly lower equipment sales and significantly higher
expense levels primarily due to the acquisition of the Delphax
Business, only partially offset by the significantly higher
revenues from maintenance contracts, spare parts, supplies and
consumable items, also primarily due to the acquisition of the
Delphax Business. The fiscal 2002 net loss was exacerbated by
the fiscal 2002 income tax expense due to the Company recording
a full valuation allowance against its net deferred tax assets.

Restructuring Initiatives.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.

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However, savings realized are not expected to be
directly incremental to net income, but rather are expected to
be reinvested in the Company, supporting growth and product
research and development. The restructuring initiatives are
summarized below.


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

In April 2002, the Company effected a workforce
reduction, 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 and included
in accrued expenses in the Consolidated Balance Sheets. As of
September 30, 2003, the restructuring was completed at
approximately the original cost estimate. By taking this action,
the Company anticipates eliminating annual operating expenses of
approximately $1.3 million without affecting its ability to
fulfill current or future orders.

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. As of September 30, 2003, the
accrued liability for benefits payable in the future was
$344,000, all of which was paid out in the first quarter of
fiscal 2004. 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
current and 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 22% of its
revenues from outside North America. The Companys ability
to sell its products in foreign markets may be affected by
changes in economic, political or market conditions in the
foreign markets in which it does business.

The Companys net investment in its foreign
subsidiaries was $7.2 million at September 30, 2003
and 2002, 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, 2003. The
functional currency of the Canadian subsidiary is the U.S.
dollar.

From time to time, the Company has entered into
foreign exchange contracts as a hedge against specific foreign
currency receivables. In fiscal 2003 and 2002, the Company did
not enter into any foreign exchange contracts.

Interest Rate Risk

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

Factors Affecting Results of
Operations

The Companys revenues are subject to
fluctuations, which may be material. The Companys net
sales and operating results may fluctuate from quarter to
quarter because: (i) the Companys sales cycle is
relatively long, (ii) the size of orders may vary
significantly, (iii) the availability of financing for
customers in some countries is

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variable, (iv) customers may postpone or
cancel orders, and (v) economic, political and market
conditions in some markets change with minimal notice and affect
the timing and size of orders. Because the Companys
operating expenses are based on anticipated revenue levels and a
high percentage of the Companys operating costs are
relatively fixed, variations in the timing of revenue
recognition will result in significant fluctuations in operating
results from period to period.


The acquisition of the Delphax Business in
December 2001 significantly expanded the Companys product
lines to include the CR Series and RS Series of
roll-fed printing equipment. To date, a limited number of
CR Series presses and only one RS Series
print system have been sold and there can be no assurance that
such equipment will be sold in the future.

As noted above under Business 
Sales and Marketing, the Company had two significant
customers that accounted for 19% and 14% of net sales in fiscal
2003. The Company anticipates, but cannot assure, that these
customers will continue to be significant in fiscal 2004.
However, the loss of, or a significant decrease in sales to,
either of these customers could have a material adverse effect
on the Company.

To maintain liquidity, the Company depends on
revolving loans with its U.S. and Canadian lenders, secured by
substantially all of the Companys assets. 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 an 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 will monitor prospective compliance
with the bank covenants. If the Company determines 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 the covenants. The Company has developed
specific plans to reduce certain expenses in the event of
covenant noncompliance, 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, 2004.

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. Under that agreement, the lender had a
security interest in substantially all of the Companys
assets. In fiscal 2003 and 2002, the Company generated positive
cash flow from operations of $2.5 million and
$3.8 million, respectively. This positive cash flow was
used to repay indebtedness under the credit agreement, and the
loan balance was reduced from a high of $17.2 million in
May 2002, to $13.9 million at September 30, 2003 and
$11.9 million as of December 31, 2003. During the time
up until the expiration and maturity of the credit facility on
December 31, 2003, the Company had paid all installments of
principal and interest when due, though the Company was not in
compliance with certain financial covenants. On February 5,
2004, the Company refinanced its indebtedness to the lender by:
(i) issuing at par $3.0 million of convertible
subordinated notes that were accompanied by warrants to purchase
Company Common Stock, and (ii) entering into new senior
credit agreements between the Company and a new senior lender
and between the Companys Canadian subsidiary and a
Canadian affiliate of the new lender to the Company. See
Note K to the Consolidated Financial Statements for
details. The Company believes its current financial arrangements
and anticipated level of internally generated funds will be
sufficient to fund the working capital requirements of the
Company.

For fiscal 2004, compared with fiscal 2003, the
Company projects increased sales of printing equipment due to
product enhancements, increased revenues from sale of
maintenance contracts, spare parts, supplies and consumable
items due to a larger installed base, improved margins due to
programs in place to reduce cost of sales and lower operating
expenses as a result of the restructuring initiatives taken. The
Company anticipates, but cannot assure, that fiscal 2004 cash
flow from operations will be higher than the $2.5 million
achieved for fiscal 2003, and that a substantial portion of that
cash flow (if achieved) would be used to repay debt.

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Working capital was $11.4 million at
September 30, 2003, compared with $24.0 million at
September 30, 2002. Of the $12.6 million decrease,
approximately $11.6 million was the result of classifying
the entire indebtedness under the credit facility as a current
liability, based on the loan maturity date of December 31,
2003. The Companys inventory levels decreased to
$17.9 million at September 30, 2003, from
$20.9 million at September 30, 2002, due to conscious
efforts to manage inventory levels, as well as sale of finished
goods inventory from stock greater than new builds. Accounts
receivable increased to $11.0 million at September 30,
2003, from $10.7 million at September 30, 2002,
primarily due to the higher sales levels in fiscal 2003,
compared with fiscal 2002, partially offset by an increase in
the allowance for doubtful accounts. Cash and short-term
investments amounted to $2.7 million at September 30,
2003, compared with $1.7 million at September 30,
2002. The increase in cash and short-term investments was
primarily due to anticipated near-term cash requirements,
including payroll funding by October 3, 2003. Deferred
revenue totaled $1.1 million at September 30, 2003 (of
which $505,000 was current and $614,000 was long-term), compared
to a total of $490,000 (all of which was current) at
September 30, 2002. This increase was principally due to
the fiscal 2003 addition of a long-term customer note, giving
rise to long-term deferred revenue.

The Company has undertaken no significant
investing activities. No significant capital investment has been
undertaken or is planned, and at September 30, 2003, the
Company had no material commitments for capital expenditures.
Short-term investments are purchased as cash is available and
sold as they mature.

Contractual Obligations and Commercial
Commitments

The Company is obligated to make future payments
under various contracts, including the credit facility,
operating leases and capital leases. The following table
summarizes the contractual cash obligations of the Company as of
September 30, 2003:

|                 |  |       |            |               |  |      |            |      |  |   |           |  |  |   |           | 
|---------------- |  | ----- | ---------- | ------------- |  | ---- | ---------- | ---- |  | - | --------- |  |  | - | --------- | 
|                 |  |       |            |              
|                 |  |       |            | Due in Fiscal
|                 |  |       |            |              
|                 |  | Total |            | 2004          |  | 2005 |            | 2006
|                 |  |       |            |               |  |      |            |     
|Credit facility  |  | $     | 13,900,000 |               |  | $    | 13,900,000 |      |  | $ |          |  |  | $ |          | 
|Operating leases |  |       | 10,238,739 |               |  |      | 2,161,741  |      |  |   | 2,140,702 |  |  |   | 1,852,626 | 
|Capital leases   |  |       | 84,463     |               |  |      | 49,674     |      |  |   | 18,976    |  |  |   | 15,813    | 
|                 |  |       |            |               |  |      |            |      |  |   |           |  |  |   |           | 
|                 |  | $     | 24,223,202 |               |  | $    | 16,111,415 |      |  | $ | 2,159,678 |  |  | $ | 1,868,439 | 
|                 |  |       |            |               |  |      |            |      |  |   |           |  |  |   |           | 

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

The Companys indebtedness under its new
senior credit facilities consists of term loans and revolving
credit. The original principal amount of the terms loans is
$1,156,000, and principal payments of $192,667 are due in each
of fiscal 2004, 2005 and 2006, with cash interest payable
monthly. The revolving credit portion of the senior facilities
is variable, depending on the borrowing base, and matures on
January 30, 2007, when all outstanding revolving and term
debt is payable, unless the senior facilities are extended. The
$3.0 million of convertible subordinated notes that the
Company issued on February 5, 2004 will mature and be
payable in one lump sum on February 4, 2008, unless they
are converted to equity or earlier called for redemption by the
Company. Interest on the convertible subordinated notes is
payable in the form of shares of Company Common Stock.

Cautionary Statement

Statements included in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations, the Companys Annual Report, the Companys
Form 10-K, 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.

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




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk

The 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.




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

None.




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 section entitled
Election of Directors included in the Companys
definitive proxy statement, filed with the Securities and
Exchange Commission on January 28, 2004.

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.

The Company is required to adopt a formal Code of
Conduct by May 4, 2004, to comply with the code of
ethics outlined in Section 406(c) of the
Sarbanes-Oxley Act of 2002. The Company expects to have a
formal, worldwide Code of Conduct in place by the required
adoption date, but is still working through various
administrative issues related to implementation at its foreign
subsidiaries.




Item 11.     Executive
Compensation

Reference is made to the section entitled
Executive Compensation included in the
Companys definitive proxy statement, filed with the
Securities and Exchange Commission on January 28, 2004.




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, filed with the Securities and Exchange Commission on
January 28, 2004.

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Item 13.     Certain
Relationships and Related Transactions

None.




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, filed with the Securities and
Exchange Commission on January 28, 2004.






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 Auditors                                                                              |  |      | 29 | 
|Consolidated Balance Sheets 
    September 30, 2003 and 2002                                               |  |      | 30 | 
|Consolidated Statements of Operations 
    The years ended September 30, 2003, 2002 and 2001               |  |      | 31 | 
|Consolidated Statements of Shareholders
    Equity  The years ended September 30, 2003, 2002
    and 2001 |  |      | 32 | 
|Consolidated Statements of Cash Flows 
    The years ended September 30, 2003, 2002 and 2001               |  |      | 33 | 
|Notes to Consolidated Financial
    Statements  September 30, 2003                                         |  |      | 34 | 

Financial Statement Schedule

|            |  |                                                |  |      |    | 
|----------- |  | ---------------------------------------------- |  | ---- | -- | 
|Number      |  | Description                                    |  | Page
|            |  |                                                |  |     
|Schedule II |  | Valuation and Qualifying Accounts and Reserves |  |      | 48 | 

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

Report on Form 8-K

The Company filed or furnished the following
report on Form 8-K during the three months ended
September 30, 2003:

August 12, 2003  Form 8-K:
Item 5. Other Events and Regulation FD
Disclosure  Amendment to credit agreement with its
bank lender, dated August 11, 2003; Item 12.
Regulation FD Disclosure (Item 12. Disclosure of
Results of Operations and Financial Condition) 
Earnings release issued August 12, 2003, for the quarter
ended June 30, 2003.



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

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|       |       |             |  |                                                                                                                                                                                                                                                                                                       |  |                                                                             
|------ | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------
|Number |       | Description |  | Page or Incorporated by Reference from                                                                                                                                                                                                                                                               
|       |       |             |  |                                                                                                                                                                                                                                                                                                      
|       | 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           |  | Forbearance 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                          
|       | 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 filed herewith                                              

23



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##### Table of Contents



|       |       |             |  |                                                                                                                              |  |                                                                            
|------ | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|Number |       | Description |  | Page or Incorporated by Reference from                                                                                      
|       |       |             |  |                                                                                                                             
|       | 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
|       | 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 to Form 10-K for the fiscal year ended
    September 30, 2003   
|       | 23.1  |             |  | Consent of Independent Auditors                                                                                              |  | Exhibit 23.1 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                                                

24



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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: February 24, 2004



| |     |                        
| | --- | -----------------------
| | By: | /s/ ROBERT M. BARNISKIS

| |                                               
| | ----------------------------------------------
| |                                               
| | Robert M. Barniskis                           
| | Vice President and Chief Financial
    Officer

Dated: February 24, 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)                      |  | February 24, 2004
|                                              
|/s/ ROBERT M. BARNISKISRobert M. Barniskis     |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | February 24, 2004
|                                              
|/s/ R. STEPHEN ARMSTRONGR. Stephen Armstrong   |  | Director                                                                                    |  | February 24, 2004
|                                              
|/s/ GARY R. HOLLANDGary R. Holland             |  | Director                                                                                    |  | February 24, 2004
|                                              
|/s/ KENNETH E. OVERSTREETKenneth E. Overstreet |  | Director                                                                                    |  | February 24, 2004
|                                              
|/s/ EARL W. ROGERSEarl W. Rogers               |  | Director                                                                                    |  | February 24, 2004

25



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26



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##### Table of Contents



ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 15(a)(1) AND (2), (c),
AND (d)


LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE


FINANCIAL STATEMENT SCHEDULE


CERTAIN EXHIBITS


Year Ended September 30, 2003

DELPHAX TECHNOLOGIES INC.


Minnetonka, Minnesota


27



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##### Table of Contents








FORM 10-K  ITEM 15(a)(1)
AND (2)


DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE

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

Report
of Independent Auditors

Consolidated
Balance Sheets  September 30, 2003 and 2002

Consolidated
Statements of Operations  The years ended
September 30, 2003, 2002 and 2001

Consolidated
Statements of Shareholders Equity -The years ended
September 30, 2003, 2002 and 2001

Consolidated
Statements of Cash Flows  The years ended
September 30, 2003, 2002 and 2001

Notes
to Consolidated Financial Statements 
September 30, 2003

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

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

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

28



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##### Table of Contents








REPORT OF INDEPENDENT AUDITORS


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 2002, and the related
consolidated statements of operations, shareholders
equity, and cash flows for each of the three 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 2002, and the consolidated results of their operations and
their cash flows for each of the three 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


29



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |            |            | 
|-------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                   |                                                                                                                                                                                     |                                  
|                                                   |                                                                                                                                                                                     | September 30,                    
|                                                   |                                                                                                                                                                                     |                                  
|                                                   |                                                                                                                                                                                     | 2003                              |            | 2002      
|                                                   |                                                                                                                                                                                     |                                   |            |           
|ASSETS                                            
|CURRENT ASSETS                                     |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   | Cash and cash equivalents                                                                                                                                                           |                                   | $          | 2,669,763  |            |   | $          | 1,717,973  |           
|                                                   | Short-term investments                                                                                                                                                              |                                   |            | 41,608     |            |   |            | 78,430     |           
|                                                   | Accounts receivable, less allowance for doubtful
    accounts of $737,018 and $253,106 as of September 30, 2003
    and 2002, respectively                                          |                                   |            | 11,037,583 |            |   |            | 10,712,889 |           
|                                                   | Current portion of note receivable from customer                                                                                                                                    |                                   |            | 105,377    |            |   |            |           |           
|                                                   | Inventory:                                                                                                                                                                          |                                   |            |            |            |   |            |            |           
|                                                   |                                                                                                                                                                                     | Raw materials and component parts |            |            | 11,321,554 |   |            |            | 13,602,964 | 
|                                                   |                                                                                                                                                                                     | Work-in-progress                  |            |            | 1,057,264  |   |            |            | 597,388    | 
|                                                   |                                                                                                                                                                                     | Finished goods                    |            |            | 5,479,882  |   |            |            | 6,672,664  | 
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   |                                                                                                                                                                                     |                                   | 17,858,700 |            |            |   | 20,873,016 |           
|                                                   | Other current assets                                                                                                                                                                |                                   |            | 1,283,604  |            |   |            | 1,525,695  |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|TOTAL CURRENT ASSETS                               |                                                                                                                                                                                     |                                   | 32,996,635 |            |            |   | 34,908,003 |           
|Long-term portion of note receivable from customer |                                                                                                                                                                                     |                                   | 614,408    |            |            |   |           |           
|EQUIPMENT AND FIXTURES                             |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   | Machinery and equipment                                                                                                                                                             |                                   |            | 4,569,678  |            |   |            | 4,853,798  |           
|                                                   | Furniture and fixtures                                                                                                                                                              |                                   |            | 3,748,663  |            |   |            | 3,190,447  |           
|                                                   | Leasehold improvements                                                                                                                                                              |                                   |            | 2,342,682  |            |   |            | 2,386,996  |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   |                                                                                                                                                                                     |                                   | 10,661,023 |            |            |   | 10,431,241 |           
|                                                   | Less accumulated depreciation and amortization                                                                                                                                      |                                   |            | 7,199,818  |            |   |            | 5,671,854  |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   |                                                                                                                                                                                     |                                   | 3,461,205  |            |            |   | 4,759,387  |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|TOTAL ASSETS                                       |                                                                                                                                                                                     | $                                 | 37,072,248 |            |            | $ | 39,667,390 |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                  
|LIABILITIES AND SHAREHOLDERS
    EQUITY          
|CURRENT LIABILITIES                                |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   | Accounts payable                                                                                                                                                                    |                                   | $          | 3,422,082  |            |   | $          | 4,284,465  |           
|                                                   | Accrued expenses                                                                                                                                                                    |                                   |            | 3,356,644  |            |   |            | 3,269,531  |           
|                                                   | Income taxes payable                                                                                                                                                                |                                   |            | 375,444    |            |   |            | 482,197    |           
|                                                   | Current portion of bank credit facility                                                                                                                                             |                                   |            | 13,900,000 |            |   |            | 2,300,000  |           
|                                                   | Current portion of capital leases                                                                                                                                                   |                                   |            | 44,289     |            |   |            | 33,361     |           
|                                                   | Current portion of deferred revenue                                                                                                                                                 |                                   |            | 505,480    |            |   |            | 489,996    |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|TOTAL CURRENT LIABILITIES                          |                                                                                                                                                                                     |                                   | 21,603,939 |            |            |   | 10,859,550 |           
|Long-term portion of bank credit facility          |                                                                                                                                                                                     |                                   |           |            |            |   | 12,980,000 |           
|Long-term portion of deferred revenue              |                                                                                                                                                                                     |                                   | 614,408    |            |            |   |           |           
|Long-term portion of capital leases                |                                                                                                                                                                                     |                                   | 33,566     |            |            |   | 28,217     |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|TOTAL LIABILITIES                                  |                                                                                                                                                                                     |                                   | 22,251,913 |            |            |   | 23,867,767 |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|SHAREHOLDERS EQUITY                               |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|                                                   | Common stock  par value $.10 per
    share  authorized 50,000,000 shares; issued and
    outstanding: 6,214,873 and 6,175,898 as of September 30,
    2003 and 2002, respectively |                                   |            | 621,487    |            |   |            | 617,590    |           
|                                                   | Additional paid-in capital                                                                                                                                                          |                                   |            | 17,151,389 |            |   |            | 17,039,945 |           
|                                                   | Accumulated other comprehensive loss                                                                                                                                                |                                   |            | (1,172,165 | )          |   |            | (1,912,335 | )         
|                                                   | (Accumulated deficit) retained earnings                                                                                                                                             |                                   |            | (1,780,376 | )          |   |            | 54,423     |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|TOTAL SHAREHOLDERS EQUITY                         |                                                                                                                                                                                     |                                   | 14,820,335 |            |            |   | 15,799,623 |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY         |                                                                                                                                                                                     | $                                 | 37,072,248 |            |            | $ | 39,667,390 |           
|                                                   |                                                                                                                                                                                     |                                   |            |            |            |   |            |           

See notes to consolidated financial statements.

30



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |            | 
|------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                           |                                     |                         
|                                                                                           |                                     | Year Ended September 30,
|                                                                                           |                                     |                         
|                                                                                           |                                     | 2003                     |            | 2002       |  | 2001
|                                                                                           |                                     |                          |            |            |  |     
|Sales:                                                                                     |                                     |                          |            |            |  |      |            |            |  |   |            |           
|                                                                                           | Maintenance, spares and supplies    |                          | $          | 48,856,588 |  |      | $          | 38,430,976 |  |   | $          | 15,274,788 | 
|                                                                                           | Printing equipment                  |                          |            | 9,122,645  |  |      |            | 13,973,365 |  |   |            | 27,803,639 | 
|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |           
|NET SALES                                                                                  |                                     |                          | 57,979,233 |            |  |      | 52,404,341 |            |  |   | 43,078,427 |           
|Costs and Expenses:                                                                        |                                     |                          |            |            |  |      |            |            |  |   |            |           
|                                                                                           | Cost of sales                       |                          |            | 27,821,343 |  |      |            | 25,518,803 |  |   |            | 21,917,827 | 
|                                                                                           | Selling, general and administrative |                          |            | 24,859,405 |  |      |            | 21,963,686 |  |   |            | 15,100,284 | 
|                                                                                           | Research and development            |                          |            | 4,693,761  |  |      |            | 5,736,140  |  |   |            | 2,635,198  | 
|                                                                                           | Restructuring costs                 |                          |            | 1,101,737  |  |      |            |           |  |   |            |           | 
|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |           
|                                                                                           |                                     |                          | 58,476,246 |            |  |      | 53,218,629 |            |  |   | 39,653,309 |           
|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |           
|(LOSS) INCOME FROM SYSTEM SALES AND SERVICE                                                |                                     |                          | (497,013   | )          |  |      | (814,288   | )          |  |   | 3,425,118  |           
|Interest expense                                                                           |                                     |                          | 808,355    |            |  |      | 768,843    |            |  |   | 52,564     |           
|Interest income                                                                            |                                     |                          | (52,692    | )          |  |      | (50,780    | )          |  |   | (39,328    | )         
|Realized exchange loss (gain)                                                              |                                     |                          | 109,993    |            |  |      | (220,699   | )          |  |   | (542,623   | )         
|Unrealized exchange loss (gain)                                                            |                                     |                          | 172,130    |            |  |      | (31,090    | )          |  |   | 652,636    |           
|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |           
|(LOSS) INCOME BEFORE INCOME TAXES                                                          |                                     |                          | (1,534,799 | )          |  |      | (1,280,562 | )          |  |   | 3,301,869  |           
|Income tax expense                                                                         |                                     |                          | 300,000    |            |  |      | 1,111,000  |            |  |   | 1,152,000  |           
|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |           
|NET (LOSS) INCOME                                                                          |                                     | $                        | (1,834,799 | )          |  | $    | (2,391,562 | )          |  | $ | 2,149,869  |           
|                                                                                           |                                     |                          |            |            |  |      |            |            |  |   |            |           
|Basic and diluted (loss) earnings per common share                                         |                                     | $                        | (0.30      | )          |  | $    | (0.39      | )          |  | $ | 0.35       |           
|Weighted average number of shares outstanding
    during the
    period        
    basic |                                     |                          | 6,189,328  |            |  |      | 6,167,199  |            |  |   | 6,174,411  |           
|                                                                                           |  diluted                           |                          |            | 6,189,328  |  |      |            | 6,167,199  |  |   |            | 6,227,724  | 

See notes to consolidated financial statements.

31



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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
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |      
|Balance, September 30, 2000                                            |                        |              | 6,190,978 |            |  | $             | 619,098 |              |  | $        | 17,063,384 |       |  | $ | (1,968,736 | )        |   | $ | 209,490    |            |   | $ | 15,923,236 |           
|Comprehensive income:                                                  |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|                                                                       | Net income             |              |           |           |  |               |         |             |  |          |            |      |  |   |            |         |   |   |            | 2,149,869  |   |   |            | 2,149,869  |  
|                                                                       | Translation adjustment |              |           |           |  |               |         |             |  |          |            |      |  |   |            | (120,747 | ) |   |            |           |   |   |            | (120,747   | )
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Total comprehensive income                                             |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   | 2,029,122  |           
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Issuance of common stock                                               |                        |              | 4,410     |            |  |               | 441     |              |  |          | 17,750     |       |  |   |           |          |   |   |           |            |   |   | 18,191     |           
|Cancellation of stock                                                  |                        |              | (27,250   | )          |  |               | (2,725  | )            |  |          | (80,520    | )     |  |   |           |          |   |   |           |            |   |   | (83,245    | )         
|Tax benefit related to exercise of stock options                       |                        |              |          |            |  |               |        |              |  |          | 31,885     |       |  |   |           |          |   |   |           |            |   |   | 31,885     |           
|Vesting of restricted stock                                            |                        |              |          |            |  |               |        |              |  |          |           |       |  |   |           |          |   |   | 86,626     |            |   |   | 86,626     |           
|Cancellation of restricted stock, including tax
    expense of $36,927 |                        |              | (7,000    | )          |  |               | (700    | )            |  |          | (65,100    | )     |  |   |           |          |   |   |           |            |   |   | (65,800    | )         
|Forgiveness of executive officer note                                  |                        |              |          |            |  |               |        |              |  |          | 42,609     |       |  |   |           |          |   |   |           |            |   |   | 42,609     |           
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Balance, September 30, 2001                                            |                        |              | 6,161,138 |            |  |               | 616,114 |              |  |          | 17,010,008 |       |  |   | (2,089,483 | )        |   |   | 2,445,985  |            |   |   | 17,982,624 |           
|Comprehensive loss:                                                    |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|                                                                       | Net loss               |              |           |           |  |               |         |             |  |          |            |      |  |   |            |         |   |   |            | (2,391,562 | ) |   |            | (2,391,562 | )
|                                                                       | Translation adjustment |              |           |           |  |               |         |             |  |          |            |      |  |   |            | 177,148  |   |   |            |           |   |   |            | 177,148    |  
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Total comprehensive loss                                               |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   | (2,214,414 | )         
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Issuance of common stock                                               |                        |              | 4,410     |            |  |               | 441     |              |  |          | 13,450     |       |  |   |           |          |   |   |           |            |   |   | 13,891     |           
|Exercise of stock options, including tax benefit
    of $4,649         |                        |              | 17,350    |            |  |               | 1,735   |              |  |          | 37,837     |       |  |   |           |          |   |   |           |            |   |   | 39,572     |           
|Cancellation of restricted stock                                       |                        |              | (7,000    | )          |  |               | (700    | )            |  |          | (21,350    | )     |  |   |           |          |   |   |           |            |   |   | (22,050    | )         
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Balance, September 30, 2002                                            |                        |              | 6,175,898 |            |  |               | 617,590 |              |  |          | 17,039,945 |       |  |   | (1,912,335 | )        |   |   | 54,423     |            |   |   | 15,799,623 |           
|Comprehensive loss:                                                    |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|                                                                       | Net loss               |              |           |           |  |               |         |             |  |          |            |      |  |   |            |         |   |   |            | (1,834,799 | ) |   |            | (1,834,799 | )
|                                                                       | Translation adjustment |              |           |           |  |               |         |             |  |          |            |      |  |   |            | 740,170  |   |   |            |           |   |   |            | 740,170    |  
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Total comprehensive loss                                               |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   | (1,094,629 | )         
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Exercise of stock options, including tax benefit
    of $8,962         |                        |              | 38,975    |            |  |               | 3,897   |              |  |          | 111,444    |       |  |   |           |          |   |   |           |            |   |   | 115,341    |           
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           
|Balance, September 30, 2003                                            |                        |              | 6,214,873 |            |  | $             | 621,487 |              |  | $        | 17,151,389 |       |  | $ | (1,172,165 | )        |   | $ | (1,780,376 | )          |   | $ | 14,820,335 |           
|                                                                       |                        |              |           |            |  |               |         |              |  |          |            |       |  |   |            |          |   |   |            |            |   |   |            |           

See notes to consolidated financial statements.

32



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |            |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------- | ------------------------ | ---------- | ---------- | - | ---- | ----------- | --------- | - | - | ---------- | ---------- | -
|                                                                                                       |                                                   |                         
|                                                                                                       |                                                   | Year Ended September 30,
|                                                                                                       |                                                   |                         
|                                                                                                       |                                                   | 2003                     |            | 2002       |   | 2001
|                                                                                                       |                                                   |                          |            |            |   |     
|OPERATING ACTIVITIES                                                                                   |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|Net (loss) income                                                                                      |                                                   | $                        | (1,834,799 | )          |   | $    | (2,391,562  | )         |   | $ | 2,149,869  |           
|Adjustments to reconcile net (loss) income to net
    cash provided by (used in) operating activities: |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|                                                                                                       | Depreciation and amortization                     |                          |            | 1,721,688  |   |      |             | 1,898,142 |   |   |            | 343,870    |  
|                                                                                                       | Loss (gain) on disposal of equipment and fixtures |                          |            |           |   |      |             | 20,104    |   |   |            | (4,171     | )
|                                                                                                       | Forgiveness of executive officer note             |                          |            |           |   |      |             |          |   |   |            | 135,186    |  
|                                                                                                       | Other                                             |                          |            | 86,195     |   |      |             | (4,720    | ) |   |            | 82,564     |  
|Changes in operating assets and liabilities:                                                           |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|                                                                                                       | Accounts receivable, net                          |                          |            | (56,738    | ) |      |             | 3,507,432 |   |   |            | (4,718,577 | )
|                                                                                                       | Inventory                                         |                          |            | 3,470,732  |   |      |             | (737,868  | ) |   |            | (91,073    | )
|                                                                                                       | Other current assets                              |                          |            | 285,191    |   |      |             | 740,731   |   |   |            | 868,221    |  
|                                                                                                       | Note receivable from customer                     |                          |            | (719,785   | ) |      |             |          |   |   |            |           |  
|                                                                                                       | Accounts payable and accrued expenses             |                          |            | (1,042,547 | ) |      |             | 1,365,168 |   |   |            | 1,033,774  |  
|                                                                                                       | Deferred revenue                                  |                          |            | 626,642    |   |      |             | (566,989  | ) |   |            | (2,261,056 | )
|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|NET CASH PROVIDED BY (USED IN) OPERATING
    ACTIVITIES                                                |                                                   |                          | 2,536,579  |            |   |      | 3,830,438   |           |   |   | (2,461,393 | )         
|INVESTING ACTIVITIES                                                                                   |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|Business acquisition                                                                                   |                                                   |                          |           |            |   |      | (16,673,000 | )         |   |   |           |           
|Purchase of equipment and fixtures                                                                     |                                                   |                          | (713,316   | )          |   |      | (642,531    | )         |   |   | (526,349   | )         
|Proceeds from sale of equipment and fixtures                                                           |                                                   |                          |           |            |   |      |            |           |   |   | 27,492     |           
|Purchase of short-term investments                                                                     |                                                   |                          | (40,066    | )          |   |      | (146,817    | )         |   |   | (132,563   | )         
|Proceeds from sale of short-term investments                                                           |                                                   |                          | 80,133     |            |   |      | 68,387      |           |   |   | 248,663    |           
|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|NET CASH USED IN INVESTING ACTIVITIES                                                                  |                                                   |                          | (673,249   | )          |   |      | (17,393,961 | )         |   |   | (382,757   | )         
|FINANCING ACTIVITIES                                                                                   |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|Issuance of common stock                                                                               |                                                   |                          | 115,341    |            |   |      | 53,463      |           |   |   | 18,191     |           
|Repurchase of common stock                                                                             |                                                   |                          |           |            |   |      | (22,050     | )         |   |   | (149,045   | )         
|Repayment of note receivable from stock sale                                                           |                                                   |                          |           |            |   |      |            |           |   |   | 11,028     |           
|(Payment) borrowing on bank credit facility, net                                                       |                                                   |                          | (1,380,000 | )          |   |      | 14,685,000  |           |   |   | 595,000    |           
|Principal payments on capital lease obligations                                                        |                                                   |                          | (30,451    | )          |   |      | (6,203      | )         |   |   |           |           
|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|NET CASH (USED IN) PROVIDED BY FINANCING
    ACTIVITIES                                                |                                                   |                          | (1,295,110 | )          |   |      | 14,710,210  |           |   |   | 475,174    |           
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                |                                                   |                          | 383,570    |            |   |      | (20,250     | )         |   |   | (83,242    | )         
|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                                            |                                                   |                          | 951,790    |            |   |      | 1,126,437   |           |   |   | (2,452,218 | )         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                         |                                                   |                          | 1,717,973  |            |   |      | 591,536     |           |   |   | 3,043,754  |           
|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                               |                                                   | $                        | 2,669,763  |            |   | $    | 1,717,973   |           |   | $ | 591,536    |           
|                                                                                                       |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|Supplemental disclosure of non-cash activities:                                                        |                                                   |                          |            |            |   |      |             |           |   |   |            |           
|Forgiveness of executive officer note                                                                  |                                                   | $                        |           |            |   | $    |            |           |   | $ | 135,186    |           
|Purchase of equipment through capital lease
    obligations                                            |                                                   |                          | 49,680     |            |   |      | 67,781      |           |   |   |           |           

See notes to consolidated financial statements.

33



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


September 30, 2003


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. 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.

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

Equipment and
Fixtures:Equipment and fixtures are
stated on the basis of cost and include the cost of assets held
under capital lease obligations. Demonstration equipment not
expected to be resold is carried in equipment on a cost basis.
Depreciation is provided on the straight-line method 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, are recognized as
revenue upon completion or attainment of the specified
condition. Service revenue is recognized as services are
rendered. For spare parts, supplies and consumable items stored
at customer sites, revenue is recognized when the customer uses
the inventory. Amounts billed to customers under maintenance
contracts are recorded as deferred revenue and recognized in
income over the term of the maintenance agreement. Revenue on
the Companys PS MICRsystems product line,
manufactured by Océ and private-labeled by the Company, or
on 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

34



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
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 or income
and net loss or earnings per share would be as follows:

|                                                                                       |  |                                  |            |      |  |      |            |   |  |   |           |  
|-------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | --------- | -
|                                                                                       |  |                                 
|                                                                                       |  | For the Year Ended September 30,
|                                                                                       |  |                                 
|                                                                                       |  | 2003                             |            | 2002 |  | 2001
|                                                                                       |  |                                  |            |      |  |     
|Net (loss) income, as reported                                                         |  | $                                | (1,834,799 | )    |  | $    | (2,391,562 | ) |  | $ | 2,149,869 |  
|Stock-based compensation determined under fair
    value based method for all awards   |  |                                  | (178,567   | )    |  |      | (203,741   | ) |  |   | (233,467  | )
|                                                                                       |  |                                  |            |      |  |      |            |   |  |   |           |  
|Pro forma net (loss) income, assuming fair
    value method for all stock-based awards |  | $                                | (2,013,366 | )    |  | $    | (2,595,303 | ) |  | $ | 1,916,402 |  
|                                                                                       |  |                                  |            |      |  |      |            |   |  |   |           |  
|Basic (loss) earnings per share, as reported                                           |  | $                                | (0.30      | )    |  | $    | (0.39      | ) |  | $ | 0.35      |  
|Diluted (loss) earnings per share, as
    reported                                     |  |                                  | (0.30      | )    |  |      | (0.39      | ) |  |   | 0.35      |  
|Basic (loss) earnings per share, pro forma                                             |  |                                  | (0.33      | )    |  |      | (0.42      | ) |  |   | 0.31      |  
|Diluted (loss) earnings per share, pro forma                                           |  |                                  | (0.33      | )    |  |      | (0.42      | ) |  |   | 0.31      |  

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
2003, 2002 and 2001:

|                                |  |                          |         |      |  |      |         |   |  |  |         |  
|------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                |  |                         
|                                |  | Year Ended September 30,
|                                |  |                         
|                                |  | 2003                     |         | 2002 |  | 2001
|                                |  |                          |         |      |  |     
|Expected dividend yield         |  |                          | 0       | %    |  |      | 0       | % |  |  | 0       | %
|Expected stock price volatility |  |                          | 52      |      |  |      | 53      |   |  |  | 49      |  
|Risk-free interest rate         |  |                          | 2.7     |      |  |      | 5.0     |   |  |  | 6.6     |  
|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

35



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                 |                        |      |           |      |  |      |           |   |  |  |           |        | 
|-------------------------------------------------------------------------------- | ---------------------- | ---- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | ------ | 
|                                                                                 |                        | 2003 |           | 2002 |  | 2001
|                                                                                 |                        |      |           |      |  |     
|Denominator for basic earnings per share,
    weighted average shares            |                        |      | 6,189,328 |      |  |      | 6,167,199 |   |  |  | 6,174,411 |       
|Effect of dilutive securities:                                                   |                        |      |           |      |  |      |           |   |  |  |           |       
|                                                                                 | Employee stock options |      |           |     |  |      |           |  |  |  |           | 53,313 | 
|                                                                                 |                        |      |           |      |  |      |           |   |  |  |           |       
|Dilutive potential common shares                                                 |                        |      |          |      |  |      |          |   |  |  | 53,313    |       
|Denominator for diluted earnings per share,
    adjusted weighted average shares |                        |      | 6,189,328 |      |  |      | 6,167,199 |   |  |  | 6,227,724 |       
|                                                                                 |                        |      |           |      |  |      |           |   |  |  |           |       

Employee stock options totaling 32,068 and
162,508 in fiscal 2003 and 2002, respectively, were excluded
from diluted weighted average shares because their impact would
be antidilutive.

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

Impairment or Disposal of Long-Lived
Assets:As of October 1, 2002,
the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes Statement of Financial
Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations for a disposal of a segment of a
business. The adoption of this Statement had no impact on the
Companys operating results or financial position.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal
activities and replaces Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring)
(EITF 94-3). SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS 146 also establishes
that fair value is the objective for initial measurement of the
liability. The Statement was effective for exit or disposal
activities initiated after December 31, 2002.

36



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reclassification:Certain items in the fiscal 2002 and 2001 Consolidated Financial
Statements have been reclassified to conform to the 2003
presentation.

Note B  Income Taxes

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

|                                  |  |                          |            |      |  |      |            |   |  |   |           | 
|--------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | --------- | 
|                                  |  |                         
|                                  |  | Year Ended September 30,
|                                  |  |                         
|                                  |  | 2003                     |            | 2002 |  | 2001
|                                  |  |                          |            |      |  |     
|Domestic                          |  | $                        | (1,693,819 | )    |  | $    | (3,666,923 | ) |  | $ | 2,968,919 | 
|Foreign                           |  |                          | 159,020    |      |  |      | 2,386,361  |   |  |   | 332,950   | 
|                                  |  |                          |            |      |  |      |            |   |  |   |           | 
|(Loss) income before income taxes |  | $                        | (1,534,799 | )    |  | $    | (1,280,562 | ) |  | $ | 3,301,869 | 
|                                  |  |                          |            |      |  |      |            |   |  |   |           | 

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

|                         |         |                          |         |         |  |      |           |         |  |   |           |          |  
|------------------------ | ------- | ------------------------ | ------- | ------- |  | ---- | --------- | ------- |  | - | --------- | -------- | -
|                         |         |                         
|                         |         | Year Ended September 30,
|                         |         |                         
|                         |         | 2003                     |         | 2002    |  | 2001
|                         |         |                          |         |         |  |     
|Current:                 |         |                          |         |         |  |      |           |         |  |   |           |         
|                         | Federal |                          | $       |        |  |      | $         |        |  |   | $         | 893,000  |  
|                         | State   |                          |         | 12,000  |  |      |           | 14,000  |  |   |           | 163,000  |  
|                         | Foreign |                          |         | 288,000 |  |      |           | 254,000 |  |   |           | (805,000 | )
|                         |         |                          |         |         |  |      |           |         |  |   |           |         
|                         |         |                          | 300,000 |         |  |      | 268,000   |         |  |   | 251,000   |         
|                         |         |                          |         |         |  |      |           |         |  |   |           |         
|Deferred:                |         |                          |         |         |  |      |           |         |  |   |           |         
|                         | Federal |                          |         |        |  |      |           | 760,000 |  |   |           | 203,000  |  
|                         | State   |                          |         |        |  |      |           | 74,000  |  |   |           | 20,000   |  
|                         | Foreign |                          |         |        |  |      |           | 9,000   |  |   |           | 678,000  |  
|                         |         |                          |         |         |  |      |           |         |  |   |           |         
|                         |         |                          |        |         |  |      | 843,000   |         |  |   | 901,000   |         
|                         |         |                          |         |         |  |      |           |         |  |   |           |         
|Total income tax expense |         | $                        | 300,000 |         |  | $    | 1,111,000 |         |  | $ | 1,152,000 |         
|                         |         |                          |         |         |  |      |           |         |  |   |           |         

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

|                                                   |  |                          |          |      |  |      |           |   |  |   |           |  
|-------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                   |  |                         
|                                                   |  | Year Ended September 30,
|                                                   |  |                         
|                                                   |  | 2003                     |          | 2002 |  | 2001
|                                                   |  |                          |          |      |  |     
|Statutory rate applied to loss before income taxes |  | $                        | (522,000 | )    |  | $    | (435,000  | ) |  | $ | 1,123,000 |  
|Tax credits                                        |  |                          |         |      |  |      | 47,000    |   |  |   | 125,000   |  
|Change in valuation allowance                      |  |                          | 931,000  |      |  |      | 1,513,000 |   |  |   | (251,000  | )
|Other                                              |  |                          | (109,000 | )    |  |      | (14,000   | ) |  |   | 155,000   |  
|                                                   |  |                          |          |      |  |      |           |   |  |   |           |  
|Total income tax expense                           |  | $                        | 300,000  |      |  | $    | 1,111,000 |   |  | $ | 1,152,000 |  
|                                                   |  |                          |          |      |  |      |           |   |  |   |           |  

37



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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,
|                          |                                                                       |              
|                          |                                                                       | 2003          |            | 2002     
|                          |                                                                       |               |            |          
|Deferred tax assets:      |                                                                       |               |            |           |  |   |            |          
|                          | Net operating loss                                                    |               | $          | 1,883,000 |  |   | $          | 1,123,000 | 
|                          | Business credit carryforwards and alternative
    minimum tax credits |               |            | 642,000   |  |   |            | 666,000   | 
|                          | Inventory valuation reserves                                          |               |            | 320,000   |  |   |            | 223,000   | 
|                          | Other domestic and foreign differences                                |               |            | 146,000   |  |   |            | 48,000    | 
|                          |                                                                       |               |            |           |  |   |            |          
|Gross deferred tax assets |                                                                       |               | 2,991,000  |           |  |   | 2,060,000  |          
|Valuation allowance       |                                                                       |               | (2,991,000 | )         |  |   | (2,060,000 | )        
|                          |                                                                       |               |            |           |  |   |            |          
|Net deferred tax assets   |                                                                       | $             |           |           |  | $ |           |          
|                          |                                                                       |               |            |           |  |   |            |          

At September 30, 2003, the Company had
domestic tax loss carryforwards of approximately $4,160,000,
which expire in varying amounts through 2018. 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 2020. Domestic alternative minimum tax credits
of approximately $143,000 are available to offset future income
tax with no expiration date. These tax benefits, together with
future tax deductions from the reversal of temporary
differences, comprise the net deferred tax assets. Deferred tax
assets have been offset by a valuation allowance as deemed
necessary based on the Companys estimates of its future
sources of taxable income and the expected timing of temporary
difference reversals.

Undistributed earnings of the Companys
foreign subsidiaries amounted to approximately $3,462,360 at
September 30, 2003. 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, 2003, 2002 and 2001 were $150,000, $226,000
and $20,000, 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.

38



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##### Table of Contents



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,
|                      |                |                         
|                      |                | 2003                     |            | 2002       |  | 2001
|                      |                |                          |            |            |  |     
|Total revenues(a):    |                |                          |            |            |  |      |            |            |  |   |            |           
|                      | United States  |                          | $          | 45,230,177 |  |      | $          | 42,523,182 |  |   | $          | 31,601,106 | 
|                      | United Kingdom |                          |            | 7,933,156  |  |      |            | 6,170,228  |  |   |            | 6,950,380  | 
|                      | France         |                          |            | 4,815,900  |  |      |            | 3,344,684  |  |   |            | 3,597,398  | 
|                      | Canada         |                          |            |           |  |      |            | 121,688    |  |   |            |           | 
|                      | Australia      |                          |            |           |  |      |            | 244,559    |  |   |            | 929,543    | 
|                      |                |                          |            |            |  |      |            |            |  |   |            |           
|Consolidated revenues |                | $                        | 57,979,233 |            |  | $    | 52,404,341 |            |  | $ | 43,078,427 |           
|                      |                |                          |            |            |  |      |            |            |  |   |            |           

|                               |                |               |           |           |  |      |           |           |  |   |           |         | 
|------------------------------ | -------------- | ------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | ------- | 
|                               |                |              
|                               |                | September 30,
|                               |                |              
|                               |                | 2003          |           | 2002      |  | 2001
|                               |                |               |           |           |  |     
|Long-lived assets:             |                |               |           |           |  |      |           |           |  |   |           |        
|                               | United States  |               | $         | 899,091   |  |      | $         | 1,148,636 |  |   | $         | 915,905 | 
|                               | United Kingdom |               |           | 34,919    |  |      |           | 44,284    |  |   |           | 74,086  | 
|                               | France         |               |           | 23,646    |  |      |           | 28,878    |  |   |           | 27,931  | 
|                               | Canada         |               |           | 2,503,549 |  |      |           | 3,537,589 |  |   |           |        | 
|                               | Australia      |               |           |          |  |      |           |          |  |   |           | 19,887  | 
|                               |                |               |           |           |  |      |           |           |  |   |           |        
|Consolidated long-lived assets |                | $             | 3,461,205 |           |  | $    | 4,759,387 |           |  | $ | 1,037,809 |        
|                               |                |               |           |           |  |      |           |           |  |   |           |        



---



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

Export sales to customers were $7,846,000,
$4,186,000 and $2,396,000 for the fiscal years ended
September 30, 2003, 2002 and 2001, respectively.

In fiscal 2003, 2002 and 2001, sales to the
Companys largest customer were $10,858,000, $14,461,000
and $24,261,000, 19%, 28% and 57%, respectively, of total sales
for the fiscal year. At September 30, 2003 and 2002,
accounts receivable from this customer totaled $1,027,000 and
$1,946,000, 9% and 18%, respectively, of total trade accounts
receivable as of those dates. Sales to the Companys
largest OEM customer were $8,172,000 and $6,777,000 in fiscal
2003 and 2002, respectively, 14% and 13%, respectively, of total
sales for fiscal 2003 and fiscal 2002. Accounts receivable from
this OEM customer were $1,172,000 and $1,047,000 as of
September 20, 3003 and 2002, respectively, comprising 11%
and 10% of total trade accounts receivable as of those dates.

Note D  Stock Options and Benefit
Plans

During fiscal 2003, 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 all cases, subject to the provisions
of the plans, the Board of Directors has complete discretion in
establishing the terms and conditions of each option granted to
the employees of the Company. During fiscal 1995, an executive

39



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

officer exercised stock options for a $148,966
interest-bearing note, collateralized by the underlying stock,
described in detail in Note H.

Options outstanding as of September 30, 2003
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, 2003, there were no options outstanding or
reserved for future grants. At September 30, 2002 and 2001,
there were no options outstanding under the 1986 Plan, with
188,660 shares then reserved for future grants.



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

At September 30, 2003, 2002 and 2001, there
were 88,000, 142,334 and 144,834 options, respectively,
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
2003, 2002 or 2001.

|                            |                  |            |         |             |  |           |         |         |   |   |      |      | 
|--------------------------- | ---------------- | ---------- | ------- | ----------- |  | --------- | ------- | ------- | - | - | ---- | ---- | 
|                            |                  |            |         |             |  | Weighted 
|                            |                  | Shares     |         |             |  | Average  
|                            |                  | Reserved   |         |             |  | Exercise 
|                            |                  | for Future |         | Options     |  | Price    
|                            |                  | Grants     |         | Outstanding |  | per Share
|                            |                  |            |         |             |  |          
|Balance, September 30, 2000 |                  |            | 85,535  |             |  |           | 147,834 |         |   | $ | 6.91 |     
|                            | Options canceled |            |         | 3,000       |  |           |         | (3,000  | ) |   |      | 8.88 | 
|                            |                  |            |         |             |  |           |         |         |   |   |      |     
|Balance, September 30, 2001 |                  |            | 88,535  |             |  |           | 144,834 |         |   |   | 6.87 |     
|                            | Options canceled |            |         | 2,500       |  |           |         | (2,500  | ) |   |      | 7.75 | 
|                            |                  |            |         |             |  |           |         |         |   |   |      |     
|Balance, September 30, 2002 |                  |            | 91,035  |             |  |           | 142,334 |         |   |   | 6.85 |     
|                            | Options canceled |            |         | 54,334      |  |           |         | (54,334 | ) |   |      | 7.85 | 
|                            |                  |            |         |             |  |           |         |         |   |   |      |     
|Balance, September 30, 2003 |                  |            | 145,369 |             |  |           | 88,000  |         |   | $ | 6.44 |     
|                            |                  |            |         |             |  |           |         |         |   |   |      |     

40



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

At September 30, 2003, 2002 and 2001, there
were 295,975, 266,858 and 237,858 options, respectively,
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
2003.

|                            |                   |            |         |             |   |           |         |          |   |   |      |      | 
|--------------------------- | ----------------- | ---------- | ------- | ----------- | - | --------- | ------- | -------- | - | - | ---- | ---- | 
|                            |                   |            |         |             |   | Weighted 
|                            |                   | Shares     |         |             |   | Average  
|                            |                   | Reserved   |         |             |   | Exercise 
|                            |                   | for Future |         | Options     |   | Price per
|                            |                   | Grants     |         | Outstanding |   | Share    
|                            |                   |            |         |             |   |          
|Balance, September 30, 2000 |                   |            | 282,967 |             |   |           | 446,750 |          |   | $ | 2.99 |     
|                            | Options granted   |            |         | (182,700    | ) |           |         | 182,700  |   |   |      | 4.01 | 
|                            | Options canceled  |            |         | 4,100       |   |           |         | (4,100   | ) |   |      | 3.39 | 
|                            |                   |            |         |             |   |           |         |          |   |   |      |     
|Balance, September 30, 2001 |                   |            | 104,367 |             |   |           | 625,350 |          |   |   | 3.28 |     
|                            | Options exercised |            |         |            |   |           |         | (17,350  | ) |   |      | 3.27 | 
|                            | Options granted   |            |         | (100,000    | ) |           |         | 100,000  |   |   |      | 3.15 | 
|                            | Options canceled  |            |         | 37,050      |   |           |         | (37,050  | ) |   |      | 3.06 | 
|                            |                   |            |         |             |   |           |         |          |   |   |      |     
|Balance, September 30, 2002 |                   |            | 41,417  |             |   |           | 670,950 |          |   |   | 3.28 |     
|                            | Options exercised |            |         |            |   |           |         | (38,975  | ) |   |      | 2.73 | 
|                            | Options canceled  |            |         | 132,200     |   |           |         | (132,200 | ) |   |      | 3.50 | 
|                            |                   |            |         |             |   |           |         |          |   |   |      |     
|Balance, September 30, 2003 |                   |            | 173,617 |             |   |           | 499,775 |          |   | $ | 3.26 |     
|                            |                   |            |         |             |   |           |         |          |   |   |      |     



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

At September 30, 2003, there were 7,000
options exercisable under the 2000 Plan, at prices of $3.15 to
$6.10 per share. No options were exercisable under the 2000 Plan
as of September 30, 2002 or 2001.

|                            |                  |            |           |             |   |           |         |         |   |   |      |      | 
|--------------------------- | ---------------- | ---------- | --------- | ----------- | - | --------- | ------- | ------- | - | - | ---- | ---- | 
|                            |                  |            |           |             |   | Weighted 
|                            |                  | Shares     |           |             |   | Average  
|                            |                  | Reserved   |           |             |   | Exercise 
|                            |                  | for Future |           | Options     |   | Price per
|                            |                  | Grants     |           | Outstanding |   | Share    
|                            |                  |            |           |             |   |          
|Balance, September 30, 2001 |                  |            | 1,250,000 |             |   |           |        |         |   | $ |     |     
|                            | Options granted  |            |           | (70,000     | ) |           |         | 70,000  |   |   |      | 3.78 | 
|                            |                  |            |           |             |   |           |         |         |   |   |      |     
|Balance, September 30, 2002 |                  |            | 1,180,000 |             |   |           | 70,000  |         |   |   | 3.78 |     
|                            | Options granted  |            |           | (210,000    | ) |           |         | 210,000 |   |   |      | 3.10 | 
|                            | Options canceled |            |           | 40,000      |   |           |         | (40,000 | ) |   |      | 3.12 | 
|                            |                  |            |           |             |   |           |         |         |   |   |      |     
|Balance, September 30, 2003 |                  |            | 1,010,000 |             |   |           | 240,000 |         |   | $ | 3.30 |     
|                            |                  |            |           |             |   |           |         |         |   |   |      |     

Total shares under all plans reserved for options
and restricted stock were 1,328,986 shares as of
September 30, 2003. Total compensation expense for
stock-based compensation was $0, $0 and $87,000 in fiscal 2003,
2002 and 2001, respectively.

For options granted under all plans in fiscal
2003, 2002 and 2001, the weighted average fair value of options
granted was $1.71, $2.04 and $2.40, respectively.

41



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##### Table of Contents



DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
concerning options outstanding and exercisable as of
September 30, 2003:

|                         |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |         |  |  |   |      | 
|------------------------ |  | ------------------- | ------- | ------------------- |  | --------- | ---- | ----------- |  | --------- | ---- |  |  |  | ------- |  |  | - | ---- | 
|                         |  |                     |         |                    
|                         |  | Options Outstanding |         | Options Exercisable
|                         |  |                     |         |                    
|                         |  |                     |         | Weighted            |  | Weighted  |      |             |  | Weighted 
|                         |  |                     |         | Average             |  | Average   |      |             |  | Average  
|                         |  |                     |         | Remaining           |  | Exercise  |      |             |  | Exercise 
|                         |  | Number              |         | Contractual         |  | Price per |      | Number      |  | Price per
|Range of Exercise Prices |  | Outstanding         |         | Life in Years       |  | Share     |      | Outstanding |  | Share    
|                         |  |                     |         |                     |  |           |      |             |  |          
|$1.750-4.750             |  |                     | 718,775 |                     |  |           | 4.24 |             |  | $         | 3.20 |  |  |  | 295,475 |  |  | $ | 3.27 | 
|5.063-7.750              |  |                     | 91,500  |                     |  |           | 2.02 |             |  |           | 5.69 |  |  |  | 78,000  |  |  |   | 5.62 | 
|8.125-9.625              |  |                     | 17,500  |                     |  |           | 2.57 |             |  |           | 9.63 |  |  |  | 17,500  |  |  |   | 9.63 | 
|                         |  |                     |         |                     |  |           |      |             |  |           |      |  |  |  |         |  |  |   |      | 
|$1.750-9.625             |  |                     | 827,775 |                     |  |           | 3.96 |             |  | $         | 3.61 |  |  |  | 390,975 |  |  | $ | 4.03 | 



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

The Company 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 $184,000, $182,000
and $127,000, for the fiscal years ended September 30,
2003, 2002 and 2001, respectively.

The Company has a defined contribution plan
covering substantially all Canadian employees. The expenses
related to the plan for the fiscal years ended September 30,
2003 and 2002 were $228,000 and $173,000, respectively.
Similarly, the Company also has defined contribution plans for
employees in the United Kingdom and France. For the fiscal years
ended September 30, 2003, 2002 and 2001, respectively, the
expenses related to the plan for employees in the United Kingdom
were $82,000, $74,000 and $69,000, and for the employees in
France were $21,000, $23,000 and $28,000.

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

On December 20, 2001, the Company, through a
newly organized Canadian subsidiary, acquired substantially all
of the North American business assets of Delphax Systems, a
Massachusetts general partnership, and Delphax Systems, Inc., a
Delaware corporation (collectively, the Delphax
Business). The Delphax Business is located in suburban
Toronto, Ontario, and is engaged in the development, manufacture
and distribution of print engines, print management software and
a range of digital printing equipment incorporating the Delphax
Businesss 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.

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

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 I.

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         
|                                        |  |              
|Net sales                               |  | $             | 58,088,597 |  
|Net loss                                |  |               | (2,759,639 | )
|Basic and diluted loss per common share |  |               | (0.45      | )

Note F  Credit Agreement

Effective December 20, 2001, the Company
entered into a bank credit agreement, secured by substantially
all the assets of the Company. The credit agreement provides for
term and revolving loans, which, at the Companys election,
may be outstanding at one of two rates, the banks prime
rate plus 1% or the banks adjusted LIBOR rate plus 4%,
provided that $3.0 million of the principal amount of the
revolving loans bears interest at the fixed rate of 7.35% per
annum. The term loan portion of the credit facility was advanced
as a single borrowing on December 20, 2001, in the amount
of $4.0 million, $2.5 million of which remained
outstanding as of September 30, 2003. No amount repaid or
prepaid on any term loan may be borrowed again. The Company may
borrow on a revolving loan basis up to the lesser of the
revolving credit commitment or the then current borrowing base
and is subject to a commitment fee of 0.5% per annum on the
unused portion of the commitment. As of September 30, 2003,
revolving loans outstanding were $11.4 million. Of the
total term and revolving loans of $13.9 million as of
September 30, 2003, $1.9 million was outstanding at
the banks prime rate plus 1%, $3.0 million was
outstanding at the fixed rate of 7.35% and $9.0 million was
outstanding at adjusted LIBOR plus 4%, for a weighted average
interest rate of approximately 6.8%.

During fiscal 2003, three amendments to the
credit facility were executed, which: (1) continued the
required quarterly installments of term loan principal of
$250,000 but changed the maturity date of the loan to
December 31, 2003; (2) revised the revolving credit
commitment, which was $14.5 million as of September 30,
2002, to $12.5 million as of December 31, 2002,
$11.5 million as of January 1, 2003, $10.5 million as
of July 1, 2003 and $12.0 million as of
August 11, 2003; (3) increased the variable interest rates
applicable to the loan; and (4) relaxed certain financial
covenants in the credit agreement, waiving financial covenant
defaults that would have existed absent an amendment to the
agreement.

As of September 30, 2003, the Company was
not in compliance with certain financial covenants of the credit
agreement related to the credit facility. Prior to fiscal year
end, in anticipation of the debt maturity on December 31,
2003, the Company commenced discussions for a new credit
facility with the current lender, as well as alternative lending
institutions, but had no commitment for replacement financing.
On February 5, 2004, the Company refinanced its
indebtedness to its lender by: (i) issuing at par
$3.0 million of convertible subordinated notes that were
accompanied by warrants to purchase Company Common Stock, and
(ii) entering into new senior credit agreements between the
Company and a new senior lender and between the Companys
Canadian subsidiary and a Canadian affiliate of the new lender
to the Company. See Note K below for details.

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

Cash interest payments, principally comprised of
interest on the credit facility, but including interest on
capital leases included in Note G below, for the fiscal
years ended September 30, 2003, 2002 and 2001, were
$876,000, $636,000 and $50,000, respectively.

Note G  Capital Leases

|                                          |                                                                                                                        |                   |        |        |        |   |        |        |        | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ----------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                          |                                                                                                                        |                  
|                                          |                                                                                                                        | September 30,    
|                                          |                                                                                                                        |                  
|                                          |                                                                                                                        | 2003              |        | 2002  
|                                          |                                                                                                                        |                   |        |       
|Capital lease obligations on:             |                                                                                                                        |                   |        |        |        |   |        |       
|                                          | Computer equipment, due over 24 months in
    monthly installments of $3,629, including interest at 21.4% to
    22.1% |                   | $      | 28,217 |        |   | $      | 61,578 |       
|                                          | Computer software, due over 36 months in
    monthly installments of $1,786, including interest at 9.1%                |                   |        | 49,638 |        |   |        |        |       
|                                          |                                                                                                                        |                   |        |        |        |   |        |       
|                                          |                                                                                                                        | Total obligations |        |        | 77,855 |   |        |        | 61,578 | 
|Less current portion of lease obligations |                                                                                                                        |                   | 44,289 |        |        |   | 33,361 |       
|                                          |                                                                                                                        |                   |        |        |        |   |        |       
|Long-term portion of lease obligations    |                                                                                                                        | $                 | 33,566 |        |        | $ | 28,217 |       
|                                          |                                                                                                                        |                   |        |        |        |   |        |       

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

|                          |      |                                    |   |        |        |  
|------------------------- | ---- | ---------------------------------- | - | ------ | ------ | -
|                          |      | Capital                           
|                          |      | Lease                             
|                          |      | Obligations                       
|                          |      |                                   
|Year ending September 30: |      |                                    |   |       
|                          | 2004 |                                    | $ | 49,674 |       
|                          | 2005 |                                    |   | 18,976 |       
|                          | 2006 |                                    |   | 15,813 |       
|                          |      |                                    |   |       
|                          |      | Total payments                     |   |        | 84,463 |  
|                          |      | Less amounts representing interest |   |        | (6,608 | )
|                          |      |                                    |   |       
|                          |      | Present value of lease payments    |   | $      | 77,855 |  
|                          |      |                                    |   |       

Note H  Executive Loan

During fiscal 1995, the Chairman and Chief
Executive Officer exercised 40,000 options to purchase Common
Stock at $2.00 per share, by executing a $148,996, five-year,
full recourse note, bearing interest at a floating rate, under
the Executive Loan Program. The purpose of the loan was to
provide cash for the exercise of the options and to pay the
related income taxes. When exercised, the Companys stock
had a market value of $6.375 per share. In 1998, the loan terms
were amended to change the loan from full recourse to
non-recourse, and the floating rate was fixed at 5.25%. In May
of fiscal 2000, the Company extended the term of the loan to May
2001 and granted forgiveness of the loan ratably over the
extension period. These modifications resulted in the options
being treated as a fixed stock award. The Company recognized the
fair market value of the stock award of $225,000 over the
extension period, which concluded in the third quarter of fiscal
2001. As a result, no expense was incurred in fiscal 2003 or
2002; $135,186 was recognized as compensation expense related to
the stock award in fiscal 2001. Over the life of the loan, total
principal payments made by the executive were $54,671.

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note I  Restructuring
Initiatives

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 Delphax Business 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 out in the first quarter of
fiscal 2004.

Note J  Commitments and
Contingencies

Building, equipment and automobile rentals under
operating leases were $2,220,562, $1,602,412 and $1,033,956 for
the fiscal years ended September 30, 2003, 2002 and 2001,
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, increasing to $481,000
in the eleventh year and thereafter. The Company is obligated to
pay operating expenses and real estate taxes incurred by the
landlord. The Company has the right to terminate such lease at
the end of the tenth lease year, subject to a termination fee.

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

The Companys subsidiary in the United
Kingdom leases office space under a lease expiring in 2013.
Annual rental under the lease 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 $10,238,739 and are due as follows: fiscal years
ending September 30, 2004  $2,161,741;
2005  $2,140,702; 2006  $1,852,626;
2007  $884,471; 2008  $874,450;
thereafter  $2,324,749.

Note K  Subsequent
Event

On February 5, 2004, the Company refinanced
its indebtedness to its prior lender by: (i) issuing at par
$3.0 million of convertible subordinated notes that were
accompanied by warrants to purchase Company

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Common Stock, and (ii) entering into new
senior credit agreements between the Company and a new senior
lender and between the Companys Canadian subsidiary and a
Canadian affiliate of the new lender to the Company.

The subordinated debt financing consisted of a
private placement to an accredited investor of $3.0 million
in 7% convertible subordinated notes (the Convertible Notes) and
accompanying four-year warrants to purchase 515,625 shares of
Company Common Stock at an exercise price of $3.51 per share
(the Warrants). The Convertible Notes are immediately
convertible to Company Common Stock at a conversion price of
$3.20 per share, which would result in 937,500 shares being
issued if all $3.0 million in principal of the Convertible
Notes were converted at that conversion price. The Convertible
Notes are junior to the senior credit facilities described
below, bear interest at the rate of 7% per annum, payable
quarterly in shares of Common Stock, and principal is due and
payable in one lump sum in four years on February 4, 2008,
unless earlier paid or converted. The number of shares of Common
Stock to be issued in payment of interest is determined by
dividing the monetary value of the accrued interest by the
initial conversion price of $3.20 per common share, or 16,406
shares per quarter. Interest expense will be recorded quarterly
based on the fair value of the common shares issued.
Accordingly, interest expense may fluctuate from quarter to
quarter. The Convertible Notes are unsecured. The Warrants
issued in connection with the Convertible Notes are exercisable
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 $562,000. Furthermore, the
Convertible Notes contained a beneficial conversion feature
representing an effective initial conversion price that was less
than the fair value of the underlying Common Stock on
February 5, 2004. The fair value of the beneficial
conversion feature was estimated to be approximately $853,000.
Both the relative fair value of the Warrants and the fair value
of the beneficial conversion feature will be recorded as an
increase in additional paid-in capital and as original issue
discount on the underlying debt. The total original issue
discount of approximately $1,415,000 will be amortized to
interest expense over the four-year life of the Convertible
Notes. Anytime after February 4, 2006, if the average
closing price of the Companys Common Stock has been above
$7.00 per share for the preceding 15 trading days and certain
other conditions are met, the Company may issue a notice to
redeem the Convertible Notes. Holders of the Convertible Notes
would then be required to either convert the Convertible Notes
to Common Stock or accept payment of 120% of the outstanding
unpaid principal.

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

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

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

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 an 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 will monitor prospective compliance with the bank
covenants. If the Company determines 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 the
covenants. The Company has developed specific plans to reduce
certain expenses in the event of covenant noncompliance, 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, 2004.

Note L  Summarized Quarterly
Financial Information (Unaudited)

|                                  |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|--------------------------------- |  | ------------- | ---------- | -------- |  | ------- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | -
|                                  |  |              
|                                  |  | Quarter Ended
|                                  |  |              
|                                  |  | December 31   |            | March 31 |  | June 30 |            | September 30
|                                  |  |               |            |          |  |         |            |             
|Fiscal 2003                       |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Net sales                         |  | $             | 15,474,896 |          |  | $       | 14,230,602 |              |  | $ | 14,804,696 |   |  | $ | 13,469,039 |  
|Gross profit                      |  |               | 7,658,812  |          |  |         | 7,905,601  |              |  |   | 7,698,310  |   |  |   | 6,895,167  |  
|Loss before income taxes          |  |               | (1,137,342 | )        |  |         | (9,277     | )            |  |   | (104,691   | ) |  |   | (283,489   | )
|Net loss                          |  |               | (1,137,342 | )        |  |         | (9,277     | )            |  |   | (104,691   | ) |  |   | (583,489   | )
|Basic loss per share              |  |               | (0.18      | )        |  |         | (0.00      | )            |  |   | (0.02      | ) |  |   | (0.09      | )
|Diluted loss per share            |  |               | (0.18      | )        |  |         | (0.00      | )            |  |   | (0.02      | ) |  |   | (0.09      | )
|Fiscal 2002                       |  |               |            |          |  |         |            |              |  |   |            |   |  |   |            |  
|Net sales                         |  | $             | 11,777,542 |          |  | $       | 13,067,039 |              |  | $ | 13,531,014 |   |  | $ | 14,028,746 |  
|Gross profit                      |  |               | 5,628,281  |          |  |         | 6,781,380  |              |  |   | 7,585,343  |   |  |   | 6,890,534  |  
|Income (loss) before income taxes |  |               | 981,761    |          |  |         | (889,658   | )            |  |   | (126,601   | ) |  |   | (1,246,064 | )
|Net income (loss)                 |  |               | 638,761    |          |  |         | (578,958   | )            |  |   | (9,801     | ) |  |   | (2,441,564 | )
|Basic earnings (loss) per share   |  |               | 0.10       |          |  |         | (0.09      | )            |  |   | (0.00      | ) |  |   | (0.40      | )
|Diluted earnings (loss) per share |  |               | 0.10       |          |  |         | (0.09      | )            |  |   | (0.00      | ) |  |   | (0.40      | )

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DELPHAX TECHNOLOGIES INC. AND
SUBSIDIARIES






SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES


|                                                   |                               |            |   |            |  |            |  |              |  |            |  |         |      |  |  |            |   |  |   |           | 
|-------------------------------------------------- | ----------------------------- | ---------- | - | ---------- |  | ---------- |  | ------------ |  | ---------- |  | ------- | ---- |  |  | ---------- | - |  | - | --------- | 
|                                                   |                               | Balance at |   | Charged to |  | Charged to |  |              |  | Balance at
|                                                   |                               | Beginning  |   | Costs and  |  | Other      |  |              |  | End of    
|Description                                        |                               | of Period  |   | Expenses   |  | Accounts   |  | (Deductions) |  | Period    
|                                                   |                               |            |   |            |  |            |  |              |  |           
|I. Allowance for doubtful accounts                 |                               |            |   |            |  |            |  |              |  |            |  |         |      |  |  |            |   |  |   |          
|                                                   | Year ended September 30, 2003 |            | $ | 253,106    |  |            |  | 535,000      |  |            |  | 1,175   | (a)  |  |  | (52,263    | ) |  | $ | 737,018   | 
|                                                   | Year ended September 30, 2002 |            | $ | 51,749     |  |            |  | 200,906      |  |            |  | 451     | (a)  |  |  |           |   |  | $ | 253,106   | 
|                                                   | Year ended September 30, 2001 |            | $ | 51,697     |  |            |  |             |  |            |  | 52      | (a)  |  |  |           |   |  | $ | 51,749    | 
|II. Reserve for obsolete and slow moving inventory |                               |            |   |            |  |            |  |              |  |            |  |         |      |  |  |            |   |  |   |          
|                                                   | Year ended September 30, 2003 |            | $ | 1,373,638  |  |            |  | 315,871      |  |            |  | 35,650  | (a)  |  |  | (221,778   | ) |  | $ | 1,503,381 | 
|                                                   | Year ended September 30, 2002 |            | $ | 804,000    |  |            |  | 2,285,638    |  |            |  | (47,000 | )(a) |  |  | (1,669,000 | ) |  | $ | 1,373,638 | 
|                                                   | Year ended September 30, 2001 |            | $ | 495,000    |  |            |  | 302,000      |  |            |  | 7,000   | (a)  |  |  |           |   |  | $ | 804,000   | 



---



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

48