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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

Commission file number 0-10691



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DELPHAX TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Minnesota                                                      |  | 41-1392000                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|6100 West 110thStreet Bloomington, Minnesota                   |  | 55438-2664                       
|(Address of principal executive offices)                       |  | (Zip Code)                       

(952) 939-9000

Registrants telephone number, including area code



Former name, former address and former fiscal year, if changed since last report



---

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act).

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical
date.

As of May 5, 2006, there were 6,388,391 shares outstanding of Common Stock, par value $0.10 per share.



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##### Table of Contents

DELPHAX TECHNOLOGIES INC.

INDEX



|                              |  |                                                                                                      |  |   
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Financial Statements                                                                                 |  | 3 
|                              |  |                                                                                                     
|                              |  | Condensed consolidated balance sheets  March 31, 2006 and September 30, 2005                        |  | 3 
|                              |  |                                                                                                     
|                              |  | Condensed consolidated statements of operations  Three and six months ended March 31, 2006 and 2005 |  | 4 
|                              |  |                                                                                                     
|                              |  | Condensed consolidated statements of cash flows  Six months ended March 31, 2006 and 2005           |  | 5 
|                              |  |                                                                                                     
|                              |  | Notes to condensed consolidated financial statements                                                 |  | 6 
|                              |  |                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 11
|                              |  |                                                                                                     
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                           |  | 20
|                              |  |                                                                                                     
|Item 4.                       |  | Controls and Procedures                                                                              |  | 21
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                     
|                              |  |                                                                                                     
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 21
|                              |  |                                                                                                     
|Item 6.                       |  | Exhibits                                                                                             |  | 21
|                              | 
|SIGNATURES                    |  | 22                                                                                                  
|                              | 
|CERTIFICATIONS                |  |                                                                                                     



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DELPHAX TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                                                                                                       |  | March 31,2006  |        |   | September 30,2005 |  
|                                                                                                                                                                       |  | (In thousands) |       
|                                                                                                                                                                       |  | (Unaudited)    |        |   |                   |  
|ASSETS                                                                                                                                                                 |  |                |        |   |                   |   |        |  
|CURRENT ASSETS                                                                                                                                                         |  |                |        |   |                   |   |        |  
|Cash and cash equivalents                                                                                                                                              |  | $              | 949    |   |                   | $ | 736    |  
|Accounts receivable, less allowance for doubtful accounts of $193 and $174 as of March 31, 2006 and September 30, 2005,
respectively                                   |  |                | 7,205  |   |                   |   | 6,615  |  
|Inventory                                                                                                                                                              |  |                | 19,536 |   |                   |   | 19,470 |  
|Other current assets                                                                                                                                                   |  |                | 2,117  |   |                   |   | 2,000  |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|TOTAL CURRENT ASSETS                                                                                                                                                   |  |                | 29,807 |   |                   |   | 28,821 |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|Equipment and fixtures, net                                                                                                                                            |  |                | 1,196  |   |                   |   | 1,454  |  
|Other non-current assets                                                                                                                                               |  |                | 127    |   |                   |   | 125    |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|TOTAL ASSETS                                                                                                                                                           |  | $              | 31,130 |   |                   | $ | 30,400 |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                   |  |                |        |   |                   |   |        |  
|CURRENT LIABILITIES                                                                                                                                                    |  |                |        |   |                   |   |        |  
|Accounts payable                                                                                                                                                       |  | $              | 3,015  |   |                   | $ | 3,233  |  
|Accrued compensation                                                                                                                                                   |  |                | 1,980  |   |                   |   | 1,512  |  
|Other accrued expenses                                                                                                                                                 |  |                | 897    |   |                   |   | 910    |  
|Income taxes payable                                                                                                                                                   |  |                | 197    |   |                   |   |       |  
|Current portion of bank credit facilities                                                                                                                              |  |                | 193    |   |                   |   | 193    |  
|Current portion of capital leases                                                                                                                                      |  |                | 100    |   |                   |   | 106    |  
|Customer deposits                                                                                                                                                      |  |                | 254    |   |                   |   | 1,006  |  
|Deferred revenue                                                                                                                                                       |  |                | 330    |   |                   |   | 305    |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|TOTAL CURRENT LIABILITIES                                                                                                                                              |  |                | 6,966  |   |                   |   | 7,265  |  
|Long-term portion of bank credit facilities and 7% convertible subordinated notes                                                                                      |  |                | 7,363  |   |                   |   | 5,989  |  
|Long-term portion of capital leases                                                                                                                                    |  |                | 27     |   |                   |   | 74     |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|TOTAL LIABILITIES                                                                                                                                                      |  |                | 14,356 |   |                   |   | 13,328 |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|SHAREHOLDERS EQUITY                                                                                                                                                   |  |                |        |   |                   |   |        |  
|Common stock - par value $0.10 per share - authorized 50,000 shares; issued and outstanding: 6,372 and 6,339 as of March 31, 2006 and
September 30, 2005, respectively |  |                | 637    |   |                   |   | 634    |  
|Additional paid-in capital                                                                                                                                             |  |                | 19,198 |   |                   |   | 19,011 |  
|Accumulated other comprehensive loss                                                                                                                                   |  |                | (728   | ) |                   |   | (710   | )
|Accumulated deficit                                                                                                                                                    |  |                | (2,333 | ) |                   |   | (1,863 | )
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                             |  |                | 16,774 |   |                   |   | 17,072 |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                             |  | $              | 31,130 |   |                   | $ | 30,400 |  
|                                                                                                                                                                       |  |                |        |   |                   |   |        |  

See notes to unaudited condensed consolidated financial statements.



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DELPHAX TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                 |  | Three Months EndedMarch 31,           |        |   | Six Months EndedMarch 31, |  
|                                                                 |  | 2006                                  |        |   | 2005                      |   |        | 2006 |  |   | 2005   |  
|                                                                 |  | (In thousands, except per share data) |       
|                                                                 |  | (Unaudited)                           |       
|Sales:                                                           |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Maintenance, spares and supplies                                 |  | $                                     | 11,208 |   |                           | $ | 11,260 |      |  | $ | 21,303 |   |  | $ | 22,848 |  
|Printing equipment                                               |  |                                       | 1,638  |   |                           |   | 1,587  |      |  |   | 4,280  |   |  |   | 2,969  |  
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|NET SALES                                                        |  |                                       | 12,846 |   |                           |   | 12,847 |      |  |   | 25,583 |   |  |   | 25,817 |  
|Cost of sales                                                    |  |                                       | 5,808  |   |                           |   | 5,669  |      |  |   | 11,831 |   |  |   | 11,956 |  
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|GROSS PROFIT                                                     |  |                                       | 7,038  |   |                           |   | 7,178  |      |  |   | 13,752 |   |  |   | 13,861 |  
|                                                                 |  |                                       |        |  
|Operating Expenses:                                              |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Selling, general and administrative                              |  |                                       | 5,797  |   |                           |   | 5,697  |      |  |   | 11,116 |   |  |   | 11,443 |  
|Research and development                                         |  |                                       | 1,218  |   |                           |   | 1,013  |      |  |   | 2,356  |   |  |   | 2,082  |  
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                                                 |  |                                       | 7,015  |   |                           |   | 6,710  |      |  |   | 13,472 |   |  |   | 13,525 |  
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|INCOME FROM OPERATIONS                                           |  |                                       | 23     |   |                           |   | 468    |      |  |   | 280    |   |  |   | 336    |  
|                                                                 |  |                                       |        |  
|Net interest expense                                             |  |                                       | 261    |   |                           |   | 269    |      |  |   | 496    |   |  |   | 528    |  
|Net realized exchange loss (gain)                                |  |                                       | 150    |   |                           |   | (54    | )    |  |   | 302    |   |  |   | 117    |  
|Net unrealized exchange gain                                     |  |                                       | (17    | ) |                           |   | (21    | )    |  |   | (74    | ) |  |   | (76    | )
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|(LOSS) INCOME BEFORE INCOME TAXES                                |  |                                       | (371   | ) |                           |   | 274    |      |  |   | (444   | ) |  |   | (233   | )
|                                                                 |  |                                       |        |  
|Income tax (benefit) expense                                     |  |                                       | (57    | ) |                           |   | 12     |      |  |   | 26     |   |  |   | 24     |  
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|NET (LOSS) INCOME                                                |  | $                                     | (314   | ) |                           | $ | 262    |      |  | $ | (470   | ) |  | $ | (257   | )
|                                                                 |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted (loss) earnings per common share               |  | $                                     | (0.05  | ) |                           | $ | 0.04   |      |  | $ | (0.07  | ) |  | $ | (0.04  | )
|                                                                 |  |                                       |        |  
|Weighted average number of shares outstanding during the period: |  |                                       |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                            |  |                                       | 6,372  |   |                           |   | 6,306  |      |  |   | 6,364  |   |  |   | 6,296  |  
|Diluted                                                          |  |                                       | 6,372  |   |                           |   | 6,366  |      |  |   | 6,364  |   |  |   | 6,296  |  

See notes to unaudited condensed consolidated financial statements.



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DELPHAX TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  |                           |       |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ------ | -
|                                                                                          |  | Six Months EndedMarch 31, |      
|                                                                                          |  | 2006                      |       |   | 2005 |  
|                                                                                          |  | (In thousands)            |      
|                                                                                          |  | (Unaudited)               |      
|OPERATING ACTIVITIES                                                                      |  |                           |       |   |      |   |        |  
|Net loss                                                                                  |  | $                         | (470  | ) |      | $ | (257   | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                           |       |   |      |   |        |  
|Depreciation and amortization                                                             |  |                           | 473   |   |      |   | 564    |  
|Non-cash interest on 7% convertible subordinated notes:                                   |  |                           |       |   |      |   |        |  
|Amortization of original issue discount                                                   |  |                           | 176   |   |      |   | 168    |  
|Issuance of common stock                                                                  |  |                           | 87    |   |      |   | 119    |  
|Stock-based compensation                                                                  |  |                           | 102   |   |      |   |       |  
|Other                                                                                     |  |                           |      |   |      |   | 38     |  
|Changes in operating assets and liabilities:                                              |  |                           |       |   |      |   |        |  
|Accounts receivable, net                                                                  |  |                           | (590  | ) |      |   | (765   | )
|Inventory                                                                                 |  |                           | (66   | ) |      |   | 2,105  |  
|Other current assets                                                                      |  |                           | (117  | ) |      |   | 606    |  
|Accounts payable, accrued expenses, deposits and other                                    |  |                           | (318  | ) |      |   | (2,420 | )
|Deferred revenue                                                                          |  |                           | 25    |   |      |   | 41     |  
|                                                                                          |  |                           |       |   |      |   |        |  
|NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                       |  |                           | (698  | ) |      |   | 199    |  
|                                                                                          |  |                          
|INVESTING ACTIVITIES                                                                      |  |                           |       |   |      |   |        |  
|Purchase of equipment and fixtures                                                        |  |                           | (216  | ) |      |   | (135   | )
|                                                                                          |  |                           |       |   |      |   |        |  
|NET CASH USED IN INVESTING ACTIVITIES                                                     |  |                           | (216  | ) |      |   | (135   | )
|                                                                                          |  |                          
|FINANCING ACTIVITIES                                                                      |  |                           |       |   |      |   |        |  
|Issuance of common stock on exercise of stock options                                     |  |                           |      |   |      |   | 7      |  
|Additional borrowing (repayment) on bank credit facilities, net                           |  |                           | 1,199 |   |      |   | (317   | )
|Principal payments on capital lease obligations                                           |  |                           | (54   | ) |      |   | (47    | )
|                                                                                          |  |                           |       |   |      |   |        |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                       |  |                           | 1,145 |   |      |   | (357   | )
|                                                                                          |  |                          
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                   |  |                           | (18   | ) |      |   | 45     |  
|                                                                                          |  |                           |       |   |      |   |        |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          |  |                           | 213   |   |      |   | (248   | )
|                                                                                          |  |                          
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            |  |                           | 736   |   |      |   | 1,314  |  
|                                                                                          |  |                           |       |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  |  | $                         | 949   |   |      | $ | 1,066  |  
|                                                                                          |  |                           |       |   |      |   |        |  

See notes to unaudited condensed consolidated financial statements.



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DELPHAX TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Interim Financial Statements

We have prepared the accompanying
unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation, consisting of
normal recurring accruals, have been included.

Interim unaudited financial results should be read in conjunction with the audited consolidated financial
statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended September 30, 2005. Reclassifications have been made in the prior year to conform to classifications in the current year.

The results of operations for the three and six months ended March 31, 2006 are not necessarily indicative of the operating results to be expected for the full
fiscal year.

Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related net sales and expenses. Actual results could differ from those estimates.

2. Inventory

As of March 31, 2006 and September 30, 2005, inventory was comprised as follows:



|                                  |  |                |        |                   |   |       
|--------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                  |  | March 31,2006  |        | September 30,2005
|                                  |  | (In thousands)
|Raw materials and component parts |  | $              | 12,430 |                   | $ | 12,662
|Work-in-progress                  |  |                | 1,802  |                   |   | 1,237 
|Finished goods                    |  |                | 5,304  |                   |   | 5,571 
|                                  |  |                |        |                   |   |       
|                                  |  | $              | 19,536 |                   | $ | 19,470
|                                  |  |                |        |                   |   |       

New Pronouncement  Inventory Costs

Effective October 1, 2005, we adopted Statement of Financial Accounting Standards No. 151, Inventory Costs (SFAS 151). SFAS 151 amended prior guidance on the recognition of inventory costs to clarify
the accounting for abnormal amounts of idle expense, freight, handling costs and wasted material (spoilage). Prior guidance indicated that under some circumstances, items such as idle facility expense, excessive spoilage, double freight and
rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of so abnormal. In addition,
SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this Statement had no material impact on the valuation of inventory or operating
results for the three and six months ended March 31, 2006.



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3. Loss or Earnings per Share

The following table sets forth the computation of basic and diluted loss or earnings per share:



|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ---------------------------------------- | ----- | ------------------------- | ---- | - | ----- |  | - | ----- | - |  | - | ----- | -
|                                                                           |  | Three Months EndedMarch 31,              |       | Six Months EndedMarch 31, |     
|                                                                           |  | 2006                                     |       |                           | 2005 |   | 2006  |  |   | 2005  |  
|                                                                           |  | (In thousands, except per share amounts) |      
|Numerator:                                                                 |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|Numerator for basic (loss) earnings per share                              |  | $                                        | (314  | )                         |      | $ | 262   |  | $ | (470  | ) |  | $ | (257  | )
|Dilutive potential loss, Convertible Notes                                 |  |                                          |      |                           |      |   |      |  |   |      |   |  |   |      |  
|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|Numerator for diluted (loss) earnings per share                            |  | $                                        | (314  | )                         |      | $ | 262   |  | $ | (470  | ) |  | $ | (257  | )
|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|Denominator:                                                               |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|Denominator for basic (loss) earnings per share, weighted average shares   |  |                                          | 6,372 |                           |      |   | 6,306 |  |   | 6,364 |   |  |   | 6,296 |  
|                                                                           |  |                                          |       |                          
|Dilutive potential shares:                                                 |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|Employee stock options                                                     |  |                                          |      |                           |      |   | 47    |  |   |      |   |  |   |      |  
|Warrants                                                                   |  |                                          |      |                           |      |   | 13    |  |   |      |   |  |   |      |  
|Convertible Notes                                                          |  |                                          |      |                           |      |   |      |  |   |      |   |  |   |      |  
|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|Dilutive potential shares                                                  |  |                                          |      |                           |      |   | 60    |  |   |      |   |  |   |      |  
|                                                                           |  |                                          |       |                          
|Denominator for diluted (loss) earnings per share, weighted average shares |  |                                          | 6,372 |                           |      |   | 6,366 |  |   | 6,364 |   |  |   | 6,296 |  
|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|(Loss) earnings per share - basic                                          |  | $                                        | (0.05 | )                         |      | $ | 0.04  |  | $ | (0.07 | ) |  | $ | (0.04 | )
|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  
|(Loss) earnings per share - diluted                                        |  | $                                        | (0.05 | )                         |      | $ | 0.04  |  | $ | (0.07 | ) |  | $ | (0.04 | )
|                                                                           |  |                                          |       |                           |      |   |       |  |   |       |   |  |   |       |  

Dilutive potential losses related to Convertible Notes were excluded from calculation of the numerator for diluted
loss or earnings per share because the effect would be antidilutive. The amounts excluded for the three and six months ended March 31, 2006 and the three and six months ended March 31, 2005 were $136,000, $263,000, $141,000 and $287,000,
respectively. Similarly, dilutive potential common shares were excluded from calculation of the denominator because the effect would be antidilutive. Shares excluded for the three and six months ended March 31, 2006 and the six months ended
March 31, 2005 were 20,000, 10,000 and 56,000, respectively. Shares excluded related to Warrants for the three and six months ended March 31, 2006 and the six months ended March 31, 2005 were none, none and 15,000, respectively. In
all periods, 938,000 shares related to the Convertible Notes were excluded from calculation of the denominator because of their antidilutive effect.

Options to purchase shares of Common Stock and Warrants were excluded from calculation of the denominator for diluted loss per share because the effect would be antidilutive due to the fact that exercise prices were greater than the average
market prices of the common shares for those periods. Shares excluded for the three and six months ended March 31, 2006 and the three and six months ended March 31, 2005 were 586,000, 776,000, 278,000 and 225,000, respectively. In all
periods, 516,000 shares related to Warrants were excluded from calculation of the denominator because of their antidilutive effect.



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4. Comprehensive Loss or Income

The components of comprehensive loss or income for the three and six months ended March 31, 2006 and 2005 were as follows:



|                                        |  |                             |      |                           |      |   |      |  |   |      |   |  |   |      |  
|--------------------------------------- |  | --------------------------- | ---- | ------------------------- | ---- | - | ---- |  | - | ---- | - |  | - | ---- | -
|                                        |  | Three Months EndedMarch 31, |      | Six Months EndedMarch 31, |     
|                                        |  | 2006                        |      |                           | 2005 |   | 2006 |  |   | 2005 |  
|                                        |  | (In thousands)              |     
|Net (loss) income                       |  | $                           | (314 | )                         |      | $ | 262  |  | $ | (470 | ) |  | $ | (257 | )
|                                        |  |                             |      |                          
|Foreign currency translation adjustment |  |                             | 23   |                           |      |   | 21   |  |   | (18  | ) |  |   | 390  |  
|                                        |  |                             |      |                           |      |   |      |  |   |      |   |  |   |      |  
|Comprehensive (loss) income             |  | $                           | (291 | )                         |      | $ | 283  |  | $ | (488 | ) |  | $ | 133  |  
|                                        |  |                             |      |                           |      |   |      |  |   |      |   |  |   |      |  

5. Senior Credit Facilities and Convertible Subordinated Debt

Our debt primarily consists of senior credit facilities totaling approximately $13.7 million and 7% convertible subordinated notes (the Convertible Notes) of $3.0
million. The senior credit facilities, which prohibit the payment of dividends, are secured by substantially all of the Companys assets. The Convertible Notes are unsecured and junior to the senior credit facilities, with interest payable in
the form of 16,406 shares of Common Stock per quarter, which is expensed based on the average market price of the Common Stock over the interest period. Original issue discount on the Convertible Notes, approximately $1.4 million at issue, is being
amortized to interest expense over the four-year life of the Convertible Notes.

Our senior credit financing has both a U.S. and Canadian component. The
U.S. component consists 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
Canadian component consists 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. In March 2006, our credit agreements were amended to extend the three-year term by three months to April 2007.

The senior credit agreements provide for interest rates ranging from Canadian prime plus 1.75% to plus 2.25%, to U.S. prime plus 0.25% to plus 1%, depending on the calculated debt service coverage ratio. As of March 31, 2006, the
interest rates applicable to our loans were 7.25% and 8.0% for our Canadian and U.S. revolving loans, respectively, and 8.25% for our term loans.

The
availability of revolving credit under the senior credit facilities is based primarily on our accounts receivable and inventory levels, but also on compliance with certain covenants. As of March 31, 2006, we were in compliance with the terms of
the credit agreements.

The subordinated debt financing consists 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 are converted at that conversion price. The Convertible Notes are junior to the senior
credit facilities described above, 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 was 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 is recorded quarterly



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

Our subsidiary in the United Kingdom has a line of credit of £100,000 (approximately $176,000 at March 31, 2006 exchange rates).
This line of credit has not been used.

As of March 31, 2006, there was $5.2 million of indebtedness under the senior credit facilities outstanding at
an approximate average annual interest rate of 7.7%. The weighted average interest rate on all of the Companys debt was approximately 11.7%, which gives effect to the senior credit facilities and the $3.0 million of Convertible Notes. Total
interest expense on all debt includes both interest paid or accrued in cash and non-cash interest expense, comprised of the amortization of the original issue discount of approximately $1.4 million over the four-year term of the Convertible Notes
and the value of the Companys Common Stock issued in payment of interest and expensed at the average market price of the stock over the interest period.

6. Stock-based Compensation

Commencing October 1, 2005, we adopted Statement of Financial Accounting Standard No. 123(R),
Share Based Payment (SFAS 123(R)), which requires all share-based payments, including grants of stock options, to be recognized in the statement of operations as an operating expense, based on their fair value over the requisite service
period. We recorded compensation expense of $51,000 and $102,000, respectively, in the three and six months ended March 31, 2006, with $47,000 and $4,000, respectively, expensed to selling, general and administrative expense and research and
development expense in each of the two fiscal quarters. The related tax benefits from recording this non-cash expense were $19,000 and $38,000, respectively, for the three and six months ended March 31, 2006. The net compensation expense
reduced both basic and diluted loss per share by $0.01 for the three-month period and by $0.01 for the six-month period ended March 31, 2006. As of March 31, 2006, $368,000 of total unrecognized compensation costs related to non-vested
stock option awards is expected to be recognized over a weighted average period of approximately 4 years.



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Prior to adopting SFAS 123(R), we accounted for stock-based compensation under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. We have applied the modified prospective method in adopting SFAS 123(R). Accordingly, periods prior to adoption have not been restated. The following table illustrates the effect on net
income and loss and net income and loss per share if the fair value based method had been applied to the prior periods:



|                                                                                   |  |                                       |      |                                |   |       |  
|---------------------------------------------------------------------------------- |  | ------------------------------------- | ---- | ------------------------------ | - | ----- | -
|                                                                                   |  | Three Months EndedMarch 31, 2005      |      | Six Months EndedMarch 31, 2005 |  
|                                                                                   |  | (In thousands, except per share data) |     
|Net income (loss), as reported                                                     |  | $                                     | 262  |                                | $ | (257  | )
|Stock-based compensation determined under fair value based method for all awards   |  |                                       | 52   |                                |   | 105   |  
|                                                                                   |  |                                       |      |                                |   |       |  
|Pro forma net income (loss), assuming fair value method for all stock-based awards |  | $                                     | 210  |                                | $ | (362  | )
|                                                                                   |  |                                       |      |                                |   |       |  
|Basic earnings (loss) per share, as reported                                       |  | $                                     | 0.04 |                                | $ | (0.04 | )
|Diluted earnings (loss) per share, as reported                                     |  |                                       | 0.04 |                                |   | (0.04 | )
|Basic earnings (loss) per share, pro forma                                         |  |                                       | 0.03 |                                |   | (0.06 | )
|Diluted earnings (loss) per share, pro forma                                       |  |                                       | 0.03 |                                |   | (0.06 | )

We use the Black-Scholes option pricing model to determine the weighted average fair value of options. The
weighted average fair values of options granted during the six months ended March 31, 2006, and the three and six months ended March 31, 2005, respectively, were $156,000, $243,000 and $243,000. There were no options granted during the
three months ended March 31, 2006. The assumptions we used to determine fair value were as follows:



|                                |  |                                  |   |  |                  |   |  |         |  
|------------------------------- |  | -------------------------------- | - |  | ---------------- | - |  | ------- | -
|                                |  | Three Months EndedMarch 31, 2005 |   |  | Six Months Ended |  
|                                |  | March 31, 2006                   |   |  | March 31, 2005   |  
|Expected dividend yield         |  | 0                                | % |  | 0                | % |  | 0       | %
|Expected stock price volatility |  | 50                               | % |  | 58               | % |  | 50      | %
|Risk-free interest rate         |  | 4.1                              | % |  | 4.4              | % |  | 4.1     | %
|Expected life of options        |  | 7 years                          |   |  | 4.75 years       |   |  | 7 years |  

The Companys stock options generally vest over four years of service and have a contractual life of 7 years.
At the beginning of fiscal 2006, we had 216,000, 257,000 and 780,000 shares authorized for grant under the 1991 Stock Plan, the 1997 Stock Plan and the 2000 Stock Plan (the 2000 Plan), respectively. However, since fiscal 2003, all options have been
granted under the 2000 Plan. Options granted under the 2000 Plan during the six months ended March 31, 2006 were as follows:



|                                        |  |                  |   |  |                                       |     
|--------------------------------------- |  | ---------------- | - |  | ------------------------------------- | ----
|                                        |  | Numberof Options |   |  | WeightedAverageExercisePrice perShare
|                                        |  | (In thousands)   |   |  |                                      
|Options outstanding, September 30, 2005 |  | 872              |   |  | $                                     | 3.44
|Granted                                 |  | 115              |   |  |                                       | 2.59
|Canceled                                |  | (55              | ) |  |                                       | 3.61
|                                        |  |                  |   |  |                                       |     
|Options outstanding, March 31, 2006     |  | 932              |   |  |                                       | 3.32
|                                        |  |                  |   |  |                                       |     



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The following tables summarize information concerning options outstanding and exercisable as of March 31, 2006:



|                        |             |                             |     |                                         |            |                                       |   |     
|----------------------- | ----------- | --------------------------- | --- | --------------------------------------- | ---------- | ------------------------------------- | - | ----
|Options Outstanding    
|Range ofExercise Prices |             | Numberof OptionsOutstanding |     | WeightedAverageRemainingContractualLife |            | WeightedAverageExercisePrice perShare
|                        |             | (In thousands)              |     |                                         |            |                                      
|$                       | 1.75 - 4.80 |                             | 893 |                                         | 3.24 years |                                       | $ | 3.14
|                        | 5.06 - 7.75 |                             | 21  |                                         | 3.33 years |                                       |   | 5.99
|                        | 9.63 - 9.63 |                             | 18  |                                         | 0.22 years |                                       |   | 9.63
|                        |             |                             |     |                                         |            |                                       |   |     
|                        | 1.75 - 9.63 |                             | 932 |                                         | 3.18 years |                                       |   | 3.32



|                       |             |                             |     |                                       |   |     
|---------------------- | ----------- | --------------------------- | --- | ------------------------------------- | - | ----
|Options Exercisable   
|Range ofExercisePrices |             | Numberof OptionsExercisable |     | WeightedAverageExercisePrice perShare
|                       |             | (In thousands)              |     |                                      
|$                      | 1.75 - 4.80 |                             | 535 |                                       | $ | 3.21
|                       | 5.06 - 7.75 |                             | 21  |                                       |   | 5.99
|                       | 9.63 - 9.63 |                             | 18  |                                       |   | 9.63
|                       |             |                             |     |                                       |   |     
|                       | 1.75 - 9.63 |                             | 574 |                                       |   | 3.51

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

The following discussion of our financial condition and results of operations should be read together with the other financial information and Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed
in Risk Related to Operations and elsewhere in this report.

Executive Summary

For the second quarter of fiscal 2006, we incurred a net loss of $0.3 million, compared with net income of $0.3 million for the year-ago quarter. This change, on
virtually flat net sales and a slightly lower gross margin, was primarily the result of operating expense levels higher by $0.3 million and a $0.2 million swing in net foreign exchange losses in the second quarter of fiscal 2006, compared with net
foreign exchange gains in the same quarter last year. The first half of fiscal 2006 was also significantly affected by net foreign exchange losses, $0.2 million higher than in the year-ago period. For the first six months of fiscal 2006, on net
sales lower by $0.2 million, flat margins and flat operating expense levels, we incurred a loss of $0.5 million, $0.2 million higher than in the first half of fiscal 2005. The decline in our net income in the fiscal 2006 periods compared with the
fiscal 2005 periods was almost entirely attributable to two factors: certain cost reduction measures implemented during fiscal 2005 that led to improved gross margins and reduced operating expenses in the second quarter of fiscal 2005 and the
continued strengthening of the Canadian dollar compared with the U.S. dollar.

In fiscal 2006, we adopted SFAS 123(R), which requires all share-based
payments, including grants of stock options, to be recognized in the statement of operations as an operating expense, based on their fair value over the requisite service period. We recorded $51,000 and $102,000, respectively, of related
compensation expense for the three and



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six months ended March 31, 2006. For the second quarter and first half of fiscal 2006, implementation of SFAS
123(R), contributed approximately $32,000 and $64,000 net of income taxes, respectively, to the net losses for the periods.

Overview

The Companys business is the design, manufacture, sale and servicing of advanced digital print production equipment based on its patented electron beam imaging
(EBI) technology. The majority of our revenue is from the sale of maintenance contracts, spare parts and supplies that are used with this equipment. Our equipment includes both roll-fed or web presses (the CR Seriesand RS Series), where the paper input is on rolls, and cut-sheet or sheet-fed printers and presses (the Imaggia and the Checktronic system) that use pre-cut sheets of paper or base stock. Our flagship
printing systems are the CR Series and the Imaggia presses. The Checktronic and Foliotronic are among the Companys legacy products. The Checktronic is now sold principally as a system upgrade or refurbished
product in Latin America, Asia and Africa. The Foliotronic is still actively marketed to customers with folio production applications.

The Company
operates and manages its business in a single business segment  the development and marketing of advanced digital print production equipment. We market our products and services through a direct sales force and independent distributors in the
United States and international markets. Our Common Stock is currently traded on the NASDAQ Global Market under the symbol DLPX.

Critical
Accounting Policies

This Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our Condensed
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 net sales and expenses during the reporting period. On an ongoing
basis, management evaluates its estimates and assumptions, including those related to revenue recognition, product warranties, inventory, stock-based compensation expense, allowance for doubtful accounts and income taxes. 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 the Condensed Consolidated Financial Statements.

Revenue Recognition

Revenue on printing equipment sales is
recognized upon customer acceptance and transfer of risk of loss. Revenue for printing equipment sales is not recognized when the contract includes a right of return until after the expiration of the right. Discounts, credits and other sales
incentive arrangements offered to our customers are accounted for as reductions to revenue at the point the revenue is recognized. Revenue for post-shipment obligations, such as training and installation, considered perfunctory as defined under
Staff Accounting Bulletin No. 104, Revenue Recognition, is deferred and recognized as the services are performed. For spare parts and supplies stored at customer sites, we recognize revenue 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. In accordance with Emerging Issues Task Force Issue 99-19, Reporting Revenue Gross as a
Principal verses Net as an Agent, as primary obligor to the manufacturer, we record revenue for pre-press or finishing equipment manufactured by others on a gross basis. Freight revenue is recorded on a gross basis and recognized upon shipment.
The related freight costs are recorded as costs of sales.



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Product Warranties

We provide a limited warranty on our digital presses, certain licensed software and on proprietary spares and supplies. Our standard equipment warranty commences with installation and extends for a period of 90 days thereafter. Similarly,
on proprietary spares and supplies, our warranty is for 90 days from product shipment date. For certain licensed software, we warrant substantial conformance to documented specifications. Warranty reserves are reviewed quarterly and adjustments are
made from time to time based on actual claims experience in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that the warranty reserve is adequate
and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.

Inventory

Purchased inventory is recorded at cost. Manufactured inventory is recorded at cost based on normal capacity. Idle or excess
facility expense, excessive spoilage, double freight, rehandling and similar costs are expensed as incurred. We reduce the stated value of our 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. 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. If actual future demand or market conditions are less favorable than we project, additional reductions in stated value may be required.

Stock-based Compensation Expense

Commencing October 1, 2005, we adopted SFAS 123(R), which requires all
share-based payments, including grants of stock options, to be recognized in the statement of operations as an operating expense, based on their fair value over the requisite service period. We recorded $51,000 and $102,000, respectively, of related
compensation expense for the three and six months ended March 31, 2006.

The determination of fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise behaviors.

We use the Black-Scholes option pricing model to determine the
weighted average fair value of options. The weighted average fair values of options granted during the six months ended March 31, 2006, and the three and six months ended March 31, 2005, respectively, were $156,000, $243,000 and $243,000.
There were no options granted during the three months ended March 31, 2006. The assumptions we used to determine fair value were as follows:



|                                |  |                                  |   |  |                  |   |  |         |  
|------------------------------- |  | -------------------------------- | - |  | ---------------- | - |  | ------- | -
|                                |  | Three Months EndedMarch 31, 2005 |   |  | Six Months Ended |  
|                                |  | March 31, 2006                   |   |  | March 31, 2005   |  
|Expected dividend yield         |  | 0                                | % |  | 0                | % |  | 0       | %
|Expected stock price volatility |  | 50                               | % |  | 58               | % |  | 50      | %
|Risk-free interest rate         |  | 4.1                              | % |  | 4.4              | % |  | 4.1     | %
|Expected life of options        |  | 7 years                          |   |  | 4.75 years       |   |  | 7 years |  

Expected stock price volatility was determined based on the daily stock price for Delphax Common Stock beginning
March 1, 2002, the earliest trading day for which information is available on NASDAQ subsequent to the acquisition of our Canadian subsidiary, which substantially changed the size and complexity of the Companys business. We believe the
volatility during this period represents the volatility for the expected life of the options. The risk-free interest rate assumption was determined based upon United States Treasury Strips with a term that approximates the expected life of the
option. For the expected life of the options, we have applied the simplified method allowed under Staff Accounting Bulletin, Topic 14.D.2. SFAS 123(R) requires forfeitures to be estimated at the time of the grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from estimates.



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If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the
compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current periods.

Allowance for
Doubtful Accounts

We record an allowance for doubtful accounts based on identification of specific accounts receivable, supplemented by a general
allowance of approximately 20% of accounts aged greater than 90 days not otherwise specifically considered. Specific identification of doubtful accounts and determination of the amount of the required allowance involve a degree of judgment based on
discussion with our customer support and sales organization, examination of the financial stability of our customers and review of their payment history. Accounts determined to be uncollectible are written off against the allowance for doubtful
accounts. There can be no assurance that our estimates will match actual amounts ultimately written off. During periods of downturn in the market for printed materials or economic recession, a greater degree of risk exists concerning the
ultimate collectability of accounts receivable due to the impact that these conditions might have on our customer base. We evaluate the adequacy of the allowance for doubtful accounts quarterly.

Income Taxes

In determining the carrying value of our net deferred
tax assets, we assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. We have fully reserved our net deferred tax assets, totaling $3.0
million and $1.6 million as of March 31, 2006 and September 30, 2005, respectively, recognizing that the Company has incurred income tax losses in two of the last four fiscal years and there is no assurance that this or future years will
be profitable. If these estimates and assumptions change in the future, we may record a reduction in the valuation allowance, resulting in an income tax benefit in the statements of operations. We evaluate the realizability of the deferred tax
assets and assess the valuation allowance quarterly.



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##### Table of Contents

Results of Operations

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



|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|----------------------------------- |  | --------------------------- | -- |  | ------------------------- | - |  | ----- | -- |  | ----- | --
|                                    |  | Three Months EndedMarch 31, |    |  | Six Months EndedMarch 31, |  
|                                    |  | 2006                        |    |  | 2005                      |   |  | 2006  |    |  | 2005  |   
|                                    |  | (Unaudited)                 |   
|Sales:                              |  |                             |    |  |                           |   |  |       |    |  |       |   
|Maintenance, spares and supplies    |  | 87.2                        | %  |  | 87.6                      | % |  | 83.3  | %  |  | 88.5  | % 
|Printing equipment                  |  | 12.8                        |    |  | 12.4                      |   |  | 16.7  |    |  | 11.5  |   
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|NET SALES                           |  | 100.0                       |    |  | 100.0                     |   |  | 100.0 |    |  | 100.0 |   
|Cost of sales                       |  | 45.2                        |    |  | 44.1                      |   |  | 46.2  |    |  | 46.3  |   
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|GROSS PROFIT                        |  | 54.8                        |    |  | 55.9                      |   |  | 53.8  |    |  | 53.7  |   
|                                    |  |                             |    | 
|Operating Expenses:                 |  |                             |    |  |                           |   |  |       |    |  |       |   
|Selling, general and administrative |  | 45.1                        |    |  | 44.4                      |   |  | 43.5  |    |  | 44.3  |   
|Research and development            |  | 9.5                         |    |  | 7.9                       |   |  | 9.2   |    |  | 8.1   |   
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|                                    |  | 54.6                        |    |  | 52.3                      |   |  | 52.7  |    |  | 52.4  |   
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|INCOME FROM OPERATIONS              |  | 0.2                         |    |  | 3.6                       |   |  | 1.1   |    |  | 1.3   |   
|                                    |  |                             |    | 
|Net interest expense                |  | 1.9                         |    |  | 2.1                       |   |  | 1.9   |    |  | 2.0   |   
|Net realized exchange loss (gain)   |  | 1.2                         |    |  | (0.4                      | ) |  | 1.2   |    |  | 0.5   |   
|Net unrealized exchange gain        |  | (0.1                        | )  |  | (0.2                      | ) |  | (0.3  | )  |  | (0.3  | ) 
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|(LOSS) INCOME BEFORE INCOME TAXES   |  | (2.8                        | )  |  | 2.1                       |   |  | (1.7  | )  |  | (0.9  | ) 
|                                    |  |                             |    | 
|Income tax (benefit) expense        |  | (0.4                        | )  |  | 0.1                       |   |  | 0.1   |    |  | 0.1   |   
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   
|NET (LOSS) INCOME                   |  | (2.4                        | )% |  | 2.0                       | % |  | (1.8  | )% |  | (1.0  | )%
|                                    |  |                             |    |  |                           |   |  |       |    |  |       |   

Net Sales.

The Companys revenues consist of sales of (i) maintenance, spare parts and supplies, and (ii) printing systems and related equipment. For the second quarter of fiscal 2006, net sales were $12.8
million, flat compared with the second quarter of fiscal 2005. For the first six months of fiscal 2006, net sales were $25.6 million, down 1% from $25.8 million for the same period in fiscal 2005.

For the second quarter of fiscal 2006, net sales from maintenance, spare parts and supplies of $11.2 million were down insignificantly from $11.3 million for the second
quarter of fiscal 2005. Net sales from maintenance, spare parts and supplies for the first half of fiscal 2006 were $21.3 million, compared with $22.8 million for the same period in fiscal 2005, lower by 7%. We attribute the decrease in net sales
for the six months ended March 31, 2006 to a temporary decline in usage of our customers installed base of legacy equipment and the timing of purchase orders from certain customers during the first quarter of fiscal 2006. We expect net
sales from maintenance, spare parts and supplies to experience varying degrees of downward pressure from the attrition of older equipment in the field, until such time as installations of our newer CR Series printing systems are sufficient to
reverse this trend.

Net sales of printing equipment were $1.6 million for the second quarter of fiscal 2006, flat compared with the same period in fiscal
2005. For the six months ended March 31, 2006, net sales of printing equipment were $4.3 million, a



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44% increase over printing equipment sales for the same period in fiscal 2005 of $3.0 million. Our printing systems
primarily consist of the CR Series and the Imaggia. The Checktronic and Foliotronic are among the Companys legacy products. The Checktronic is now sold principally as a system upgrade or refurbished product
in Latin America, Asia and Africa. The Foliotronic is still actively marketed to customers with folio production applications. For the first half of fiscal 2006 compared with the first half of fiscal 2005, the increase in net sales of
printing equipment was primarily due to higher CR Seriessales, four units in the six months ended March 31, 2006 and two units in the same period in fiscal 2005. Legacy product sales were also higher in the first six months of fiscal
2006 than in the same period in fiscal 2005. The increase in legacy product sales was partially offset by lower Imaggia sales. One Imaggia unit was sold in the first half of fiscal 2005; only Imaggia upgrades were sold in the
first half of fiscal 2006.

Gross Margin.

The Companys gross margin percentage for the second quarter of fiscal 2006 was 55%, compared with 56% for the second quarter of fiscal 2005, and 54% for the first half of fiscal 2006 and 2005. The decrease in
the gross margin percentage for the second quarter of fiscal 2006, compared with the same period in fiscal 2005, was primarily due to sales mix. The decrease in margins on the mix of products sold was partially offset by productivity improvements
which reduced the levels of unabsorbed labor and overhead costs incurred in the second quarter of fiscal 2006, compared with the second quarter of fiscal 2005.

Though the gross margin percentage for the first half of fiscal 2006 was flat compared with that for the first half of fiscal 2005, similar to the second-quarter comparison, product margins were lower due to sales mix, with the reduction
wholly offset by lower levels of unabsorbed labor and overhead costs.

For both the three and six months ended March 31, 2006 compared with the same
periods in fiscal 2005, absorbed and unabsorbed labor costs were lower in the fiscal 2005 periods as a result of the cost reduction measures implemented in fiscal 2005. In general, we anticipate that the gross margin percentage in fiscal 2006 as a
whole will be about the same as in fiscal 2005.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses were $5.8 million for the second quarter of fiscal 2006, compared with $5.7 million for the same quarter of fiscal 2005. As a
percentage of net sales, selling, general and administrative expenses were 45% for the second quarter of fiscal 2006, compared with 44% for the year-ago quarter. For the three-month period ended March 31, 2006 compared with the same period in
fiscal 2005, customer support contract services and travel expenses were approximately $185,000 higher and commissions to a third-party distributor were approximately $259,000 lower. In addition, approximately $60,000 in moving expenses related to
the relocation of our Corporate headquarters was incurred in the second quarter of fiscal 2006.

Selling, general and administrative expenses were $11.1
million and $11.4 million for the six months ended March 31, 2006 and 2005, respectively. As a percentage of net sales, selling, general and administrative expenses were 43% and 44%, respectively, for the six-month periods ended March 31,
2006 and 2005. For the first half of fiscal 2006 compared with the first half of fiscal 2005, customer support contract services and travel expenses were approximately $194,000 higher, commissions to a third-party distributor were approximately
$343,000 lower and compensation expenses were approximately $244,000 lower. In addition, the $60,000 in moving expenses related to the relocation of our Corporate headquarters incurred in the second quarter of fiscal 2006 increased expense for the
first half of the year by the same amount.

Research and Development Expenses.

Research and development expenses were $1.2 million for the second quarter of fiscal 2006, compared with $1.0 million for the second quarter of fiscal 2005, or 9% and 8%
of net sales in each period, respectively. Compensation expenses for the second quarter of fiscal 2006 were approximately $182,000 higher than in the comparable year-ago quarter. For the six months ended March 31, 2006, research and development
expenses were $2.4 million, compared



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with $2.1 million for the same period in fiscal 2005, or 9% and 8% of net sales, respectively. Compensation expenses in
the first half of fiscal 2006 were approximately $194,000 higher than in the first half of fiscal 2005. The lower compensation expenses in the second quarter and first half of fiscal 2005 compared with the same periods in fiscal 2006 were due in
part to the cost reduction measures implemented in fiscal 2005.

Net Interest Expense.

Net interest expense for the second quarter of fiscal 2006 was $261,000 (consisting of $125,000 cash and $136,000 non-cash interest), compared with $269,000 (consisting
of $128,000 cash and $141,000 non-cash interest) for the second quarter of fiscal 2005. Net interest expense for the first half of fiscal 2006 was $496,000 (consisting of $233,000 cash and $263,000 non-cash interest), compared with $528,000
(consisting of $241,000 cash and $287,000 non-cash interest) for first half of fiscal 2005. The bank debt levels, to which the cash interest expense applies, have tended to be lower and the interest rates higher in fiscal 2006, compared with fiscal
2005. Non-cash interest expenses in the fiscal 2006 periods have been lower than in the comparable 2005 periods due to the lower average market price of Delphax stock over the interest periods, partially offset by higher amortization of the original
issue discount, both related to our Convertible Notes.

Foreign Exchange Gains and Losses.

Delphax incurs realized and unrealized transactional foreign exchange gains and losses on currency conversion transactions that are reflected in our Consolidated
Statements of Operations. Realized and unrealized transactional exchange gains and losses reflect actual and anticipated gains or losses recognized as the result of transactions among the Company and its subsidiaries that have different functional
currencies. The net transactional exchange loss for the three months ended March 31, 2006 was $133,000, compared with a gain of $75,000 for the same period in fiscal 2005. For the six-month periods ended March 31, 2006 and 2005, we
recognized transactional foreign exchange losses of $228,000 and $41,000, respectively. The increase in realized transactional foreign exchange losses between the fiscal 2006 periods and the comparable fiscal 2005 periods was primarily the result of
the Canadian subsidiary collecting its receivables in U.S. dollars, and then needing to exchange them for Canadian dollars. Beginning in the latter part of the second quarter of fiscal 2006, to control this cost, we identified and began utilizing a
lower-cost seller of Canadian dollars.

The Company experiences translational foreign currency exchange gains and losses, which are reflected in equity,
with gains due to the weakening, and losses due to the strengthening, of the U.S. dollar against the currencies of our foreign subsidiaries and the resulting effect of currency translation on the valuation of the intercompany accounts and certain
assets of the subsidiaries, which are denominated in U.S. dollars. The functional currency of the Canadian subsidiary is the U.S. dollar. We anticipate continuing to have transactional and translational foreign currency gains and losses from foreign
operations in the future, although we are reviewing strategies to reduce the size of the losses we have experienced in recent quarters.

Income Taxes.

For fiscal 2006, we project that income tax expense will be the tax on taxable income, less income tax
credits limited to alternative minimum taxes. On that basis, an income tax benefit of $57,000 was recognized for the second quarter of fiscal 2006 and an income tax expense of $26,000 was recognized for the first half of the fiscal year. For fiscal
2005, we projected that our income tax expense would be comprised of applicable minimum taxes, as we anticipated utilizing loss carry-forwards from previous years. Interim income tax expense for the second quarter and the first six months of fiscal
2005 was recognized on that basis, at $12,000 and $24,000, respectively. As of March 31, 2006 and 2005, we have fully reserved deferred tax assets of $3.0 million and $2.2 million, respectively, recognizing that Delphax has incurred income tax
losses in two of the last four fiscal years and there is no assurance that this or future years will be profitable.



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Earnings or Loss per Share.

For the second quarter of fiscal 2006, basic and diluted loss per share was $0.05, compared with basic and diluted earnings per share of $0.04 for the second quarter of fiscal 2005. For the first six months of fiscal 2006, basic and diluted
loss per share was $0.07, compared with basic and diluted loss per share of $0.04 for the first six months of fiscal 2005. The decline in our net income in the fiscal 2006 periods compared with the fiscal 2005 periods was almost entirely
attributable to two factors: certain cost reduction measures implemented during fiscal 2005 that led to improved gross margins and reduced operating expenses in the second quarter of fiscal 2005 and the continued strengthening of the Canadian dollar
compared with the U.S. dollar.

Market Risk

Delphax
has foreign subsidiaries in Canada, the United Kingdom and France. We do business in more than 60 countries and generate approximately 20% to 30% of our net sales from outside North America. Our ability to sell our products in foreign markets may be
affected by changes in economic, political or market conditions in the foreign markets in which we do business.

The Companys net investment in its
foreign subsidiaries was $6.1 million and $7.1 million at March 31, 2006 and September 30, 2005, respectively, translated into U.S. dollars at the closing exchange rates. The potential loss based on end-of-period balances and prevailing
exchange rates resulting from a hypothetical 10% strengthening of the dollar against foreign currencies was not material for the three-month and six-month periods ended March 31, 2006 and 2005. The functional currency of the Canadian subsidiary
is the U.S. dollar.

From time to time, the Company has entered into foreign exchange contracts as a hedge against specific foreign currency receivables.
In the fiscal-year-to-date period and in fiscal 2005, the Company did not enter into any foreign exchange contracts. However, we are reviewing strategies to reduce the magnitude of losses we have experienced in recent quarters.

Interest Rate Risk

Substantially all of our senior debt and the
associated interest expense are sensitive to changes in the level of interest rates. A hypothetical 100 basis point (one percentage point) increase in interest rates would result in incremental interest expense of approximately $14,000 and $17,000,
respectively, for the second quarter of fiscal 2006 and 2005, and $27,000 and $34,000, respectively, for the six months ended March 31, 2006 and 2005.

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

Risk Related to Operations

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

Limited sales of our new product lines.Acquisition of our Canadian
subsidiary in December 2001 significantly expanded our product lines to include the CR Series and RS Series of roll-fed printing equipment. To date, a limited number of CR Seriespresses and RS Seriesprint systems have
been sold and there can be no assurance that these products can be sold in meaningful numbers in the future.



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Reliance on significant customers.In the second quarter of 2006, we had two significant customers that
individually accounted for 29% and 16% of net sales. This compares with 30% and 17% in the second quarter of fiscal 2005. For the six months ended March 31, 2006 and 2005, respectively, these customers individually accounted for 28% and 15%,
and 28% and 18% of net sales. Net sales from these two customers have typically been significant to total net sales. We anticipate, but cannot assure, that these customers will continue to be significant throughout fiscal 2006. The loss of, or a
significant decrease in sales to, either of these customers could have a material adverse effect on the Companys financial condition and results of operation. In addition, for the first half of fiscal 2006, net sales to a third customer, which
included purchase of equipment, represented 10% of total net sales for the period.

Requirements for availability of working capital. We depend on
our revolving credit facilities for working capital. The lender has a security interest in substantially all of the Companys assets. Our ability to borrow under the credit facilities depends on maintaining a borrowing base of eligible accounts
receivable and, to a lesser extent, eligible inventory and complying with financial covenants concerning tangible net worth, debt service coverage, interest coverage and maximum capital expenditures. If the Company is unable to generate a sufficient
borrowing base and comply with the financial covenants and other requirements of the credit facilities, it will limit or prevent borrowing under the credit facilities and could have a serious adverse effect on the Company.

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

Significant proportion of operating expenses paid in foreign currencies. Though variable by period, we estimate that up to
60% of our operating expenses in any period, the most significant of which is payroll, are paid in currencies other than the US dollar. In addition, our printing presses and proprietary consumables, spares and supplies are manufactured by our
Canadian subsidiary, which, unlike our other foreign subsidiaries, does not generate any cash inflows in its local currency. In periods where the dollar has weakened in relation to comparable reporting periods, higher expenses and higher
manufactured-product costs are incurred on a US dollar basis when equal expense levels are incurred on a functional currency basis. We are reviewing strategies to reduce the size of the exposure to losses from foreign currency we have experienced in
recent quarters.

Net sales are subject to fluctuations, which may be material. Our net sales and operating results may fluctuate from quarter to
quarter because the sales cycle is relatively long, the size of orders may vary significantly, the availability of financing for customers in some countries is variable, customers may postpone or cancel orders, and economic, political and market
conditions in some markets change with minimal notice and affect the timing and size of orders. Because operating expenses are based on anticipated net sales levels and a high percentage of the operating costs are relatively fixed in the short-term,
variations in the timing of revenue recognition could result in significant fluctuations in operating results from period to period.

Liquidity and
Capital Resources

Working capital was $22.8 million at March 31, 2006, compared with $21.6 million at September 30, 2005. A number of factors
contributed to the increase. Accounts receivable increased from $6.6 million at September 30, 2005, to $7.2 million at March 31, 2006 due to timing of collections. Customer deposits decreased from $1.0 million at September 30, 2005,
to $254,000 at March 31, 2006, primarily due to recognition of revenue in the first quarter of fiscal 2006 related to a deposit on equipment at a customer site as of September 30, 2005. Off-setting these increases in working capital,
accounts payable, accrued expenses and income taxes payable increased from $5.7 million at September 30, 2005, to $6.1 million at March 31, 2006.



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Debt, excluding capital leases, totaled approximately $7.6 million and $6.2 million as of March 31, 2006 and
September 30, 2005, respectively, detailed as follows:



|                                                                                                                       |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ------------------ | - | ------------------ |  | --------------- | ----- |  | - | -----
|                                                                                                                       |  | March 31, 2006     |       | September 30, 2005
|                                                                                                                       |  | BalanceOutstanding |       | AvailableCredit    |   | BalanceOutstanding |  | AvailableCredit
|                                                                                                                       |  | (In thousands)    
|Senior credit facilities:                                                                                              |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|Term loans                                                                                                             |  | $                  | 738   |                    | $ |                   |  | $               | 836   |  | $ |     
|Revolving loans, $12.5 million limit                                                                                   |  |                    | 4,499 |                    |   | 4,940              |  |                 | 3,203 |  |   | 5,592
|Line of credit, United Kingdom                                                                                         |  |                    |      |                    |   | 176                |  |                 |      |  |   | 176  
|                                                                                                                       |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|Total bank credit facilities                                                                                           |  |                    | 5,237 |                    |   | 5,116              |  |                 | 4,039 |  |   | 5,768
|                                                                                                                       |  |                    |       |                   
|7% Convertible Notes, $3.0 million issued at a discount of $1.4 million amortized over the the 4-year term of the loan |  |                    | 2,319 |                    |   |                   |  |                 | 2,143 |  |   |     
|                                                                                                                       |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|Total debt, excluding capital leases                                                                                   |  | $                  | 7,556 |                    | $ | 5,116              |  | $               | 6,182 |  | $ | 5,768
|                                                                                                                       |  |                    |       |                    |   |                    |  |                 |       |  |   |      

We expect availability under the credit facilities to be adequate to fund operations throughout fiscal 2006.

We have undertaken no significant investing activities. In the second quarter of fiscal 2006, in conjunction with moving the Corporate headquarters to
6100 West 110thStreet, Bloomington, MN 55438 in April 2006, we committed to approximately $125,000 for
communications equipment.

Cautionary Statement

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

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

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

The information called for by this item
is provided under the caption Market Risk under Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.



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Item 4.Controls and Procedures.

(a) Evaluation of Disclosure
Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of
March 31, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting
them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Exchange Act.

(b) Changes in Internal Controls over Financial Reporting.

During the fiscal quarter covered by this report, there were no significant changes in the Companys internal controls over financial reporting (as defined in Rule 13a  15(f) under the Exchange Act) or in
other factors that have materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

On January 3, 2006, we issued
16,406 shares of Common Stock in payment of $39,000 of accrued interest on the Convertible Notes. As of March 31, 2006, interest of $48,000 on the Convertible Notes was accrued related to the 16,406 shares issued on April 3, 2006. The
Convertible Notes provide for 7% interest in the form of Company Common Stock, issued on the first business day of each calendar quarter, computed based on the initial conversion price of $3.20 per share. The shares issued on January 3, 2006
and April 3, 2006 were issued in reliance on the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended. No underwriting discounts or commissions were paid.

Item 6.Exhibits.

The following documents are filed as Exhibits to
this report:

10.1 Amendment No. 5 to Loan and Security Agreement Dated February 4, 2004, between Delphax Technologies Inc. and
LaSalle Business Credit, LLC.

10.2 Amending Agreement No. 3, This Agreement Dated as of March 31, 2006, between: Delphax
Technologies Canada Limited, a Corporation Existing under the Laws of Ontario, and ABN AMRO Bank N.V., Canada Branch, the Canadian Branch of a Netherlands Bank.

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).

32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.



|                  |  |                                                       
|----------------- |  | ------------------------------------------------------
|                  |  | DELPHAX TECHNOLOGIES INC.                             
|                  |  | Registrant                                            
|                  | 
|Date May 10, 2006 |  | /s/ Jay A. Herman                                     
|                  |  | Jay A. Herman                                         
|                  |  | Chairman and Chief Executive Officer                  
|                  | 
|Date May 10, 2006 |  | /s/ Gregory S. Furness                                
|                  |  | Gregory S. Furness                                    
|                  |  | Vice President, Finance and Chief Financial Officer   
|                  |  | (Chief Financial Officer and Chief Accounting Officer)



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