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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM  TO



Commission file number: 0-20828



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DANKA BUSINESS SYSTEMS PLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|ENGLAND & WALES                                                |  | 98-0052869                          
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)



|                                                        |  |     |  |                                                          
|------------------------------------------------------- |  | --- |  | ---------------------------------------------------------
|11101 ROOSEVELT BOULEVARD ST. PETERSBURG, FLORIDA 33716 |  | AND |  | MASTERS HOUSE 107 HAMMERSMITH ROAD LONDON W14 0QH ENGLAND
|(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               



REGISTRANTS
TELEPHONE NUMBER, INCLUDING AREA CODE:

(727) 622-2100 in the United States

011-44-207-605-0150 in the United Kingdom



NOT APPLICABLE

(FORMER NAME OR
FORMER ADDRESS, 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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes  x    No ̈



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



Applicable only to corporate
issues:



Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of February 3, 2006: The registrant had 256,582,252 ordinary shares outstanding with par value of 1.25 pence, including 55,472,004 represented by American Depositary Shares ADS. Each ADS represents four
ordinary shares. The ADSs are evidenced by American Depositary receipts.



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INDEX



|                                                                                                               |  |   
|-------------------------------------------------------------------------------------------------------------- |  | --
|RISK FACTORS                                                                                                   |  | 4 
|                                                                                                               | 
|PART I 
FINANCIAL INFORMATION                                                                                 |  | 11
|                                                                                                               | 
|ITEM 1.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS                                                            |  | 11
|Consolidated Condensed Statements of Operations for the Three and Nine Months Ended December 31, 2005 and 2004 |  | 11
|Consolidated Condensed Balance Sheets as of December 31, 2005 and March 31, 2005                               |  | 12
|Consolidated Condensed Statements of Cash Flows for the Nine Months Ended December 31, 2005 and 2004           |  | 13
|                                                                                                               | 
|Notes to Consolidated Condensed Financial Statements                                                           |  | 14
|ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS                  |  | 32
|ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                             |  | 53
|ITEM 4.
CONTROLS AND PROCEDURES                                                                                |  | 54
|                                                                                                               | 
|PART II 
OTHER INFORMATION                                                                                    |  | 56
|                                                                                                               | 
|ITEM 1.
LEGAL PROCEEDINGS                                                                                      |  | 56
|ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS                                                              |  | 57
|ITEM 3.
DEFAULTS UPON SENIOR SECURITIES                                                                        |  | 57
|ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                    |  | 57
|ITEM 5.
OTHER INFORMATION                                                                                      |  | 58
|ITEM 6.
EXHIBITS                                                                                               |  | 58
|                                                                                                               | 
|SIGNATURE                                                                                                      |  | 59



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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS



Certain statements contained herein, or otherwise made by our officers, including statements related to our future performance and our
outlook for our businesses and respective markets, projections, statements of our plans or objectives, forecasts of market trends and other matters, are forward-looking statements, and contain information relating to us that is based on our beliefs
as well as assumptions, made by, and information currently available to us. The words goal, anticipate, expect, believe, could, should, intend and similar
expressions as they relate to us are intended to identify forward-looking statements, although not all forward looking statements contain such identifying words. No assurance can be given that the results in any forward-looking statement will be
achieved. For the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements provided for in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended
and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions that could cause actual results
to differ materially from those reflected in the forward-looking statements. Factors that might cause such actual results to differ materially from those reflected in any forward-looking statements include, but are not limited to, the following:
(i) any inability to successfully implement our strategy; (ii) any inability to successfully implement our cost restructuring plans to achieve and maintain cost savings; (iii) any inability to comply with the Sarbanes-Oxley Act of
2002; (iv) any material adverse change in financial markets, the economy or in our financial position; (v) increased competition in our industry and the discounting of products by our competitors; (vi) new competition from
non-traditional competitors as the result of evolving and converging technology; (vii) any inability by us to procure, or any inability by us to continue to gain access to and successfully distribute current and new products, including digital
products, color products, multi-function products and high-volume copiers, or to continue to bring current products to the marketplace at competitive costs and prices; (viii) any inability to arrange financing for our customers purchases
of equipment from us; (ix) any inability to successfully enhance, unify and effectively utilize our management information systems; (x) any inability to access vendor or bank lines of credit, which could adversely affect our liquidity;
(xi) any inability to record and process key data due to ineffective implementation of business processes and policies; (xii) any negative impact from the loss of a key vendor or customer; (xiii) any negative impact from the loss of
any of our senior or key management personnel; (xiv) any change in economic conditions in markets where we operate or have material investments which may affect demand for our products or services; (xv) any negative impact from the
international scope of our operations; (xvi) fluctuations in foreign currencies; (xvii) any incurrence of tax liabilities or tax payments beyond our current expectations, which could adversely affect our liquidity and profitability;
(xviii) any inability to continue to access our credit facilities, or comply with the financial or other representations, warranties or covenants in our debt instruments; (xix) any delayed or lost sales or other impacts related to the
commercial and economic disruption caused by natural disasters, including hurricanes; (xx) any delayed or lost sales and other impacts related to the commercial and economic disruption caused by terrorist attacks, the related war on terrorism,
and the fear of additional terrorist attacks; (xxi) any inability by us to remediate our material weaknesses and (xxii) other risks including those risks identified in any of our filings with the Securities and Exchange Commission. Readers
are cautioned not to place undue reliance on these forward-looking statements, which reflect our analysis only as of the date they are made. Except as required by applicable law, we undertake no obligation, and do not intend, to update these
forward-looking statements to reflect events or circumstances that arise after the date they are made. Furthermore, as a matter of policy, we do not generally make any specific projections as to future earnings, nor do we endorse any projections
regarding future performance, which may be made by others outside our company.



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RISK FACTORS



Business StrategyDanka
Business Systems PLC (also referred to herein as Danka, the Company, we, us or our) believes that in order to stay competitive and generate positive earnings and cash flow, we must
successfully implement our strategies.



In connection with the implementation
of our strategies, we have launched, and expect to continue to launch, several operational and strategic initiatives. However, the success of any of these initiatives may not be achieved if:



| |  |  | we do not maintain adequate levels of liquidity to finance such initiatives;
| | - |  | ----------------------------------------------------------------------------



| |  |  | they are not accepted by our customers;
| | - |  | ---------------------------------------



| |  |  | they do not result in revenue growth, generate cash flow, reduce operating costs or reduce our working capital investments; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are unable to provide the hardware, software, solutions or services necessary to successfully implement these initiatives or other products are introduced to the marketplace
which result in our strategies being of less value to customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Failure to implement one or more of our strategies and related initiatives could materially and adversely affect our business, financial condition or results of operations.



Operating EarningsWe generated an operating loss for the first nine months of fiscal year 2006 due to decreased revenue and
gross margins and increased restructuring charges. The operating losses for the first nine months of fiscal year 2006 included $7.6 million in restructuring charges. If we are not able to increase our revenue and improve our gross margins or reduce
our operating costs, these operating losses may continue in the future. As we continue to evaluate our business and strategies, we could incur future operating losses and/or restructuring charges which may materially and adversely affect our
operations, financial position, liquidity and results of operations. If we incur operating losses or do not generate sufficient profitability in the future, our growth potential and our ability to execute our business strategy may be limited. In
addition, our ability to service our indebtedness may be impaired because we may not generate sufficient cash flow from operations to pay principal or interest when due.



Restructuring of OperationsWe have implemented plans to reduce costs in order to become more competitive within our industry.
These cost reduction plans involve, among other things, the outlay of cash for significant headcount reductions, the exit of certain non-strategic and non-core facilities, markets and products, the consolidation of many back-office functions into
more centralized locations and the outsourcing of resource management functions and business process changes. If we fail to successfully implement our cost restructuring plans, including the timely buyout or sublease of vacant facilities, and fail
to achieve our other long-term cost reduction goals, we may not reduce costs quickly enough to become more competitive within our industry or obtain necessary return on our cash investments. Additionally, we may lose valuable institutional
knowledge, bear the risk of additional costs and expenses and incur a breakdown in our business and operational functions, including certain critical back-office operations, any of which could result in negative consequences to our customer service,
our current internal control environment and operating results.



IndebtednessAt December 31, 2005, we had consolidated long-term indebtedness, including current maturities of long-term debt and notes payable, of $240.0 million which included $64.5 million in principal amount of 10.0%
subordinated notes due April 1, 2008 and $175.0 million in principal amount of 11.0% senior notes due June 15, 2010, less unamortized discount of $3.0 million. The subordinated notes accrue interest which is paid every six months on
April 1 and October 1 while the senior notes have interest payable every six months on June 15 and December 15.



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The amount of our indebtedness could have important consequences to us, including the
following:



| |  |  | use of a portion of our cash flow to pay interest on our indebtedness will reduce the availability of our cash flow and liquidity to fund working capital, capital expenditures,
strategic initiatives, restructuring and other business activities, including keeping pace with the technological, competitive and other changes currently affecting our industry;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase our vulnerability to general adverse economic and industry conditions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | limit our ability in making strategic acquisitions or exploiting business opportunities; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | limit our operational flexibility, including our ability to borrow additional funds, access our vendor credit lines, or dispose of assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



Debt and Credit FacilitiesThe indenture governing our senior notes and our $50
million senior secured revolving credit facility with Bank of America, who acquired Fleet Capital Corporation (or Fleet Credit Facility) contains representations, warranties and covenants that, among other things, limit our ability to:
(1) incur additional indebtedness or, in the case of our restricted subsidiaries, issue preferred stock; (2) create liens; (3) pay dividends or make other restricted payments; (4) make certain investments; (5) sell or make
certain dispositions of assets or engage in sale and leaseback transactions; (6) engage in transactions with affiliates; (7) engage in certain business activities; and (8) engage in mergers or consolidations. They also restrict the
ability of our restricted subsidiaries to pay dividends, or make other payments to us. In addition, the indenture governing the senior notes may require us to use a portion of our excess cash flow (as defined in the indenture) to repay other senior
indebtedness or offer to repurchase the senior notes.



CompetitionThe industry in which we operate is highly competitive. We have competitors in all markets in which we operate, and our competitors include a number of companies worldwide with significant technological, distribution
and financial resources. Competition in our industry is based upon many factors, including technology, performance, pricing, quality, reliability, distribution, market coverage, customer service and support and lease and rental financing. In
addition, our equipment suppliers have established themselves as direct competitors in many of the areas in which we do business, and non-traditional competitors, primarily printer manufacturers, are developing technologies designed to lower prices.



Besides competition from within the office imaging industry, we are also
experiencing competition from other sources as a result of evolving technology, including the development of alternative means of document processing, retention, storage and printing. Our retail equipment operations are in direct competition with
local and regional equipment suppliers and dealers, manufacturers, mass merchandisers and wholesale clubs. We have suffered, and may continue to suffer, a reduction of our market share because of the high level of competition in our industry. The
intense competition in our industry may result in pressure on the prices and margins that we can obtain for our products and may affect our ability to retain customers, both of which could materially and adversely affect our business, financial
condition or results of operations.



As our suppliers develop new products,
there is no guarantee that they will permit us to distribute such products or that such products will meet our customers needs and demands. In addition, some of our principal competitors design and manufacture new technology, which may give
them a competitive advantage over us.



Furthermore, there is a trend within our
industry to offer on-demand pricing where the customer does not buy or lease the equipment. Rather, the customer is only charged for the number of images produced by the equipment. This trend could require us to increase our rental equipment
investments in order to remain competitive and we may not have the capital available to do so.



Additionally, the competitive environment hinders employee retention, especially in the sales and service areas, which leads to higher turnover of employees, increased compensation expense and lower employee
productivity.



Vendor RelationshipsWe primarily have relationships
with Canon, Ricoh, Toshiba, Kodak, Hewlett-Packard and Konica-Minolta. These companies manufacture equipment, parts, supplies and software for resale by us in the markets in which we operate. We also rely on our equipment suppliers for related parts
and supplies, vendor rebates and significant levels of vendor financing for our purchases of products from them. Any inability to obtain equipment, parts, supplies or software in the volumes required and at competitive prices from our major vendors,
or the loss of any major vendor, or the discontinuation of vendor rebate programs or adequate levels of vendor financing may seriously harm our business because we may not be able to supply those vendors products to our customers on a timely
basis in sufficient quantities or at all. In addition, we rely on our vendors to effectively respond to changing technology and manufacture new products to meet the demands of evolving customer needs. There is no guarantee that these vendors or any
of our other vendors will effectively



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respond to changing technology, continue to sell their products and services to us, or that they will do so at
competitive prices. Other factors, including reduced access to credit by our vendors resulting from economic conditions, may impair our vendors ability to effectively respond to changing technology or provide products in a timely manner or at
competitive prices. We also rely on non-equipment vendors for critical services such as transportation, supply chain and professional services. Any negative impacts to our business or liquidity could adversely impact our ability to establish or
maintain these relationships.



Technological ChangesThe industry
in which we operate is characterized by rapidly changing technology. Technological changes have contributed to declines in our revenues in the past and may continue to do so in the future. For example, the office imaging industry has changed from
analog to digital copiers, multi-function peripherals (MFPs) and printers. Most of our digital products replaced analog products, which have historically been a significant percentage of our machines in field (MIF). Digital
copiers and MFPs are more reliable than analog copiers and require less maintenance. Moreover, color printing and copying represents an important and growing part of our industry. We must improve our execution of color equipment sales and meet the
demand for color products if we are to maintain and improve our operating performance and our ability to compete. To meet these trends, manufacturers are accelerating the introduction of products and new technology to address the growing need for
color. These include both cartridge based laser imaging systems, and newer inkjet based systems. Partially as a result of these technology trends, the industry and we are seeing increased downward pressure on average selling prices for both
equipment and the accompanying service and supply contracts. Furthermore, the success of the cartridge based systems may put further pressure on the willingness of our traditional customers to enter into long-term service contracts, or service
contracts at all.



Another industry change that has been fueled by
technological changes is the migration of copy volume from traditional stand-alone copiers to network printers. This change allows end users to print distributed documents on printers linked directly to their personal computers as opposed to
receiving copies of such documents that were copied on a traditional stand-alone copier. We will need to increasingly provide comprehensive solutions to our customers, such as offering digital copiers, MFPs, software solutions and printers that are
directly linked to their networks, in order to remain competitive. Finally, the speed of technological changes may cause us in the future to write down our inventory, including, but not limited to showroom, rental and other equipment and related
supplies and parts, including parts and supplies for our TechSource initiative, as a result of obsolescence. In order to remain competitive, we must quickly and effectively respond to changing technology. Otherwise, such developments of technologies
in our industry may impair our business, financial condition, results of operations or competitive position.



Third Party Financing ArrangementsA large majority of our retail equipment and related sales are financed by third party finance or leasing companies. We have an agreement with General Electric Capital
Corporation (or GECC), under which GECC has agreed to provide financing to our qualified United States customers to purchase equipment from us. Although we have other financing arrangements in place, GECC finances a significant part of
our United States business. GECC has current and prospective lease financing agreements with our competitors. If these agreements result in more favorable terms to our competitors than our current agreement with GECC, we may be placed at a
competitive disadvantage within the industry in arranging third party financing to our customers, which could negatively affect our operating results. With respect to our customers outside the United States, we have country by country arrangements
with various third party finance and leasing companies.



Our largest third
party financing company in Europe, which is centrally organized, is De Lage Landen International B.V. (DLL), a 100% owned subsidiary of Rabobank. In December, DLL issued notice of termination of its existing local operating agreements.
These terminations are effective June 2006. We are currently in discussions with DLL to negotiate new agreements on or before the expiration of the existing agreements. While we currently have meaningful alternative lease funding sources available
in most of Europe (including ING Group, BNP Paribas and GECC), failure to negotiate a new agreement with DLL could adversely impact our revenue and profitability as a change in lease companies can involve higher costs and early lease termination
penalties compared to the existing DLL agreements.



If we were to breach the
covenants or other restrictions in our agreements with one or more of our financing sources, including GECC and our non-U.S. leasing sources or our financial condition were to deteriorate, such sources might refuse to provide financing to our
customers, require additional security or protection, or exercise other remedies of default. If one or more of our financing sources were to fail to provide financing to our customers, and we were unable to arrange alternative financing on similar
terms or provide financing ourselves, those customers might be unable to purchase equipment from us. In addition, if we were unable to arrange financing, we would lose sales, which could negatively affect our operating results. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsOther Financing ArrangementsGeneral Electric Capital Corporation.



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Information SystemsCertain of our Europe/Australia operations run on numerous, disparate legacy IT systems
that are outdated and incompatible. The operation and coordination of these management information systems and billings systems are labor intensive and expensive. We have determined that we need to upgrade our information systems and have
standardized our network infrastructure and email system across Europe/Australia. Oracle has been implemented in Italy and the Netherlands, and other countries are planned to be upgraded from the existing legacy systems to the latest Oracle releases
where possible. The failure to solve our management information system issues in those Europe/Australia operations or any disruption in our business processes when we upgrade any of our IT systems worldwide could materially and adversely affect our
operations, internal controls, financial position or results of operations.



Disaster RecoveryOur systems in the United States are designed for security and reliability. We regularly back up our information systems and subject them to a virus scan. These efforts are intended to buttress the integrity
and security of our information systems and the data stored in them, and to minimize the potential for loss in the event of a disaster, including but not limited to natural disasters or terrorist attacks. During fiscal year 2005, we entered into a
hosting agreement with IBM for the management of our U.S. information systems infrastructure. This arrangement has relocated our data center out of Florida to a secure location in Atlanta, Georgia, which we believe has provided an additional
disaster recovery capability. Our facilities have reserve power generating systems to prevent the loss of power and minimize downtime in the event of shortages; however, should a natural disaster impact our critical United States facilities we may
suffer disruption of certain critical support functions.



Due to the delayed
investment in our information systems in certain of our Europe/Australia operations, we have not adequately invested in disaster recovery systems in all of our operations. In the event that one or more of our business systems in those operations
were to fail, we would be at risk of not being able to process or record transactions or losing valuable business knowledge in the locations where the failure occurred. We are developing a comprehensive disaster recovery plan but until it is
implemented, a disaster could materially and adversely affect our business, financial condition, results of operations or competitive position.



Business Processes and PoliciesOur past rapid expansion through acquisitions, past financial difficulties and a historical lack of focus on, and investment
in, our information systems have impeded our ability to develop and implement internal controls and business processes consistently and enforce policies effectively. We have identified instances where we do not have adequate processes in place or
our business processes and policies have not been properly implemented or followed in the past, which have resulted in, among other things, poor billing and credit practices, weak customer contract management, excessive and undisciplined issuances
of customer credits, inaccurate customer data, inconsistent customer contract terms and conditions, inadequate document retention and inconsistent lease classification. We believe that some of these issues that relate to the United States have been
addressed with the implementation of new internal control procedures and the continued implementation of our Oracle ERP system, which is configured with better system based internal controls. However, we have not adequately reduced the number of
manual processes necessary to run our business and, as a result, have not fully leveraged the new Oracle ERP system. Until we do so, there is no assurance that all of these issues will be completely rectified. See our discussion in Part I
Item 4-Controls and Procedures regarding material weaknesses in our Information Technology General Controls, as well as other business processes and policies.



International Scope of OperationsWe are incorporated under the laws of England and Wales, and we conduct a significant portion
of our business outside of the United States. We generated 52.7% and 52.2% of our revenue outside the United States during the third quarter and first nine months of fiscal year 2006, respectively. We market office imaging equipment, document
solutions and related services and supplies directly to customers in over 15 countries. The international scope of our operations may lead to volatile financial results and difficulties in managing our operations because of, but not limited to, the
following:



| |  |  | difficulties and costs of staffing, social responsibility and managing international operations;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | currency restrictions and exchange rate fluctuations;
| | - |  | -----------------------------------------------------



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | potentially adverse tax and tariff consequences;
| | - |  | ------------------------------------------------



| |  |  | the burden of complying with multiple and potentially conflicting laws and accounting regulations;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the impact of business cycles, including potentially longer payment cycles, in any particular region;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the geographic, time zone, language and cultural differences between personnel in different areas of the world;
| | - |  | ---------------------------------------------------------------------------------------------------------------



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| |  |  | greater difficulty in collecting accounts receivable in and moving cash out of certain countries;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the need for a significant amount of available cash to fund operations in a number of geographic and economically diverse locations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | political, social and economic instability in any particular region.
| | - |  | --------------------------------------------------------------------



With respect to our international operations that are experiencing difficulties as described above, we continue to evaluate the viability and future prospects of these
businesses. Based on these evaluations, we sold operations in Canada and Central and South America during the first nine months of fiscal year 2006, and sold operations in Portugal and Russia during fiscal year 2005. Should we decide to downsize or
exit any of our other businesses, we could incur costs relating to severance, closure of facilities and write-off of goodwill, and we may also be required to recognize cumulative translation losses and minimum pension liabilities that would reduce
our earnings.



Any of these factors could
materially and adversely affect our business, financial condition or results of operations.



Currency FluctuationsAs a multinational company, changes in currency exchange rates affect our revenues, cost of sales and operating expenses. In addition, fluctuations in exchange rates between the
United States dollar and the currencies in each of the countries in which we operate affect the results of our operations and the value of the net assets of our non-United States operations when reported in United States dollars in our United States
financial statements. These fluctuations may negatively impact our results of operations or financial condition or, in some circumstances, may positively impact our results of operations disproportionately to underlying levels of actual growth or
improvement in our businesses.



The majority of our revenues outside the United
States are denominated in either the euro or the British pound sterling. During the first nine months of fiscal year 2006, the euro weakened 8.7% against the United States dollar and the British pound sterling weakened 9.0% against the United States
dollar resulting in lower revenues.



Further, our intercompany loans are
subject to fluctuations in exchange rates between the United States dollar and the currencies in each of the countries in which we operate, primarily the euro and the British pound sterling. Based on the outstanding balance of our intercompany loans
at December 31, 2005, an increase of 1% in the exchange rate for the euro and British pound sterling versus the United States dollar would cause a foreign exchange loss of less than $0.1 million, while a decrease of 1% in the exchange rate of
the euro and the British pound sterling versus the U.S. dollar would cause a foreign exchange gain of less than $0.1 million.



Moreover, we pay for some inventory in euro countries in United States dollars, but we generally invoice our customers in such countries in euros. Generally, if the euro
weakens against the United States dollar, our operating margins and cash flow may be negatively impacted when we receive payment in euros but we pay our suppliers in United States dollars.



We do not currently hedge our exposure to changes in foreign
currency.



Tax PaymentsWe are either currently under audit or may
be audited in the key tax jurisdictions in which we operate. While we believe we are adequately reserved for such liabilities, should revenue agencies impose assessments or require payments in excess of those we currently expect to pay, we could be
required to record additional liabilities. Additionally, our liquidity could be adversely affected based upon the size and timing of such payments.



Economic UncertaintyThe profitability of our business is susceptible to uncertainties in the global economy. Overall demand for our products and services and
our profit margins may decline as a direct result of an economic recession, inflation, interest rates, governmental fiscal policy, or other macroeconomic factors which are out of our control. As a result, our customers may reduce or delay
expenditures for our products and services.



Disclosure Controls and
Procedures and Internal ControlsWe maintain disclosure controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our Audit Committee and management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. Our objective is to maintain internal controls that are designed to provide reasonable assurance that (1) our transactions are properly authorized; (2) our
assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, in order to permit the preparation of our financial statements in conformity with generally accepted accounting principles
and to comply with Sections 302, 906 and 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act or Sarbanes-Oxley).



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A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of errors or fraud, if any, within a company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more individuals, by collusion of two or more individuals, or
by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Further, because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.



Compliance with Sarbanes-Oxley Act of 2002During fiscal year 2005, we completed the process of documenting and testing our internal control procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the design and effectiveness of our internal control over financial reporting and a report by our Independent Registered Certified Public Accounting Firm
addressing these assessments.



We have
identified material weaknesses in the following areas:



| |  |  | Information Technology General Controls;
| | - |  | ----------------------------------------



| |  |  | Revenue and Billing Process;
| | - |  | ----------------------------



| |  |  | Financial Statement Close Process;
| | - |  | ----------------------------------



| |  |  | Inventory and Rental Assets; and
| | - |  | --------------------------------



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



Our efforts to remediate our material weaknesses include significant changes to our business processes (i.e. simplified customer offerings, outsourcing of non-core processes, etc.). These changes in business processes
may result in temporary or permanently decreased revenues, system downtime and higher costs during the period of change.



We are committed to addressing these material weaknesses. However, if we are unsuccessful in our focused effort to permanently and effectively remediate these material
weaknesses, or otherwise fail to maintain adequate internal controls over financial reporting, our ability to accurately and timely report our financial condition may be adversely impacted. In addition, if we do not remediate these weaknesses we
will not be able to conclude, pursuant to Section 404 of the Sarbanes-Oxley Act and Item 308 of Regulation S-K, that our internal controls over financial reporting are effective in the current fiscal year. It is not possible to say at this
time what conclusions our management or independent registered public accounting firm might reach with respect to the effectiveness of our internal controls over financial reporting at the end of this current fiscal year. In the event of
non-compliance, we may lose the trust of our customers, suppliers and security holders, and our stock price could be adversely impacted. For more information, see Controls and Procedures in Part I Item 4 of this report and
Item 9A. Controls and Procedures, included in the Companys Form 10-K for the fiscal year ended March 31, 2005.



Compliance with this legislation will continue to divert managements attention and resources and is expected to cause us to incur significant expense in the
foreseeable future.



Share PriceThe market price of our ordinary
shares and American Depositary Shares (or ADSs) could be subject to significant fluctuations as a result of many factors. In addition, global stock markets have from time to time experienced significant price and volume fluctuations.
These fluctuations may lead to a drop in the market price of our ordinary shares and ADSs. Factors which may add to the volatility of the price of our ordinary shares and ADSs include many of the factors set out above, and may also include changes
in liquidity in the market for our ordinary shares and ADSs, sales of our ordinary shares and ADSs, investor sentiment towards the business sector in which we operate and conditions in the capital markets generally. Many of these factors are beyond
our control. These factors may change the market price of our ordinary shares and ADSs, regardless of our operating performance.



Dividends on Ordinary SharesWe have not paid any cash or other dividends on our ordinary shares since 1998 and we do not expect to do so for the foreseeable
future. We are an English company and, under English law, we are allowed to pay



9



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##### Table of Contents

dividends to shareholders only if, as determined by reference to our financial statements prepared in accordance with
International Financial Reporting Standards;



| |  |  | we have accumulated, realized profits that have not been previously distributed or capitalized, in excess of our accumulated, realized losses that have not previously been written
off in a reduction or reorganization of capital; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our net assets are not less than the aggregate of our share capital and our non-distributable reserves, either before or as a result of the dividend.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



As of the date of filing of this quarterly report, we have insufficient accumulated, realized
profits to pay dividends on our ordinary shares. In addition, our Fleet Credit Facility prohibits us from paying dividends on our ordinary shares without our lenders consent, and the indenture governing the senior notes restricts our ability
to pay such dividends. Also, we may only pay dividends on our ordinary shares if we have paid all dividends due on our 6.50% senior convertible participating shares.



ADDITIONAL INFORMATION AVAILABLE ON COMPANY WEB-SITE



Our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports may
be viewed, downloaded electronically or printed from our website: http://www.danka.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our recent press releases are also available
to be viewed or downloaded electronically at http://www.danka.com. We will also provide electronic or paper copies of our SEC filings free of charge on request. Any information on or linked from our website is not incorporated by reference
into this Quarterly Report on Form 10-Q.



10



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. Consolidated Condensed Financial Statements



Danka Business Systems PLC

Consolidated Condensed Statements of Operations for the Three and Nine Months
Ended December 31, 2005 and 2004

(In thousands, except per American Depositary Share (ADS) amounts)

(Unaudited)



|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | Three months ended December 31 |         |   | Nine months ended December 31 |  
|                                                                                   |  | 2005                           |         |   | 2004                          |   |         | 2005 |  |   | 2004    |  
|Revenue:                                                                           |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Retail equipment and related sales                                                 |  | $                              | 100,168 |   |                               | $ | 107,065 |      |  | $ | 317,688 |   |  | $ | 311,925 |  
|Retail service                                                                     |  |                                | 120,907 |   |                               |   | 141,080 |      |  |   | 376,507 |   |  |   | 431,072 |  
|Retail supplies and rentals                                                        |  |                                | 19,353  |   |                               |   | 23,074  |      |  |   | 62,089  |   |  |   | 69,615  |  
|Wholesale                                                                          |  |                                | 25,033  |   |                               |   | 25,354  |      |  |   | 68,490  |   |  |   | 70,019  |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total revenue                                                                      |  |                                | 265,461 |   |                               |   | 296,573 |      |  |   | 824,774 |   |  |   | 882,631 |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Cost of sales:                                                                     |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Retail equipment and related sales costs                                           |  |                                | 68,495  |   |                               |   | 68,709  |      |  |   | 219,866 |   |  |   | 202,500 |  
|Retail service costs                                                               |  |                                | 79,584  |   |                               |   | 85,761  |      |  |   | 240,294 |   |  |   | 254,746 |  
|Retail supplies and rental costs, including depreciation on rental assets          |  |                                | 11,857  |   |                               |   | 13,762  |      |  |   | 38,379  |   |  |   | 41,555  |  
|Wholesale costs                                                                    |  |                                | 21,037  |   |                               |   | 21,448  |      |  |   | 56,512  |   |  |   | 57,877  |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total cost of sales                                                                |  |                                | 180,973 |   |                               |   | 189,680 |      |  |   | 555,051 |   |  |   | 556,678 |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                                                       |  |                                | 84,488  |   |                               |   | 106,893 |      |  |   | 269,723 |   |  |   | 325,953 |  
|Operating expenses:                                                                |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Selling, general and administrative expenses                                       |  |                                | 79,759  |   |                               |   | 109,176 |      |  |   | 272,626 |   |  |   | 314,717 |  
|Restructuring charges (credits)                                                    |  |                                | (106    | ) |                               |   | (385    | )    |  |   | 7,578   |   |  |   | (1,746  | )
|Other expense (income)                                                             |  |                                | (176    | ) |                               |   | 1,515   |      |  |   | (315    | ) |  |   | 1,833   |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                           |  |                                | 79,477  |   |                               |   | 110,306 |      |  |   | 279,889 |   |  |   | 314,804 |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations                               |  |                                | 5,011   |   |                               |   | (3,413  | )    |  |   | (10,166 | ) |  |   | 11,149  |  
|Interest expense                                                                   |  |                                | (7,922  | ) |                               |   | (8,060  | )    |  |   | (23,896 | ) |  |   | (22,877 | )
|Interest income                                                                    |  |                                | 209     |   |                               |   |        |      |  |   | 349     |   |  |   | 73      |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes                     |  |                                | (2,702  | ) |                               |   | (11,473 | )    |  |   | (33,713 | ) |  |   | (11,655 | )
|Provision (benefit) for income taxes                                               |  |                                | (11,100 | ) |                               |   | (16,888 | )    |  |   | (9,049  | ) |  |   | (16,706 | )
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                         |  |                                | 8,398   |   |                               |   | 5,415   |      |  |   | (24,664 | ) |  |   | 5,051   |  
|Earnings (loss) from discontinued operations, net of tax                           |  |                                |        |   |                               |   | (959    | )    |  |   | (1,306  | ) |  |   | (2,014  | )
|Gain (loss) on sale of discontinued operations, net of tax                         |  |                                | (63     | ) |                               |   |        |      |  |   | (30,322 | ) |  |   |        |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss)                                                                |  | $                              | 8,335   |   |                               | $ | 4,456   |      |  | $ | (56,292 | ) |  | $ | 3,037   |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss) attributable to common shareholders                            |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss) from continuing operations                                     |  | $                              | 8,398   |   |                               | $ | 5,415   |      |  | $ | (24,664 | ) |  | $ | 5,051   |  
|Dividends and accretion on participating shares                                    |  |                                | (5,439  | ) |                               |   | (5,111  | )    |  |   | (16,114 | ) |  |   | (15,108 | )
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss) from continuing operations attributable to common shareholders |  | $                              | 2,959   |   |                               | $ | 304     |      |  | $ | (40,778 | ) |  | $ | (10,057 | )
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net earnings (loss) attributable to common shareholders per ADS: |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss) from continuing operations                                     |  | $                              | 0.05    |   |                               | $ | 0.01    |      |  | $ | (0.64   | ) |  | $ | (0.16   | )
|Net earnings (loss) from discontinued operations                                   |  |                                | 0.00    |   |                               |   | (0.02   | )    |  |   | (0.50   | ) |  |   | (0.03   | )
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss)                                                                |  | $                              | 0.05    |   |                               | $ | (0.01   | )    |  | $ | (1.14   | ) |  | $ | (0.19   | )
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Weighted average ADSs                                                              |  |                                | 64,122  |   |                               |   | 63,185  |      |  |   | 63,778  |   |  |   | 62,938  |  
|                                                                                   |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  



The accompanying
notes are an integral part of these consolidated condensed financial statements



11



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##### Table of Contents

Danka Business Systems PLC

Consolidated Condensed Balance Sheets as of December 31, 2005 and
March 31, 2005

(In thousands except per share data)



|                                                                                          |  |                   |          |   |                |   |          |  
|----------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | -------------- | - | -------- | -
|                                                                                          |  | December 31, 2005 |          |   | March 31, 2005 |  
|                                                                                          |  | (Unaudited)       |          |   |                |  
|Assets                                                                                    |  |                   |          |   |                |   |          |  
|Current assets:                                                                           |  |                   |          |   |                |   |          |  
|Cash and cash equivalents, including restricted cash of $12,150 and $14,956, respectively |  | $                 | 50,715   |   |                | $ | 91,925   |  
|Accounts receivable, net of allowance for doubtful accounts                               |  |                   | 191,640  |   |                |   | 211,415  |  
|Inventories                                                                               |  |                   | 90,540   |   |                |   | 91,029   |  
|Assets held for sale  discontinued operations                                            |  |                   |         |   |                |   | 43,177   |  
|Prepaid expenses, deferred income taxes and other current assets                          |  |                   | 12,673   |   |                |   | 14,690   |  
|                                                                                          |  |                   |          |   |                |   |          |  
|Total current assets                                                                      |  |                   | 345,568  |   |                |   | 452,236  |  
|Equipment on operating leases, net                                                        |  |                   | 13,078   |   |                |   | 19,157   |  
|Property and equipment, net                                                               |  |                   | 38,981   |   |                |   | 49,225   |  
|Goodwill                                                                                  |  |                   | 203,448  |   |                |   | 213,531  |  
|Other intangible assets, net of accumulated amortization                                  |  |                   | 1,948    |   |                |   | 2,406    |  
|Deferred income taxes                                                                     |  |                   | 1,477    |   |                |   | 8,946    |  
|Other assets                                                                              |  |                   | 19,075   |   |                |   | 23,525   |  
|                                                                                          |  |                   |          |   |                |   |          |  
|Total assets                                                                              |  | $                 | 623,575  |   |                | $ | 769,026  |  
|                                                                                          |  |                   |          |   |                |   |          |  
|Liabilities and shareholders equity (deficit)                                            |  |                   |          |   |                |   |          |  
|Current liabilities:                                                                      |  |                   |          |   |                |   |          |  
|Current maturities of long-term debt and notes payable                                    |  | $                 | 1,713    |   |                | $ | 2,308    |  
|Accounts payable                                                                          |  |                   | 150,892  |   |                |   | 167,292  |  
|Accrued expenses and other current liabilities                                            |  |                   | 79,722   |   |                |   | 122,546  |  
|Taxes payable                                                                             |  |                   | 32,868   |   |                |   | 36,249   |  
|Liabilities held for sale  discontinued operations                                       |  |                   |         |   |                |   | 14,403   |  
|Deferred revenue                                                                          |  |                   | 33,950   |   |                |   | 37,772   |  
|                                                                                          |  |                   |          |   |                |   |          |  
|Total current liabilities                                                                 |  |                   | 299,145  |   |                |   | 380,570  |  
|Long-term debt and notes payable, less current maturities                                 |  |                   | 238,315  |   |                |   | 239,406  |  
|Deferred income taxes and other long-term liabilities                                     |  |                   | 47,253   |   |                |   | 65,831   |  
|                                                                                          |  |                   |          |   |                |   |          |  
|Total liabilities                                                                         |  |                   | 584,713  |   |                |   | 685,807  |  
|                                                                                          |  |                   |          |   |                |   |          |  
|6.5% senior convertible participating shares                                              |  |                   | 316,020  |   |                |   | 299,906  |  
|Shareholders equity (deficit):                                                           |  |                   |          |   |                |   |          |  
|Ordinary shares, 1.25 pence stated value                                                  |  |                   | 5,329    |   |                |   | 5,277    |  
|Additional paid-in capital                                                                |  |                   | 329,716  |   |                |   | 329,152  |  
|Accumulated deficit                                                                       |  |                   | (568,362 | ) |                |   | (495,960 | )
|Accumulated other comprehensive loss                                                      |  |                   | (43,841  | ) |                |   | (55,156  | )
|                                                                                          |  |                   |          |   |                |   |          |  
|Total shareholders equity (deficit)                                                      |  |                   | (277,158 | ) |                |   | (216,687 | )
|                                                                                          |  |                   |          |   |                |   |          |  
|Total liabilities and shareholders equity (deficit)                                      |  | $                 | 623,575  |   |                | $ | 769,026  |  
|                                                                                          |  |                   |          |   |                |   |          |  



The accompanying
notes are an integral part of these consolidated condensed financial statements



12



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##### Table of Contents

Danka Business Systems PLC

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended
December 31, 2005 and 2004

(In thousands)

(Unaudited)



|                                                                                                     |  |                   |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                     |  | Nine Months Ended |        
|                                                                                                     |  | December 31, 2005 |         |   | December 31, 2004 |  
|Operating activities:                                                                                |  |                   |         |   |                   |   |         |  
|Net earnings (loss)                                                                                  |  | $                 | (56,292 | ) |                   | $ | 3,037   |  
|Loss from discontinued operations                                                                    |  |                   | (31,628 | ) |                   |   | (2,014  | )
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Earnings (loss) from continuing operations                                                           |  |                   | (24,664 | ) |                   |   | 5,051   |  
|Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |  |                   |         |   |                   |   |         |  
|Depreciation and amortization                                                                        |  |                   | 22,083  |   |                   |   | 26,470  |  
|Deferred income taxes                                                                                |  |                   | 1,464   |   |                   |   | 251     |  
|Amortization of debt issuance costs                                                                  |  |                   | 1,585   |   |                   |   | 1,554   |  
|Loss on sale of property & equipment and equipment on operating leases                               |  |                   | 1,033   |   |                   |   | 791     |  
|Proceeds from sale of equipment on operating leases                                                  |  |                   | 575     |   |                   |   | 2,950   |  
|Restructuring charges (credits)                                                                      |  |                   | 7,578   |   |                   |   | (1,746  | )
|Changes in net assets and liabilities:                                                               |  |                   |         |   |                   |   |         |  
|Accounts receivable                                                                                  |  |                   | 21,175  |   |                   |   | (5,617  | )
|Inventories                                                                                          |  |                   | 489     |   |                   |   | (25,279 | )
|Prepaid expenses and other current assets                                                            |  |                   | 562     |   |                   |   | (1,684  | )
|Other non-current assets                                                                             |  |                   | 5,126   |   |                   |   | (20     | )
|Accounts payable                                                                                     |  |                   | (16,399 | ) |                   |   | 33,049  |  
|Accrued expenses and other current liabilities                                                       |  |                   | (56,487 | ) |                   |   | (41,329 | )
|Deferred revenue                                                                                     |  |                   | (3,821  | ) |                   |   | (829    | )
|Other long-term liabilities                                                                          |  |                   | (11,007 | ) |                   |   | (3,429  | )
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net cash used in continuing operations                                                               |  |                   | (50,708 | ) |                   |   | (9,817  | )
|Net cash provided by (used in) discontinued operations                                               |  |                   | 359     |   |                   |   | (679    | )
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net cash used in operating activities                                                                |  |                   | (50,349 | ) |                   |   | (10,496 | )
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Investing activities:                                                                                |  |                   |         |   |                   |   |         |  
|Capital expenditures                                                                                 |  |                   | (8,205  | ) |                   |   | (13,163 | )
|Purchase of subsidiary, net of cash acquired                                                         |  |                   |        |   |                   |   | (2,110  | )
|Proceeds from sale of discontinued operations, net of cash                                           |  |                   | 16,924  |   |                   |   | 209     |  
|Proceeds from the sale of property and equipment                                                     |  |                   | 208     |   |                   |   | 313     |  
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net cash provided by (used in) continuing investing activities                                       |  |                   | 8,927   |   |                   |   | (14,751 | )
|Net cash used in discontinued investing activities                                                   |  |                   | (456    | ) |                   |   | (2,787  | )
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net cash provided by (used in) investing activities                                                  |  |                   | 8,471   |   |                   |   | (17,538 | )
|Financing activities:                                                                                |  |                   |         |   |                   |   |         |  
|(Payments) borrowings under line of credit agreements, net                                           |  |                   | (205    | ) |                   |   | 986     |  
|Payments under capital lease arrangements                                                            |  |                   | (1,741  | ) |                   |   | (1,281  | )
|Proceeds from stock options exercised                                                                |  |                   | 619     |   |                   |   | 880     |  
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net cash (used in) provided by continuing financing activities                                       |  |                   | (1,327  | ) |                   |   | 585     |  
|Net cash used in discontinued financing activities                                                   |  |                   | (99     | ) |                   |   | (331    | )
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net cash (used in) provided by financing activities                                                  |  |                   | (1,426  | ) |                   |   | 254     |  
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Effect of exchange rates                                                                             |  |                   | (4,097  | ) |                   |   | 4,244   |  
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Net decrease in cash and cash equivalents                                                            |  |                   | (47,401 | ) |                   |   | (23,536 | )
|Cash and cash equivalents from continuing operations, beginning of period                            |  |                   | 91,925  |   |                   |   | 106,854 |  
|Cash and cash equivalents from discontinued operations, beginning of period                          |  |                   | 6,191   |   |                   |   | 5,936   |  
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Cash and cash equivalents, end of period                                                             |  | $                 | 50,715  |   |                   | $ | 89,254  |  
|                                                                                                     |  |                   |         |   |                   |   |         |  
|Supplemental disclosures - cash flow information:                                                    |  |                   |         |   |                   |   |         |  
|Interest paid                                                                                        |  | $                 | 29,043  |   |                   | $ | 28,127  |  
|Income taxes paid                                                                                    |  |                   | 1,183   |   |                   |   | 3,680   |  



The accompanying
notes are an integral part of these consolidated condensed financial statements



13



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##### Table of Contents

Danka Business Systems PLC

Notes to Consolidated Condensed Financial Statements

(All tables in thousands, except per American Depositary (ADS) amounts)

(Unaudited)



Note 1. Basis of Presentation



The accompanying condensed
financial statements of Danka Business Systems PLC (the Company) are unaudited as of and for the three and nine months ended December 31, 2005 and 2004. In the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results which may be
expected for the entire fiscal year. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for the
year ended March 31, 2005. Accordingly, the results of operations for the interim periods are not necessarily indicative of the results which may be expected for the entire fiscal year.



The condensed financial statements contained herein as of and for the three and nine months
ended December 31, 2005 and December 31, 2004 do not comprise statutory accounts within the meaning of Section 240 of the United Kingdom Companies Act 1985. Statutory accounts for the year ended March 31, 2005 were delivered to
the Registrar of Companies for England and Wales following the Companys 2005 annual general meeting. The independent auditors report on those statutory accounts was unqualified and did not contain a statement under Section 237(2) or
237(3) of the United Kingdom Companies Act 1985.



For the nine months ended
December 31, 2005, selling, general and administrative expenses included the following:



| |  |  | A charge of $2.9 million relating to the correction of an error in the accounting for long-lived assets at March 31, 2005 which was recorded in the first quarter. This adjustment
was not material to the previously reported results for the year ended March 31, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A reduction of $3.2 million for overpayments and $1.7 million of over accruals for workers compensation insurance for prior periods. These credits were recorded in the third
quarter. These adjustments were not material to the previously reported results for any of the prior periods affected.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credits of $5.5 million related to prior years sales tax recoveries in the United States, of which $2.2 million was recorded in the third quarter and $3.3 million was recorded
in the second quarter.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain
prior year amounts have been reclassified to conform to current year presentations.



Note 2. Interim Period Stock Compensation Disclosures



As
permitted by SFAS 123, Accounting for Stock-Based Compensation (SFAS 123), the Company continues to account for its stock option plans under the intrinsic value recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations. As the exercise price of all options granted under these plans was equal to the market price of the underlying common stock on the grant date, no
stock-based employee compensation cost on these options is recognized in net earnings (loss). In general, these options expire in ten years and vest over three years. The proceeds from options exercised are credited to shareholders equity.



The following table illustrates the effect on net earnings (loss) attributable
and earnings (loss) attributable per ADS shareholder if the Company had applied the fair value recognition provisions of SFAS No.123 to employee stock benefits, including shares and options issued under the stock option plans. For purposes of this
pro-forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the options vesting periods.



14



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##### Table of Contents

|                                                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                        |  | Three months ended December 31, |        |   | Nine months ended December 31, |  
|                                                                                                                                        |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004    |  
|Net earnings (loss) from continuing operations, as reported                                                                             |  | $                               | 8,398  |   |                                | $ | 5,415  |      |  | $ | (24,664 | ) |  | $ | 5,051   |  
|Less: total stock-based employee compensation expense determined under the fair value provisions of SFAS 123 for all awards, net of
tax |  |                                 | (771   | ) |                                |   | (908   | )    |  |   | (2,706  | ) |  |   | (3,580  | )
|                                                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Pro forma earnings (loss) from continuing operations                                                                                    |  |                                 | 7,627  |   |                                |   | 4,507  |      |  |   | (27,370 | ) |  |   | 1,471   |  
|Dividends and accretion on participating shares                                                                                         |  |                                 | (5,439 | ) |                                |   | (5,111 | )    |  |   | (16,114 | ) |  |   | (15,108 | )
|                                                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Pro forma earnings (loss) from continuing operations attributable to common shareholders                                                |  |                                 | 2,188  |   |                                |   | (604   | )    |  |   | (43,484 | ) |  |   | (13,637 | )
|Earnings (loss) from discontinued operations                                                                                            |  |                                 | (63    | ) |                                |   | (959   | )    |  |   | (31,628 | ) |  |   | (2,014  | )
|                                                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net earnings (loss) attributable to common shareholders                                                                       |  | $                               | 2,125  |   |                                | $ | (1,563 | )    |  | $ | (75,112 | ) |  | $ | (15,651 | )
|                                                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted earnings (loss) from continuing operations attributable to common shareholders per ADS                                |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                                                                             |  | $                               | 0.05   |   |                                | $ | 0.01   |      |  | $ | (0.64   | ) |  | $ | (0.16   | )
|Pro forma                                                                                                                               |  |                                 | 0.03   |   |                                |   | (0.01  | )    |  |   | (0.68   | ) |  |   | (0.22   | )
|Basic and diluted net earnings (loss) attributable to common shareholders per ADS                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                                                                             |  | $                               | 0.05   |   |                                | $ | (0.01  | )    |  | $ | (1.14   | ) |  | $ | (0.19   | )
|Pro forma                                                                                                                               |  |                                 | 0.03   |   |                                |   | (0.02  | )    |  |   | (1.18   | ) |  |   | (0.25   | )
|Weighted average ADS                                                                                                                    |  |                                 | 64,122 |   |                                |   | 63,185 |      |  |   | 63,778  |   |  |   | 62,938  |  



Note 3. Recent Accounting
Pronouncements



In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R), an amendment of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS 123R eliminates the
ability to account for share-based payments using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and instead requires companies to recognize compensation expense using a fair-value based method
for costs related to share-based payments, including stock options. The expense will be measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable
service period. In the absence of an observable market price for a share-based award, the fair value would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected
term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate.



The requirements of SFAS No. 123R are effective for the Companys fiscal year
beginning April 1, 2006. Early adoption of the provisions of SFAS No. 123R is encouraged, but not required. At meetings held on January 30 and 31, 2006, the Human Resources Committee of the Board of Directors and the Board of
Directors of the Company approved the acceleration of the vesting of all Company stock options outstanding as of January 31, 2006. The acceleration of the options is to take place on or before March 31, 2006. The purpose of the accelerated
vesting is to enable the Company to avoid recognizing in its income statement compensation expense associated with these options in future periods, due to the adoption of SFAS No. 123R. The pre-tax charge to be avoided upon adoption of SFAS
No. 123R is expected to be approximately $2.1 million and represents the fair value of the unvested awards as of the date of the acceleration as determined under SFAS No. 123. As a result of the accelerated vesting, approximately
2.3 million shares with varying remaining vesting schedules will become immediately exercisable. In order to help avoid unintended personal benefits to holders of the accelerated options, any shares received through exercise of accelerated
options may not be sold by the option holder until the original vesting date of the accelerated option or the termination of the employment of the option holder, whichever occurs first. In connection with the accelerated vesting, each option
agreement underlying such options will be amended.



The Company expects the
adoption of SFAS No. 123R will have an unfavorable impact for all future grants on its consolidated results of operations and net income per common share. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current guidelines. This requirement may reduce the Companys net operating cash flows and increase net financing cash flows in
periods after adoption. The Company cannot estimate what those amounts will be in the future because they depend on, among other things, when employees exercise stock options.



15



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##### Table of Contents

All grants after March 31, 2006 will be valued using a binomial pricing model and the Company will recognize the
associated expense over the vesting period based on the fair values determined by the binomial pricing model using the accelerated attribution method.



In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections (SFAS 154), which requires retrospective
application to prior periods financial statements of every voluntary change in accounting principle unless it is impracticable to do so. SFAS 154 replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate the
adoption of SFAS 154 to have a material impact on its consolidated financial statements.



Note 4. Comprehensive Income (Loss)



Comprehensive income (loss) consisted of the following for the three and nine months ended December 31, 2005 and 2004:



|                                                          |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|--------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                          |  | Three months ended December 31, |        | Nine months ended December 31,
|                                                          |  | 2005                            |        |                                | 2004 |   | 2005   |  |   | 2004   
|Net earnings (loss)                                       |  | $                               | 8,335  |                                |      | $ | 4,456  |  | $ | (56,292 | ) |  | $ | 3,037 
|Net foreign currency translation adjustment, net of taxes |  |                                 | (2,790 | )                              |      |   | 22,801 |  |   | (12,513 | ) |  |   | 24,663
|                                                          |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Comprehensive income (loss)                               |  | $                               | 5,545  |                                |      | $ | 27,257 |  | $ | (68,805 | ) |  | $ | 27,700
|                                                          |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       



Note 5. Restructuring Charges
(Credits)



Fiscal Year 2005 Plan:In fiscal year 2005, the Company
formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions and exiting certain facilities. These charges were
accounted for under the provisions of Statement of Financial Accounting Standards No. 112, Employers Accounting for Postemployment Benefits (SFAS 112) and Statement of Financial Accounting Standards No. 146,
Accounting for Cost Associated with Exit or Disposal Activities (SFAS 146).



As part of these plans, the Company recorded a $7.4 million restructuring charge in the first nine months of fiscal year 2006. Cash outlays for severance and facilities during the nine month period were $8.0 million.
The other non-cash changes of $0.9 million represent foreign currency adjustments.



In the three months ended December 31, 2005, the Company recorded a $1.3 million restructuring charge comprised primarily of severance charges in the United States due to additional cost reduction efforts. This charge was offset by a
reduction in severance charges in Europe/Australia of $1.4 million due to favorable severance negotiations and employee attrition. Cash outlays for the employee severance and facilities during the three month period were $3.1 million.



The Company expects to incur approximately $1.0 million to $3.0 million in restructuring
charges relating to the fiscal year 2005 plan over the next quarter.



The
remaining liability of the 2005 Plan restructuring charge of $5.2 million and $3.7 million is categorized within Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities,
respectively.



16



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##### Table of Contents

The following table summarizes the fiscal year 2005 Plan restructuring charge:



2005 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | ------------ | ----- |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |       |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|Severance                                     |  | $                                         | 12,828 |                           | $ | 10,007                      |  | $            | 6,983 |  | $                      | (7,805 | ) |                              | $ | (688 | ) |  | $ | 8,497
|Future lease obligations on facility closures |  |                                           | 934    |                           |   | 367                         |  |              | 391   |  |                        | (233   | ) |                              |   | (167 | ) |  |   | 358  
|                                              |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      
|Total                                         |  | $                                         | 13,762 |                           | $ | 10,374                      |  | $            | 7,374 |  | $                      | (8,038 | ) |                              | $ | (855 | ) |  | $ | 8,855
|                                              |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      



2005 Plan Restructuring Severance
Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | ------------ | ----- |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                 |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |       |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|United States    |  | $                                         | 3,542  |                           | $ | 2,687                       |  | $            | 2,533 |  | $                      | (3,790 | ) |                              | $ |     |   |  | $ | 1,430
|Europe/Australia |  |                                           | 9,286  |                           |   | 7,320                       |  |              | 4,450 |  |                        | (4,015 | ) |                              |   | (688 | ) |  |   | 7,067
|                 |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      
|Total            |  | $                                         | 12,828 |                           | $ | 10,007                      |  | $            | 6,983 |  | $                      | (7,805 | ) |                              | $ | (688 | ) |  | $ | 8,497
|                 |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      



2005 Plan Restructuring Facility
Charge by Operating Segment:



|                 |  |                                           |     |                           |   |                             |  |              |     |  |                        |      |   |                              |   |      |   |  |   |    
|---------------- |  | ----------------------------------------- | --- | ------------------------- | - | --------------------------- |  | ------------ | --- |  | ---------------------- | ---- | - | ---------------------------- | - | ---- | - |  | - | ---
|                 |  | Cumulative Expense through March 31, 2005 |     | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |     |  | Other Non-Cash Changes |      |   | Reserve at December 31, 2005
|United States    |  | $                                         | 615 |                           | $ |                            |  | $            | 293 |  | $                      | (151 | ) |                              | $ |     |   |  | $ | 142
|Europe/Australia |  |                                           | 319 |                           |   | 367                         |  |              | 98  |  |                        | (82  | ) |                              |   | (167 | ) |  |   | 216
|                 |  |                                           |     |                           |   |                             |  |              |     |  |                        |      |   |                              |   |      |   |  |   |    
|Total            |  | $                                         | 934 |                           | $ | 367                         |  | $            | 391 |  | $                      | (233 | ) |                              | $ | (167 | ) |  | $ | 358
|                 |  |                                           |     |                           |   |                             |  |              |     |  |                        |      |   |                              |   |      |   |  |   |    



Fiscal Year 2004 Plan:In
fiscal year 2004, the Company formulated plans to significantly reduce its selling, general and administrative costs by consolidating the back-office functions in the United States, exiting non-strategic real estate facilities and reducing headcount
in the United States and Europe/Australia. These charges were accounted for under the provisions of SFAS 112 and SFAS 146.



As part of these plans, the Company recorded a $50.6 million restructuring charge in fiscal year 2004 that included $26.9 million related to severance for employees and
$23.7 million related to future lease obligations for facilities that were vacated by March 31, 2004. The Company reversed $3.6 million of fiscal year 2004 Plan severance and facility charges during fiscal year 2005 as a result of employee
attrition in its United States and Europe/Australia segments, and a change in restructuring plans in Europe/Australia due to improved performance in certain markets partially offset by a higher estimate of facility charges in the United States due
to the Companys inability to sublease the facilities.



Cash outlays for
facilities for the three and nine months ending December 31, 2005 were $1.3 million and $6.3 million, respectively. The Company incurred $0.5 million of fiscal year 2004 Plan facility charges during fiscal year 2006, as a result of broker
commissions paid in the United States due to the sub-lease of certain facilities. If remaining leases are not terminated, payments will continue through their respective terms.



Cash outlays for employee severance during the three and nine month period were $0.3 million and $2.0 million, respectively. In addition,
the Company reversed $0.3 million of severance costs during the nine month period due to employee attrition. The remaining non-cash change of $0.4 million represents foreign currency adjustments.



17



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##### Table of Contents

The remaining liability of the 2004 Plan restructuring charge of $4.3 million and $2.9 million is categorized within
Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities, respectively.



The following table summarizes the fiscal year 2004 Plan restructuring charge:



2004 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | - | ------------ | - |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|Severance                                     |  | $                                         | 21,418 |                           | $ | 3,117                       |  | $ | (286         | ) |  | $                      | (1,968 | ) |                              | $ | (159 | ) |  | $ | 704  
|Future lease obligations on facility closures |  |                                           | 25,634 |                           |   | 12,606                      |  |   | 490          |   |  |                        | (6,306 | ) |                              |   | (258 | ) |  |   | 6,532
|                                              |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |      
|Total                                         |  | $                                         | 47,052 |                           | $ | 15,723                      |  | $ | 204          |   |  | $                      | (8,274 | ) |                              | $ | (417 | ) |  | $ | 7,236
|                                              |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |      



2004 Plan Restructuring Severance
Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |    
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | - | ------------ | - |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | ---
|                 |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|United States    |  | $                                         | 7,597  |                           | $ | 313                         |  | $ | (101         | ) |  | $                      | (212   | ) |                              | $ |     |   |  | $ |   
|Europe/Australia |  |                                           | 13,773 |                           |   | 2,804                       |  |   | (185         | ) |  |                        | (1,756 | ) |                              |   | (159 | ) |  |   | 704
|Other (1)        |  |                                           | 48     |                           |   |                            |  |   |             |   |  |                        |       |   |                              |   |     |   |  |   |   
|                 |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |    
|Total            |  | $                                         | 21,418 |                           | $ | 3,117                       |  | $ | (286         | ) |  | $                      | (1,968 | ) |                              | $ | (159 | ) |  | $ | 704
|                 |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |    

---

|(1) | Includes corporate charges
|--- | --------------------------



2004 Plan Restructuring Facility Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                             |  |              |     |  |                        |        |   |                              |   |      |   |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | ------------ | --- |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                 |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |     |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|United States    |  | $                                         | 15,621 |                           | $ | 6,600                       |  | $            | 420 |  | $                      | (3,657 | ) |                              | $ |     |   |  | $ | 3,363
|Europe/Australia |  |                                           | 5,568  |                           |   | 4,437                       |  |              | 70  |  |                        | (1,080 | ) |                              |   | (258 | ) |  |   | 3,169
|Other (1)        |  |                                           | 4,445  |                           |   | 1,569                       |  |              |    |  |                        | (1,569 | ) |                              |   |     |   |  |   |     
|                 |  |                                           |        |                           |   |                             |  |              |     |  |                        |        |   |                              |   |      |   |  |   |      
|Total            |  | $                                         | 25,634 |                           | $ | 12,606                      |  | $            | 490 |  | $                      | (6,306 | ) |                              | $ | (258 | ) |  | $ | 6,532
|                 |  |                                           |        |                           |   |                             |  |              |     |  |                        |        |   |                              |   |      |   |  |   |      

---

|(1) | Includes corporate charges
|--- | --------------------------



Note 6. Discontinued Operations and Assets and Liabilities Held For Sale



In September 2005, the Company sold the shares of its business units in Central and South America for a purchase price of $10.0 million in cash. The operating activities
of the business units in Central and South America have been reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation. Summarized information for the Central
and South America business units is set forth below:



|                                                             |  |                                 |     |                                |      |   |       |  |   |         |   |  |   |       
|------------------------------------------------------------ |  | ------------------------------- | --- | ------------------------------ | ---- | - | ----- |  | - | ------- | - |  | - | ------
|                                                             |  | Three months ended December 31, |     | Nine months ended December 31,
|                                                             |  | 2005                            |     |                                | 2004 |   | 2005  |  |   | 2004   
|Revenues                                                     |  | $                               |    |                                |      | $ | 8,130 |  | $ | 12,563  |   |  | $ | 23,435
|Net earnings (loss) from discontinued operations, net of tax |  |                                 |    |                                |      |   | 335   |  |   | (595    | ) |  |   | 1,424 
|Provision for income taxes on discontinued operations        |  |                                 |    |                                |      |   | 253   |  |   | 790     |   |  |   | 881   
|Gain (loss) on sale of discontinued operations, net of tax   |  |                                 | (10 | )                              |      |   |      |  |   | (29,120 | ) |  |   |      
|Income tax benefit on sale of discontinued operations        |  |                                 |    |                                |      |   |      |  |   |        |   |  |   |      



18



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##### Table of Contents

The loss on the sale of discontinued operations includes a write off of currency translation adjustments of $19.9
million.



In June 2005, the Company sold the shares of its Canadian business
unit, Danka Canada, Inc. to Pitney Bowes of Canada, LTD., a subsidiary of Pitney Bowes, Inc. for a purchase price of $14.0 million in cash. The operating activities of Danka Canada, Inc. have been reported as discontinued operations and the
consolidated financial statements for all prior periods have been adjusted to reflect this presentation. Summarized information for Danka Canada, Inc. is set forth below:



|                                                                  |  |                                 |     |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three months ended December 31, |     |   | Nine months ended December 31, |  
|                                                                  |  | 2005                            |     |   | 2004                           |   |        | 2005 |  |   | 2004   |  
|Revenues                                                          |  | $                               |    |   |                                | $ | 9,080  |      |  | $ | 9,407  |   |  | $ | 26,696 |  
|Net earnings (loss) from discontinued operations                  |  |                                 |    |   |                                |   | (1,294 | )    |  |   | (711   | ) |  |   | (3,438 | )
|Income tax benefit on discontinued operations                     |  |                                 |    |   |                                |   |       |      |  |   |       |   |  |   | (30    | )
|Gain (loss) on sale of discontinued operations, net of tax of nil |  |                                 | (53 | ) |                                |   |       |      |  |   | (1,202 | ) |  |   |       |  



The loss on the sale of discontinued
operations includes a write off of currency translation adjustments of $4.7 million. In addition, the purchase price is subject to adjustment based upon working capital, as defined in the purchase and sale agreement. Accordingly, the loss on the
sale of discontinued operations may be adjusted when the working capital adjustment is finalized.



In accordance with FASB Statement No.144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), an estimate of assets and liabilities to be sold have been reclassified from
various line items within the balance sheet and aggregated into Assets held for sale  discontinued operations and Liabilities held for sale  discontinued operations as of March 31, 2005. The following
represents the Canadian and Central and South American business units carrying amounts of the major classes of assets and liabilities held for sale at March 31, 2005:



|                                                                 |  |                                |       
|---------------------------------------------------------------- |  | ------------------------------ | ------
|                                                                 |  | March 31, 2005 Carrying Amount
|Assets                                                           |  |                                |       
|Cash and cash equivalents                                        |  | $                              | 6,191 
|Accounts receivable, net                                         |  |                                | 17,089
|Inventory                                                        |  |                                | 5,646 
|Prepaid expenses, deferred income taxes and other current assets |  |                                | 784   
|Equipment on operating leases, net                               |  |                                | 4,286 
|Property and equipment, net                                      |  |                                | 1,429 
|Goodwill                                                         |  |                                | 2,951 
|Other assets                                                     |  |                                | 4,801 
|                                                                 |  |                                |       
|Assets held for sale  discontinued operations                   |  | $                              | 43,177
|                                                                 |  |                                |       
|                                                                 | 
|                                                                 |  | March 31, 2005 Carrying Amount
|Liabilities                                                      |  |                                |       
|Accounts payable                                                 |  | $                              | 5,820 
|Accrued expenses and other current liabilities                   |  |                                | 4,841 
|Taxes payable                                                    |  |                                | 1,348 
|Deferred revenue                                                 |  |                                | 2,394 
|                                                                 |  |                                |       
|Liabilities held for sale  discontinued operations              |  | $                              | 14,403
|                                                                 |  |                                |       



19



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##### Table of Contents

Note 7. Earnings (Loss) Per Share



The effect of the Companys 6.5% senior convertible participating shares, which represent the ADSs shown in the table below are not
included in the computation of diluted earnings per share for the first three and nine months ended December 31, 2005 and 2004, because they are anti-dilutive. ADS equivalents from stock options shown in the table below, presented using the
treasury stock method, are not included in the computation of diluted earnings per share for the three and nine months ended December 31, 2005 and 2004. The total number of outstanding shares related to stock options (all of which are
anti-dilutive) was 6.4 million and 8.0 million at December 31, 2005 and 2004, respectively.



|                                             |  |                                 |  |                                |  |        |  |       
|-------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ------ |  | ------
|                                             |  | Three months ended December 31, |  | Nine months ended December 31,
|                                             |  | 2005                            |  | 2004                           |  | 2005   |  | 2004  
|Potential ADSs issuance from:                |  |                                 |  |                                |  |        |  |       
|                                             |  |                                 |  |                               
|6.5% senior convertible participating shares |  | 25,454                          |  | 23,861                         |  | 25,052 |  | 23,486
|Stock options                                |  | 840                             |  | 1,701                          |  | 778    |  | 2,109 



Note 8. Segment Reporting



The Company previously had two reporting segments, the Americas and
Europe/Australia. Due to the sales of operations in Canada and Central and South America during fiscal year 2006, the Americas segment has been renamed the United States segment as it now comprises only the United States. Dankas United States
and Europe/Australia segments provide office imaging equipment, document solutions and related services and supplies on a direct basis to retail customers. The Companys Europe/Australia segment also provides office imaging equipment and
supplies on a wholesale basis to independent dealers. The Companys management relies on an internal management reporting process that provides segment revenue and operating earnings. Management believes that this is an appropriate measure of
evaluating the operating performance of our segments. The following tables present information about the Companys segments.



Revenue, Gross profit and Operating earnings (loss) from continuing operations



|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                           |  | Three months ended December 31, |         |   | Nine months ended December 31, |  
|                                                           |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Revenue                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States                                              |  | $                               | 125,475 |   |                                | $ | 137,919 |      |  | $ | 394,209 |   |  | $ | 431,200 |  
|Europe/Australia                                           |  |                                 | 139,986 |   |                                |   | 158,654 |      |  |   | 430,565 |   |  |   | 451,431 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Revenue                                              |  | $                               | 265,461 |   |                                | $ | 296,573 |      |  | $ | 824,774 |   |  | $ | 882,631 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States                                              |  | $                               | 43,047  |   |                                | $ | 57,171  |      |  | $ | 139,127 |   |  | $ | 178,664 |  
|Europe/Australia                                           |  |                                 | 41,441  |   |                                |   | 49,722  |      |  |   | 130,596 |   |  |   | 147,289 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Gross profit                                         |  | $                               | 84,488  |   |                                | $ | 106,893 |      |  | $ | 269,723 |   |  | $ | 325,953 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations       |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States (1)                                          |  | $                               | 6,980   |   |                                | $ | 4,749   |      |  | $ | 7,016   |   |  | $ | 23,174  |  
|Europe/Australia(2)                                        |  |                                 | 2,732   |   |                                |   | 2,279   |      |  |   | 941     |   |  |   | 13,610  |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Subtotal                                                   |  |                                 | 9,712   |   |                                |   | 7,028   |      |  |   | 7,957   |   |  |   | 36,784  |  
|Other (3)                                                  |  |                                 | (4,701  | ) |                                |   | (10,441 | )    |  |   | (18,123 | ) |  |   | (25,635 | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Operating earnings (loss) from continuing operations |  | $                               | 5,011   |   |                                | $ | (3,413  | )    |  | $ | (10,166 | ) |  | $ | 11,149  |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States                                              |  | $                               | (112    | ) |                                | $ | (303    | )    |  | $ | (940    | ) |  | $ | (529    | )
|Europe/Australia                                           |  |                                 | (2,690  | ) |                                |   | (2,829  | )    |  |   | (8,094  | ) |  |   | (9,213  | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Subtotal                                                   |  |                                 | (2,802  | ) |                                |   | (3,132  | )    |  |   | (9,034  | ) |  |   | (9,742  | )
|Other (3)                                                  |  |                                 | (5,120  | ) |                                |   | (4,928  | )    |  |   | (14,862 | ) |  |   | (13,135 | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Interest expense                                     |  | $                               | (7,922  | ) |                                | $ | (8,060  | )    |  | $ | (23,896 | ) |  | $ | (22,877 | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

---

|(1) | Includes restructuring charges (credits) of $1.2 million and ($0.5 million) for the three months ended December 31, 2005 and 2004, respectively and $3.1 million and $0.6
million for the nine months ended December 31, 2005 and 2004, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

|(2) | Includes restructuring charges (credits) of ($1.3 million) and ($0.3 million) for the three months ended December 31, 2005 and 2004, respectively and $4.5 million and ($2.1
million) for the nine months ended December 31, 2005 and 2004, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Other primarily includes corporate expenses and foreign exchange gains/losses.
|--- | ------------------------------------------------------------------------------



Approximately 52.7% and 52.2% of the Companys revenue for the three and nine months ended December 31, 2005, respectively, was generated outside the United
States while approximately 53.5% and 51.1% of the companys revenue was generated outside the United States during the three and nine months ended December 31, 2004, respectively.



Capital Expenditures and Depreciation and Amortization



|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                    |  | Three months ended December 31, |       | Nine months ended December 31,
|                                    |  | 2005                            |       | 2004                           |   | 2005  |  | 2004
|Capital Expenditures                |  |                                 |       |                                |   |       |  |      |        |  |   |       
|United States                       |  | $                               | 564   |                                | $ | 2,311 |  | $    | 2,912  |  | $ | 3,952 
|Europe/Australia                    |  |                                 | 1,480 |                                |   | 2,446 |  |      | 5,275  |  |   | 8,526 
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Subtotal                            |  |                                 | 2,044 |                                |   | 4,757 |  |      | 8,187  |  |   | 12,478
|Other (1)                           |  |                                 |      |                                |   |      |  |      | 18     |  |   | 685   
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Total Capital Expenditures          |  | $                               | 2,044 |                                | $ | 4,757 |  | $    | 8,205  |  | $ | 13,163
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Depreciation and Amortization       |  |                                 |       |                                |   |       |  |      |        |  |   |       
|United States                       |  | $                               | 4,446 |                                | $ | 6,147 |  | $    | 14,159 |  | $ | 17,316
|Europe/Australia                    |  |                                 | 2,164 |                                |   | 2,663 |  |      | 6,953  |  |   | 7,806 
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Subtotal                            |  |                                 | 6,610 |                                |   | 8,810 |  |      | 21,112 |  |   | 25,122
|Other (2)                           |  |                                 | 286   |                                |   | 336   |  |      | 971    |  |   | 1,348 
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Total Depreciation and Amortization |  | $                               | 6,896 |                                | $ | 9,146 |  | $    | 22,083 |  | $ | 26,470
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       

---

|(1) | Other includes corporate assets.
|--- | --------------------------------

|(2) | Other includes depreciation on corporate assets.
|--- | ------------------------------------------------



Assets and Long-lived Assets



|                        |  |                   |         |                |   |        
|----------------------- |  | ----------------- | ------- | -------------- | - | -------
|                        |  | December 31, 2005 |         | March 31, 2005
|Assets                  |  |                   |         |                |   |        
|United States           |  | $                 | 200,721 |                | $ | 232,213
|Europe/Australia        |  |                   | 346,515 |                |   | 382,797
|                        |  |                   |         |                |   |        
|Subtotal                |  |                   | 547,236 |                |   | 615,010
|Other (1)               |  |                   | 76,339  |                |   | 154,016
|                        |  |                   |         |                |   |        
|Total Assets            |  | $                 | 623,575 |                | $ | 769,026
|                        |  |                   |         |                |   |        
|Long-lived Assets (2)   |  |                   |         |                |   |        
|United States           |  | $                 | 93,548  |                | $ | 106,032
|Europe/Australia        |  |                   | 124,336 |                |   | 138,510
|                        |  |                   |         |                |   |        
|Subtotal                |  |                   | 217,884 |                |   | 244,542
|Other (1)               |  |                   | 60,123  |                |   | 72,248 
|                        |  |                   |         |                |   |        
|Total Long-lived Assets |  | $                 | 278,007 |                | $ | 316,790
|                        |  |                   |         |                |   |        

---

|(1) | Other includes corporate assets and assets held for sale from discontinued operations.
|--- | --------------------------------------------------------------------------------------

|(2) | Long-lived assets are defined as equipment on operating leases, property and equipment, goodwill, other intangibles, deferred income taxes and other assets, all of which are net of
their related depreciation and amortization.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Note 9. Debt



Debt consists of the following as of December 31, 2005 and March 31, 2005:



|                                                                                                      |  |                   |         |   |                |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                      |  | December 31, 2005 |         |   | March 31, 2005 |  
|10.0% subordinated notes due April 2008                                                               |  | $                 | 64,520  |   |                | $ | 64,520  |  
|11.0% senior notes due June 2010                                                                      |  |                   | 175,000 |   |                |   | 175,000 |  
|Capital lease obligations                                                                             |  |                   | 2,942   |   |                |   | 4,668   |  
|Various notes payable bearing interest from prime to 12.0% maturing principally over the next 5 years |  |                   | 544     |   |                |   | 873     |  
|                                                                                                      |  |                   |         |   |                |   |         |  
|Total long-term debt and notes payable                                                                |  |                   | 243,006 |   |                |   | 245,061 |  
|Less unamortized discount on senior notes                                                             |  |                   | (2,978  | ) |                |   | (3,347  | )
|                                                                                                      |  |                   |         |   |                |   |         |  
|Total long-term debt and notes payable less unamortized discount                                      |  |                   | 240,028 |   |                |   | 241,714 |  
|Less current maturities of long-term debt and notes payable                                           |  |                   | (1,713  | ) |                |   | (2,308  | )
|                                                                                                      |  |                   |         |   |                |   |         |  
|Long-term debt and notes payable, less current maturities                                             |  | $                 | 238,315 |   |                | $ | 239,406 |  
|                                                                                                      |  |                   |         |   |                |   |         |  



The 10.0% subordinated notes due
April 1, 2008 have interest payments of $3.2 million every six months on April 1 and October 1.



The 11.0% senior notes due June 15, 2010 have a fixed annual interest rate of 11.0% and have interest payments of $9.6 million that will be paid every six months on June 15 and December 15. The senior
notes are fully and unconditionally guaranteed on a joint and several basis by all of the Companys Australian subsidiaries, a Luxembourg subsidiary, two United Kingdom subsidiaries, one of which is the Companys primary United Kingdom
operating subsidiary, and all of its United States subsidiaries other than certain dormant entities, all of which are 100% owned by the Company.



If, for any fiscal year commencing with the fiscal year ended March 31, 2004, there is excess cash flow, as such term is defined in the indenture governing the
senior notes, in an amount in excess of $5.0 million, the Company will be required to make an offer in cash to holders of the senior notes to use 50% of such excess cash flow to purchase their senior notes at 101% of the aggregate principal amount
of the senior notes to be repurchased plus accrued and unpaid interest and additional amounts, if any. No such payment is required to date.



The Company incurred $7.2 million in debt issuance costs relating to the senior notes and is amortizing these costs over the term of the senior notes. The balance of
these costs as of December 31, 2005 was $4.6 million. The $4.1 million discount related to the senior notes is being accreted to interest expense using the effective interest method over the life of the related debt. The balance of the discount
as of December 31, 2005 was $3.0 million.



The Company has a credit
facility which expires on January 4, 2008 with Bank of America, who acquired Fleet Capital Corporation, (the Fleet Credit Facility) to provide a $50.0 million, senior secured revolving credit facility, which includes a $30.0 million
sub-limit for standby and documentary letters of credit. The Fleet Credit Facility bears interest at an annual rate equal to, at our option, (a) the sum of the rate of interest publicly announced from time to time by Bank of America as its
prime or base rate of interest plus the applicable margin thereon or (b) the sum of LIBOR for interest periods at our option of one, two, three or nine months plus the applicable margin thereon. Under the terms of the Fleet Credit Facility, as
amended, extensions of credit to the borrowers are further limited to the lesser of the commitment and the borrowing base. In addition, the Fleet Credit Facility requires the Company to keep $5.0 million of cash in an operating account. During the
nine months ended December 31, 2005, the Companys borrowings under the Fleet Credit Facility ranged between $5 million and $13 million at any one time, all of which were repaid by the end of the period. As of December 31, 2005, the
borrowing base for the credit facility was $38.2 million and the Company had no borrowings under the Fleet Credit Facility. The borrowing base fluctuates each month and is generally highest at the end of a quarter.



The Company incurred $1.6 million in debt issuance costs relating to the Fleet Credit
Facility and is amortizing these costs over the remaining term of the credit facility. The balance of these costs as of December 31, 2005 was $0.3 million.



On December 31, 2003, the Company entered into a one year letter of credit facility with ABN AMRO. On November 2, 2004 this agreement was amended to provide
the Company a letter of credit facility for Euro 11.8 million (U.S. $14.0 million) and an open term credit facility of Euro 1.0 million (U.S. $1.2 million) available for general working capital purposes, including overdrafts. The open term
credit facility expired on November 15, 2005. The letter of credit facility expired on December 31, 2005. The facilities were secured by the assets of certain of the Companys Netherlands subsidiaries and were also cash collateralized
by Euro 5.0 million (U.S. $5.9 million).



22



---

##### Table of Contents

On January 1, 2006, the Company opened a replacement letter of credit facility with ABN AMRO in favor of Ricoh in
the amount of Euro 11.8 million (U.S. $14.0 million) that is fully cash collateralized and will expire on March 31, 2006. This agreement can be renewed.



Note 10. Contingencies



Litigation:In June 2003, Danka was served with a putative class action complaint titled Stephen L. Edwards, et al., Plaintiffs vs. Danka Industries, Inc., et al.,
including American Business Credit Corporation, Defendants, alleging claims of breach of contract, fraud/intentional misrepresentation, unjust enrichment, violation of the Florida Deception and Unfair Trade Protection Act and injunctive relief. The
claim was filed in the state court in Tennessee, and the Company has removed the claim to the United States District Court for Middle District of Tennessee for further proceedings. The plaintiffs have filed a motion to certify the class, which the
Company has opposed. The Company has filed a motion for summary judgment, which plaintiffs have opposed. While the amount sought in this complaint is in excess of $75,000, the Company cannot, at this time, estimate its potential exposure. The
Company will continue to vigorously defend the claims alleged by the plaintiff in this action.



The Company is also subject to legal proceedings and claims which arise in the ordinary course of its business. The Company does not expect these legal proceedings to have a material effect upon its financial
position, results of operations or liquidity.



Note 11. Income Taxes



The Company recorded an income tax benefit of $9.0 million in the first
nine months of fiscal year 2006 compared with a benefit of $16.7 million in the prior year period. The income tax benefit for the nine month period resulted from the resolution of various tax contingencies (principally in the United States) totaling
$10.7 million, which was offset by income tax expense of $1.7 million attributable to current year results. The income tax benefit for the prior year period resulted from settlement of tax audits in the Companys European operations of $19.0
million, which was offset by income tax expense of $2.3 million attributable to prior year results.



In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Our past financial performance is a significant factor which contributes to our inability,
pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), to use projections of future taxable income in assessing the realizability of deferred tax assets. Management
therefore is limited to considering the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. Considering all relevant data, management concluded that it is not more likely than not the
Company will realize the benefits of the deferred tax assets at December 31, 2005 and 2004 in most jurisdictions and therefore a valuation allowance has been recorded to reserve its deferred tax assets at December 31, 2005 and 2004 in
these jurisdictions.



Note 12. Supplemental Consolidating Financial Data for
Subsidiary Guarantors of 11.0% Senior Notes



On July 1, 2003, the
Company issued its 11.0% senior notes. The senior notes are fully and unconditionally guaranteed on a joint and several basis by all of the Companys Australian subsidiaries, a Luxembourg subsidiary, two United Kingdom subsidiaries, one of
which is the primary United Kingdom operating subsidiary, and all of its United States subsidiaries other than certain dormant entities (collectively, the Subsidiary Guarantors). All subsidiaries are 100% owned by the Company. The
Subsidiary Guarantors generated 60.0% and 61.0% of the Companys total revenue during the first nine months of fiscal years 2006 and 2005, respectively.



23



---

##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Three Months Ended December 31, 2005

(in thousands)

(Unaudited)



|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------------------- | - | ------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                                                          |  | Parent Company (1) |        |   | Subsidiary Guarantors (2) |   |         | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |        
|Revenue:                                                                  |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                          |  |                    |        |   |                          
|Retail equipment and related sales                                        |  | $                  |       |   |                           | $ | 65,381  |                               |  | $ | 34,787       |   |  | $                  |        |   |  | $ | 100,168 |  
|Retail service                                                            |  |                    |       |   |                           |   | 75,016  |                               |  |   | 45,891       |   |  |                    |        |   |  |   | 120,907 |  
|Retail supplies and rentals                                               |  |                    |       |   |                           |   | 15,620  |                               |  |   | 3,733        |   |  |                    |        |   |  |   | 19,353  |  
|Wholesale                                                                 |  |                    |       |   |                           |   |        |                               |  |   | 25,033       |   |  |                    |        |   |  |   | 25,033  |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total revenue                                                             |  |                    |       |   |                           |   | 156,017 |                               |  |   | 109,444      |   |  |                    |        |   |  |   | 265,461 |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Cost of sales:                                                            |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                          |  |                    |        |   |                          
|Retail equipment and related sales costs                                  |  |                    |       |   |                           |   | 43,940  |                               |  |   | 24,555       |   |  |                    |        |   |  |   | 68,495  |  
|Retail service costs                                                      |  |                    |       |   |                           |   | 48,710  |                               |  |   | 30,874       |   |  |                    |        |   |  |   | 79,584  |  
|Retail supplies and rental costs, including depreciation on rental assets |  |                    |       |   |                           |   | 10,505  |                               |  |   | 1,352        |   |  |                    |        |   |  |   | 11,857  |  
|Wholesale costs                                                           |  |                    |       |   |                           |   |        |                               |  |   | 21,037       |   |  |                    |        |   |  |   | 21,037  |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total cost of sales                                                       |  |                    |       |   |                           |   | 103,155 |                               |  |   | 77,818       |   |  |                    |        |   |  |   | 180,973 |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Gross profit                                                              |  |                    |       |   |                           |   | 52,862  |                               |  |   | 31,626       |   |  |                    |        |   |  |   | 84,488  |  
|                                                                          |  |                    |        |   |                          
|Operating expenses:                                                       |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                          |  |                    |        |   |                          
|Selling, general and administrative expenses                              |  |                    | 1,242  |   |                           |   | 48,381  |                               |  |   | 30,136       |   |  |                    |        |   |  |   | 79,759  |  
|Restructuring charges (credits)                                           |  |                    |       |   |                           |   | 599     |                               |  |   | (705         | ) |  |                    |        |   |  |   | (106    | )
|Equity (income) loss                                                      |  |                    | (3,556 | ) |                           |   | (9,609  | )                             |  |   | (18,339      | ) |  |                    | 31,504  |   |  |   |        |  
|Other expense (income)                                                    |  |                    | 1,168  |   |                           |   | (1,504  | )                             |  |   | 9            |   |  |                    | 151     |   |  |   | (176    | )
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total operating expenses                                                  |  |                    | (1,146 | ) |                           |   | 37,867  |                               |  |   | 11,101       |   |  |                    | 31,655  |   |  |   | 79,477  |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations                      |  |                    | 1,146  |   |                           |   | 14,995  |                               |  |   | 20,525       |   |  |                    | (31,655 | ) |  |   | 5,011   |  
|                                                                          |  |                    |        |   |                          
|Interest expense                                                          |  |                    | (6,818 | ) |                           |   | (2,843  | )                             |  |   | (17,315      | ) |  |                    | 19,054  |   |  |   | (7,922  | )
|Interest income                                                           |  |                    | 14,007 |   |                           |   | 3,067   |                               |  |   | 2,189        |   |  |                    | (19,054 | ) |  |   | 209     |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes            |  |                    | 8,335  |   |                           |   | 15,219  |                               |  |   | 5,399        |   |  |                    | (31,655 | ) |  |   | (2,702  | )
|Provision (benefit) for income taxes                                      |  |                    |       |   |                           |   | (10,904 | )                             |  |   | (196         | ) |  |                    |        |   |  |   | (11,100 | )
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                |  |                    | 8,335  |   |                           |   | 26,123  |                               |  |   | 5,595        |   |  |                    | (31,655 | ) |  |   | 8,398   |  
|Gain (loss) on sale of discontinued operations, net of tax                |  |                    |       |   |                           |   | (197    | )                             |  |   | 134          |   |  |                    |        |   |  |   | (63     | )
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Net earnings (loss)                                                       |  | $                  | 8,335  |   |                           | $ | 25,926  |                               |  | $ | 5,729        |   |  | $                  | (31,655 | ) |  | $ | 8,335   |  
|                                                                          |  |                    |        |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  



24



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##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Three Months Ended December 31, 2004

(in thousands)

(Unaudited)



|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------------- | - | ------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                                                          |  | Parent Company (1) |         |   | Subsidiary Guarantors (2) |   |         | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |        
|Revenue:                                                                  |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Retail equipment and related sales                                        |  | $                  |        |   |                           | $ | 67,033  |                               |  | $ | 40,032       |   |  | $                  |        |   |  | $ | 107,065 |  
|Retail service                                                            |  |                    |        |   |                           |   | 89,125  |                               |  |   | 51,955       |   |  |                    |        |   |  |   | 141,080 |  
|Retail supplies and rentals                                               |  |                    |        |   |                           |   | 18,322  |                               |  |   | 4,752        |   |  |                    |        |   |  |   | 23,074  |  
|Wholesale                                                                 |  |                    |        |   |                           |   |        |                               |  |   | 25,354       |   |  |                    |        |   |  |   | 25,354  |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total revenue                                                             |  |                    |        |   |                           |   | 174,480 |                               |  |   | 122,093      |   |  |                    |        |   |  |   | 296,573 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Cost of sales:                                                            |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Retail equipment and related sales costs                                  |  |                    |        |   |                           |   | 42,082  |                               |  |   | 26,627       |   |  |                    |        |   |  |   | 68,709  |  
|Retail service costs                                                      |  |                    |        |   |                           |   | 52,069  |                               |  |   | 33,692       |   |  |                    |        |   |  |   | 85,761  |  
|Retail supplies and rental costs, including depreciation on rental assets |  |                    |        |   |                           |   | 11,427  |                               |  |   | 2,335        |   |  |                    |        |   |  |   | 13,762  |  
|Wholesale costs                                                           |  |                    |        |   |                           |   |        |                               |  |   | 21,448       |   |  |                    |        |   |  |   | 21,448  |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total cost of sales                                                       |  |                    |        |   |                           |   | 105,578 |                               |  |   | 84,102       |   |  |                    |        |   |  |   | 189,680 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Gross profit                                                              |  |                    |        |   |                           |   | 68,902  |                               |  |   | 37,991       |   |  |                    |         |   |  |   | 106,893 |  
|                                                                          |  |                    |         |   |                          
|Operating expenses:                                                       |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Selling, general and administrative expenses                              |  |                    | 1,349   |   |                           |   | 71,005  |                               |  |   | 36,822       |   |  |                    |        |   |  |   | 109,176 |  
|Restructuring charges (credits)                                           |  |                    |        |   |                           |   | 149     |                               |  |   | (534         | ) |  |                    |        |   |  |   | (385    | )
|Equity (income) loss                                                      |  |                    | (18,193 | ) |                           |   | (10,931 | )                             |  |   | (16,217      | ) |  |                    | 45,341  |   |  |   |        |  
|Other (income) expense                                                    |  |                    | 7,053   |   |                           |   | (2,631  | )                             |  |   | (1,167       | ) |  |                    | (1,740  | ) |  |   | 1,515   |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total operating expenses                                                  |  |                    | (9,791  | ) |                           |   | 57,592  |                               |  |   | 18,904       |   |  |                    | 43,601  |   |  |   | 110,306 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations                      |  |                    | 9,791   |   |                           |   | 11,310  |                               |  |   | 19,087       |   |  |                    | (43,601 | ) |  |   | (3,413  | )
|                                                                          |  |                    |         |   |                          
|Interest expense                                                          |  |                    | (6,740  | ) |                           |   | (1,520  | )                             |  |   | (2,300       | ) |  |                    | 2,500   |   |  |   | (8,060  | )
|Interest income                                                           |  |                    | 1,383   |   |                           |   | 1,789   |                               |  |   | (615         | ) |  |                    | (2,557  | ) |  |   |        |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes            |  |                    | 4,434   |   |                           |   | 11,579  |                               |  |   | 16,172       |   |  |                    | (43,658 | ) |  |   | (11,473 | )
|Provision (benefit) for income taxes                                      |  |                    | (22     | ) |                           |   | 4,585   |                               |  |   | (21,451      | ) |  |                    |        |   |  |   | (16,888 | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                |  |                    | 4,456   |   |                           |   | 6,994   |                               |  |   | 37,623       |   |  |                    | (43,658 | ) |  |   | 5,415   |  
|                                                                          |  |                    |         |   |                          
|Earnings (loss) from discontinued operations, net of tax                  |  |                    |        |   |                           |   | (1,507  | )                             |  |   | 548          |   |  |                    |        |   |  |   | (959    | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Net earnings (loss)                                                       |  | $                  | 4,456   |   |                           | $ | 5,487   |                               |  | $ | 38,171       |   |  | $                  | (43,658 | ) |  | $ | 4,456   |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  





25



---

##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Nine Months Ended December 31, 2005

(in thousands)

(Unaudited)



|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------------- | - | ------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | -------- | - |  | - | ------- | -
|                                                                          |  | Parent Company (1) |         |   | Subsidiary Guarantors (2) |   |         | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |         
|Revenue:                                                                  |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Retail equipment and related sales                                        |  | $                  |        |   |                           | $ | 207,311 |                               |  | $ | 110,377      |   |  | $                  |         |   |  | $ | 317,688 |  
|Retail service                                                            |  |                    |        |   |                           |   | 236,961 |                               |  |   | 139,546      |   |  |                    |         |   |  |   | 376,507 |  
|Retail supplies and rentals                                               |  |                    |        |   |                           |   | 50,613  |                               |  |   | 11,476       |   |  |                    |         |   |  |   | 62,089  |  
|Wholesale                                                                 |  |                    |        |   |                           |   |        |                               |  |   | 68,490       |   |  |                    |         |   |  |   | 68,490  |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Total revenue                                                             |  |                    |        |   |                           |   | 494,885 |                               |  |   | 329,889      |   |  |                    |         |   |  |   | 824,774 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Cost of sales:                                                            |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Retail equipment and related sales costs                                  |  |                    |        |   |                           |   | 141,936 |                               |  |   | 77,930       |   |  |                    |         |   |  |   | 219,866 |  
|Retail service costs                                                      |  |                    |        |   |                           |   | 148,671 |                               |  |   | 91,623       |   |  |                    |         |   |  |   | 240,294 |  
|Retail supplies and rental costs, including depreciation on rental assets |  |                    |        |   |                           |   | 33,937  |                               |  |   | 4,442        |   |  |                    |         |   |  |   | 38,379  |  
|Wholesale costs                                                           |  |                    |        |   |                           |   |        |                               |  |   | 56,512       |   |  |                    |         |   |  |   | 56,512  |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Total cost of sales                                                       |  |                    |        |   |                           |   | 324,544 |                               |  |   | 230,507      |   |  |                    |         |   |  |   | 555,051 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Gross profit                                                              |  |                    |        |   |                           |   | 170,341 |                               |  |   | 99,382       |   |  |                    |         |   |  |   | 269,723 |  
|                                                                          |  |                    |         |   |                          
|Operating expenses:                                                       |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Selling, general and administrative expenses                              |  |                    | 3,688   |   |                           |   | 176,053 |                               |  |   | 92,885       |   |  |                    |         |   |  |   | 272,626 |  
|Restructuring charges (credits)                                           |  |                    |        |   |                           |   | 3,145   |                               |  |   | 4,433        |   |  |                    |         |   |  |   | 7,578   |  
|Equity (income) loss                                                      |  |                    | 71,182  |   |                           |   | 59,221  |                               |  |   | 26,359       |   |  |                    | (156,762 | ) |  |   |        |  
|Other (income) expense                                                    |  |                    | 3,248   |   |                           |   | (2,759  | )                             |  |   | (804         | ) |  |                    |         |   |  |   | (315    | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Total operating expenses                                                  |  |                    | 78,118  |   |                           |   | 235,660 |                               |  |   | 122,873      |   |  |                    | (156,762 | ) |  |   | 279,889 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Operating earnings (loss) from continuing operations                      |  |                    | (78,118 | ) |                           |   | (65,319 | )                             |  |   | (23,491      | ) |  |                    | 156,762  |   |  |   | (10,166 | )
|                                                                          |  |                    |         |   |                          
|Interest expense                                                          |  |                    | (20,416 | ) |                           |   | (20,798 | )                             |  |   | (52,929      | ) |  |                    | 70,247   |   |  |   | (23,896 | )
|Interest income                                                           |  |                    | 42,442  |   |                           |   | 21,784  |                               |  |   | 6,370        |   |  |                    | (70,247  | ) |  |   | 349     |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes            |  |                    | (56,092 | ) |                           |   | (64,333 | )                             |  |   | (70,050      | ) |  |                    | 156,762  |   |  |   | (33,713 | )
|Provision (benefit) for income taxes                                      |  |                    |        |   |                           |   | (9,904  | )                             |  |   | 855          |   |  |                    |         |   |  |   | (9,049  | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Earnings (loss) from continuing operation                                 |  |                    | (56,092 | ) |                           |   | (54,429 | )                             |  |   | (70,905      | ) |  |                    | 156,762  |   |  |   | (24,664 | )
|                                                                          |  |                    |         |   |                          
|Earnings from discontinued operations, net of tax                         |  |                    |         |   |                           |   | (652    | )                             |  |   | (654         | ) |  |                    |          |   |  |   | (1,306  | )
|Gain (loss) on sale of discontinued operations, net of tax                |  |                    | (200    | ) |                           |   | 16,599  |                               |  |   | (46,721      | ) |  |                    |         |   |  |   | (30,322 | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  
|Net earnings (loss)                                                       |  | $                  | (56,292 | ) |                           | $ | (38,482 | )                             |  | $ | (118,280     | ) |  | $                  | 156,762  |   |  | $ | (56,292 | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |          |   |  |   |         |  



26



---

##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Nine Months Ended December 31, 2004

(in thousands)

(Unaudited)



|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------------- | - | ------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                                                          |  | Parent Company (1) |         |   | Subsidiary Guarantors (2) |   |         | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |        
|Revenue:                                                                  |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Retail equipment and related sales                                        |  | $                  |        |   |                           | $ | 203,719 |                               |  | $ | 108,206      |   |  | $                  |        |   |  | $ | 311,925 |  
|Retail service                                                            |  |                    |        |   |                           |   | 278,701 |                               |  |   | 152,371      |   |  |                    |        |   |  |   | 431,072 |  
|Retail supplies and rentals                                               |  |                    |        |   |                           |   | 56,182  |                               |  |   | 13,433       |   |  |                    |        |   |  |   | 69,615  |  
|Wholesale                                                                 |  |                    |        |   |                           |   |        |                               |  |   | 70,019       |   |  |                    |        |   |  |   | 70,019  |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total revenue                                                             |  |                    |        |   |                           |   | 538,602 |                               |  |   | 344,029      |   |  |                    |        |   |  |   | 882,631 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Cost of sales:                                                            |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Retail equipment and related sales costs                                  |  |                    |        |   |                           |   | 129,887 |                               |  |   | 72,613       |   |  |                    |        |   |  |   | 202,500 |  
|Retail service costs                                                      |  |                    |        |   |                           |   | 160,335 |                               |  |   | 94,411       |   |  |                    |        |   |  |   | 254,746 |  
|Retail supplies and rental costs, including depreciation on rental assets |  |                    |        |   |                           |   | 34,459  |                               |  |   | 7,096        |   |  |                    |        |   |  |   | 41,555  |  
|Wholesale costs                                                           |  |                    |        |   |                           |   |        |                               |  |   | 57,877       |   |  |                    |        |   |  |   | 57,877  |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total cost of sales                                                       |  |                    |        |   |                           |   | 324,681 |                               |  |   | 231,997      |   |  |                    |        |   |  |   | 556,678 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Gross profit                                                              |  |                    |        |   |                           |   | 213,921 |                               |  |   | 112,032      |   |  |                    |         |   |  |   | 325,953 |  
|                                                                          |  |                    |         |   |                          
|Operating expenses:                                                       |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Selling, general and administrative expenses                              |  |                    | 3,987   |   |                           |   | 210,035 |                               |  |   | 100,695      |   |  |                    |        |   |  |   | 314,717 |  
|Restructuring charges (credits)                                           |  |                    |        |   |                           |   | 658     |                               |  |   | (2,404       | ) |  |                    |        |   |  |   | (1,746  | )
|Equity (income) loss                                                      |  |                    | (27,761 | ) |                           |   | (20,561 | )                             |  |   | (42,149      | ) |  |                    | 90,471  |   |  |   |        |  
|Other expense (income)                                                    |  |                    | 4,559   |   |                           |   | (13,203 | )                             |  |   | 10,469       |   |  |                    | 8       |   |  |   | 1,833   |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Total operating expenses                                                  |  |                    | (19,215 | ) |                           |   | 176,929 |                               |  |   | 66,611       |   |  |                    | 90,479  |   |  |   | 314,804 |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations                      |  |                    | 19,215  |   |                           |   | 36,992  |                               |  |   | 45,421       |   |  |                    | (90,479 | ) |  |   | 11,149  |  
|                                                                          |  |                    |         |   |                          
|Interest expense                                                          |  |                    | (20,201 | ) |                           |   | (2,975  | )                             |  |   | (7,847       | ) |  |                    | 8,146   |   |  |   | (22,877 | )
|Interest income                                                           |  |                    | 4,023   |   |                           |   | 2,120   |                               |  |   | 2,076        |   |  |                    | (8,146  | ) |  |   | 73      |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes            |  |                    | 3,037   |   |                           |   | 36,137  |                               |  |   | 39,650       |   |  |                    | (90,479 | ) |  |   | (11,655 | )
|Provision (benefit) for income taxes                                      |  |                    |        |   |                           |   | 4,850   |                               |  |   | (21,556      | ) |  |                    |        |   |  |   | (16,706 | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                          |  |                    |         |   |                          
|Earnings (loss) from continuing operations                                |  |                    | 3,037   |   |                           |   | 31,287  |                               |  |   | 61,206       |   |  |                    | (90,479 | ) |  |   | 5,051   |  
|                                                                          |  |                    |         |   |                          
|Earnings (loss) from discontinued operations, net of tax                  |  |                    |        |   |                           |   | (2,989  | )                             |  |   | 975          |   |  |                    |        |   |  |   | (2,014  | )
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  
|Net earnings (loss)                                                       |  | $                  | 3,037   |   |                           | $ | 28,298  |                               |  | $ | 62,181       |   |  | $                  | (90,479 | ) |  | $ | 3,037   |  
|                                                                          |  |                    |         |   |                           |   |         |                               |  |   |              |   |  |                    |         |   |  |   |         |  



27



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##### Table of Contents

Supplemental Consolidating Balance Sheet Information

As of December 31, 2005

(in
thousands)

(Unaudited)



|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------ | -------- | - | ------------------------- | - | --------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | ---------- | - |  | - | -------- | -
|                                                                 |  | Parent Company (1) |          |   | Subsidiary Guarantors (2) |   |           | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |           
|Assets                                                           |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Current assets:                                                  |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Cash and cash equivalents                                        |  | $                  | 315      |   |                           | $ | 5,572     |                               |  | $ | 44,828       |   |  | $                  |           |   |  | $ | 50,715   |  
|Accounts receivable, net                                         |  |                    |         |   |                           |   | 96,005    |                               |  |   | 95,635       |   |  |                    |           |   |  |   | 191,640  |  
|Inventories                                                      |  |                    |         |   |                           |   | 50,175    |                               |  |   | 40,365       |   |  |                    |           |   |  |   | 90,540   |  
|Due (to)/from affiliates                                         |  |                    | (509,618 | ) |                           |   | 473,216   |                               |  |   | 35,922       |   |  |                    | 480        |   |  |   |         |  
|Prepaid expenses, deferred income taxes and other current assets |  |                    | 29       |   |                           |   | 4,972     |                               |  |   | 7,672        |   |  |                    |           |   |  |   | 12,673   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total current assets                                             |  |                    | (509,274 | ) |                           |   | 629,940   |                               |  |   | 224,422      |   |  |                    | 480        |   |  |   | 345,568  |  
|Equipment on operating leases, net                               |  |                    |         |   |                           |   | 8,682     |                               |  |   | 4,396        |   |  |                    |           |   |  |   | 13,078   |  
|Property and equipment, net                                      |  |                    | 19       |   |                           |   | 34,424    |                               |  |   | 4,538        |   |  |                    |           |   |  |   | 38,981   |  
|Goodwill                                                         |  |                    |         |   |                           |   | 126,136   |                               |  |   | 77,312       |   |  |                    |           |   |  |   | 203,448  |  
|Other intangible assets, net                                     |  |                    |         |   |                           |   | 1,948     |                               |  |   |             |   |  |                    |           |   |  |   | 1,948    |  
|Investment in subsidiaries                                       |  |                    | 783,807  |   |                           |   | (64,940   | )                             |  |   | 669,603      |   |  |                    | (1,388,470 | ) |  |   |         |  
|Deferred income taxes                                            |  |                    |         |   |                           |   | (2,499    | )                             |  |   | 3,976        |   |  |                    |           |   |  |   | 1,477    |  
|Other assets                                                     |  |                    | 4,656    |   |                           |   | 12,835    |                               |  |   | 1,584        |   |  |                    |           |   |  |   | 19,075   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total assets                                                     |  | $                  | 279,208  |   |                           | $ | 746,526   |                               |  | $ | 985,831      |   |  | $                  | (1,387,990 | ) |  | $ | 623,575  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Liabilities and shareholders equity (deficit)                   |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Current liabilities:                                             |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Current maturities of long-term debt and notes payable           |  | $                  |         |   |                           | $ | 1,337     |                               |  | $ | 376          |   |  | $                  |           |   |  | $ | 1,713    |  
|Accounts payable                                                 |  |                    | 114      |   |                           |   | 79,627    |                               |  |   | 71,151       |   |  |                    |           |   |  |   | 150,892  |  
|Accrued expenses and other current liabilities                   |  |                    | 3,581    |   |                           |   | 43,313    |                               |  |   | 32,828       |   |  |                    |           |   |  |   | 79,722   |  
|Taxes payable                                                    |  |                    | 109      |   |                           |   | 20,079    |                               |  |   | 12,680       |   |  |                    |           |   |  |   | 32,868   |  
|Deferred revenue                                                 |  |                    |         |   |                           |   | 18,804    |                               |  |   | 15,146       |   |  |                    |           |   |  |   | 33,950   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total current liabilities                                        |  |                    | 3,804    |   |                           |   | 163,160   |                               |  |   | 132,181      |   |  |                    |            |   |  |   | 299,145  |  
|Long-term debt and notes payables, less current maturities       |  |                    | 236,542  |   |                           |   | 1,643     |                               |  |   | 130          |   |  |                    |           |   |  |   | 238,315  |  
|Deferred income taxes and other long-term liabilities            |  |                    |         |   |                           |   | 23,546    |                               |  |   | 23,707       |   |  |                    |           |   |  |   | 47,253   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total liabilities                                                |  |                    | 240,346  |   |                           |   | 188,349   |                               |  |   | 156,018      |   |  |                    |           |   |  |   | 584,713  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|6.5% convertible participating shares                            |  |                    | 316,020  |   |                           |   |          |                               |  |   |             |   |  |                    |           |   |  |   | 316,020  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Shareholders equity (deficit)                                   |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Ordinary shares                                                  |  |                    | 5,329    |   |                           |   | 1,176,907 |                               |  |   | 232,246      |   |  |                    | (1,409,153 | ) |  |   | 5,329    |  
|Additional paid-in capital                                       |  |                    | 329,716  |   |                           |   | 25,393    |                               |  |   | 369,296      |   |  |                    | (394,689   | ) |  |   | 329,716  |  
|Retained earnings (accumulated deficit)                          |  |                    | (568,362 | ) |                           |   | (654,833  | )                             |  |   | 460,330      |   |  |                    | 194,503    |   |  |   | (568,362 | )
|Accumulated other comprehensive (loss) income                    |  |                    | (43,841  | ) |                           |   | 10,710    |                               |  |   | (232,059     | ) |  |                    | 221,349    |   |  |   | (43,841  | )
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total shareholders equity (deficit)                             |  |                    | (277,158 | ) |                           |   | 558,177   |                               |  |   | 829,813      |   |  |                    | (1,387,990 | ) |  |   | (277,158 | )
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total liabilities & shareholders equity (deficit)               |  | $                  | 279,208  |   |                           | $ | 746,526   |                               |  | $ | 985,831      |   |  | $                  | (1,387,990 | ) |  | $ | 623,575  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  





28



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##### Table of Contents

Supplemental Consolidating Balance Sheet Information

As of March 31, 2005

(Unaudited)

(in thousands)



|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------ | -------- | - | ------------------------- | - | --------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | ---------- | - |  | - | -------- | -
|                                                                 |  | Parent Company (1) |          |   | Subsidiary Guarantors (2) |   |           | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |           
|Assets                                                           |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Current assets:                                                  |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Cash and cash equivalents                                        |  | $                  | 9,989    |   |                           | $ | 33,785    |                               |  | $ | 48,151       |   |  | $                  |           |   |  | $ | 91,925   |  
|Accounts receivable, net                                         |  |                    |         |   |                           |   | 107,197   |                               |  |   | 104,218      |   |  |                    |           |   |  |   | 211,415  |  
|Inventories                                                      |  |                    |         |   |                           |   | 43,508    |                               |  |   | 47,521       |   |  |                    |           |   |  |   | 91,029   |  
|Due (to)/from affiliates                                         |  |                    | (530,152 | ) |                           |   | 446,074   |                               |  |   | 88,465       |   |  |                    | (4,387     | ) |  |   |         |  
|Assets held for sale-discontinued operations                     |  |                    |         |   |                           |   | 17,257    |                               |  |   | 25,920       |   |  |                    |           |   |  |   | 43,177   |  
|Prepaid expenses, deferred income taxes and other current assets |  |                    | 32       |   |                           |   | 5,998     |                               |  |   | 8,660        |   |  |                    |           |   |  |   | 14,690   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total current assets                                             |  |                    | (520,131 | ) |                           |   | 653,819   |                               |  |   | 322,935      |   |  |                    | (4,387     | ) |  |   | 452,236  |  
|Equipment on operating leases, net                               |  |                    |         |   |                           |   | 13,601    |                               |  |   | 5,556        |   |  |                    |           |   |  |   | 19,157   |  
|Property and equipment, net                                      |  |                    | 27       |   |                           |   | 43,539    |                               |  |   | 5,659        |   |  |                    |           |   |  |   | 49,225   |  
|Goodwill                                                         |  |                    |         |   |                           |   | 129,217   |                               |  |   | 84,314       |   |  |                    |           |   |  |   | 213,531  |  
|Investment in subsidiaries                                       |  |                    | 845,109  |   |                           |   | 12,106    |                               |  |   | 726,963      |   |  |                    | (1,584,178 | ) |  |   |         |  
|Other intangible assets, net                                     |  |                    |         |   |                           |   | 2,406     |                               |  |   |             |   |  |                    |           |   |  |   | 2,406    |  
|Deferred income taxes                                            |  |                    |         |   |                           |   | 4,918     |                               |  |   | 4,028        |   |  |                    |           |   |  |   | 8,946    |  
|Other assets                                                     |  |                    | 5,417    |   |                           |   | 16,261    |                               |  |   | 1,847        |   |  |                    |           |   |  |   | 23,525   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total assets                                                     |  | $                  | 330,422  |   |                           | $ | 875,867   |                               |  | $ | 1,151,302    |   |  | $                  | (1,588,565 | ) |  | $ | 769,026  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Liabilities and shareholders equity (deficit)                   |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Current liabilities:                                             |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Current maturities of long-term debt and notes payable           |  | $                  |         |   |                           | $ | 1,435     |                               |  | $ | 873          |   |  | $                  |           |   |  | $ | 2,308    |  
|Accounts payable                                                 |  |                    | 790      |   |                           |   | 93,460    |                               |  |   | 73,042       |   |  |                    |           |   |  |   | 167,292  |  
|Accrued expenses and other current liabilities                   |  |                    | 10,294   |   |                           |   | 67,137    |                               |  |   | 45,115       |   |  |                    |           |   |  |   | 122,546  |  
|Taxes payable                                                    |  |                    | (54      | ) |                           |   | 7,738     |                               |  |   | 28,565       |   |  |                    |           |   |  |   | 36,249   |  
|Liabilities held for sale                                        |  |                    |         |   |                           |   | 7,725     |                               |  |   | 6,678        |   |  |                    |           |   |  |   | 14,403   |  
|Deferred revenue                                                 |  |                    |         |   |                           |   | 20,039    |                               |  |   | 17,733       |   |  |                    |           |   |  |   | 37,772   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total current liabilities                                        |  |                    | 11,030   |   |                           |   | 197,534   |                               |  |   | 172,006      |   |  |                    |           |   |  |   | 380,570  |  
|Long-term debt and notes payables, less current maturities       |  |                    | 236,173  |   |                           |   | 2,536     |                               |  |   | 697          |   |  |                    |           |   |  |   | 239,406  |  
|Deferred income taxes and other long-term liabilities            |  |                    |         |   |                           |   | 43,897    |                               |  |   | 21,934       |   |  |                    |           |   |  |   | 65,831   |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total liabilities                                                |  |                    | 247,203  |   |                           |   | 243,967   |                               |  |   | 194,637      |   |  |                    |           |   |  |   | 685,807  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|6.5% convertible participating shares                            |  |                    | 299,906  |   |                           |   |          |                               |  |   |             |   |  |                    |           |   |  |   | 299,906  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Shareholders equity (deficit)                                   |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Ordinary shares                                                  |  |                    | 5,277    |   |                           |   | 1,188,946 |                               |  |   | 236,587      |   |  |                    | (1,425,533 | ) |  |   | 5,277    |  
|Additional paid-in capital                                       |  |                    | 329,152  |   |                           |   | 26,743    |                               |  |   | 439,780      |   |  |                    | (466,523   | ) |  |   | 329,152  |  
|Retained earnings (accumulated deficit)                          |  |                    | (495,960 | ) |                           |   | (615,815  | )                             |  |   | 593,766      |   |  |                    | 22,049     |   |  |   | (495,960 | )
|Accumulated other comprehensive (loss) income                    |  |                    | (55,156  | ) |                           |   | 32,026    |                               |  |   | (313,468     | ) |  |                    | 281,442    |   |  |   | (55,156  | )
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total shareholders equity (deficit)                             |  |                    | (216,687 | ) |                           |   | 631,900   |                               |  |   | 956,665      |   |  |                    | (1,588,565 | ) |  |   | (216,687 | )
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  
|Total liabilities & shareholders equity (deficit)               |  | $                  | 330,422  |   |                           | $ | 875,867   |                               |  | $ | 1,151,302    |   |  | $                  | (1,588,565 | ) |  | $ | 769,026  |  
|                                                                 |  |                    |          |   |                           |   |           |                               |  |   |              |   |  |                    |            |   |  |   |          |  



29



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##### Table of Contents

Supplemental Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended December 31, 2005

(in thousands)

(Unaudited)



|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ------------------------- | - | ------- | ----------------------------- |  | - | ------------------ | - |  | - | ------- | -
|                                                                            |  | Nine Months Ended December 31, 2005 |        
|                                                                            |  | Parent Company (1)                  |         |   | Subsidiary Guarantors (2) |   |         | Subsidiary Non-Guarantors (3) |  |   | Consolidated Total |  
|Net cash provided by (used in) continuing operations                        |  | $                                   | (10,293 | ) |                           | $ | (41,981 | )                             |  | $ | 1,566              |   |  | $ | (50,708 | )
|Net cash provided by (used in) discontinued operations                      |  |                                     |        |   |                           |   | 1,989   |                               |  |   | (1,630             | ) |  |   | 359     |  
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net cash used in operating activities                                       |  |                                     | (10,293 | ) |                           |   | (39,992 | )                             |  |   | (64                | ) |  |   | (50,349 | )
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Investing activities                                                        |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Capital expenditures                                                        |  |                                     |        |   |                           |   | (4,242  | )                             |  |   | (3,963             | ) |  |   | (8,205  | )
|Proceeds from sale of property and equipment                                |  |                                     |        |   |                           |   | 192     |                               |  |   | 16                 |   |  |   | 208     |  
|Proceeds from sale of discontinued operations, net of cash                  |  |                                     |        |   |                           |   | 16,924  |                               |  |   |                   |   |  |   | 16,924  |  
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) continuing investing activities              |  |                                     |        |   |                           |   | 12,874  |                               |  |   | (3,947             | ) |  |   | 8,927   |  
|Net cash used in discontinued investing activities                          |  |                                     |        |   |                           |   | (101    | )                             |  |   | (355               | ) |  |   | (456    | )
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) investing activities                         |  |                                     |        |   |                           |   | 12,773  |                               |  |   | (4,302             | ) |  |   | 8,471   |  
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Financing activities                                                        |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net borrowings (payments) of debt                                           |  |                                     |        |   |                           |   | (955    | )                             |  |   | (991               | ) |  |   | (1,946  | )
|Proceeds from stock options exercised                                       |  |                                     | 619     |   |                           |   |        |                               |  |   |                   |   |  |   | 619     |  
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) continuing financing activities              |  |                                     | 619     |   |                           |   | (955    | )                             |  |   | (991               | ) |  |   | (1,327  | )
|Net cash provided by (used in) discontinued financing activities            |  |                                     |        |   |                           |   |        |                               |  |   | (99                | ) |  |   | (99     | )
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) financing activities                         |  |                                     | 619     |   |                           |   | (955    | )                             |  |   | (1,090             | ) |  |   | (1,426  | )
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Effect of exchange rates on cash                                            |  |                                     |        |   |                           |   | (391    | )                             |  |   | (3,706             | ) |  |   | (4,097  | )
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                     | (9,674  | ) |                           |   | (28,565 | )                             |  |   | (9,162             | ) |  |   | (47,401 | )
|Cash and cash equivalents from continuing operations, beginning of period   |  |                                     | 9,989   |   |                           |   | 33,785  |                               |  |   | 48,151             |   |  |   | 91,925  |  
|Cash and cash equivalents from discontinued operations, beginning of period |  |                                     |        |   |                           |   | 352     |                               |  |   | 5,839              |   |  |   | 6,191   |  
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                                   | 315     |   |                           | $ | 5,572   |                               |  | $ | 44,828             |   |  | $ | 50,715  |  
|                                                                            |  |                                     |         |   |                           |   |         |                               |  |   |                    |   |  |   |         |  



30



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##### Table of Contents

Supplemental Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended December 31, 2004

(in thousands)

(Unaudited)



|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ------------------------- | - | ------ | ----------------------------- |  | - | ------------------ | - |  | - | ------- | -
|                                                                            |  | Nine Months Ended December 31, 2004 |        
|                                                                            |  | Parent Company (1)                  |         |   | Subsidiary Guarantors (2) |   |        | Subsidiary Non-Guarantors (3) |  |   | Consolidated Total |  
|Net cash provided by (used in) continuing operations                        |  | $                                   | (62,650 | ) |                           | $ | 15,642 |                               |  | $ | 37,191             |   |  | $ | (9,817  | )
|Net cash provided by (used in) discontinued operations                      |  |                                     |        |   |                           |   | (4,331 | )                             |  |   | 3,652              |   |  |   | (679    | )
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) operating activities                         |  |                                     | (62,650 | ) |                           |   | 11,311 |                               |  |   | 40,843             |   |  |   | (10,496 | )
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Investing activities                                                        |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Capital expenditures                                                        |  |                                     |        |   |                           |   | (7,941 | )                             |  |   | (5,222             | ) |  |   | (13,163 | )
|Purchase of subsidiary, net of cash acquired                                |  |                                     |        |   |                           |   | (2,110 | )                             |  |   |                   |   |  |   | (2,110  | )
|Proceeds from sale of discontinued operations, net of cash                  |  |                                     |        |   |                           |   | 209    |                               |  |   |                   |   |  |   | 209     |  
|Proceeds from sale of property and equipment                                |  |                                     |        |   |                           |   | 276    |                               |  |   | 37                 |   |  |   | 313     |  
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net cash used in continuing investing activities                            |  |                                     |        |   |                           |   | (9,566 | )                             |  |   | (5,185             | ) |  |   | (14,751 | )
|Net cash used in discontinued investing activities                          |  |                                     |        |   |                           |   | (246   | )                             |  |   | (2,541             | ) |  |   | (2,787  | )
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net cash used in investing activities                                       |  |                                     |        |   |                           |   | (9,812 | )                             |  |   | (7,726             | ) |  |   | (17,538 | )
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Financing activities                                                        |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net borrowings (payments) of debt                                           |  |                                     |        |   |                           |   | (694   | )                             |  |   | 399                |   |  |   | (295    | )
|Proceeds from stock options exercised                                       |  |                                     | 880     |   |                           |   |       |                               |  |   |                   |   |  |   | 880     |  
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) continuing financing activities              |  |                                     | 880     |   |                           |   | (694   | )                             |  |   | 399                |   |  |   | 585     |  
|Net cash provided by (used in) discontinuing financing activities           |  |                                     |        |   |                           |   |       |                               |  |   | (331               | ) |  |   | (331    | )
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net cash provided by (used in) financing activities                         |  |                                     | 880     |   |                           |   | (694   | )                             |  |   | 68                 |   |  |   | 254     |  
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Effect of exchange rates on cash                                            |  |                                     |        |   |                           |   | 3,093  |                               |  |   | 1,151              |   |  |   | 4,244   |  
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                     | (61,770 | ) |                           |   | 3,898  |                               |  |   | 34,336             |   |  |   | (23,536 | )
|Cash and cash equivalents from continuing operations, beginning of period   |  |                                     | 68,389  |   |                           |   | 24,641 |                               |  |   | 13,824             |   |  |   | 106,854 |  
|Cash and cash equivalents from discontinued operations, beginning of period |  |                                     |        |   |                           |   | 2,549  |                               |  |   | 3,387              |   |  |   | 5,936   |  
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                                   | 6,619   |   |                           | $ | 31,088 |                               |  | $ | 51,547             |   |  | $ | 89,254  |  
|                                                                            |  |                                     |         |   |                           |   |        |                               |  |   |                    |   |  |   |         |  

---

Notes to Supplemental Consolidating Financial Data
for Subsidiary Guarantors of 11.0% Senior Notes.



|(1) | Danka Business Systems PLC
|--- | --------------------------

|(2) | Subsidiary Guarantors include the following subsidiaries:
|--- | ---------------------------------------------------------



| |  |  | Danka Australasia Pty Limited, Danka Australia Pty Limited, Danka Tower Pty Ltd, Danka Distributors Pty Ltd, Danka Datakey Pty Ltd, Datakey Alcatel Pty. Ltd. and Danka Systems Pty
Limited, representing all of our Australian Subsidiaries;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dankalux S.à r.L., a Luxembourg subsidiary;
| | - |  | -------------------------------------------



| |  |  | Danka United Kingdom Plc, our primary United Kingdom operating subsidiary, and Danka Services International Ltd., a United Kingdom subsidiary; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Danka Holding Company, American Business Credit Corporation, Danka Management II Company, Inc., Herman Enterprises, Inc. of South Florida, D.I. Investment Management, Inc., Quality
Business, Inc., Danka Management Company, Inc., Corporate Consulting Group, Inc., Danka Imaging Distribution, Inc. and Danka Office Imaging Company, which represent all of our United States Subsidiaries other than certain dormant entities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Subsidiaries of Danka Business Systems PLC other than Subsidiary Guarantors
|--- | ---------------------------------------------------------------------------



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)



Based on revenue, Danka Business Systems PLC (also referred to herein as Danka, the Company, we, us or our) is
one of the largest independent providers of managed print services in the United States and Europe/Australia. Managed print services include the provision of office imaging equipment, document solutions and related services and supplies with the
objective of managing our customers print network and print output requirements to manage efficiencies in their businesses. We offer a wide range of state of the art office imaging products, peripherals and solutions that primarily include
digital and color copiers, digital and color multi-function peripherals (MFPs), facsimile machines, printers and software. We also provide a wide range of contract services, including professional and consulting services, maintenance,
supplies, leasing arrangements, technical support and training on the installed base of equipment created primarily by our retail equipment and related sales.



Dankas mission is to deliver value to clients worldwide by using our expert sales, technical and professional services and products to implement effective
document information solutions and services. Our product portfolio is designed to enable choice, convenience, custom cost management and continuity. Our vision is to empower our customers to benefit fully from the convergence of image and document
technologies in a connected environment. This approach will strengthen our client relationships and expand Dankas strategic value.



Our strategy to accomplish our mission is to:



| |  |  | enhance customer relationships;
| | - |  | -------------------------------



| |  |  | grow revenues by providing value-added and cost-driven product solutions and services;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | re-engineer processes and systems;
| | - |  | ----------------------------------



| |  |  | maximize free cash flow generation and reduce net debt; and
| | - |  | -----------------------------------------------------------



| |  |  | develop an efficient and productive organization.
| | - |  | -------------------------------------------------



We currently operate in over 15 countries. Our reportable segments are the United States and Europe/Australia, which include operations that are experiencing political,
social and/or economic difficulty. We continue to evaluate the viability and future prospects of the operations in certain countries in light of uncertain conditions. Based on these evaluations, we sold our operations in Canada and Central and South
America during the first nine months of fiscal year 2006, and we sold our operations in Portugal and Russia during fiscal year 2005. Should we decide to downsize or exit any of our other operations in the future, we could incur costs in respect of
severance and closure of facilities and we may also be required to realize cumulative translation losses and minimum pension liabilities that would reduce our earnings, all or any of which may have a material impact on our operating results.



Critical Accounting Policies and Estimates



In preparing our consolidated financial statements and accounting for the underlying
transactions and balances, we apply various accounting policies. We consider the policies discussed below as critical to understanding our consolidated financial statements, as their application places the most significant demands on
managements judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. Specific risks associated with these critical accounting policies are discussed throughout this MD&A where
such policies affect our reported and expected financial results.



Allowance
for Doubtful AccountsWe provide allowances for doubtful accounts and allowances for billing disputes and inaccuracies on our accounts receivable as follows:



| |  |  | Allowances for doubtful accounts: Generally credit is extended to customers based on an evaluation of the customers financial condition and collateral is generally not
required. Some of the factors that we consider in determining whether to record an allowance against accounts receivable include the age of the receivable, historical write-off experience and current economic conditions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Allowances for billing disputes and inaccuracies: Because of the difficulties we experience in accurately recording the number of copies made by customers, entering contract
information into our system and timely identifying and correcting billing errors, we reduce revenue for an estimate of future credits that will be issued for billing disputes and billing inaccuracies at the time of sale. These estimates are
established based on our historical experience of write-offs and credits issued for billing disputes and inaccuracies and are influenced by a number of considerations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table summarizes our net accounts receivable:



|                                                                    |  |                   |         |   |                |   |         |  
|------------------------------------------------------------------- |  | ----------------- | ------- | - | -------------- | - | ------- | -
|                                                                    |  | December 31, 2005 |         |   | March 31, 2005 |  
|Accounts receivable, gross                                          |  | $                 | 231,207 |   |                | $ | 266,992 |  
|Allowance for doubtful accounts                                     |  |                   | (39,567 | ) |                |   | (55,577 | )
|                                                                    |  |                   |         |   |                |   |         |  
|Accounts receivable, net                                            |  | $                 | 191,640 |   |                | $ | 211,415 |  
|                                                                    |  |                   |         |   |                |   |         |  
|Allowance for doubtful accounts as a % of gross accounts receivable |  |                   | 17.1    | % |                |   | 20.8    | %



InventoriesWe acquire
inventory based on our projections of future demand and market conditions. Any unexpected decline in demand and/or rapid product improvements or technological changes may cause us to have excess and/or obsolete inventories. We have provided an
appropriate estimate of reserves against these inventory items in current and prior periods. On an ongoing basis, we review for estimated obsolete or unmarketable inventories and write-down our inventories to their estimated net realizable value
based upon our forecasts of future demand and market conditions using historical trends and analysis. If actual market conditions are less favorable than our forecasts due, in part, to a greater acceleration within the industry to digital office
imaging equipment, additional inventory write-downs may be required. Our estimates are influenced by a number of considerations including, but not limited to, the following: decline in demand due to economic downturns, rapid product improvements and
technological changes, and our ability to return to vendors a certain percentage of our purchases.



Revenue RecognitionWe generally have agreements to provide product maintenance services for the equipment that we sell or lease to customers. We follow the guidance in EITF Issue 00-21, Revenue
Arrangements with Multiple Deliverables, as modified for the impact of higher level accounting literature, to allocate revenue received between the two deliverables in the arrangement  the equipment and the product maintenance services.
For arrangements in which the product maintenance services meet the definition in FASB Technical Bulletin No. 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts, of a separately priced product
maintenance contract, revenue equal to the amount paid by the customer to obtain the product maintenance services is allocated to the separately priced maintenance agreement, with the remainder of the revenue allocated to the equipment (or operating
lease payments for use of the equipment). For arrangements in which the product maintenance services does not meet the definition in TB 90-1 of a separately priced product maintenance contract, but the revenue recognized related to the equipment is
governed by FASB Statement No. 13, Accounting for Leases, revenue is allocated between the equipment (or operating lease payments for use of the equipment) and product maintenance services on a relative fair value basis using our best
estimate of fair value of the equipment (or operating lease payments for use of the equipment) and of the product maintenance services.



Revenue from wholesale and retail equipment and related sales, including revenue allocated to equipment sales as discussed above, is recognized upon acceptance of
delivery by the customer. In the case of equipment sales financed by third party finance/leasing companies, revenue is recognized at the later of acceptance of delivery by the customer or credit acceptance by the finance/leasing company. In
addition, for the sale of certain digital equipment that requires a comprehensive setup by us before it can be used by a customer, revenue is recognized upon the customers written confirmation of delivery and installation. Supply sales to
customers are recognized at the time of shipment unless supply sales are included in a service contract, in which case supply sales are recognized upon equipment usage by the customer.



We sell equipment with embedded software to our customers. The embedded software is not sold separately, is not a significant focus of the
marketing effort, and we do not provide post contract customer support specific to the software or incur significant costs that are within the scope of Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole such that
Statement of Position No. 97-2, Software Revenue Recognition, is not applicable. Revenue from the sales of equipment subject to an operating lease, or of equipment that is leased by or intended to be leased by the purchaser to another
party, and sales-type leases is recognized in accordance with FAS No. 13. Revenue from all other sales of equipment is recognized in accordance with SEC Staff Accounting Bulletin No. 104.



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Rental operating lease income is recognized straight-line over the lease term. Retail service revenues are generally
recognized ratably over the term of the underlying product maintenance contracts. Under the terms of the product maintenance contract, the customer is billed a flat periodic charge and/or a usage-based fee. The typical agreement includes an
allowance for a minimum number of copies for a base service fee plus an overage charge for any copies in excess of the minimum. We record revenue each period for the flat periodic charge and for actual or estimated usage.



Cost of SalesInbound freight charges are included in inventory. When the
inventory is sold, the cost of the inventory, including the inbound freight charges, is relieved and charged to costs of sales. When the inventory is rented, the cost of the inventory, including the inbound freight charges, is relieved and
transferred to the rental equipment asset account. The cost of the rental equipment asset is then depreciated over the estimated useful life of the equipment. The depreciation of rental equipment assets is included in rental costs.



Purchasing and receiving costs, inspection costs, warehousing costs and other distribution
costs are included in selling, service and administrative costs because no meaningful allocation of these expenses to equipment, supplies, rental and wholesale costs of sales is practicable. Accordingly, our gross margins may not be comparable to
other companies, since some companies include all of the costs related to their distribution network in cost of sales, while others exclude a portion of them from gross margin, including them instead in operating expense line items. These costs
totaled $6.5 million and $6.8 million for the third quarter of fiscal years 2006 and 2005, respectively and $20.1 million and $21.0 million for the first nine months of fiscal year 2006 and 2005, respectively.



We receive vendor rebates based on arrangements with certain equipment vendors. Those
arrangements require vendors to make incentive payments to the Company based on the volume of purchases (dollar amounts, quantity of specific units, etc.) for monthly or quarterly periods. Such rebates are accrued when purchases are made and can be
reasonably estimated, recorded as reductions of inventory costs when accrued and recognized as a reduction to cost of sales when the related inventories are sold.



Deferred Income TaxesAs part of the process of preparing our consolidated financial statements, we have to estimate our income
and corporation taxes in each of the taxing jurisdictions in which we operate. This process involves estimating our actual current tax expense and loss carryforwards together with assessing any temporary differences resulting from the different
treatment of certain items, such as the timing for recognizing revenues and expenses for tax and accounting purposes. These differences and loss carryforwards may result in deferred tax assets and liabilities, which are included in our consolidated
balance sheet.



In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Our past financial performance is a significant factor which contributes to our inability, pursuant to Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109), to use projections of future taxable income in assessing the realizability of deferred tax assets. Management therefore is limited to considering the scheduled reversal of deferred tax
liabilities and tax planning strategies in making this assessment. Considering all relevant data, management concluded that it is not more likely than not the Company will realize the benefits of the deferred tax assets at
December 31, 2005 and 2004 in most jurisdictions and therefore a valuation allowance has been recorded to reserve its deferred tax assets at December 31, 2005 and 2004 in these jurisdictions.



In addition, we operate within multiple taxing jurisdictions and are subject to audit in
these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In managements opinion, adequate provisions for income and corporation taxes have been made for all years.



GoodwillWe had goodwill of $203.4 million as of December 31, 2005. We
review our goodwill and indefinite-lived intangible assets annually for possible impairment, or more frequently if impairment indicators arise in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142). Separable intangible assets that have finite lives are amortized over their estimated useful lives.



Goodwill was reviewed for possible impairment during the fourth quarter of our fiscal year 2005, in accordance with SFAS No. 142. In performing our impairment
testing, we engaged an independent appraisal company to assist in the valuation of our reporting units. The fair values of the reporting units were determined using a combination of a discounted cash flow model and a guideline company method using
valuation multiples. The discounted cash flow model used estimates of future revenue and expenses for each reporting unit as well as appropriate discount rates, and the estimates that were used are consistent with the plans and estimates the Company
is using to manage the underlying business. Based on that analysis, management determined that the goodwill balance was impaired for its Europe/Australia reporting unit. As such, additional goodwill impairment testing was completed for that
reporting unit, and based on the result of that testing, we recorded an impairment charge totaling $70.9 million during the fourth quarter of fiscal year 2005.



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Accounting for Stock Based CompensationAs permitted by Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS 123), we account for our stock option plans under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations. As the exercise prices of all options granted under these plans were equal to the market price of the underlying American Depositary Shares
(ADS) on the grant date, no stock-based employee compensation expense was recognized in net earnings. In general, these options expire in ten years and vest over three years. The proceeds from options exercised are credited to
shareholders equity (deficit), net of related tax benefits.



For current
disclosure purposes, we compute the impact to earnings (loss) of stock-based compensation using the Black-Scholes option pricing model. SFAS 123 allows the use of option pricing models that were not developed for use in valuing employee stock
options.



In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, Share-Based Payment (SFAS No. 123R), an amendment of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R eliminates the ability to account for share-based payments
using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments,
including stock options. The expense will be measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an
observable market price for a share-based award, the fair value would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price
of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate.



The requirements of SFAS No. 123R are effective for our fiscal year beginning April 1, 2006. Early adoption of the provisions of
SFAS No. 123R is encouraged, but not required. At meetings held on January 30 and 31, 2006, our Human Resources Committee of the Board of Directors and our Board of Directors approved the acceleration of the vesting of all of our stock
options outstanding as of January 31, 2006. The acceleration of the options is to take place on or before March 31, 2006. The purpose of the accelerated vesting is to enable us to avoid recognizing in our income statement compensation
expense associated with these options in future periods, due to the adoption of SFAS No. 123R. The pre-tax charge to be avoided upon adoption of SFAS No. 123R is expected to be approximately $2.1 million and represents the fair value of
the unvested awards as of the date of the acceleration as determined under SFAS No. 123. As a result of the accelerated vesting, approximately 2.3 million shares with varying remaining vesting schedules will become immediately exercisable.
In order to help avoid unintended personal benefits to holders of the accelerated options, any shares received through exercise of accelerated options may not be sold by the option holder until the original vesting date of the accelerated option or
the termination of the employment of the option holder, whichever occurs first. In connection with the accelerated vesting, each option agreement underlying such options will be amended.



We expect the adoption of SFAS No. 123R will have an unfavorable impact for all future grants on our consolidated results of operations
and net income per common share. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current
guidelines. This requirement may reduce our net operating cash flows and increase net financing cash flows in periods after adoption. We cannot estimate what those amounts will be in the future because they depend on, among other things, when
employees exercise stock options.



All grants after March 31, 2006 will be
valued using a binomial pricing model and we will recognize the associated expense over the vesting period based on the fair values determined by the binomial pricing model using the accelerated attribution method.



Restructuring ChargesWe recognize restructuring charges for the consolidation of
back office functions, exiting non-strategic real estate facilities and reducing headcount. These charges are recorded pursuant to formal plans developed and approved by management. These charges are accounted for under the provisions of Statement
of Financial Accounting Standards No. 112, Employers Accounting for Postemployment Benefits (SFAS 112) and Statement of Financial Accounting Standards No. 146, Accounting for Cost Associated with Exit or
Disposal Activities (SFAS 146) and the recognition of restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with these plans. The estimates of future
liabilities may change, requiring additional restructuring charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and
the utilization of the provisions are for their intended



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purpose in accordance with the restructuring programs. For further discussion of our restructuring programs, refer to
Note 5. Restructuring Charges (Credits) to the Consolidated Condensed Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.



Financial Condition



All tables presented herein are in thousands unless otherwise noted. Certain prior year
amounts have been reclassified to conform to the current year presentation.



|                                       |  |                   |         |   |                |   |         |  
|-------------------------------------- |  | ----------------- | ------- | - | -------------- | - | ------- | -
|                                       |  | December 31, 2005 |         |   | March 31, 2005 |  
|Total assets                           |  | $                 | 623,575 |   |                | $ | 769,026 |  
|Total liabilities                      |  | $                 | 584,713 |   |                | $ | 685,807 |  
|Working capital                        |  | $                 | 46,423  |   |                | $ | 71,666  |  
|Liabilities to liabilities and capital |  |                   | 93.8    | % |                |   | 89.2    | %
|Inventory turnover ratio               |  |                   | 5x      |   |                |   | 5x      |  



Total assets as of December 31,
2005 decreased $145.5 million or 18.9% from March 31, 2005. This decrease was primarily due to the sale of our Canadian and Central and South American subsidiaries which reduced assets held for sale by $43.2 million. Accounts receivable
decreased $19.8 million resulting from improved collections and decreasing revenue. In addition, cash decreased $41.2 million to fund operations, and fixed assets and rental assets decreased $16.3 million due to continuing depreciation of assets and
decreased capital spending on rental assets during the first nine months of fiscal year 2006.



Total liabilities decreased $101.1 million from March 31, 2005, or 14.7%. This decrease is primarily due to the sale of our Canadian and Central and South American subsidiaries which reduced liabilities held for
sale by $14.4 million, and a decrease in accrued expenses of $42.8 million due to the payout of restructuring accruals of $16.3 million, payouts of other accrued professional fees of $8.7 million (primarily related to our Sarbanes Oxley compliance
efforts during fiscal year 2005) and a decrease in accrued payroll of $10.1 million. Accounts payable decreased $16.4 million due to pay down of payables at the end of the quarter.



Working capital, defined as current assets less current liabilities, decreased $25.2 million from March 31, 2005 primarily resulting
from the sale of our Canadian and Central and South American subsidiaries discussed above.



Liabilities to liabilities and capital increased 4.6% at December 31, 2005 compared to March 31, 2005 due to operating losses during the first half of fiscal year 2006.



For the period ending December 31, 2005 our annualized
inventory turnover ratio remained stable at 5x.



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Results of Operations



The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items in our consolidated statements of operations:



|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|-------------------------------------------------------------- |  | ------------------ | - |  | ----------------- | - |  | ----------------- | -- |  | ----------------- | -
|                                                               |  | Three months ended |   |  | Nine months ended |  
|                                                               |  | December 31, 2005  |   |  | December 31, 2004 |   |  | December 31, 2005 |    |  | December 31, 2004 |  
|Revenue:                                                       |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Retail equipment and related sales                             |  | 37.7               | % |  | 36.1              | % |  | 38.5              | %  |  | 35.4              | %
|Retail service                                                 |  | 45.6               |   |  | 47.6              |   |  | 45.7              |    |  | 48.8              |  
|Retail supplies and rentals                                    |  | 7.3                |   |  | 7.8               |   |  | 7.5               |    |  | 7.9               |  
|Wholesale                                                      |  | 9.4                |   |  | 8.5               |   |  | 8.3               |    |  | 7.9               |  
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Total revenue                                                  |  | 100.0              |   |  | 100.0             |   |  | 100.0             |    |  | 100.0             |  
|Cost of sales                                                  |  | 68.2               |   |  | 64.0              |   |  | 67.3              |    |  | 63.1              |  
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Gross profit                                                   |  | 31.8               |   |  | 36.0              |   |  | 32.7              |    |  | 36.9              |  
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Selling, general and administrative expenses                   |  | 30.0               |   |  | 36.8              |   |  | 33.0              |    |  | 35.6              |  
|Restructuring charges (credits)                                |  | 0.0                |   |  | (0.1              | ) |  | 0.9               |    |  | (0.2              | )
|Other expense (income)                                         |  | (0.1               | ) |  | 0.5               |   |  | 0.0               |    |  | 0.2               |  
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Operating earnings (loss) from continuing operations           |  | 1.9                |   |  | (1.2              | ) |  | (1.2              | )  |  | 1.3               |  
|Interest expense                                               |  | (3.0               | ) |  | (2.7              | ) |  | (2.9              | )  |  | (2.6              | )
|Interest income                                                |  | 0.1                |   |  | 0.0               |   |  | 0.0               |    |  | 0.0               |  
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Earnings (loss) from continuing operations before income taxes |  | (1.0               | ) |  | (3.9              | ) |  | (4.1              | )  |  | (1.3              | )
|Provision (benefit) for income taxes                           |  | (4.2               | ) |  | (5.7              | ) |  | (1.1              | )  |  | (1.9              | )
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  
|Net earnings (loss) from continuing operations                 |  | 3.2                | % |  | 1.8               | % |  | (3.0              | )% |  | 0.6               | %
|                                                               |  |                    |   |  |                   |   |  |                   |    |  |                   |  



The following table sets forth for the
periods indicated the percentage of revenue increase (decrease) from continuing operations from the prior year:



|                                   |  |                    |    |  |                   |    |  |                   |    |  |                   |   
|---------------------------------- |  | ------------------ | -- |  | ----------------- | -- |  | ----------------- | -- |  | ----------------- | --
|                                   |  | Three months ended |    |  | Nine months ended |   
|                                   |  | December 31, 2005  |    |  | December 31, 2004 |    |  | December 31, 2005 |    |  | December 31, 2004 |   
|Retail equipment and related sales |  | (6.4               | )% |  | (0.5              | )% |  | 1.8               | %  |  | (4.1              | )%
|Retail service                     |  | (14.3              | )  |  | (5.2              | )  |  | (12.7             | )  |  | (5.2              | ) 
|Retail supplies and rentals        |  | (16.1              | )  |  | (22.2             | )  |  | (10.8             | )  |  | (14.5             | ) 
|Wholesale                          |  | (1.3               | )  |  | 1.5               |    |  | (2.2              | )  |  | (0.4              | ) 
|Total revenue                      |  | (10.5              | )% |  | (4.6              | )% |  | (6.6              | )% |  | (5.3              | )%



37



---

##### Table of Contents

The following table sets forth for the periods indicated the gross profit margin percentage from continuing operations
for each of our revenue classifications:



|                                   |  |                    |   |  |                   |   |  |                   |   |  |                   |  
|---------------------------------- |  | ------------------ | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                                   |  | Three months ended |   |  | Nine months ended |  
|                                   |  | December 31, 2005  |   |  | December 31, 2004 |   |  | December 31, 2005 |   |  | December 31, 2004 |  
|Retail equipment and related sales |  | 31.6               | % |  | 35.8              | % |  | 30.8              | % |  | 35.1              | %
|Retail service                     |  | 34.2               |   |  | 39.2              |   |  | 36.2              |   |  | 40.9              |  
|Retail supplies and rentals        |  | 38.7               |   |  | 40.4              |   |  | 38.2              |   |  | 40.3              |  
|Wholesale                          |  | 16.0               |   |  | 15.4              |   |  | 17.5              |   |  | 17.3              |  
|Total gross margin                 |  | 31.8               | % |  | 36.0              | % |  | 32.7              | % |  | 36.9              | %



The following tables set forth for the
periods indicated the revenue, gross profit, operating earnings (loss), capital expenditures and depreciation-amortization for each of our operating segments from continuing operations:



Revenue, Gross profit and Operating earnings (loss)



|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                           |  | Three months ended December 31, |         |   | Nine months ended December 31, |  
|                                                           |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|Revenue                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States                                              |  | $                               | 125,475 |   |                                | $ | 137,919 |      |  | $ | 394,209 |   |  | $ | 431,200 |  
|Europe/Australia                                           |  |                                 | 139,986 |   |                                |   | 158,654 |      |  |   | 430,565 |   |  |   | 451,431 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Revenue                                              |  | $                               | 265,461 |   |                                | $ | 296,573 |      |  | $ | 824,774 |   |  | $ | 882,631 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States                                              |  | $                               | 43,047  |   |                                | $ | 57,171  |      |  | $ | 139,127 |   |  | $ | 178,664 |  
|Europe/Australia                                           |  |                                 | 41,441  |   |                                |   | 49,722  |      |  |   | 130,596 |   |  |   | 147,289 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Gross profit                                         |  | $                               | 84,488  |   |                                | $ | 106,893 |      |  | $ | 269,723 |   |  | $ | 325,953 |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations       |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States(1)                                           |  | $                               | 6,980   |   |                                | $ | 4,749   |      |  | $ | 7,016   |   |  | $ | 23,174  |  
|Europe/Australia(2)                                        |  |                                 | 2,732   |   |                                |   | 2,279   |      |  |   | 941     |   |  |   | 13,610  |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Subtotal                                                   |  |                                 | 9,712   |   |                                |   | 7,028   |      |  |   | 7,957   |   |  |   | 36,784  |  
|Other (3)                                                  |  |                                 | (4,701  | ) |                                |   | (10,441 | )    |  |   | (18,123 | ) |  |   | (25,635 | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Operating earnings (loss) from continuing operations |  | $                               | 5,011   |   |                                | $ | (3,413  | )    |  | $ | (10,166 | ) |  | $ | 11,149  |  
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|United States                                              |  | $                               | (112    | ) |                                | $ | (303    | )    |  | $ | (940    | ) |  | $ | (529    | )
|Europe/Australia                                           |  |                                 | (2,690  | ) |                                |   | (2,829  | )    |  |   | (8,094  | ) |  |   | (9,213  | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Subtotal                                                   |  |                                 | (2,802  | ) |                                |   | (3,132  | )    |  |   | (9,034  | ) |  |   | (9,742  | )
|Other (3)                                                  |  |                                 | (5,120  | ) |                                |   | (4,928  | )    |  |   | (14,862 | ) |  |   | (13,135 | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total Interest expense                                     |  | $                               | (7,922  | ) |                                | $ | (8,060  | )    |  | $ | (23,896 | ) |  | $ | (22,877 | )
|                                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

---

|(1) | Includes restructuring charges (credits) of $1.2 million and ($0.5 million) for the three months ended December 31, 2005 and 2004, respectively and $3.1 million and $0.6
million for the nine months ended December 31, 2005 and 2004, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes restructuring charges (credits) of ($1.3 million) and ($0.3 million) for the three months ended December 31, 2005 and 2004, respectively and $4.5 million and ($2.1
million) for the nine months ended December 31, 2005 and 2004, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Other primarily includes corporate expenses and foreign exchange gains/losses.
|--- | ------------------------------------------------------------------------------



Approximately 52.7%, and 52.2% of our revenue for the three and nine months ended December 31, 2005, respectively, was generated outside the United States while
approximately 53.5% and 51.1% of our revenue was generated outside the United States during the year-ago periods, respectively.



38



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##### Table of Contents

Capital Expenditures and Depreciation and Amortization



|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                    |  | Three months ended December 31, |       | Nine months ended December 31,
|                                    |  | 2005                            |       | 2004                           |   | 2005  |  | 2004
|Capital Expenditures                |  |                                 |       |                                |   |       |  |      |        |  |   |       
|United States                       |  | $                               | 564   |                                | $ | 2,311 |  | $    | 2,912  |  | $ | 3,952 
|Europe/Australia                    |  |                                 | 1,480 |                                |   | 2,446 |  |      | 5,275  |  |   | 8,526 
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Subtotal                            |  |                                 | 2,044 |                                |   | 4,757 |  |      | 8,187  |  |   | 12,478
|Other (1)                           |  |                                 |      |                                |   |      |  |      | 18     |  |   | 685   
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Total Capital Expenditures          |  | $                               | 2,044 |                                | $ | 4,757 |  | $    | 8,205  |  | $ | 13,163
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Depreciation and Amortization       |  |                                 |       |                                |   |       |  |      |        |  |   |       
|United States                       |  | $                               | 4,446 |                                | $ | 6,147 |  | $    | 14,159 |  | $ | 17,316
|Europe/Australia                    |  |                                 | 2,164 |                                |   | 2,663 |  |      | 6,953  |  |   | 7,806 
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Subtotal                            |  |                                 | 6,610 |                                |   | 8,810 |  |      | 21,112 |  |   | 25,122
|Other (2)                           |  |                                 | 286   |                                |   | 336   |  |      | 971    |  |   | 1,348 
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Total Depreciation and Amortization |  | $                               | 6,896 |                                | $ | 9,146 |  | $    | 22,083 |  | $ | 26,470
|                                    |  |                                 |       |                                |   |       |  |      |        |  |   |       

---

|(1) | Other includes corporate assets.
|--- | --------------------------------

|(2) | Other includes depreciation on corporate assets.
|--- | ------------------------------------------------



Assets and Long-lived Assets



|                        |  |                   |         |                |   |        
|----------------------- |  | ----------------- | ------- | -------------- | - | -------
|                        |  | December 31, 2005 |         | March 31, 2005
|Assets                  |  |                   |         |                |   |        
|United States           |  | $                 | 200,721 |                | $ | 232,213
|Europe/Australia        |  |                   | 346,515 |                |   | 382,797
|                        |  |                   |         |                |   |        
|Subtotal                |  |                   | 547,236 |                |   | 615,010
|Other (1)               |  |                   | 76,339  |                |   | 154,016
|                        |  |                   |         |                |   |        
|Total Assets            |  | $                 | 623,575 |                | $ | 769,026
|                        |  |                   |         |                |   |        
|Long-lived Assets (2)   |  |                   |         |                |   |        
|United States           |  | $                 | 93,548  |                | $ | 106,032
|Europe/Australia        |  |                   | 124,336 |                |   | 138,510
|                        |  |                   |         |                |   |        
|Subtotal                |  |                   | 217,884 |                |   | 244,542
|Other (1)               |  |                   | 60,123  |                |   | 72,248 
|                        |  |                   |         |                |   |        
|Total Long-lived Assets |  | $                 | 278,007 |                | $ | 316,790
|                        |  |                   |         |                |   |        

---

|(1) | Other includes corporate assets and assets held for sale from discontinued operations.
|--- | --------------------------------------------------------------------------------------

|(2) | Long-lived assets are defined as equipment on operating leases, property and equipment, goodwill, other intangibles, deferred income taxes and other assets, all of which are net of
their related depreciation and amortization.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39



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##### Table of Contents

The following table sets forth for the periods indicated the percentage of growth (decline) of total revenue for each of
our operating segments:



|                 |  |                                 |    |  |                                |    |  |      |    |  |       |   
|---------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ---- | -- |  | ----- | --
|                 |  | Three months ended December 31, |    |  | Nine months ended December 31, |   
|                 |  | 2005                            |    |  | 2004                           |    |  | 2005 |    |  | 2004  |   
|United States    |  | (9.0                            | )% |  | (13.9                          | )% |  | (8.6 | )% |  | (10.9 | )%
|Europe/Australia |  | (11.8                           | )  |  | 5.2                            |    |  | (4.6 | )  |  | 0.8   |   



The following tables set forth for the
periods indicated the gross profit margin percentage and operating earnings (loss) from continuing operations margin as a percentage of sales for each of our operating segments:



|                                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|----------------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                                            |  | Three months ended December 31, |   |  | Nine months ended December 31, |  
|                                                            |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Gross profit margin                                         |  |                                 |   |  |                                |   |  |      |   |  |      |  
|United States                                               |  | 34.3                            | % |  | 41.5                           | % |  | 35.3 | % |  | 41.4 | %
|Europe/Australia                                            |  | 29.6                            |   |  | 31.3                           |   |  | 30.3 |   |  | 32.6 |  
|                                                            |  |                                 |   | 
|Operating earnings (loss) margin from continuing operations |  |                                 |   |  |                                |   |  |      |   |  |      |  
|United States                                               |  | 5.6                             | % |  | 3.6                            | % |  | 1.8  | % |  | 5.4  | %
|Europe/Australia                                            |  | 2.0                             |   |  | 1.4                            |   |  | 0.2  |   |  | 3.0  |  



Three Months Ended
December 31, 2005 compared to the Three Months Ended December 31, 2004



Revenue



Revenue includes customer purchases of office
peripherals; professional, consulting and maintenance services; supplies; software and related support products; and leasing arrangements. For three months ended December 31, 2005, our revenue decreased by $31.1 million or 10.5% from the three
months ended December 31, 2004, with the United States segment decreasing $12.4 million or 9.0% and Europe/Australia decreasing $18.7 million or 11.8%. Service revenues continued to decrease due in part to the continued conversion from analog
devices to digital devices and a shift and decline in certain segments of our installed base. In addition, we are experiencing decreases in our click rates (per copy charge) due to competitive pricing pressures and slower than expected growth in
service volume from newer printer manufacturer customers. Our retail equipment and related sales declined due to increased pricing pressures coupled with product portfolio gaps (especially in our 50 page per minute color machine offerings), a delay
in certain Europe/Australia orders, and other weaknesses in certain areas of our Europe/Australia business, most notably, the United Kingdom. These issues combined with the advent of other competitive equipment from printer manufacturers may
continue to hinder our progress in growing our retail equipment and related sales revenue.



Our revenue for the three months ended December 31, 2005 was negatively impacted by $11.4 million of foreign currency movement. During the quarter, 47.3% of our total revenue was generated by our United States
segment and 52.7% by our Europe/Australia segment, compared to 46.5% and 53.5% respectively, during the three months ended December 31, 2004.



Retail equipment and related sales for the three months ended December 31, 2005 decreased by $6.9 million or 6.4% to $100.2 million compared to the prior period. The
United States was up $1.4 million or 2.6% due to increased sales productivity due to a realignment of our sales force towards a more market-based approach. This increase was offset by increasing pricing pressures and product portfolio gaps.



Retail equipment and related sales revenue in the Europe/Australia segment was
down $8.3 million or 15.6%. This decrease was the result of a delay in certain Europe/Australia orders, combined with pricing pressures. This decrease included a negative foreign currency movement of $3.5 million or 6.7%.



Retail service revenue declined by $20.2 million or 14.3% to $120.9 million due largely to
the factors discussed above. The United States segment was down $12.6 million or 16.9%. This decrease in the United States segment was also a direct result of lower average per copy charges. In addition, these pricing pressures are inhibiting price
maintenance or increases on renewals and new contracts entered into.



Retail
service revenue in the Europe/Australia segment was down $7.6 million or 11.4%. In Germany, France, the Netherlands and the United Kingdom, we are faced with declines in per copy charges related to the transition from analog and early digital
devices to more current models. This decrease included a negative foreign currency movement of $4.9 million or 7.3%.



40



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##### Table of Contents

Retail supplies and rental revenue declined by $3.7 million or 16.1% to $19.4 million in the three months ended
December 31, 2005 with the United States segment down $1.3 million or 13.2%. This decline was primarily due to non-investment in rental equipment.



Retail supplies and rental revenue in the Europe/Australia segment was down $2.5 million or 18.2%. The decrease in supplies is a result of the trend in the United Kingdom
where color machine service contracts are moving from being exclusive to inclusive of toner supplies and thus the related revenue is moving from supplies to service. This decrease included a negative foreign currency movement of $0.7 million or
5.0%.



Wholesale revenue declined by $0.3 million or 1.3% to $25.0 million, due
in part to pricing pressures. During fiscal year 2005, we changed the IT platform in our European wholesale business to Oracle and moved the physical location of the administration center. While these changes in the long term will provide a much
improved infrastructure for our wholesale business, in the short term, they negatively impacted our ability to accept, process and deliver customer orders during fiscal year 2005 and resulted in customer erosion.



Gross Profit



Our total gross profit margin after costs of goods sold, which primarily includes inventory, service labor and overhead, management costs
and depreciation of equipment, decreased to 31.8% in the three months ended December 31, 2005 from 36.0% in the year-ago period. Our total gross profit decreased $3.3 million due to foreign currency movements during the quarter. The gross
profit margin for the United States segment decreased to 34.3% from 41.5% and the Europe/Australia segment decreased to 29.6% from 31.3% in the year-ago period.



Retail equipment and related sales margins decreased to 31.6% from 35.8% in the year-ago period. Margins decreased in the Europe/Australia segment due to market
pricing pressures and unfavorable product mix. In addition, there have been increased market pressures in certain product offerings. Retail equipment and related sales margins decreased in the United States due to increased price competition and a
product gap, primarily in our high volume color segment. This has led to discounting of products with more functionality to fill the product portfolio gaps. This decrease was offset by an increase in manufacturer rebates in the United States of $1.7
million quarter over quarter.



Retail service margins decreased to 34.2% from
39.2% in the year-ago period. In the United States, the margins decreased from 43.9% to 35.6%, and in Europe/Australia the margins decreased from 34.0% to 32.7%.



Generally, the decrease in retail service margins was due to the fixed cost element of the service business, combined with lower revenue,
and the decision to retain rather than reduce service personnel in anticipation of future service business with certain customers. In addition, service revenues were impacted by the slower than expected ramp up of some of our printer manufacturer
contracts combined with start up costs incurred to generate these contracts.



Retail supplies and rental margins decreased to 38.7% from 40.4% in the year-ago period. In the United States, the margin decreased due to continuing depreciation being taken for rental equipment on contracts with certain governmental
customers for which revenues have not been recognized in the quarter as there has been delays in executing purchase orders by those customers.



Wholesale margins increased to 16.0% from 15.4% in the year-ago period due to renewed customer loyalty resulting from our conversion to our Oracle system which is helping
to alleviate the back office constraints in prior periods.



Selling, General
and Administrative Expenses



Selling, general and administrative expenses
(SG&A) in the third quarter decreased by $29.4 million or 26.9% from the year-ago period to $79.8 million from $109.2 million. This decline reflects the continuing success of our Vision 21 reengineering initiative. As part of this
initiative in the United States, we have outsourced several of our general and administrative functions which have introduced a variable cost element in certain support operations which have historically been part of our fixed costs. This approach
has enabled the reduction of our overall costs while delivering differentiated service to our internal and external customers. The continuing focus on improving our internal systems also enabled us to recognize $2.2 million of sales tax recovery in
the United States. In addition, we recorded a credit of $3.2 million representing the recovery of overpayments made to our workers compensation insurance carrier in the United States and a credit of $1.7 million for the reduction of recorded
liabilities for future claims recorded by us but to be paid by the insurance carrier from previous periods. Foreign currency movement decreased SG&A by $3.1 million or 2.8%. As a percentage of total revenue, SG&A expenses decreased to 30.0%
in the current quarter from 36.8% in the three months ended December 31, 2004.



41



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##### Table of Contents

Restructuring Charges (Credits)



In fiscal years 2005 and 2004, we formulated plans to continue to eliminate inefficiencies in our field operations and to reduce our
SG&A costs by eliminating and consolidating back office functions and exiting certain facilities. As part of these plans, in the three months ended December 31, 2005, we recorded a $1.3 million restructuring charge comprised primarily of
severance charges in the United States due to additional cost reduction efforts. This charge was offset by a reduction in severance charges in Europe/Australia of $1.4 million due to favorable severance negotiations and employee attrition. During
the year-ago period, we took a restructuring credit of $0.4 million due to the employee attrition partially offset by higher facility charges.



Other (Income) Expense



Other expense decreased $1.7 million year over year primarily due to a loss of $1.1 million associated with the disposal of our subsidiaries in Portugal and Russia in the prior year period.



Operating Earnings (Loss) from Continuing Operations



Our operating earnings from continuing operations was $5.0 million for the three months
ended December 31, 2005 compared to a loss of $3.4 million in the prior year period. These operating earnings were attributable to the decreases in SG&A, including one time corrections that reduced expenses, offset by lower sales and our
lower gross margins as discussed above.



Interest Expense and Interest
Income



Interest expense remained
relatively stable at $7.9 million while interest income increased by $0.2 million.



Income Taxes



We recorded an income tax benefit of $11.1
million in the three months ended December 31, 2005 compared to a tax benefit of $16.9 million in the prior year period. The tax benefit during the current quarter resulted from the resolution of various tax contingencies primarily in the
United States. The income tax benefit in the prior year quarter resulted from favorable settlements of tax audits in Europe.



Net Earnings (Loss) from Continuing Operations



Net earnings from continuing operations was $8.4 million in the three months ended December 31, 2005 compared to net earnings from continuing operations of $5.4
million in the year-ago period. After allowing for the dilutive effect of dividends on our participating shares, we incurred net earnings from continuing operations attributable to common shareholders of $0.05 per ADS during the current period
compared to net earnings from continuing operations of $0.01 per ADS in the year-ago period.



Exchange Rates



We operate in over 15
countries worldwide. Fluctuations in exchange rates between the United States dollar and the currencies in each of the countries in which we operate affect:



| |  |  | the results of our international operations reported in United States dollars; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the value of the net assets of our international operations reported in United States dollars.
| | - |  | ----------------------------------------------------------------------------------------------



Our results of operations are affected by the relative strength of currencies in the countries where our products are sold. Approximately
52.7% and 53.5% of our revenue in the three months ended December 31, 2005 and 2004, respectively, was generated outside the United States in our Europe/Australia segment.



In comparing the average exchange rates between the three months ended December 31, 2005 and the year-ago period, the euro currency and
the British Sterling pound weakened against the dollar by approximately 8.3% and 6.3% respectively. The change in exchange rates negatively impacted revenue in the quarter by approximately $11.4 million, decreased gross profit by $3.3 million and
decreased SG&A by less than $3.1 million.



Our inter-company loans are
subject to fluctuations in exchange rates between the United States dollar and the currencies in each of the countries in which we operate, primarily the euro and the British pound sterling. Based on the outstanding balance of our inter-company
loans at December 31, 2005, a change of 1.0% in the exchange rate for the euro and British pound sterling would cause a change in our foreign exchange result of approximately $0.1 million.



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Our results of operations and financial condition have been, and in the future may be, adversely affected by the
fluctuations in foreign currencies and by translation of the financial statements of our non-U.S. subsidiaries from local currencies to the dollar. Generally, we do not hedge our exposure to changes in foreign currency.



Nine months Ended December 31, 2005 compared to the Nine months Ended
December 31, 2004



Revenue



In the first nine months of fiscal year 2006, our revenue decreased by $57.9 million or 6.6%
from the first nine months of fiscal year 2005, with the United States segment decreasing $37.0 million or 8.6% and Europe/Australia decreasing by $20.9 million or 4.6%. Service revenues continued to decline due in part to the continued conversion
from analog devices to digital devices and a shift and decline in certain segments of our installed base. In addition, we are experiencing decreases in our click rates (per copy charges) due to competitive pricing pressures and slower than expected
growth in service volume from newer printer manufacturer contracts. Our retail equipment and related sales declined due to increased pricing pressures coupled with product portfolio gaps (especially in our 50 page per minute color machine
offerings), a delay in certain National Accounts sales in the United States, and weaknesses in certain areas of our Europe/Australia business, most notably the United Kingdom. These issues combined with the advent of other competitive equipment from
printer manufacturers may continue to hinder our progress in growing our retail equipment and related sales revenue.



Our total revenue for the nine month period was impacted by $4.6 million of negative foreign currency movement compared to the year ago period, all of which was
attributable to Europe/Australia. During the current period, 47.8% of our total revenue was generated by our United States segment and 52.2% by our Europe/Australia segment, compared to 48.9% and 51.1 %, respectively, during the year-ago
period.



Retail equipment and related sales increased by $5.8 million or 1.8%
to $317.7 million, with the United States up $3.7 million or 2.2%. Increases year over year are due to increased sales productivity, offset by softer National Accounts business (where we had several large transactions delay and not close during the
period), increasing pricing pressures and product portfolio gaps.



Retail
equipment and related sales revenue in the Europe/Australia segment was up $2.1 million or 1.4%. This increase year over year is due to increased sales productivity which was attributable to better sales coverage as a result of the retention of
qualified sales personnel. This increase was offset by a negative foreign currency movement of $1.2 million.



Retail service revenue declined by $54.6 million or 12.7% to $376.5 million due to the factors discussed above. The United States segment was down $37.5 million or 16.0%. This decrease in the United States segment was
also a direct result of lower average per copy charges. In addition, these pricing pressures are inhibiting price maintenance or increases on renewals and new contracts.



Retail service revenue in the Europe/Australia segment was down $17.1 million or 8.7%. In Germany, France, Netherlands and United Kingdom,
we are faced with declines in per copy charges related to the transition of analogue and early digital devices to more current models. This decrease included a negative foreign currency movement of $2.3 million.



Retail supplies and rental revenue declined by $7.5 million or 10.8% to $62.1 million, with
retail supplies and rental revenue in the United States segment down $3.2 million or 10.9% in the first nine months of fiscal year 2006. This decline was primarily due to the continued strategy of non-investment in rental equipment.



Retail supplies and rental revenue in the Europe/Australia segment was down $4.3 million or
10.8%. In addition to the continued strategy of non-investment in rental equipment, the supplies decrease is associated with the performance in the United Kingdom where the trend for color machine service contracts is moving from being exclusive to
inclusive for toner supplies and thus the related revenue moves from supplies to service.



Wholesale revenue declined $1.5 million or 2.2% in the first nine months of fiscal year 2006 due in part to pricing pressures. During fiscal year 2005, we changed the IT platform in our European wholesale business to
Oracle and moved the physical location of the administration center. While these changes in the long term will provide a much improved infrastructure for our wholesale business, in the short term, they negatively impacted our ability to accept,
process and deliver customer orders during fiscal year 2005 and resulted in customer erosion. This decrease included a $1.0 million negative foreign currency movement.



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Gross Profit



Our total gross profit margin decreased to 32.7% in the first nine months of fiscal year 2006 from 36.9% in the year-ago period. Our total gross profit decreased $1.3
million due to foreign currency movements during the period. The gross profit margin for the United States segment decreased to 35.3% from 41.4% and the Europe/Australia segment decreased to 30.3% from 32.6% in the year-ago period. Margins could
continue to be impacted if we are not successful in slowing or reversing the declines in our retail service revenues.



The retail equipment and related sales margin decreased to 30.8% from 35.1% in the year-ago period. Margins decreased in the Europe/Australia segment due to market
pricing pressures and unfavorable product mix, as well as a large, no margin transaction in the United Kingdom where a deal was entered into to retain a large service customer. In addition, there have been increased market pressures in certain
product offerings. Retail equipment and related sales margins decreased in the United States due to increased price competition and a product gap primarily in our high volume color segment. This has led to discounting of products with more
functionality to fill the product portfolio gaps. This decrease was offset by an increase in manufacturer rebates in the United States of $5.9 million year over year.



Retail service margins decreased to 36.2% from 40.9% in the year-ago period. Generally the decrease was due to the fixed cost element of the
service business, combined with lower revenue, and the decision to retain rather than reduce service personnel in anticipation of future service business with certain customers. In addition, service revenues were impacted by slower than expected
ramp up of some of our printer manufacturer contacts combined with start up costs incurred to generate these contracts.



Retail supplies and rental margins decreased to 38.2% from 40.3% in the year-ago period. In the United States, margins decreased due to continuing depreciation being
taking for rental equipment on contracts with certain governmental customers for which revenues have not been recognized during the period, since there have been delays in executing purchase orders by those customers. In Europe/Australia margins
reduced in line with revenue decreases.



Wholesale margins remained relatively stable at 17.5% from the year-ago period.



Selling, General and Administrative Expenses



Selling, general and administrative expenses (SG&A) decreased by $42.1 million or 13.4% from the year-ago period to $272.6 million. This decline reflects the continuing success of our Vision 21 reengineering initiative. As
part of this initiative in the United States, we have outsourced several of our general and administrative functions which have introduced a variable cost element in certain support operations which have historically been part of our fixed costs.
This approach has enabled the reduction of our overall costs while delivering differentiated service to our internal and external customers. The continuing focus on improving our internal systems also enabled us to recognize $5.5 million of sales
tax recovery in the United States. In addition, we recorded a credit of $3.2 million representing the recovery of overpayments made to our workers compensation insurance carrier in the United States and a credit of $1.7 million for the
reduction of recorded liabilities for future claims recorded by us but to be paid by the insurance carrier from previous periods. These decreases were offset by a charge of $2.9 million relating to the correction of an error in the accounting for a
long-lived asset at March 31, 2005.



Restructuring Charges (Credits)



In fiscal years 2005 and 2004, we formulated plans to continue to
eliminate inefficiencies in our field operations and to reduce our SG&A costs by eliminating and consolidating back office functions and exiting certain facilities. As part of these plans, in the first nine months of fiscal year 2006, we
recorded a $7.6 million restructuring charge comprised primarily of severance charges due to additional cost reduction efforts. During the prior year, we reversed $1.7 million of severance charges due to employee attrition partially offset by higher
facility charges.



Other (Income) Expense



Other expense decreased $2.1 million year over year primarily due to a $1.1 million loss
associated with the disposal of our subsidiaries in Portugal and Russia in the prior year period.



Operating Earnings (Loss) from Continuing Operations



Our operating loss from continuing operations was $10.2 million in first nine months of fiscal year 2006 compared to earnings of $11.1 million in the first nine months of fiscal year 2005. This operating loss was
attributable to our lower revenues, lower gross margins and restructuring charges, offset by the decreases in SG&A due to the one time corrections which reduced SG&A as discussed above.



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##### Table of Contents

Interest Expense and Interest Income



Interest expense increased from the year ago period by $1.0 million to $23.9 million. This increase related to borrowings under our Fleet
Credit Facility. Interest income increased to $0.3 million.



Income Taxes



We recorded income tax benefit of $9.0 million in the first nine months
of fiscal year 2006 compared to tax benefit of $16.7 million in the prior year period. The income tax benefit for the nine month period resulted from the resolution of various tax contingencies (principally in the United States) totaling $10.7
million, which was offset by income tax expense of $1.7 million attributable to current year results. The income tax benefit for the prior year period resulted from settlement of tax audits in the our European operations of $19.0 million, which was
offset by income tax expense of $2.3 million attributable to prior year results.



Net Earnings (Loss) from Continuing Operations



Our net loss
from continuing operations was $24.7 million in the first nine months of fiscal year 2006 compared to net earnings of $5.1 million in the year-ago period. After allowing for the dilutive effect of dividends on our participating shares, we incurred a
net loss from continuing operations available to common shareholders of $0.64 per ADS in the first nine months of fiscal year 2006 compared to a net loss from continuing operations of $0.16 per ADS in the first nine months of fiscal year 2005.



Exchange Rates



We operate in over 15 countries worldwide. Fluctuations in exchange rates between the United
States dollar and the currencies in each of the countries in which we operate affect:



| |  |  | the results of our international operations reported in United States dollars; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the value of the net assets of our international operations reported in United States dollars.
| | - |  | ----------------------------------------------------------------------------------------------



Our results of operations are affected by the relative strength of currencies in the countries where our products are sold. Approximately
52.2% and 51.1% of our revenue in the first nine months of fiscal years 2006 and 2005, respectively, was generated outside the United States in our Europe/Australia segment.



In comparing the average exchange rates between the first nine months of fiscal year 2006 and the year ago period, the euro currency and
British pound sterling weakened against the United States dollar by approximately 1.5% and 1.9%, respectively. The change in exchange rates negatively impacted revenue by approximately $4.6 million, decreased gross profit by $1.3 million and
decreased SG&A by $1.2 million.



Our inter-company loans are subject to
fluctuations in exchange rates between the United States dollar and the currencies in each of the countries in which we operate, primarily the euro and the British pound sterling. Based on the outstanding balance of our inter-company loans at
December 31, 2005, a change of 1.0% in the exchange rate for the euro and British pound sterling would cause a change in our foreign exchange result of approximately $0.1 million.



Our results of operations and financial condition have been, and in the future may be, adversely affected by the fluctuations in foreign
currencies and by translation of the financial statements of our non-U.S. subsidiaries from local currencies to the dollar. Generally, we do not hedge our exposure to changes in foreign currency.



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##### Table of Contents

Liquidity and Capital Resources



The following summarizes our cash flows from continuing operations for the first nine months of fiscal years 2006 and 2005 as reported in
our consolidated statements of cash flows in the accompanying consolidated financial statements:



|                                                    |  |                                |         |   |      |   |         |  
|--------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                    |  | Nine months ended December 31, |        
|                                                    |  | 2005                           |         |   | 2004 |  
|Net cash used in operating activities               |  | $                              | (50,708 | ) |      | $ | (9,817  | )
|Net cash provided by (used in) investing activities |  |                                | 8,927   |   |      |   | (14,751 | )
|Net cash provided by (used in) financing activities |  |                                | (1,327  | ) |      |   | 585     |  
|Effect of discontinued operations                   |  |                                | 5,995   |   |      |   | 2,139   |  
|Effect of exchange rates                            |  |                                | (4,097  | ) |      |   | 4,244   |  
|                                                    |  |                                |         |   |      |   |         |  
|Net decrease in cash                                |  |                                | (41,210 | ) |      |   | (17,600 | )
|Cash and cash equivalents, beginning of period      |  |                                | 91,925  |   |      |   | 106,854 |  
|                                                    |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period            |  | $                              | 50,715  |   |      | $ | 89,254  |  
|                                                    |  |                                |         |   |      |   |         |  



Cash flows



Our generation and use of cash is cyclical within a quarter. Typically, we generate a
significant portion of our cash toward the end of each quarter where we typically conclude a large percentage of our retail equipment transactions while our use of cash is more evenly spread over the quarter with a much greater use of cash toward
the beginning of the quarter, when we typically pay vendors for products sold toward the end of the quarter and for other services provided during the quarter. This quarter we have used our cash more evenly throughout the period and have used cash
to reduce our accounts payable and accrued expenses, which we expect will help improve the operation of our business.



In the first and third quarter of every fiscal year, we make combined interest payments of $12.8 million for the 10.0% subordinated notes and the 11.0% senior notes.



Generally cash provided by operations and cash on the balance sheet continue
to be our primary sources of funds to finance operating needs and capital expenditures. Our net cash flow used in operating activities was $50.7 million and $9.8 million in the first nine months of fiscal year 2006 and 2005, respectively. This
increase in cash usage during the first nine months of fiscal year 2006 from the comparative prior year period is primarily due to the loss from continuing operations, payouts of restructuring of $16.3 million, payouts of accrued professional fees
of $8.7 million and reductions in accounts payable and other accrued expenses. These uses of cash were offset somewhat by net collections of accounts receivable of $21.2 million.



Because of our operating losses, the continuing cash flows used in operations, interest payments on our debt and cash requirements for
restructuring payments, liquidity was negatively impacted during the first nine months of fiscal year 2006. Additionally, we expect to make tax payments related to audit settlements in Europe of $9.7 million in the last quarter of fiscal year 2006.



Our net cash flow provided by investing activities was $8.9 million for the
first nine months of fiscal year 2006 compared to net cash used in investing activities of $14.8 million for the first nine months of fiscal year 2005. Cash provided by investing activities during the first nine months of fiscal year 2006 resulted
from cash generated by the sale of our Canadian and Central and South American subsidiaries. Cash used in investing activities during the prior year period is the result of capital expenditures and the payment of $2.1 million for the acquisition of
Image One, a regional print service provider.



Our net cash flow used in
financing activities was $1.3 million compared to net cash provided by financing activities of $0.6 million for the year-ago period. Cash flow used in financing activities in the current period is the resulted from the paydown on our capital leases.



In addition, our cash is also located in each of the countries we do business
in, some of which is more difficult to access due to country restrictions. We also have restricted cash of $12.2 million due to the cash collateralization of our lines of credit with Fleet and ABN Amro and of certain letters of credit with insurance
companies. The ABN Amro letter of credit facility expired on December 31, 2005. As a result, beginning January 1, 2006, we were required to increase our cash collateralization of our letter of credit by Euro 6.8 million (U.S. $8.1
million). Our liquidity could also be impacted if our equipment vendors were to reduce existing lines of credit for the purchase of equipment.



We believe cash and cash equivalents on hand, together with the availability of our credit facility, are sufficient to fund our cash requirements for the next twelve
months.



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##### Table of Contents

Restructuring Charges (credits)



Fiscal Year 2005 Plan:In fiscal year 2005, we formulated plans to continue to eliminate inefficiencies in our field operations and
to reduce our selling, general and administrative costs by eliminating and consolidating back office functions and exiting certain facilities. These charges were accounted for under the provisions of Statement of Financial Accounting Standards
No. 112, Employers Accounting for Postemployment Benefits (SFAS 112) and Statement of Financial Accounting Standards No. 146, Accounting for Cost Associated with Exit or Disposal Activities
(SFAS 146).



As part of these plans, we recorded a $7.4 million
restructuring charge in the first nine months of fiscal year 2006. Cash outlays for severance and facilities during the nine month period were $8.0 million. The other non-cash changes of $0.9 million represent foreign currency adjustments.



In the three months ended December 31, 2005, we recorded a $1.3 million
restructuring charge comprised primarily of severance charges in the United States due to additional cost reduction efforts. This charge was offset by a reduction in severance charges in Europe/Australia of $1.4 million due to favorable severance
negotiations and employee attrition. Cash outlays for the employee severance and facilities during the three month period were $3.1 million.



We expect to incur approximately $1.0 million to $3.0 million in restructuring charges relating to the fiscal year 2005 plan over the next quarter.



The remaining liability of the 2005 Plan restructuring charge of $5.2 million and $3.7
million is categorized within Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities, respectively.



We estimated that this program would reduce operating expenses by $44 million to $51 million and cost of goods sold by $16 million to $22
million per year when fully implemented, and would result in a 12% decrease in worldwide workforce. To date, we are on target to achieve these savings. The actions needed to achieve these savings have been taken in steps, beginning with the charges
taken in fiscal year 2005 and were expected to require up to $37 million of cash. Our current estimate of cash required has been reduced to $28 million to $33 million in cash due to less severance payouts than expected and favorable termination
terms for facility leases. The payback on the cash is expected to be less than 12 months. We expect to take an additional charge to earnings of $1.0 million to $3.0 million over the next several quarters.



The following table summarizes the fiscal year 2005 Plan
restructuring charge:



2005 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | ------------ | ----- |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |       |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|Severance                                     |  | $                                         | 12,828 |                           | $ | 10,007                      |  | $            | 6,983 |  | $                      | (7,805 | ) |                              | $ | (688 | ) |  | $ | 8,497
|Future lease obligations on facility closures |  |                                           | 934    |                           |   | 367                         |  |              | 391   |  |                        | (233   | ) |                              |   | (167 | ) |  |   | 358  
|                                              |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      
|Total                                         |  | $                                         | 13,762 |                           | $ | 10,374                      |  | $            | 7,374 |  | $                      | (8,038 | ) |                              | $ | (855 | ) |  | $ | 8,855
|                                              |  |                                           |        |                           |   |                             |  |              |       |  |                        |        |   |                              |   |      |   |  |   |      



2005 Plan Restructuring Severance
Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                             |  |              |       |  |                       |        |   |                              |   |      |   |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | ------------ | ----- |  | --------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                 |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |       |  | Other Non-CashChanges |        |   | Reserve at December 31, 2005
|United States    |  | $                                         | 3,542  |                           | $ | 2,687                       |  | $            | 2,533 |  | $                     | (3,790 | ) |                              | $ |     |   |  | $ | 1,430
|Europe/Australia |  |                                           | 9,286  |                           |   | 7,320                       |  |              | 4,450 |  |                       | (4,015 | ) |                              |   | (688 | ) |  |   | 7,067
|                 |  |                                           |        |                           |   |                             |  |              |       |  |                       |        |   |                              |   |      |   |  |   |      
|Total            |  | $                                         | 12,828 |                           | $ | 10,007                      |  | $            | 6,983 |  | $                     | (7,805 | ) |                              | $ | (688 | ) |  | $ | 8,497
|                 |  |                                           |        |                           |   |                             |  |              |       |  |                       |        |   |                              |   |      |   |  |   |      



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##### Table of Contents

2005 Plan Restructuring Facility Charge by Operating Segment:



|                 |  |                                           |     |                          |   |                             |  |              |     |  |                       |      |   |                              |   |      |   |  |   |    
|---------------- |  | ----------------------------------------- | --- | ------------------------ | - | --------------------------- |  | ------------ | --- |  | --------------------- | ---- | - | ---------------------------- | - | ---- | - |  | - | ---
|                 |  | Cumulative Expense through March 31, 2005 |     | Reserve atMarch 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |     |  | OtherNon-Cash Changes |      |   | Reserve at December 31, 2005
|United States    |  | $                                         | 615 |                          | $ |                            |  | $            | 293 |  | $                     | (151 | ) |                              | $ |     |   |  | $ | 142
|Europe/Australia |  |                                           | 319 |                          |   | 367                         |  |              | 98  |  |                       | (82  | ) |                              |   | (167 | ) |  |   | 216
|                 |  |                                           |     |                          |   |                             |  |              |     |  |                       |      |   |                              |   |      |   |  |   |    
|Total            |  | $                                         | 934 |                          | $ | 367                         |  | $            | 391 |  | $                     | (233 | ) |                              | $ | (167 | ) |  | $ | 358
|                 |  |                                           |     |                          |   |                             |  |              |     |  |                       |      |   |                              |   |      |   |  |   |    



Fiscal Year 2004 Plan:In
fiscal year 2004, we formulated plans to significantly reduce our selling, general and administrative costs by consolidating the back-office functions in the United States, exiting non-strategic real estate facilities and reducing headcount in the
United States and Europe/Australia. These charges were accounted for under the provisions of SFAS 112 and SFAS 146.



As part of these plans, we recorded a $50.6 million restructuring charge in fiscal year 2004 that included $26.9 million related to severance for employees and $23.7
million related to future lease obligations for facilities that were vacated by March 31, 2004. We reversed $3.6 million of fiscal year 2004 Plan severance and facility charges during fiscal year 2005 as a result of employee attrition in its
United States and Europe/Australia segments, and a change in restructuring plans in Europe/Australia due to improved performance in certain markets partially offset by a higher estimate of facility charges in the United States due to our inability
to sublease the facilities.



Cash outlays for facilities for the three and nine
months ending December 31, 2005 were $1.3 million and $6.3 million, respectively. We incurred $0.5 million of fiscal year 2004 Plan facility charges during fiscal year 2006, as a result of broker commissions paid in the United States due to the
sub-lease of certain facilities. If remaining leases are not terminated, payments will continue through their respective terms.



Cash outlays for employee severance during the three and nine month period were $0.3 million and $2.0 million, respectively. In addition, we reversed $0.3 million of
severance costs during the nine month period due to employee attrition. The remaining non-cash change of $0.4 million represents foreign currency adjustments.



The remaining liability of the 2004 Plan restructuring charge of $4.3 million and $2.9 million is categorized within Accrued expenses and other current
liabilities and Deferred income taxes and other long-term liabilities, respectively.



We expected to realize savings between $51 million and $56 million in connection with the fiscal year 2004 restructuring plan. Management believes substantially all of these savings were realized through lower
personnel and facility related costs during fiscal year 2005.



The following table summarizes the fiscal year 2004 Plan restructuring charge:



2004 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | - | ------------ | - |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|Severance                                     |  | $                                         | 21,418 |                           | $ | 3,117                       |  | $ | (286         | ) |  | $                      | (1,968 | ) |                              | $ | (159 | ) |  | $ | 704  
|Future lease obligations on facility closures |  |                                           | 25,634 |                           |   | 12,606                      |  |   | 490          |   |  |                        | (6,306 | ) |                              |   | (258 | ) |  |   | 6,532
|                                              |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |      
|Total                                         |  | $                                         | 47,052 |                           | $ | 15,723                      |  | $ | 204          |   |  | $                      | (8,274 | ) |                              | $ | (417 | ) |  | $ | 7,236
|                                              |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |      



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2004 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |    
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | - | ------------ | - |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | ---
|                 |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|United States    |  | $                                         | 7,597  |                           | $ | 313                         |  | $ | (101         | ) |  | $                      | (212   | ) |                              | $ |     |   |  | $ |   
|Europe/Australia |  |                                           | 13,773 |                           |   | 2,804                       |  |   | (185         | ) |  |                        | (1,756 | ) |                              |   | (159 | ) |  |   | 704
|Other (1)        |  |                                           | 48     |                           |   |                            |  |   |             |   |  |                        |       |   |                              |   |     |   |  |   |   
|                 |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |    
|Total            |  | $                                         | 21,418 |                           | $ | 3,117                       |  | $ | (286         | ) |  | $                      | (1,968 | ) |                              | $ | (159 | ) |  | $ | 704
|                 |  |                                           |        |                           |   |                             |  |   |              |   |  |                        |        |   |                              |   |      |   |  |   |    

---

|(1) | Includes corporate charges
|--- | --------------------------



2004 Plan Restructuring Facility Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                             |  |              |     |  |                        |        |   |                              |   |      |   |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | --------------------------- |  | ------------ | --- |  | ---------------------- | ------ | - | ---------------------------- | - | ---- | - |  | - | -----
|                 |  | Cumulative Expense through March 31, 2005 |        | Reserve at March 31, 2005 |   | Charge to December 31, 2005 |  | Cash Outlays |     |  | Other Non-Cash Changes |        |   | Reserve at December 31, 2005
|United States    |  | $                                         | 15,621 |                           | $ | 6,600                       |  | $            | 420 |  | $                      | (3,657 | ) |                              | $ |     |   |  | $ | 3,363
|Europe/Australia |  |                                           | 5,568  |                           |   | 4,437                       |  |              | 70  |  |                        | (1,080 | ) |                              |   | (258 | ) |  |   | 3,169
|Other (1)        |  |                                           | 4,445  |                           |   | 1,569                       |  |              |    |  |                        | (1,569 | ) |                              |   |     |   |  |   |     
|                 |  |                                           |        |                           |   |                             |  |              |     |  |                        |        |   |                              |   |      |   |  |   |      
|Total            |  | $                                         | 25,634 |                           | $ | 12,606                      |  | $            | 490 |  | $                      | (6,306 | ) |                              | $ | (258 | ) |  | $ | 6,532
|                 |  |                                           |        |                           |   |                             |  |              |     |  |                        |        |   |                              |   |      |   |  |   |      

---

|(1) | Includes corporate charges
|--- | --------------------------



Long-Term Debt



The following table sets forth our future payments for our long-term debt:



|                                 |  |       |         |   |                                  |   |                                  |  |   |         |  
|-------------------------------- |  | ----- | ------- | - | -------------------------------- | - | -------------------------------- |  | - | ------- | -
|                                 |  | Total |         |   | Payments due in Less Than 1 Year |   | Payments due in More Than 1 Year | 
|11% senior notes, due 2010       |  | $     | 175,000 |   |                                  | $ |                                 |  | $ | 175,000 |  
|10% subordinated notes, due 2008 |  |       | 64,520  |   |                                  |   |                                 |  |   | 64,520  |  
|Capital leases                   |  |       | 2,942   |   |                                  |   | 1,582                            |  |   | 1,360   |  
|Other long-term obligations      |  |       | 544     |   |                                  |   | 131                              |  |   | 413     |  
|Less unamortized discount        |  |       | (2,978  | ) |                                  |   |                                 |  |   | (2,978  | )
|                                 |  |       |         |   |                                  |   |                                  |  |   |         |  
|Total                            |  | $     | 240,028 |   |                                  | $ | 1,713                            |  | $ | 238,315 |  
|                                 |  |       |         |   |                                  |   |                                  |  |   |         |  



The 10.0% subordinated notes due
April 1, 2008 require interest payable of $3.2 million every six months on April 1 and October 1.



The 11% senior notes have a fixed annual interest rate and require interest payments of $9.6 million every six months on June 15 and December 15. The senior
notes mature on June 15, 2010. The senior notes are fully and unconditionally guaranteed on a joint and several basis by our Australian subsidiaries, a Luxembourg subsidiary, two United Kingdom subsidiaries, one of which is our primary United
Kingdom operating subsidiary, and all of our United States subsidiaries other than certain dormant entities.



If, for any fiscal year commencing with the fiscal year ending March 31, 2004, there is excess cash flow, as such term is defined in the indenture governing the senior notes, in an amount in excess of $5.0
million, we will be required to make an offer in cash to holders of the senior notes to use 50.0% of such excess cash flow to purchase their senior notes at 101.0% of the aggregate principal amount of the senior notes to be repurchased plus accrued
and unpaid interest and additional amounts, if any. As of December 31, 2005 there has not been excess cash flow.



We incurred $7.2 million in debt issuance costs relating to the senior notes and are amortizing these costs over the term of the senior notes. The balance of these costs
as of December 31, 2005 was $4.6 million. The $4.1 million discount related to the senior notes is being accreted to interest expense using the effective interest method over the life of the related debt. The balance of the discount as of
December 31, 2005 was $3.0 million.



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We have a credit facility which expires on January 4, 2008, with Bank of America, who acquired Fleet Capital
Corporation, (the Fleet Credit Facility) to provide a $50.0 million, senior secured revolving credit facility, which includes a $30.0 million sub-limit for standby and documentary letters of credit. The Fleet Credit Facility will bear
interest at an annual rate equal to, at our option, (a) the sum of the rate of interest publicly announced from time to time by Bank of America as its prime or base rate of interest plus the applicable margin thereon or (b) the sum of
LIBOR for interest periods at our option of one, two, three or nine months plus the applicable margin thereon. Under the terms of the Fleet Credit Facility, as amended, extensions of credit to the borrowers are further limited to the lesser of the
commitment and the borrowing base. In addition, the Fleet Credit Facility requires us to keep $5.0 million of cash in an operating account. During the nine months ended December 31, 2005 our borrowings under the Credit Fleet Facility ranged
between $5 million and $13 million at any one time, all of which were repaid by the end of the quarter. As of December 31, 2005, the borrowing base for the credit facility was $38.2 million and we had no borrowings under the Fleet Credit
Facility. The borrowing base fluctuates each month and is generally highest at the end of the quarter.



We incurred $1.6 million in debt issuance costs relating to the Fleet Credit Facility and are amortizing these costs over the remaining term of the credit facility. The balance of these costs as of December 31,
2005 was $0.3 million.



On December 31, 2003, we entered into a one year
letter of credit facility with ABN. On November 2, 2004, this agreement was amended to provide us a letter of credit facility for Euro 11.8 million (U.S. $14.0 million) and an open term credit facility of Euro 1.0 million (U.S. $1.2
million) available for general working capital purposes, including overdrafts. The open term credit facility expired on November 15, 2005. The letter of credit facility expired on December 31, 2005. The facilities were secured by the
assets of certain of our Netherlands subsidiaries and were also cash collateralized by Euro 5.0 million (U.S. $5.9 million).



On January 1, 2006, we opened a replacement letter of credit facility with ABN AMRO in favor of Ricoh in the amount of Euro 11.8 million (U.S. $14.0 million)
that is fully cash collateralized and will expire on March 31, 2006. This agreement can be renewed.



Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K.



Contractual Obligations and Commitments



The following table summarizes our significant contractual obligations at December 31, 2005, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods. This table excludes accounts payable, accrued expenses (except restructuring charges), taxes payable and deferred revenue already recorded on our balance sheet as current liabilities at December 31, 2005.



|                                      |  |                                              |         |                  |   |             |  |             |         |               |   |         |  |   |       
|------------------------------------- |  | -------------------------------------------- | ------- | ---------------- | - | ----------- |  | ----------- | ------- | ------------- | - | ------- |  | - | ------
|                                      |  | Amount of contractual obligations per period
|                                      |  | Total                                        |         | Less than 1 year |   | 1  3 years |  | 4  5 years |         | After 5 years
|Long-term debt  11.0% Notes          |  | $                                            | 175,000 |                  | $ |            |  | $           |        |               | $ | 175,000 |  | $ |      
|Long-term debt  10.0% Notes          |  |                                              | 64,520  |                  |   |            |  |             | 64,520  |               |   |        |  |   |      
|Capital lease obligations             |  |                                              | 2,942   |                  |   | 1,582       |  |             | 1,360   |               |   |        |  |   |      
|Other long-term obligations           |  |                                              | 544     |                  |   | 131         |  |             | 165     |               |   | 72      |  |   | 176   
|Restructuring payment obligations (1) |  |                                              | 16,080  |                  |   | 9,414       |  |             | 6,666   |               |   |        |  |   |      
|Operating lease obligations           |  |                                              | 95,203  |                  |   | 21,718      |  |             | 31,622  |               |   | 15,731  |  |   | 26,132
|Purchase obligations                  |  |                                              | 84,905  |                  |   | 83,384      |  |             | 1,488   |               |   | 33      |  |   |      
|Estimated pension obligations         |  |                                              | 27,394  |                  |   | 1,963       |  |             | 3,267   |               |   | 2,500   |  |   | 19,664
|                                      |  |                                              |         |                  |   |             |  |             |         |               |   |         |  |   |       
|Total contractual obligations         |  | $                                            | 466,588 |                  | $ | 118,192     |  | $           | 109,088 |               | $ | 193,336 |  | $ | 45,972
|                                      |  |                                              |         |                  |   |             |  |             |         |               |   |         |  |   |       

---

|(1) | Includes amounts as part of restructuring plans committed to by management.
|--- | ---------------------------------------------------------------------------



The above table does not include interest payments of $3.2 million paid every six months on April 1 and October 1 on our 10.0% subordinated notes due
April 1, 2008 or interest payments of $9.6 million paid every six months on June 15 and December 15 on our 11.0% senior notes due June 15, 2010.



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Other Financing Arrangements



Senior Convertible Participating Shares



On December 17, 1999, we issued 218,000 6.50% senior convertible participating shares, or the participating shares, for $218.0 million. The participating shares are
entitled to dividends equal to the greater of 6.50% per annum or ordinary share dividends on an as converted basis. In accordance with the terms of their issue, dividends were payable in the form of additional participating shares in the period
through to December 2004. The terms of the issue of the senior notes due 2010 forbid the payment of cash dividends. Accordingly, dividends, which are cumulative, were paid in the form of additional participating shares through December 2004. At that
time, we were obliged to pay the participating share dividends in cash. However, the terms of the participating shares permit us to continue to pay payment-in-kind dividends following December 17, 2004 if our then existing principal
indebtedness, which includes our credit facility and debt securities issued in an aggregate principal amount in excess of $50.0 million in a bona fide underwritten public or private offering, prohibits us from paying cash dividends. Further, if we
are not permitted by the terms of the participating shares to pay payment-in-kind dividends following December 17, 2004 and we have insufficient distributable reserves under English law to pay cash dividends, the amount of any unpaid dividend
will be added to the liquidation return of each participating share.



The holders of the participating shares are, in general, entitled to appoint two directors to the board. In the event that the Company does not pay dividends in cash for six successive quarters following December 2004, they are entitled to
appoint a further two directors until the time the Company has paid cash dividends on the participating shares for four successive quarters.



The participating shares are currently convertible into ordinary shares at a conversion price of $3.11 per ordinary share (equal to $12.44 per ADS), subject to adjustment
in certain circumstances to avoid dilution of the interests of participating shareholders. As of December 31, 2005 the participating shares have voting rights, on an as converted basis, currently corresponding to approximately 28.7% of the
total voting power of our capital stock which includes an additional 101,202 participating shares in respect of payment-in-kind dividends.



If, by December 17, 2010, we have not converted or otherwise redeemed the participating shares, we are required, subject to compliance with applicable laws and the
instruments governing our indebtedness, and except as set out immediately following to redeem all of the then outstanding participating shares. If we fail to do this, we must then redeem the maximum number of such shares that can then lawfully be
redeemed, assuming that the liquidation value per participating share is at that time greater than the market value of the ordinary shares into which the participating shares are convertible. The amount to be paid on the redemption of each
participating share in cash is the greater of (a) the then liquidation value or (b) the then market value of the ordinary shares into which the participating shares are convertible, in each case plus accumulated and unpaid dividends from
the most recent dividend payment date. If the price set out in (b) above is applicable, we are permitted to convert the participating shares into the number of ordinary shares into which they are convertible instead of making the cash payment.



English Company law (to which we are subject, as an English corporation)
requires that the participating shares may be redeemed only out of our accumulated, realized profits (as described below, and generally described under English law as distributable profits) or, subject to some restrictions, the proceeds
of a new issuance of shares for the purposes of financing the redemption.



We
currently estimate that, as of December 17, 2010, the liquidation value of the then outstanding participating shares will be approximately $419.8 million. To the extent that we are legally permitted to do so, and except where a majority of our
board of directors decided bona fide that to do so would be materially prejudicial to the business of the subsidiary undertaking, we are required to use our best efforts to ensure that our subsidiary undertakings distribute to us a sufficient amount
of their profits, if any, to enable us to redeem the convertible participating shares. If we have insufficient distributable profits on December 17, 2010 to redeem the participating shares in full, we will be required to use our best efforts to
complete a fresh issue of shares and use the proceeds of that fresh issue to finance the redemption. As of the date of this document, we have no distributable profits. However, in determining whether we are able to issue new shares, we may take into
account then prevailing market conditions and other factors deemed reasonable by a majority of our board of directors, and we will not be required to issue new shares to the extent prohibited by our then existing indebtedness, whether under our
principal bank credit facilities or pursuant to debt securities issued in an aggregate principal amount in excess of $50.0 million in a bona fide underwritten public offering or in a bona fide private offering.



In the event that we are unable to redeem all of the then outstanding participating shares on
December 10, 2010, we are required to redeem so many of the shares as we are able, pro rata among the holders of the participating shares. Any participating shares that are not so redeemed shall remain outstanding, but shall thereafter be
entitled to dividends at an increased rate of 8.5% per annum until redemption.



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In the event of liquidation of Danka, participating shareholders will be entitled to receive a distribution equal to the
greater of (a) the liquidation return per share (initially $1,000 and subject to upward adjustment on certain default events by us) plus any accumulated and unpaid dividends accumulating from the most recent dividend date or b) the amount that
would have been payable on each participating share if it had been converted into ordinary shares if the market value of those shares exceed the liquidation value of the participating shares.



We are likely either to pursue alternative financing arrangements or modifications in
relation to the relevant requirements in relation both to the redemption of the participating shares and to the maturity of the $175.0 million of senior notes due in June 2010 in order to manage our liquidity and capital requirements beyond those
dates.



General Electric Capital Corporation



We have an agreement with General Electric Capital Corporation (GECC) under
which GECC agrees to provide financing to our qualified United States customers to purchase equipment. The agreement expires March 31, 2009. In connection with this agreement, we are obligated to provide a minimum level of customer leases to
GECC. The minimum level of customer leases is equal to a specified percentage of United States retail equipment and related sales revenues. If we fail to provide a minimum level of customer leases under the agreement, we are obligated to pay penalty
payments to GECC. For the nine months ended December 31, 2005 and 2004, we were not required to make any penalty payments to GECC.



Tax Payments



We have not paid substantial amounts of income tax in the prior three years because of our net operating losses in most jurisdictions. We are subject to audits by multiple tax authorities with respect to prior years
and certain of these audits are in the latter stages. Where we disagree with any of these positions adopted by the tax authorities, we may formally protest them. We expect to pay $9.7 million to certain European tax authorities by the end fiscal
year 2006 principally in settlement of completed audits.



NEW ACCOUNTING
PRONOUNCEMENTS



In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R), an amendment of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R eliminates the ability to account for share-based
payments using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based
payments, including stock options. The expense will be measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an
observable market price for a share-based award, the fair value would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price
of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate.



The requirements of SFAS No. 123R are effective for our fiscal year beginning April 1, 2006. Early adoption of the provisions of
SFAS No. 123R is encouraged, but not required. At meetings held on January 30 and 31, 2006, our Human Resources Committee of the Board of Directors and our Board of Directors approved the acceleration of the vesting of all of our stock
options outstanding as of January 31, 2006. The acceleration of the options is to take place on or before March 31, 2006. The purpose of the accelerated vesting is to enable us to avoid recognizing in our income statement compensation
expense associated with these options in future periods, due to the adoption of SFAS No. 123R. The pre-tax charge to be avoided upon to adoption of SFAS No. 123R is expected to be approximately $2.1 million and represents the fair value of
the unvested awards as of the date of the acceleration as determined under SFAS No. 123. As a result of the accelerated vesting, approximately 2.3 million shares with varying remaining vesting schedules will become immediately exercisable.
In order to help avoid unintended personal benefits to holders of the accelerated options, any shares received through exercise of accelerated options may not be sold by the option holder until the original vesting date of the accelerated option or
the termination of the employment of the option holder, whichever occurs first. In connection with the accelerated vesting, each option agreement underlying such options will be amended.



We expect the adoption of SFAS No. 123R will have an unfavorable impact for all future grants on our consolidated results of operations
and net income per common share. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current
guidelines. This requirement may reduce our net operating cash flows and increase net financing cash flows in periods after adoption. We cannot estimate what those amounts will be in the future because they depend on, among other things, when
employees exercise stock options.



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All grants after March 31, 2006 will be valued using a binomial pricing model and we will recognize the associated
expense over the vesting period based on the fair values determined by the binomial pricing model using the accelerated attribution method.



In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections (SFAS 154), which requires retrospective
application to prior periods financial statements of every voluntary change in accounting principal unless it is impracticable to do so. SFAS 154 replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not anticipate the adoption of SFAS
154 to have a material impact on our consolidated financial statements.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Interest Rate Risk



Our market risk is
primarily limited to fluctuations in interest rates as it pertains to our borrowings under our credit facility, while the 11.0% senior notes and the 10.0% subordinated notes bear a fixed rate.



We have outstanding $64.5 million of subordinated notes that have a fixed annual interest
rate of 10.0% and interest payments of $3.2 million for the subordinated notes will be paid every six months on April 1 and October 1. The subordinated notes mature on April 1, 2008.



We have outstanding $175.0 million aggregate principal amount of senior notes that have a
fixed annual interest rate of 11.0% and interest payments of $9.6 million for the senior notes will be paid every six months on June 15 and December 15. The senior notes mature on June 15, 2010.



We also have a credit facility with Bank of America, who acquired Fleet Capital Corporation
that expires on January 4, 2008, to provide a $50.0 million, senior secured revolving credit facility, which includes a $30.0 million sublimit for standby and documentary letters of credit. The Fleet Credit Facility bears interest at an annual
rate equal to, at our option, (a) the sum of the rate of interest publicly announced from time to time by Bank of America as its prime or base rate of interest plus the applicable margin thereon or (b) the sum of LIBOR for interest periods
at our option of one, two, three or nine months plus the applicable margin thereon.



On December 31, 2003, we entered into a one year letter of credit facility with ABN. On November 2, 2004, this agreement was amended to provide us a letter of credit facility for Euro 11.8 million (U.S. $14.0 million) and an
open term credit facility of Euro 1.0 million (U.S. $1.2 million) available for general working capital purposes, including overdrafts. The open term credit facility expired on November 15, 2005. The letter of credit facility expired on
December 31, 2005. The facilities were secured by the assets of certain of our Netherlands subsidiaries and were also cash collateralized by Euro 5.0 million (U.S. $5.9 million).



On January 1, 2006, we opened a replacement letter of credit facility with ABN AMRO in
favor of Ricoh in the amount of Euro 11.8 million (U.S. $14.0 million) that is fully cash collateralized and will expire on March 31, 2006. This agreement can be renewed.



Foreign Currency Exchange Risk



Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. These exposures may impact future earnings and/or
cash flows. Revenue from Europe/Australia represented approximately 52.7% and 52.2% of our consolidated revenue during the first three and nine months ended December 31, 2005, respectively. The economic impact of foreign exchange rate movements
is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies.
Therefore, to solely isolate the effect of changes in currency does not accurately portray the effect of these other important economic factors. As foreign exchange rates change, translation of the income statements of our international subsidiaries
into U.S. dollars affects year-over-year comparability of operating results. While we may hedge specific transaction risks, we generally do not hedge translation risks because we believe there is no long-term economic benefit in doing so.



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At December 31, 2005, we had no outstanding forward contracts or option contracts to buy or sell foreign currency.
For the nine month periods ended December 31, 2005 and 2004, there were no gains or losses included in our consolidated statements of operations on forward contracts and option contracts.



Assets and liabilities are matched in the local currency, which reduces the need for dollar
conversion. Any foreign currency impact on translating assets and liabilities into dollars is included as a component of shareholders equity. Our revenue results for the first nine months of fiscal year 2006 were negatively impacted by a $4.6
million foreign currency movement, primarily due to the weakening of the euro and the British pound sterling versus the U.S. dollar.



Changes in foreign exchange rates that have the largest impact on translating our international operating profits relate to the euro and the British pound versus the U.S.
dollar. We estimate that a 1% adverse change in foreign exchange rates would have decreased our revenues by approximately $4.3 million in the first nine months of fiscal 2006, assuming no changes other than the exchange rate itself. As discussed
above, this quantitative measure has inherent limitations. Further, the sensitivity analysis disregards the possibility that rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another
currency.



Item 4. Controls and Procedures



The Company
maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SECs rules and regulations, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required financial disclosures.



As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to the Securities and Exchange Act Rule 13a- 15(e) and 15d-15(e). Based upon this evaluation as of
December 31, 2005, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the reasons more fully described below related to the weaknesses in our internal control
over financial reporting identified during the fiscal 2005 internal control over financial reporting evaluation in connection with Section 404 of the Sarbanes-Oxley Act of 2002. Although progress is being made to remediate the material
weaknesses that were identified at March 31, 2005, additional action is still required. To address the control weaknesses, the Company performed other procedures to ensure the unaudited quarterly consolidated financial statements are prepared
in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q, fairly presents, in all material respects our financial
condition, results of operations and cash flows for the periods presented.



Managements assessment identified the following material weaknesses in the Companys internal control over financial reporting as of March 31, 2005 (this section of Item 4. Controls and Procedures, should be read in
conjunction with Item 9A. Controls and Procedures, included in the Companys Form 10-K for the fiscal year ended March 31, 2005, for additional information on Managements Report on Internal Controls Over Financial Reporting):



Information Technology General Controls (ITGCs)ITGCs are
policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. ITGCs include four basic information technology (IT)
areas relevant to internal control over financial reporting: program development, program changes, computer operations, and access to programs and data. As of March 31, 2005, a material weakness existed relating to our information technology
general controls, including ineffective controls relating to:



 Program development and program changes including (1) authorization of changes, (2) appropriate testing and approval of the changes prior to the changes being moved into production, and
(3) restricting the ability to migrate changes to production; and



 Access to programs and data including (1) user administration, (2) application and system configurations, and (3) periodic user access validation



Revenue and Billing ProcessesAs of March 31, 2005, the following four
material weaknesses existed related to ineffective controls over our revenue and billing processes:



 Billing of service revenue: Ineffective controls to (a) accurately record the number of copies made by customers in order to
calculate service revenue, (b) accurately enter contract information into our billing systems in order to determine correct amounts for service billings, and (c) timely identify and correct billing errors;



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 Determination of the reserves for bad debts and inaccurate billings: Ineffective
controls over (a) the accuracy of the information used in determining the allowance for bad debts and the allowance for billing disputes and inaccuracies, and (b) the review of the bad debt and billing disputes and inaccuracies allowances
computations and their underlying assumptions;



 Recording of sales of hardware under lease: Ineffective controls over the evaluation and review of these transactions for the appropriate application of U.S. generally accepted accounting principles; and



 Service accrual and deferred revenue: Ineffective
controls over (a) the accuracy of the information used in determining the service accrual and related deferred revenue account, and (b) the review of the service accrual and underlying assumptions.



As a result of these material weaknesses, management recorded material adjustments to the
revenue, accounts receivable and deferred revenue accounts during the fiscal year ended March 31, 2005.



Financial Statement Close Process As of March 31, 2005, the following three material weaknesses existed related to our financial statement close process. We did not maintain effective controls to
ensure:



 Timely and accurate completion
of all account reconciliations, review of reconciliations and monitoring of accounts (including clearing and suspense accounts);



 Compliance with accounting guidance disseminated and communicated to subsidiaries domiciled outside the United States; and



 The accuracy of the preparation and
adequate review of the consolidation of accounts and journal entries.



These
material weaknesses related to the financial statement close process affect all of our significant accounts and could result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or
detected.



The material weaknesses described above in our financial statement
close process were compounded by: (a) our lack of segregation of duties related to the design of controls to properly segregate incompatible functions and the lack of operating effectiveness of system controls designed to segregate duties by
preventing access to incompatible system functions, and (b) our lack of sufficient qualified personnel.



Custody and Tracking of Inventory and Rental AssetsAs of March 31, 2005, the following two material weaknesses existed related to our custody and tracking of physical inventories and rental assets:



 Ineffective controls over the timely
completion and review of inventory reconciliations; and



 Ineffective controls over the conduct of physical observations of inventory and rental assets.



Errors resulting from these material weaknesses resulted in adjustments recorded in the consolidated financial statements for year ended March 31, 2005 to correct
identified errors in the following accounts  inventories, equipment on operating leases, rental costs of sale and operating expenses.



Income TaxesAs of March 31, 2005, a material weakness existed related to our accounting for income taxes, including ineffective controls over the
determination and recording of income tax reserves, taxes payable, sales and use tax and property taxes during interim periods of fiscal 2005.



We identified these deficiencies in our internal control over financial reporting during the fiscal 2005 implementation of Section 404 of the Sarbanes-Oxley Act of
2002 and; accordingly, these control deficiencies are in the process of being remediated. The findings discussed above were characterized as material weaknesses in accordance with the rules and regulations of the Securities and Exchange Commission,
as a more than remote possibility that a material misstatement to the Companys interim or annual financial statements could occur. To address the control weaknesses, the Company performed other procedures to ensure the unaudited quarterly
consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q, fairly presents,
in all material respects our financial condition, results of operations and cash flows for the periods presented.



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Planned Remediation Efforts to Address Material Weaknesses



We have initiated substantial efforts to remediate the identified deficiencies and to
establish adequate disclosure controls and internal controls over financial reporting as soon as reasonably practicable. We have significantly increased the number of resources dedicated to our remediation efforts and have established a Worldwide
Compliance Department to focus exclusively on process transformation and remediation. Our efforts to remediate our material weaknesses include significant changes to our business process and many of those changes have been or are in the process of
being implemented. Among those changes include simplification of our product offerings, automation of key processes and outsourcing of non-core processes. Among those processes to be improved are the meter reading process and the maintenance of
customer contracts, data and calls. Additionally, we have out-sourced the operations of our Information Technology and Human Resource functions in the United States. Dedicated project teams and specific project plans for each process area have been
created as part of this effort to address the control deficiencies in their respective areas and to work cross-functionally to address broad remediation items. This effort provides for continuous updates as new processes and systems, improvements to
internal controls over financial reporting, or changes to the existing processes and systems are implemented to remediate the identified deficiencies. We are firmly committed to improving the internal controls of all of our business processes,
including those impacting financial reporting, and establishing and maintaining an effective overall control environment at our company remains a top priority. In that regard, we have also established a steering committee that has been tasked with
monitoring and driving the progress of the remediation effort and its project teams. This committee meets on a regular basis to receive reports and provide feedback and instruction for further progress. We also provide regular reports to the Audit
Committee on the progress of our remediation efforts and ongoing compliance with Rule 404 of the Sarbanes-Oxley Act of 2002. We will provide appropriate updates regarding our general progress with the remediation efforts in future filings.



Changes in Internal Control Over Financial Reporting



There were no changes in our internal controls over financial reporting during the quarter
ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.



Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls
will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within Danka have been detected.



APPROVAL OF NON-AUDIT SERVICES



The audit committee has
approved Ernst & Young LLP and its affiliates to perform services regarding local statutory audits and assist in certain tax issues during the nine months ended December 31, 2005.



PART II  OTHER INFORMATION



Item 1. Legal Proceedings



In June 2003,
Danka was served with a putative class action complaint titled Stephen L. Edwards, et al., Plaintiffs vs. Danka Industries, Inc., et al., including American Business Credit Corporation, Defendants, alleging claims of breach of contract,
fraud/intentional misrepresentation, unjust enrichment, violation of the Florida Deception and Unfair Trade Protection Act and injunctive relief. The claim was filed in the state court in Tennessee, and the Company has removed the claim to the
United States District Court for Middle District of Tennessee for further proceedings. The plaintiffs have filed a motion to certify the class, which the Company has opposed. The Company has filed a motion for summary judgment, which plaintiffs have
opposed. While the amount sought in this complaint is in excess of $75,000, the Company cannot, at this time, estimate its potential exposure. The Company will continue to vigorously defend the claims alleged by the plaintiff in this action.



The Company is also subject to legal proceedings and claims which arise in the
ordinary course of its business. The Company does not expect these legal proceedings to have a material effect upon its financial position, results of operations or liquidity.



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Item 2. Changes in Securities and Use of Proceeds



Not applicable.



Item 3. Defaults Upon Senior Securities



Not applicable.



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



The annual general meeting of the shareholders of Danka Business Systems PLC was held on November 9, 2005. At the meeting, the following actions were taken by the shareholders:



1. David J. Downes was elected as Director of the Company. The voting on
resolution was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 159.8 million
|AGAINST |  | 1.8 million  
|ABSTAIN |  | 0            



2. Kevin C. Daly was
re-elected as Director of the Company. The voting on resolution was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 159.8 million
|AGAINST |  | 1.8 million  
|ABSTAIN |  | 0            



3. W. Andres McKenna
was re-elected as Director of the Company. The voting on resolution was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 159.7 million
|AGAINST |  | 1.8 million  
|ABSTAIN |  | 0            



4. Christopher B.
Harned was re-elected as Director of the Company. The voting on resolution was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 159.6 million
|AGAINST |  | 1.8 million  
|ABSTAIN |  | 0            



The following
directors continued their terms of office after the meeting: Jamie W. Ellertson, J. Ernst Riddle, Todd Mavis, James L. Singleton and Erik Vonk. Michael B. Gifford retired from the Board of Directors effective November 9, 2005.



5. Ernst & Young LLP was re-appointed as our auditor for fiscal year
2006, and the Board of Directors, or duly appointed Committee thereof, was authorized to fix the auditors remuneration. The voting on resolution was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 159.3 million
|AGAINST |  | 2.1 million  
|ABSTAIN |  | 0            



6. The Board of
Directors was granted the authority to allot securities up to an aggregate nominal amount of £1,068,387. The voting on resolution was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 159.6 million
|AGAINST |  | 1.9 million  
|ABSTAIN |  | 0            



7. The Board of
Directors was granted the authority to allot equity securities, subject to certain limitations, without providing certain pre-emptive rights. The voting was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 157.9 million
|AGAINST |  | 2.9 million  
|ABSTAIN |  | 0            



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8. The Directors Remuneration report for fiscal year 2005 was approved. The voting on resolution
was as follows:



|        |  |              
|------- |  | -------------
|FOR     |  | 118.7 million
|AGAINST |  | 42.8 million 
|ABSTAIN |  | 0            



Item 5. Other Information



Not applicable.



Item 6. Exhibits



(a)
Exhibits.



|            |  |                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                           
|31.1        |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                       
|            | 
|31.2        |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                       
|            | 
|32.1        |  | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURE



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.



|                       |  |                           
|---------------------- |  | --------------------------
|                       |  | Danka Business Systems PLC
|                       |  | (Registrant)              
|                       | 
|Date: February 8, 2006 |  | /s/ Edward K. Quibell     
|                       |  | Edward K. Quibell         
|                       |  | Chief Financial Officer   



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Exhibit Index



|            |  |                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                           
|31.1        |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                       
|            | 
|31.2        |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                       
|            | 
|32.1        |  | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



60