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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 December 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



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the 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 February 13, 2007, there were 6,455,110 shares outstanding of Common
Stock, par value $0.10 per share.



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DELPHAX TECHNOLOGIES INC.

INDEX



|                              |  |                                                                                                 |  |   
|----------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --
|                              |  | Page                                                                                           
|PART I. FINANCIAL INFORMATION |  |                                                                                                
|                              |  |                                                                                                
|Item 1.                       |  | Financial Statements                                                                            |  |   
|                              |  |                                                                                                
|                              |  | Condensed consolidated balance sheets  December 31, 2006 and September 30, 2006                |  | 3 
|                              |  |                                                                                                
|                              |  | Condensed consolidated statements of operations  Three months ended December 31, 2006 and 2005 |  | 4 
|                              |  |                                                                                                
|                              |  | Condensed consolidated statements of cash flows  Three months ended December 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           |  | 12
|                              |  |                                                                                                
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                      |  | 18
|                              |  |                                                                                                
|Item 4.                       |  | Controls and Procedures                                                                         |  | 18
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                
|                              |  |                                                                                                
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                     |  | 18
|                              |  |                                                                                                
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                             |  | 19
|                              |  |                                                                                                
|Item 6.                       |  | Exhibits                                                                                        |  | 19
|                              | 
|SIGNATURES                    |  | 20                                                                                             
|                              | 
|CERTIFICATIONS                |  |                                                                                                



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

DELPHAX TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                                                                                          |  | December 31, 2006 |         |   | September 30, 2006 |  
|ASSETS                                                                                                                                                                    |  |                   |         |   |                    |   |         |  
|CURRENT ASSETS                                                                                                                                                            |  |                   |         |   |                    |   |         |  
|Cash and cash equivalents                                                                                                                                                 |  | $                 | 1,236   |   |                    | $ | 582     |  
|Accounts receivable, less allowance for doubtful accounts of $419 and $331 as of December 31, 2006 and September 30, 2006,
respectively                                   |  |                   | 6,533   |   |                    |   | 6,298   |  
|Inventory                                                                                                                                                                 |  |                   | 14,324  |   |                    |   | 15,958  |  
|Other current assets                                                                                                                                                      |  |                   | 1,103   |   |                    |   | 1,087   |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                      |  |                   | 23,196  |   |                    |   | 23,925  |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|Equipment and fixtures, net                                                                                                                                               |  |                   | 1,617   |   |                    |   | 1,838   |  
|Other                                                                                                                                                                     |  |                   | 470     |   |                    |   | 453     |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|TOTAL ASSETS                                                                                                                                                              |  | $                 | 25,283  |   |                    | $ | 26,216  |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                      |  |                   |         |   |                    |   |         |  
|CURRENT LIABILITIES                                                                                                                                                       |  |                   |         |   |                    |   |         |  
|Accounts payable                                                                                                                                                          |  | $                 | 2,717   |   |                    | $ | 3,992   |  
|Accrued compensation                                                                                                                                                      |  |                   | 3,535   |   |                    |   | 3,969   |  
|Other accrued expenses                                                                                                                                                    |  |                   | 1,699   |   |                    |   | 1,580   |  
|Income taxes payable                                                                                                                                                      |  |                   | 124     |   |                    |   | 63      |  
|Deferred revenue                                                                                                                                                          |  |                   | 357     |   |                    |   | 247     |  
|Customer deposits                                                                                                                                                         |  |                   | 171     |   |                    |   | 175     |  
|Current portion of bank credit facilities                                                                                                                                 |  |                   | 5,785   |   |                    |   | 193     |  
|Current portion of capital leases                                                                                                                                         |  |                   | 82      |   |                    |   | 105     |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                 |  |                   | 14,470  |   |                    |   | 10,324  |  
|Long-term portion of bank credit facilities and 7% convertible subordinated notes                                                                                         |  |                   | 2,590   |   |                    |   | 7,906   |  
|Long-term portion of capital leases                                                                                                                                       |  |                   | 142     |   |                    |   | 150     |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|TOTAL LIABILITIES                                                                                                                                                         |  |                   | 17,202  |   |                    |   | 18,380  |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                                      |  |                   |         |   |                    |   |         |  
|Common stock - par value $0.10 per share - authorized 50,000 shares; issued and outstanding: 6,439 and 6,422 as of December 31, 2006 and
September 30, 2006, respectively |  |                   | 644     |   |                    |   | 642     |  
|Additional paid-in capital                                                                                                                                                |  |                   | 19,405  |   |                    |   | 19,332  |  
|Accumulated other comprehensive loss                                                                                                                                      |  |                   | (531    | ) |                    |   | (654    | )
|Accumulated deficit                                                                                                                                                       |  |                   | (11,437 | ) |                    |   | (11,484 | )
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                |  |                   | 8,081   |   |                    |   | 7,836   |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                |  | $                 | 25,283  |   |                    | $ | 26,216  |  
|                                                                                                                                                                          |  |                   |         |   |                    |   |         |  

See notes to unaudited condensed consolidated financial statements.



3



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DELPHAX TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)



|                                                                 |  |                                |        |   |      |   |        |  
|---------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                 |  | Three Months EndedDecember 31, |       
|                                                                 |  | 2006                           |        |   | 2005 |  
|Sales:                                                           |  |                                |        |   |      |   |        |  
|Maintenance, spare parts and supplies                            |  | $                              | 10,736 |   |      | $ | 10,095 |  
|Printing equipment                                               |  |                                | 947    |   |      |   | 2,642  |  
|                                                                 |  |                                |        |   |      |   |        |  
|NET SALES                                                        |  |                                | 11,683 |   |      |   | 12,737 |  
|Cost of sales                                                    |  |                                | 8,583  |   |      |   | 8,674  |  
|                                                                 |  |                                |        |   |      |   |        |  
|GROSS PROFIT                                                     |  |                                | 3,100  |   |      |   | 4,063  |  
|                                                                 |  |                               
|Operating Expenses:                                              |  |                                |        |   |      |   |        |  
|Selling, general and administrative                              |  |                                | 1,978  |   |      |   | 2,475  |  
|Research and development                                         |  |                                | 856    |   |      |   | 1,278  |  
|                                                                 |  |                                |        |   |      |   |        |  
|OPERATING EXPENSES                                               |  |                                | 2,834  |   |      |   | 3,753  |  
|                                                                 |  |                                |        |   |      |   |        |  
|INCOME FROM OPERATIONS                                           |  |                                | 266    |   |      |   | 310    |  
|                                                                 |  |                               
|Net interest expense                                             |  |                                | 335    |   |      |   | 288    |  
|Net realized exchange (gain) loss                                |  |                                | (73    | ) |      |   | 152    |  
|Net unrealized exchange gain                                     |  |                                | (43    | ) |      |   | (57    | )
|                                                                 |  |                                |        |   |      |   |        |  
|INCOME (LOSS) BEFORE INCOME TAXES                                |  |                                | 47     |   |      |   | (73    | )
|                                                                 |  |                               
|Income tax expense                                               |  |                                |       |   |      |   | 83     |  
|                                                                 |  |                                |        |   |      |   |        |  
|NET INCOME (LOSS)                                                |  | $                              | 47     |   |      | $ | (156   | )
|                                                                 |  |                                |        |   |      |   |        |  
|Basic and diluted earnings (loss) per common share               |  | $                              | 0.01   |   |      | $ | (0.02  | )
|Weighted average number of shares outstanding during the period: |  |                                |        |   |      |   |        |  
|Basic                                                            |  |                                | 6,439  |   |      |   | 6,356  |  
|Diluted                                                          |  |                                | 6,445  |   |      |   | 6,356  |  

See notes to unaudited condensed consolidated financial statements.



4



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DELPHAX TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                   |  |                                |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                   |  | Three Months EndedDecember 31, |       
|                                                                                                   |  | 2006                           |        |   | 2005 |  
|OPERATING ACTIVITIES                                                                               |  |                                |        |   |      |   |        |  
|Net income (loss)                                                                                  |  | $                              | 47     |   |      | $ | (156   | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                                      |  |                                | 233    |   |      |   | 240    |  
|Non-cash interest on 7% convertible subordinated notes:                                            |  |                                |        |   |      |   |        |  
|Amortization of original issue discount                                                            |  |                                | 92     |   |      |   | 87     |  
|Issuance of common stock                                                                           |  |                                | 19     |   |      |   | 39     |  
|Stock-based compensation                                                                           |  |                                | 36     |   |      |   | 51     |  
|Other                                                                                              |  |                                | (19    | ) |      |   |       |  
|Changes in operating assets and liabilities:                                                       |  |                                |        |   |      |   |        |  
|Accounts receivable, net                                                                           |  |                                | (235   | ) |      |   | (1,247 | )
|Inventory                                                                                          |  |                                | 1,634  |   |      |   | 259    |  
|Other current assets                                                                               |  |                                | (14    | ) |      |   | (169   | )
|Accounts payable, accrued expenses, deposits and other                                             |  |                                | (1,571 | ) |      |   | (1,171 | )
|Deferred revenue                                                                                   |  |                                | 109    |   |      |   | (33    | )
|                                                                                                   |  |                                |        |   |      |   |        |  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                                |  |                                | 331    |   |      |   | (2,100 | )
|                                                                                                   |  |                               
|INVESTING ACTIVITIES                                                                               |  |                                |        |   |      |   |        |  
|Purchase of equipment and fixtures                                                                 |  |                                | (6     | ) |      |   | (101   | )
|                                                                                                   |  |                                |        |   |      |   |        |  
|NET CASH USED IN INVESTING ACTIVITIES                                                              |  |                                | (6     | ) |      |   | (101   | )
|                                                                                                   |  |                               
|FINANCING ACTIVITIES                                                                               |  |                                |        |   |      |   |        |  
|Additional borrowing on bank credit facilities, net                                                |  |                                | 185    |   |      |   | 2,016  |  
|Checks written in excess of bank balances                                                          |  |                                | 58     |   |      |   | 472    |  
|Principal payments on capital leases                                                               |  |                                | (31    | ) |      |   | (27    | )
|                                                                                                   |  |                                |        |   |      |   |        |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                          |  |                                | 212    |   |      |   | 2,461  |  
|                                                                                                   |  |                               
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                            |  |                                | 117    |   |      |   | (41    | )
|                                                                                                   |  |                                |        |   |      |   |        |  
|INCREASE IN CASH AND CASH EQUIVALENTS                                                              |  |                                | 654    |   |      |   | 219    |  
|                                                                                                   |  |                               
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                     |  |                                | 582    |   |      |   | 736    |  
|                                                                                                   |  |                                |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                           |  | $                              | 1,236  |   |      | $ | 955    |  
|                                                                                                   |  |                                |        |   |      |   |        |  

See notes to unaudited condensed consolidated financial statements.



5



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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, 2006. Reclassifications have been made in the prior year to conform to classifications in the current year.

The results of operations for the three months ended December 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.

New Pronouncements

Accounting for Uncertainty in Income Taxes (FIN 48)

In June 2006, the
Financial Accounting Standards Board (FASB) issued interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of SFAS No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain income tax
positions accounted for in accordance with SFAS No. 109. The interpretation stipulates recognition and measurement criteria in addition to classification, interim period accounting and significantly expanded disclosure provisions for uncertain
tax positions that are expected to be taken in a companys income tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, our fiscal 2008. We have not yet determined the impact the adoption of FIN 48 will have
on our consolidated financial statements.

Accounting Changes and Error Corrections (SFAS 154)

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154), as part of its short-term convergence project with the International Accounting Standards Board. SFAS 154 requires that all voluntary changes in accounting principles and changes required by a new accounting pronouncement
that do not include specific transition provisions be applied retrospectively to prior periods financial statements, unless it is impractical to do so. Opinion 20, Accounting Changes, required that most voluntary changes in accounting
principle be recognized by including the cumulative effect of changing to the new accounting principle as a component of net income in the period of the change. SFAS 154 is effective prospectively for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. SFAS 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of the Statement. This
pronouncement had no effect on the Companys financial position, results of operations or cash flows.

Fair Value Measurements (SFAS 157)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We have not yet determined the impact the adoption of SFAS 157 will have on our consolidated financial statements.



6



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Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R), (SFAS 158). SFAS 158 requires an employer to recognize in its statement of financial position an asset for a plans overfunded status or a liability
for a plans underfunded status, measure a plans assets and its obligations that determine its funded status as of the end of the employers fiscal year, and recognize changes in the funded status of a defined benefit postretirement
plan in the year in which the changes occur. Those changes will be reported in comprehensive income and as a separate component of stockholders equity. SFAS 158 is effective for publicly held companies for fiscal years ending after
December 15, 2006. We participate in a defined benefit pension plan in France. We have not yet fully determined the impact of the adoption of SFAS 158 on the Companys financial position, results of operations or cash flows for fiscal
2007. However, we expect the impact to be immaterial.

Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statement (SAB 108)

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(SAB 108). SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial
statements. The SAB requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 does not change the guidance in SAB 99, Materiality, when evaluating the materiality of misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. Upon
initial application, SAB 108 permits a one-time cumulative effect adjustment to beginning retained earnings. This pronouncement had no effect on the Companys financial position, results of operations or cash flows.

2. Inventory

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



|                                  |  |                   |        |                    |   |       
|--------------------------------- |  | ----------------- | ------ | ------------------ | - | ------
|                                  |  | December 31, 2006 |        | September 30, 2006
|                                  | 
|                                  |  | (In thousands)   
|Raw materials and component parts |  | $                 | 8,294  |                    | $ | 8,446 
|Work-in-progress                  |  |                   | 1,285  |                    |   | 1,587 
|Finished goods                    |  |                   | 4,745  |                    |   | 5,925 
|                                  |  |                   |        |                    |   |       
|                                  |  | $                 | 14,324 |                    | $ | 15,958
|                                  |  |                   |        |                    |   |       



7



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3. Earnings or Loss per Share

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



|                                                                           |  |                                         |       |      |   |       |  
|-------------------------------------------------------------------------- |  | --------------------------------------- | ----- | ---- | - | ----- | -
|                                                                           |  | Three Months EndedDecember 31,          |      
|                                                                           |  | 2006                                    |       | 2005 |  
|                                                                           |  | (In thousands, exceptper share amounts) |      
|Numerator:                                                                 |  |                                         |       |      |   |       |  
|Numerator for basic earnings (loss) per share                              |  | $                                       | 47    |      | $ | (156  | )
|Dilutive potential loss, Convertible Notes                                 |  |                                         |      |      |   |      |  
|                                                                           |  |                                         |       |      |   |       |  
|Numerator for diluted earnings (loss) per share                            |  | $                                       | 47    |      | $ | (156  | )
|                                                                           |  |                                         |       |      |   |       |  
|Denominator:                                                               |  |                                         |       |      |   |       |  
|Denominator for basic earnings (loss) per share, weighted average shares   |  |                                         | 6,439 |      |   | 6,356 |  
|Dilutive potential shares:                                                 |  |                                         |       |      |   |       |  
|Employee stock options                                                     |  |                                         | 6     |      |   |      |  
|Warrants                                                                   |  |                                         |      |      |   |      |  
|Convertible Notes                                                          |  |                                         |      |      |   |      |  
|                                                                           |  |                                         |       |      |   |       |  
|Dilutive potential shares                                                  |  |                                         | 6     |      |   |      |  
|                                                                           |  |                                        
|Denominator for diluted earnings (loss) per share, weighted average shares |  |                                         | 6,445 |      |   | 6,356 |  
|                                                                           |  |                                         |       |      |   |       |  
|Earnings (loss) per share - basic                                          |  | $                                       | 0.01  |      | $ | (0.02 | )
|                                                                           |  |                                         |       |      |   |       |  
|Earnings (loss) per share - diluted                                        |  | $                                       | 0.01  |      | $ | (0.02 | )
|                                                                           |  |                                         |       |      |   |       |  

Dilutive potential losses related to Convertible Notes were excluded from calculation of the numerator for diluted
earnings or loss per share because the effect would be antidilutive. The amounts excluded for the three months ended December 31, 2006 and 2005 were $111,000 and $126,000, respectively. Similarly, dilutive potential common shares were excluded
from calculation of the denominator because the effect would be antidilutive. Shares excluded related to in-the-money employee stock options for the three months ended December 31, 2005 were zero. Shares excluded related to in-the-money
Warrants for the three months ended December 31, 2006 and 2005 were zero in each period. In both 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 earnings or 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 related to these employee stock options for the three months ended
December 31, 2006 and 2005 were 553,000 and 996,000, respectively. In both periods, 516,000 shares related to Warrants were excluded from calculation of the denominator because of their antidilutive effect.



8



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4. Comprehensive Income or Loss

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



|                                        |  |                                 |     |      |   |      |  
|--------------------------------------- |  | ------------------------------- | --- | ---- | - | ---- | -
|                                        |  | Three Months Ended December 31, |    
|                                        |  | 2006                            |     | 2005 |  
|                                        |  | (In thousands)                  |    
|Net income (loss)                       |  | $                               | 47  |      | $ | (156 | )
|Foreign currency translation adjustment |  |                                 | 123 |      |   | (41  | )
|                                        |  |                                 |     |      |   |      |  
|Comprehensive income (loss)             |  | $                               | 170 |      | $ | (197 | )
|                                        |  |                                 |     |      |   |      |  

5. Senior Credit Facilities and Convertible Subordinated Debt

Our debt primarily consists of senior credit facilities totaling approximately $13.7 million and $3.0 million in 7% convertible subordinated notes (the Convertible
Notes). 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.

The senior credit agreements were amended in February 2005, providing 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 December 31, 2006, the interest rates applicable to our loans were 9.0% and 8.25% for our Canadian and
US revolving loans, respectively, and 9.25% for our term loans. On December 20, 2006, the Company also amended the senior credit agreements. The amendments extended the terms of the facilities to October 31, 2007 and revised the debt
covenants.

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. It is our intent to meet all the covenants of the agreements, and we monitor prospective compliance with the covenants. As of December 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 were immediately convertible to Company Common Stock at a
conversion price of $3.20 per share, which would result in 937,500 shares being issued if all $3.0 million in principal of the Convertible Notes were converted at that conversion price. The Convertible Notes are junior to the senior credit
facilities, 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
based on the



9



---

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

Our subsidiaries in the United Kingdom and France have lines of credit of £100,000 and 50,000, respectively (approximately $196,000 and $66,000,
respectively, at December 31, 2006 exchange rates). No amounts were due under these lines of credit as of December 31, 2006 and 2005.

As of
December 31, 2006, we had $5.8 million of debt under the senior credit facilities outstanding at an approximate average annual effective interest rate of 12.5%, which includes the nominal rate of interest on the loans plus certain credit fees
and the amortization of the costs of entering into the credit facilities agreements. The weighted average annual effective interest rate on all of the Companys debt was approximately 13.4%, which includes both the bank debt 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 $36,000 and $51,000 in the three months ended
December 31, 2006 and 2005, respectively. For the first quarter of fiscal 2007, $31,000, $3,000 and $2,000 were expensed to selling, general and administrative, research and development and indirect manufacturing expense, respectively. For the
first quarter of fiscal 2006, $46,000, $3,000 and $2,000 were expensed to selling, general and administrative, research and development and indirect manufacturing expense, respectively.

As of December 31, 2006, $350,000 of total unrecognized compensation costs related to non-vested stock option awards was expected to be recognized over a weighted average period of approximately four years.



10



---

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 three months ended December 31, 2006 and 2005 were $99,000 and $156,000, respectively. The assumptions we used to determine fair value were as follows:



|                                |  |                                 |   |  |            |  
|------------------------------- |  | ------------------------------- | - |  | ---------- | -
|                                |  | Three Months Ended December 31, |  
|                                |  | 2006                            |   |  | 2005       |  
|Expected dividend yield         |  | 0                               | % |  | 0          | %
|Expected stock price volatility |  | 49                              | % |  | 58         | %
|Risk-free interest rate         |  | 4.8                             | % |  | 4.3        | %
|Expected life of options        |  | 4.75 years                      |   |  | 4.75 years |  

The Companys stock options generally vest over four years of service and have a contractual life of seven
years. At the beginning of fiscal 2007, we had 226,000, 450,000 and 872,000 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. Option activity under the 2000 Plan during the three months ended December 31, 2006 were as follows:



|                                        |  |                  |   |  |                                       |     
|--------------------------------------- |  | ---------------- | - |  | ------------------------------------- | ----
|                                        |  | Number ofOptions |   |  | WeightedAverageExercisePrice perShare
|                                        |  | (In thousands)   |   |  |                                      
|Options outstanding, September 30, 2006 |  | 560              |   |  | $                                     | 3.29
|Granted                                 |  | 180              |   |  |                                       | 1.16
|Canceled                                |  | (7               | ) |  |                                       | 9.63
|                                        |  |                  |   |  |                                       |     
|Options outstanding, December 31, 2006  |  | 733              |   |  | $                                     | 2.70
|                                        |  |                  |   |  |                                       |     



11



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



|                         |  |                              |  |                                         |  |                                       |      |  |  |  | 
|------------------------ |  | ---------------------------- |  | --------------------------------------- |  | ------------------------------------- | ---- |  |  |  | 
|Options Outstanding     
|Range of Exercise Prices |  | Number of OptionsOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice perShare
|                         |  | (In thousands)               |  | (In years)                              |  |                                      
|$1.16 - 2.52             |  | 200                          |  | 6.79                                    |  | $                                     | 1.30
|2.59 - 3.10              |  | 208                          |  | 3.49                                    |  |                                       | 2.72
|3.12 - 4.80              |  | 311                          |  | 2.97                                    |  |                                       | 3.46
|5.06 - 7.75              |  | 14                           |  | 2.78                                    |  |                                       | 5.82
|                         |  |                              |  |                                         |  |                                       |     
|1.16 - 7.75              |  | 733                          |  | 4.16                                    |  | $                                     | 2.70
|                         |  |                              |  |                                         |  |                                       |     
|                        
|Options Exercisable     
|Range of Exercise Prices |  | Number of OptionsExercisable |  |                                         |  | WeightedAverageExercisePrice perShare
|                         |  | (In thousands)               |  |                                         |  |                                      
|$1.16 - 2.52             |  |                             |  |                                         |  | $                                     |    
|2.59 - 3.10              |  | 70                           |  |                                         |  |                                       | 2.79
|3.12 - 4.80              |  | 249                          |  |                                         |  |                                       | 3.45
|5.06 - 7.75              |  | 14                           |  |                                         |  |                                       | 5.82
|                         |  |                              |  |                                         |  |                                       |     
|1.16 - 7.75              |  | 333                          |  |                                         |  | $                                     | 3.41
|                         |  |                              |  |                                         |  |                                       |     

7. Restructuring Initiative

In June and September 2006, we reduced our worldwide workforce, with most of the staff reductions in research and development and manufacturing positions in our Canadian subsidiary. We incurred approximately $2.5
million in restructuring expenses, comprised solely of employee severance benefits. We have accounted for the restructuring in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. By taking this action, we expect to lower annual operating expenses by over $3.0 million, focusing our resources on a more strategically targeted market. As of December 31, 2006, the remaining severance benefits
liability, included in accrued compensation on the balance sheet, was approximately $1.4 million. We expect to have paid out all severance benefits by the end of the first quarter of fiscal 2008.



|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 and in our Annual Report on Form 10-K for the year ended September 30, 2006. 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 Item 1A. Risk Factors, in our Form 10-K for the year ended September 30,
2006.



12



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Executive Summary

Net sales and gross profit were lower for the first quarter of fiscal 2007 compared with the first quarter of the prior year. However, we achieved modest profitability for the fiscal 2007 quarter as compared with a net loss for the fiscal
2006 first quarter. For the first quarter of fiscal 2007, our net income was $47,000, or $0.01 per share, compared with a net loss of $156,000, or $0.02 per share, for the first quarter of fiscal 2006. The improvement was attributable to a number of
factors, most significantly:



| |  |  | Operating expenses were lower by $919,000 for the first three months of fiscal 2007 compared with the same period in fiscal 2006, primarily as a result of the
restructuring initiated at the end of fiscal 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recognized foreign exchange gains in the first quarter of fiscal 2007 compared with losses in the year-earlier quarter; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recognized no income tax in the current fiscal year quarter as a result of utilizing income tax loss carryforwards, compared with income tax expense in the
year-ago quarter.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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. In response to notification we received from NASDAQ in January 2007 that we no longer meet the standards for listing on the NASDAQ Global Stock Market, we have applied
for listing on the NASDAQ Capital Market.

Critical Accounting Policies

There has been no material change in the Companys critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2006.



13



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Results of Operations

The following table sets forth the Companys Condensed Consolidated 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 Ended December 31, |  
|                                      |  | 2006                            |   |  | 2005  |   
|Sales:                                |  |                                 |   |  |       |   
|Maintenance, spare parts and supplies |  | 91.9                            | % |  | 79.3  | % 
|Printing equipment                    |  | 8.1                             |   |  | 20.7  |   
|                                      |  |                                 |   |  |       |   
|NET SALES                             |  | 100.0                           |   |  | 100.0 |   
|Cost of sales                         |  | 73.5                            |   |  | 68.1  |   
|                                      |  |                                 |   |  |       |   
|GROSS PROFIT                          |  | 26.5                            |   |  | 31.9  |   
|Operating Expenses:                   |  |                                 |   |  |       |   
|Selling, general and administrative   |  | 16.9                            |   |  | 19.5  |   
|Research and development              |  | 7.3                             |   |  | 10.0  |   
|                                      |  |                                 |   |  |       |   
|OPERATING EXPENSES                    |  | 24.2                            |   |  | 29.5  |   
|                                      |  |                                 |   |  |       |   
|INCOME FROM OPERATIONS                |  | 2.3                             |   |  | 2.4   |   
|                                      |  |                                
|Net interest expense                  |  | 2.9                             |   |  | 2.2   |   
|Net realized exchange (gain) loss     |  | (0.6                            | ) |  | 1.2   |   
|Net unrealized exchange gain          |  | (0.4                            | ) |  | (0.4  | ) 
|                                      |  |                                 |   |  |       |   
|INCOME (LOSS) BEFORE INCOME TAXES     |  | 0.4                             |   |  | (0.6  | ) 
|Income tax expense                    |  |                                |   |  | 0.6   |   
|                                      |  |                                 |   |  |       |   
|NET INCOME (LOSS)                     |  | 0.4                             | % |  | (1.2  | )%
|                                      |  |                                 |   |  |       |   

Net Sales.

The Companys revenues consist of sales of: (i) maintenance, spare parts and supplies, and (ii) printing systems and related equipment. 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 quarter of fiscal 2007, net sales were $11.7 million, down 8% compared with net sales of $12.7 million for the first quarter of fiscal 2006.

For the first quarter of fiscal 2007, net sales from maintenance, spare parts and supplies of $10.7 million were up 6% from $10.1 million for the first quarter of fiscal
2006. We attribute the increase in fiscal 2007 to an unusually weak quarter in fiscal 2006 when there was a temporary decline in usage in our customers installed base of equipment and the timing of purchase orders from certain customers.
Although net sales from maintenance, spare parts and supplies were higher in the current quarter compared with the year ago quarter, we expect net sales from maintenance, spare parts and supplies to experience varying degrees of downward pressure.
Some of our printing systems have been installed for many years. As these systems age and technology changes, users are decreasing volumes of production on our systems or replacing our systems with alternative technology, which results in less
maintenance, spare parts and supplies revenue from these customers. We expect these downward pressures to continue until such time as installations of our newer CR Series printing systems are sufficient to reverse this trend.



14



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Net sales of printing equipment were $0.9 million for the first quarter of fiscal 2007, compared with $2.6 million for
the first quarter of fiscal 2006, down 64% year-to-year. One CR Series unit was sold in the first quarter of fiscal 2007, compared with three in the first quarter of fiscal 2006. In addition to the lower volume of CR Series sales, the
particular CR Series unit configurations sold in the first quarter of fiscal 2006 were at higher average per unit selling prices than the unit sold in the current year. Comparative net sales from all other products were virtually flat.

Gross Margin.

The Companys gross margin
percentage for the first quarter of fiscal 2007 was 27%, compared with 32% for the first quarter of fiscal 2006. Manufacturing expenses not capitalized into inventory were approximately $0.7 million higher in the first quarter of fiscal 2007 than in
the comparable quarter in fiscal 2006, lowering gross margin by approximately 6%. This is due primarily to lower volumes of product being manufactured, resulting in our fixed costs of manufacturing being spread over a smaller volume of production.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses were $2.0 million for the first quarter of fiscal 2007, compared with $2.5 million for the same quarter of fiscal 2006. As a percentage of net sales, selling, general and administrative expenses
were 17% for the first quarter of fiscal 2007, compared with 20% for the year-ago quarter. The lower expense level in the current year was primarily the result of the restructuring measures taken at the end of fiscal 2006.

Research and Development Expenses.

Research and development expenses
were $0.9 million for the first quarter of fiscal 2007, compared with $1.3 million for the first quarter of fiscal 2006, or 7% and 10% of net sales in each period, respectively. The decrease was primarily the result of lower compensation costs due
to the restructuring measures taken at the end of fiscal 2006.

Net Interest Expense.

Net interest expense for the first quarter of fiscal 2007 was $335,000 (consisting of $224,000 cash and $111,000 non-cash interest), compared with $288,000 (consisting of $161,000 cash and $127,000 non-cash interest)
for the first quarter of fiscal 2006. Average bank debt levels, to which the cash interest expense applies, were higher by approximately $1.0 million in the first quarter of fiscal 2007 compared with the first quarter of fiscal 2006. In addition, as
a result of an increasing prime rate, cash interest expense was higher in the first quarter of the current fiscal year compared with the first quarter last fiscal year. Cash interest expense includes the nominal rate of interest on the loans plus
certain credit fees and the amortization of the costs of entering into the credit facilities agreements. Non-cash interest relates to the Convertible Notes. For the first quarter of fiscal 2007, non-cash interest expense was lower than in the
comparable fiscal 2006 period due to higher amortization of the original issue discount, more than offset by the effects of the lower average market price of Delphax stock over the interest period.

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 gain for the three months ended December 31, 2006 was $73,000,
compared with a loss of $152,000 for the same period in fiscal 2006. The increase in realized transactional foreign exchange losses between the periods was primarily the result of a strengthening of the U.S. dollar against the Canadian dollar during
the first quarter of fiscal 2007.



15



---

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. The functional currencies of our subsidiaries in the United Kingdom and France are Pounds Sterling and the Euro,
respectively. We anticipate continuing to have transactional and translational foreign currency gains and losses from foreign operations in the future.

Income Taxes.

As a result of significant income tax loss carry-forwards, we expect to incur no income taxes in fiscal 2007, and on an
interim basis for the first quarter of fiscal 2007 recognized no income tax expense or benefit. For the first quarter of fiscal 2006, we recognized income tax expense of approximately $83,000 based on projected full-year results, particularly
considering the impact of non-deductible interest related to the Convertible Notes. As of December 31, 2006 and 2005, we have fully reserved deferred tax assets of $6.1 million and $1.8 million, respectively, recognizing that Delphax has
incurred income tax losses in three of the last five fiscal years and has no assurance that this or future years will be profitable.

Earnings or Loss
per Share.

For the first quarter of fiscal 2007, basic and diluted earnings per share were $0.01, compared with basic and diluted loss per share of
$0.02 for the first quarter of fiscal 2006. The improvement was primarily due to lower operating expenses, derived from the fiscal 2006 restructuring, which substantially offset comparatively lower fiscal 2007 net sales and gross margins and
resulted in substantially equivalent income from operations for the first quarter of fiscal 2007 and the same period in fiscal 2006. The higher interest expenses incurred in the first quarter of fiscal 2007 compared with the year earlier quarter
were more than offset by the foreign exchange gains, in fiscal 2007 versus foreign exchange losses and an income tax expense recognized in the first quarter of fiscal 2006.

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 investments in its foreign subsidiaries were deficits of $0.9 million and $0.7 million at December 31,
2006 and September 30, 2006, respectively, translated into U.S. dollars at the closing exchange rates, as a result of accumulated subsidiary net losses. The potential gain or 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 periods ended December 31, 2006 and 2005. The functional currency of the Canadian subsidiary is the U.S. dollar. The
functional currencies of our subsidiaries in the United Kingdom and France are Pounds Sterling and the Euro, respectively.

From time to time, the Company
has entered into foreign exchange contracts as a hedge against specific foreign currency receivables. The Company did not enter into any foreign exchange contracts in the first quarter of fiscal 2007 or in fiscal 2006. However, strategies to reduce
the magnitude of foreign exchange gains or losses will be considered if economical and practical.

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 $13,000 for the first quarter of fiscal 2007 and 2006, respectively.



16



---

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 per quarter. 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 interest 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 significant risks related to operations are as described in our Annual Report of Form 10-K for the year ended September 30, 2006. With respect to
sales to significant customers, sales to John H. Harland Company were $3.6 million and $3.4 million, or 31% and 27% of total net sales, for the three months ended December 31, 2006 and 2005, respectively. Sales to the RR Donnelley family of
companies were $2.4 million and $1.7 million, or 21% and 14% of total net sales, for the three months ended December 31, 2006 and 2005, respectively.

Liquidity and Capital Resources

Working capital was $8.7 million at December 31, 2006, compared with $13.6 million at
September 30, 2006. The decrease was primarily the result of reclassifying the outstanding senior credit facilities, which expire in October 2007, as a current liability as of December 31, 2006, rather than as a long-term liability as it
was substantially classified on September 30, 2006. As of September 30, 2006, only $193,000 of the bank credit facilities was classified as current. In addition, inventory was lower by approximately $1.6 million, primarily due to lower
inventory purchases and sale of printing equipment in inventory and not replenished. This was partially offset by a decline in accounts payable, which were lower by $1.3 million due primarily to lower purchases of inventory in the first quarter of
fiscal 2007. Accrued compensation was $0.4 million lower, primarily due to payment of severance related to the fiscal 2006 restructuring, offset by $0.7 million higher cash levels, primarily related to payments for equipment received at the end of
December 2006.

Debt, excluding capital leases, totaled approximately $8.4 million and $8.1 million as of December 31, 2006 and September 30,
2006, respectively, detailed as follows:



|                                                                                                                          |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ------------------ | - | ------------------ |  | --------------- | ----- |  | - | -----
|                                                                                                                          |  | December 31, 2006  |       | September 30, 2006
|                                                                                                                          |  | BalanceOutstanding |       | AvailableCredit    |   | BalanceOutstanding |  | AvailableCredit
|                                                                                                                          |  | (In thousands)    
|Senior credit facilities:                                                                                                 |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|Term loans                                                                                                                |  | $                  | 594   |                    | $ |                   |  | $               | 642   |  | $ |     
|Revolving loans, $12.5 million limit                                                                                      |  |                    | 5,191 |                    |   | 2,726              |  |                 | 4,958 |  |   | 3,193
|Lines of credit:                                                                                                          |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|United Kingdom                                                                                                            |  |                    |      |                    |   | 196                |  |                 |      |  |   | 187  
|France                                                                                                                    |  |                    |      |                    |   | 66                 |  |                 |      |  |   | 63   
|                                                                                                                          |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|Total bank credit facilites                                                                                               |  |                    | 5,785 |                    |   | 2,988              |  |                 | 5,600 |  |   | 3,443
|7% Convertible Notes, $3.0 million issued at a discount of $1.4 million amortized over the the four-year term of the loan |  |                    | 2,590 |                    |   |                   |  |                 | 2,499 |  |   |     
|                                                                                                                          |  |                    |       |                    |   |                    |  |                 |       |  |   |      
|Total debt, excluding capital leases                                                                                      |  | $                  | 8,375 |                    | $ | 2,988              |  | $               | 8,099 |  | $ | 3,443
|                                                                                                                          |  |                    |       |                    |   |                    |  |                 |       |  |   |      



17



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We expect availability under the credit facilities as amended in fiscal 2006 to be adequate to fund operations throughout
fiscal 2007 and until such time as the credit agreements expire in October 2007. However, should our net sales be too low to generate sufficient accounts receivable for our borrowing base or the results of operations be insufficient to comply with
the financial covenants of our credit agreements, as amended, it will limit or prevent borrowing under the credit facilities and could have a serious adverse effect on the Company. We are seeking additional financing to replace or extend the
maturity of our senior credit facilities. We have undertaken no significant investing activities.

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. 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
Item 1A. Risk Factors, in our Form 10-K for our fiscal year ended September 30, 2006.



|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.



|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
December 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 October 2, 2006 we issued 16,406 shares of Common Stock in payment of $50,000 of accrued interest on the Convertible Notes. As of December 31, 2006, interest of $19,000 on the Convertible Notes was accrued related to the 16,406
shares issued on January 2, 2007. 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 October 2, 2006 and January 2, 2007 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.



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

We plan to hold our Annual Meeting of Shareholders on March 22, 2007, at 3:30 p.m. Central Time at the Companys
headquarters at 6100 West, 110thStreet, Bloomington, MN 55438, for shareholders of record on February 12,
2007. As of that date, 6,455,110 shares of capital stock of Delphax were outstanding and entitled to vote at the meeting, as estimated in our Definitive 14A filed with the Securities and Exchange Commission on January 29, 2007. Beneficial
ownership as disclosed in that filing was unchanged as of our record date.



|Item 6. | Exhibits.
|------- | ---------

The following documents are filed
as Exhibits to this report:

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 February 14, 2007 |  | /s/ Dieter P. Schilling                               
|                       |  | Dieter P. Schilling                                   
|                       |  | President and Chief Executive Officer                 
|                       | 
|Date February 14, 2007 |  | /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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