##### Table of Contents

---



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



(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, 2002 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



---



DANKA
BUSINESS SYSTEMS PLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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



|11201 DANKA CIRCLE NORTH ST. PETERSBURG, FLORIDA 33716 |  | AND |  | MASTERS HOUSE 107 HAMMERSMITH ROAD LONDON, ENGLAND W14
0QH
|------------------------------------------------------ |  | --- |  | ----------------------------------------------------------

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)



REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE:

(727) 576-6003 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)



---



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 ̈



The registrant had 249,262,074
Ordinary Shares outstanding as of February 1, 2003



---



---

##### Table of Contents



INDEX



|RISK FACTORS                                                                                                                                    |  | 3 
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|                                                                                                                                               
|PART I  FINANCIAL INFORMATION                                                                                                                  |  | 8 
|Item 1. Consolidated Financial Statements                                                                                                       |  | 8 
|Consolidated Statements of Operations for the three and nine months ended December 31, 2002 and 2001                                            |  | 8 
|Condensed Consolidated Balance Sheets as of December 31, 2002 and March 31, 2002                                                                |  | 9 
|Consolidated Statements of Cash Flows for the nine months ended December 31, 2002 and 2001                                                      |  | 10
|Consolidated Statements of Shareholders Equity and Accumulated Other Comprehensive Losses for the nine months ended December 31, 2002 and 2001 |  | 11
|Notes to Consolidated Financial Statements                                                                                                      |  | 12
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                   |  | 26
|Three Months Ended December 31, 2002 compared to the Three Months Ended December 31, 2001                                                       |  | 28
|Nine Months Ended December 31, 2002 compared to the Nine Months Ended December 31, 2001                                                         |  | 30
|Exchange Rates                                                                                                                                  |  | 32
|Liquidity and Capital Resources                                                                                                                 |  | 32
|Other Financing Arrangements                                                                                                                    |  | 34
|Critical Accounting Policies and Estimates                                                                                                      |  | 36
|Item 3. Quantitative and Qualitative Analysis About Market Risk                                                                                 |  | 38
|Item 4. Controls and Procedures                                                                                                                 |  | 38
|                                                                                                                                               
|PART II  OTHER INFORMATION                                                                                                                     |  | 39
|                                                                                                                                               
|Item 1. Legal Proceedings                                                                                                                       |  | 39
|Item 2. Changes in Securities                                                                                                                   |  | 39
|Item 3. Defaults Upon Senior Securities                                                                                                         |  | 39
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                     |  | 39
|Item 5. Other Information                                                                                                                       |  | 39
|Item 6. Exhibits and Reports on Form 8-K                                                                                                        |  | 39
|                                                                                                                                               
|SIGNATURE                                                                                                                                       |  | 40



2



---

##### Table of Contents



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 managements plans or objectives, forecasts of market trends
and other matters, are forward looking statements, and contain information relating to us that is based on the beliefs of our management as well as assumptions, made by, and information currently available to, our management. The words
goal, anticipate, expect, believe and similar expressions as they relate to us or our management are intended to identify forward looking statements. 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 in the Private Securities Litigation Reform Act of 1995. 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 (some of which are explained in greater detail below): (i) any material adverse change in financial markets or
in our own position, (ii) any inability to achieve or maintain cost savings, (iii) increased competition from other high-volume and digital copier distributors and the discounting of such copiers by our competitors, (iv) any inability by us to
procure, or any inability by us to continue to gain access to and successfully distribute, new products, including digital products and high-volume copiers, or to continue to bring current products to the marketplace at competitive costs and prices,
(v) any negative impact from the loss of any of our key upper management personnel, (vi) fluctuations in foreign currencies, and (vii) any change in economic conditions in domestic or international markets where we operate or have material
investments which may affect demand for our services. 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. 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.



Risk Factors



ProfitabilityWe incurred losses from continuing operations of $9.9 million during fiscal year 2002 and $233.5 million during fiscal year 2001. We generated earnings from continuing operations and net earnings of $10.8
million during the first nine months of fiscal year 2003, which fiscal year will end March 31, 2003. If we incur losses 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.



We believe that our results for the first nine months of fiscal year 2003 and for fiscal years 2002 and 2001 were impacted in large part by competitive
pressures, the transition in our industry from analog to digital products, our decision to substantially exit the analog business by positioning ourselves as a preeminent provider of digital equipment, services and solutions, the costs associated
with the disposal of certain under-performing business units and the use of our resources to develop and grow areas of our business that do not rely on the sale and servicing of office imaging equipment.



In order to be profitable, we must maintain efficient and cost-effective
operations. We are continuing to focus on exploring and exploiting new market opportunities, pursuing productivity initiatives and streamlining our infrastructure. These initiatives are aimed at making us more profitable and competitive in the
long-term. Our ability to sustain and improve our profit margins through these initiatives may be affected by factors outside our control.



CompetitionOur industry 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 largely upon technology, performance, pricing, quality, reliability, distribution, customer service and support, and
leasing and rental financing. In addition, our suppliers continue to establish themselves as direct competitors in many of the areas in which we do business. Besides competition from within the office imaging industry, we are also experiencing
competition from other sources as a result of technology convergence, including the development of document management processing, retention and digital printing technologies. We may not be able to maintain, and we may even 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 that we can obtain for our products and may affect our ability to retain customers, both of which
could negatively affect our operating results.





3



---

##### Table of Contents

Technological ChangesThe office imaging industry continues to change from analog to digital
photocopiers. Most of our digital products replace or compete with analog products. Digital photocopiers are more efficient than analog photocopiers, meaning that our customers require fewer of them to provide the same level of output. Digital
photocopiers are increasingly more reliable than analog photocopiers and require less maintenance. This has contributed, in part, to a decline in our service contract revenue, which has traditionally formed a significant portion of our revenues. In
addition, color printing and copying represents an important and growing part of our industry. We must improve our execution of color sales and meet the demand for color products if we are to maintain and improve our operating performance and our
ability to compete. Development of technologies in our industry, including digital and color products and printing and multi-function technology from outside the traditional office imaging industry, may impair our future operating performance and
our ability to compete. For example, we may not be able to procure or gain access to products and bring them to the marketplace, or to make the investments necessary for us to maintain a technologically competitive workforce.



We launched three major initiatives in fiscal year 2002, which are designed to
address the impact of technological changes on our revenues: (1) our Danka @ the Desktop initiative, which is intended to improve print management processes, increase productivity, and lower overall document production costs for our customers, (2)
our multi-vendor services initiative, which is intended to leverage our existing Technical Services group and expand the types of technical services and maintenance that we provide for our customers to include other types of digitally connected
devices and equipment installed by other vendors, and (3) our professional services group which provides consultive services to our customers and supports our digital initiatives. The success of these initiatives may not be achieved if they are not
accepted by our customers, do not generate additional revenue, or we are unable to provide the software, hardware, solutions or services necessary to successfully implement these initiatives.



Vendor RelationshipsWe have relationships with Canon, Ricoh,
Toshiba, Heidelberg/Nexpress, and Konica. These companies manufacture equipment, parts, supplies and software for resale by us in all of our markets. We also rely on our equipment suppliers for related parts and supplies. An inability to obtain
parts or supplies in the volumes required and at competitive prices from our major vendors, or the loss of any major vendor, 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. There is no guarantee that these vendors or any of our other vendors will 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 provide products on a timely manner or at competitive prices.



IndebtednessWe have significant outstanding indebtedness. At December 31, 2002 we had consolidated bank and
long-term indebtedness, including current maturities of long-term debt, of approximately $240.4 million which includes $47.6 million in principal amount of zero coupon senior subordinated notes due April 1, 2004 and $64.5 million in principal amount
of 10% subordinated notes due April 1, 2008. A discussion of the terms and maturity dates of our indebtedness is included in the Liquidity and Capital Resources section in this Quarterly Report on Form 10-Q. Our level of indebtedness requires us to
dedicate a significant portion of our operating cash flows to payments of interest and principal. The payment obligations and covenants under our indebtedness may also limit our liquidity and our ability to make investments that are necessary for us
to keep pace with the technological and other changes currently affecting our industry. The majority of our borrowings bear interest at a variable rate. Accordingly, increases in interest rates could increase our interest expense and adversely
affect our cash flow, reducing the amounts available to make payments on our indebtedness.



Bank and Other CovenantsOur credit facility imposes significant operating restrictions on us, because it contains financial and non-financial covenants, which restrict our business
operations. If we were to fail to comply with the financial covenants and did not obtain a waiver or amendment from our senior bank lenders, we would be in default under the credit facility and lenders owning a majority of our senior bank debt would
be permitted to demand immediate repayment. If we were to fail to repay our senior bank debt when it becomes due, our lenders could proceed against certain of our assets and our subsidiaries assets and capital stock which we have pledged to
them as security for the repayment of our senior bank debt.



Third Party Financing ArrangementsWe have an agreement with General Electric Capital Corporation (GECC) under which GECC agrees to provide financing to our United States customers to purchase equipment from
us. Although we have other financing arrangements, GECC finances a significant part of our business. If we were to breach the covenants or other restrictions in our agreement with GECC, then GECC might refuse to provide financing to our customers.
If GECC were to fail to provide financing to our customers, those customers might be unable to purchase equipment from us if we were unable to provide alternative financing arrangements on similar terms. In addition, if we were unable to provide
financing, we may lose sales, which could negatively affect our operating results. If we fail to provide a minimum level of customer leases under the agreement, we are required to pay penalty payments to GECC. The minimum level of customer leases is
equal to a specified percentage of U.S. hardware revenues. For the year ended March 31, 2002 we were obligated for penalty payments of approximately $0.2 million to GE Capital.



4



---

##### Table of Contents



Information Systems and
Financial Controls Our management information systems run on numerous disparate legacy IT systems that are outdated and incompatible in certain regards. This is primarily the result of our rapid expansion through many acquisitions,
followed by a period of financial difficulties that caused a lack of focus on, and investment in, these systems.



The operation and coordination of our management information systems is labor-intensive and expensive. We must manually collect, compile and consolidate certain information due to system limitations.
We utilize manual internal control reviews to provide assurance of the accuracy of such information. These manual procedures are more difficult to supervise, more time-consuming and more costly than automated processes. As a result of these issues,
we are limited in our ability to obtain, manage and access important information, such as customer and contract data, in an effective and timely manner. We also incur substantial effort and expense with respect to billing, collections, managing
contract data and inventory accounting. Our ability to manage, account for and control our business efficiently and effectively can be adversely affected when important information and knowledge cannot be accessed timely or accurately.



We believe that we must upgrade our management information systems so that we
have an infrastructure that is appropriate for a business of our size, scope and complexity. We are in the process of implementing an approximately $45 million program, known as Vision 21, to enhance and unify our United States management
information systems. This program has proved more expensive and time-consuming than we originally anticipated, in part because of the lack of prior investment in our IT infrastructure, systems performance issues and software deficiencies. It is
possible that the costs of completing the project may still exceed our current expectations. We anticipate that the United States program will be completed by the end of the first quarter of fiscal year 2004, although we cannot give any assurance
that this will be the case. If we are not able to successfully implement our Vision 21 program, then we will continue to incur substantial costs using manual procedures to process information in an accurate and timely manner in addition to the
write-off of capitalized costs associated with the program.



For
the same reasons, we are evaluating what information system investments we should make for the countries within our European and International operations. We are installing new software in some of these countries and may require more effective
software in other countries. We are evaluating the costs to implement such software and are analyzing the software requirements of the business model in those countries. Any implementation of new or improved information systems in such countries may
take considerable time and could require a substantial investment.



In conjunction with the management information system initiatives outlined above, we are in the process of improving our internal financial disclosure and business control functions. We are working with outside consultants to
strengthen and improve certain areas of identified weaknesses in our financial controls. We are developing a new European internal audit department to supplement our existing internal audit department and are developing a compliance auditing
function as well as implementing new policy controls, quality standards and corporate governance initiatives.



Business Process ComplianceOur rapid expansion through acquisitions, past financial difficulties and a historical lack of focus and investment in our information systems have impeded our
managements ability to implement business processes consistently and enforce policies effectively, which has impaired our progress in areas such as billing and accounts receivable. These issues have adversely affected our profitability and
liquidity in the past and may continue to do so in future periods.



Partly as a result of our efforts to improve our management information systems and controls described above, we have identified instances where our business processes and policies have not been properly implemented and or followed
in the past, which have resulted in, among other things, instances of poor billing practices, excessive and undisciplined issuance of customer credits, inaccurate customer data, inconsistent customer contract terms and conditions, and inadequate
document retention. These system and process issues have impaired our ability, in some cases, to issue accurate and timely customer invoices, which has resulted in some customers refusing or delaying payments. These deficiencies have adversely
affected our profitability in past periods and, although we are taking steps in conjunction with the upgrade of our management information systems to improve our business processes and policies, deficiencies may continue to adversely affect our
profitability and liquidity in future periods for some time to come.



DisclosureControls 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 Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to
our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We also maintain internal controls that are designed with the objective of providing
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, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.



Our management 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 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 fraud, if any, within the



5



---

##### Table of Contents



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 simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, 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, control 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.



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 non-United States operations when reported in United States dollars in
our U.S. financial statements, and the value of the net assets of our non-United States operations when reported in United States dollars in our U.S. financial statements. These fluctuations may negatively impact our results of operations and
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.



Approximately 46.2% of our revenues were generated outside the United States during the first nine months of fiscal year
2003, with the majority of these revenues generated in countries that have adopted the euro as their currency and the United Kingdom. During the first nine months of fiscal year 2003, the euro strengthened approximately 9.0% against the United
States dollar and the United Kingdom pound strengthened approximately 6.4% against the United States dollar with relative positive effects on our revenue and income.



We pay for some high-volume copiers, parts and supplies in euro countries in United States dollars, but we generally invoice
our customers in euro countries in euros. If the euro weakens against the United States dollar, our operating margins and cash flow may be negatively impacted when we receive payment in euro but we pay our suppliers in United States dollars. In
addition, our results of operations and financial condition have been, and may in the future be, negatively impacted by the effect of currency fluctuations on the translation of the financial statements of our non-United States subsidiaries,
including our European and Latin American subsidiaries, from local currencies to the United States dollar for inclusion in our U.S financial statements. We generally do not hedge our exposure to changes in foreign currency.



Share PriceThe market price of our ordinary shares and American
depositary shares 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 American depositary shares. Factors which may add to the volatility of the price of our ordinary shares and American depositary shares include many of the factors set out above, and may also include changes in
liquidity in the market for our ordinary shares and American depositary shares, sales of our ordinary shares and American depositary shares, 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 decrease the market price of our ordinary shares and American depositary shares, 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 dividends to shareholders only if, as determined by reference to our
financial statements prepared in accordance with UK GAAP:



| |  |  | 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 Form 10-Q we have
insufficient, accumulated realized profits to pay dividends on our ordinary shares. In addition, our credit facility prohibits us from paying dividends on our ordinary shares without our lenders consent. We may only pay dividends on our
ordinary shares if we have paid all dividends due on our 6.50% senior convertible participating shares.



6



---

##### Table of Contents



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 or downloaded electronically or as paper copies from our website: http://www.danka.com/FinancialReports.asp. Our recent
press releases are also available to be viewed or downloaded electronically at http://www.danka.com/PressReleases.htm. 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.



7



---

##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements



Danka Business Systems PLC

Consolidated Statements of Operations for the three and nine months ended December 31, 2002 and 2001

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

(Unaudited)



|                                                                      |  | For the Three Months Ended |         |   | For the Nine Months Ended |  
|--------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | -
|                                                                      |  | December 31, 2002          |         |   | December 31, 2001         |  
|Revenue:                                                              |  |                            |         |   |                           |  
|Retail equipment sales                                                |  | $                          | 121,768 |   |                           | $
|Retail service, supplies and rentals                                  |  |                            | 209,211 |   |                           |  
|Wholesale                                                             |  |                            | 22,136  |   |                           |  
|                                                                      |  |                            |         |   |                           |  
|Total revenue                                                         |  |                            | 353,115 |   |                           |  
|                                                                      |  |                            |         |   |                           |  
|Costs and operating expenses:                                         |  |                            |         |   |                           |  
|Cost of retail equipment sales                                        |  |                            | 80,427  |   |                           |  
|Retail service, supplies and rental costs                             |  |                            | 123,387 |   |                           |  
|Wholesale costs of revenue                                            |  |                            | 18,048  |   |                           |  
|Selling, general and administrative expenses                          |  |                            | 119,926 |   |                           |  
|Amortization of intangible assets                                     |  |                            | 84      |   |                           |  
|Restructuring charges (credits)                                       |  |                            |        |   |                           |  
|Other (income) expense                                                |  |                            | (1,575  | ) |                           |  
|                                                                      |  |                            |         |   |                           |  
|Total costs and operating expenses                                    |  |                            | 340,297 |   |                           |  
|                                                                      |  |                            |         |   |                           |  
|Operating earnings (loss) from continuing operations                  |  |                            | 12,818  |   |                           |  
|Interest expense                                                      |  |                            | (8,734  | ) |                           |  
|Interest income                                                       |  |                            | 419     |   |                           |  
|                                                                      |  |                            |         |   |                           |  
|Earnings (loss) from continuing operations before income taxes        |  |                            | 4,503   |   |                           |  
|Provision (benefit) for income taxes                                  |  |                            | 1,219   |   |                           |  
|                                                                      |  |                            |         |   |                           |  
|Earnings (loss) from continuing operations before extraordinary
items |  |                            | 3,284   |   |                           |  
|Discontinued operations, net of tax                                   |  |                            |        |   |                           |  
|Extraordinary gain (loss) on early retirement of debt, net of tax     |  |                            |        |   |                           |  
|                                                                      |  |                            |         |   |                           |  
|Net earnings (loss)                                                   |  | $                          | 3,284   |   |                           | $
|                                                                      |  |                            |         |   |                           |  
|Basic (loss) earnings available to common shareholders per ADS:       |  |                            |         |   |                           |  
|Net earnings (loss) per ADS, continuing operations                    |  | $                          | (0.02   | ) |                           | $
|Net earnings (loss) per ADS, discontinued operations                  |  |                            |        |   |                           |  
|Net earnings per ADS, extraordinary item                              |  |                            |        |   |                           |  
|Net earnings (loss) per ADS                                           |  | $                          | (0.02   | ) |                           | $
|Weighted average ADSs                                                 |  |                            | 62,194  |   |                           |  
|Diluted (loss) earnings available to common shareholders per ADS:     |  |                            |         |   |                           |  
|Net earnings (loss) per ADS, continuing operations                    |  | $                          | (0.02   | ) |                           | $
|Net earnings (loss) per ADS, discontinued operations                  |  |                            |        |   |                           |  
|Net earnings per ADS, extraordinary item                              |  |                            |        |   |                           |  
|Net earnings (loss) per ADS                                           |  | $                          | (0.02   | ) |                           | $
|Weighted average ADSs                                                 |  |                            | 62,194  |   |                           |  



See
accompanying notes to the consolidated financial statements



8



---

##### Table of Contents

Danka Business Systems PLC

Condensed Consolidated Balance Sheets as of December 31, 2002 and March 31, 2002

(In Thousands)

(Unaudited)



|                                                                 |  | December 31, 2002 |          |   | March 31, 2002 |  
|---------------------------------------------------------------- |  | ----------------- | -------- | - | -------------- | -
|Assets                                                           |  |                   |          |   |                |  
|Current assets:                                                  |  |                   |          |   |                |  
|Cash and cash equivalents                                        |  | $                 | 71,642   |   |                | $
|Accounts receivable, net                                         |  |                   | 251,992  |   |                |  
|Inventories                                                      |  |                   | 108,579  |   |                |  
|Prepaid expenses, deferred income taxes and other current assets |  |                   | 46,307   |   |                |  
|                                                                 |  |                   |          |   |                |  
|Total current assets                                             |  |                   | 478,520  |   |                |  
|Equipment on operating leases, net                               |  |                   | 44,176   |   |                |  
|Property and equipment, net                                      |  |                   | 61,014   |   |                |  
|Goodwill, net                                                    |  |                   | 255,353  |   |                |  
|Noncompete agreements, net                                       |  |                   | 830      |   |                |  
|Deferred income taxes                                            |  |                   | 67,707   |   |                |  
|Other assets                                                     |  |                   | 28,746   |   |                |  
|                                                                 |  |                   |          |   |                |  
|Total assets                                                     |  | $                 | 936,346  |   |                | $
|                                                                 |  |                   |          |   |                |  
|Liabilities and shareholders' equity                             |  |                   |          |   |                |  
|Current liabilities:                                             |  |                   |          |   |                |  
|Current maturities of long-term debt and notes payable           |  | $                 | 38,163   |   |                | $
|Accounts payable                                                 |  |                   | 113,735  |   |                |  
|Accrued expenses and other current liabilities                   |  |                   | 90,338   |   |                |  
|Taxes payable                                                    |  |                   | 96,460   |   |                |  
|Deferred revenue                                                 |  |                   | 40,014   |   |                |  
|                                                                 |  |                   |          |   |                |  
|Total current liabilities                                        |  |                   | 378,710  |   |                |  
|Long-term debt and notes payable, less current maturities        |  |                   | 202,264  |   |                |  
|Deferred income taxes and other long-term liabilities            |  |                   | 25,427   |   |                |  
|                                                                 |  |                   |          |   |                |  
|Total liabilities                                                |  |                   | 606,401  |   |                |  
|6.5% convertible participating shares                            |  |                   | 253,811  |   |                |  
|                                                                 |  |                   |          |   |                |  
|Shareholders' equity:                                            |  |                   |          |   |                |  
|Ordinary shares, 1.25 pence stated value                         |  |                   | 5,160    |   |                |  
|Additional paid-in capital                                       |  |                   | 326,887  |   |                |  
|Retained earnings (accumulated deficit)                          |  |                   | (184,372 | ) |                |  
|Accumulated other comprehensive (loss) income                    |  |                   | (71,541  | ) |                |  
|                                                                 |  |                   |          |   |                |  
|Total shareholders' equity                                       |  |                   | 76,134   |   |                |  
|                                                                 |  |                   |          |   |                |  
|Total liabilities & shareholders' equity                         |  | $                 | 936,346  |   |                | $
|                                                                 |  |                   |          |   |                |  



See
accompanying notes to the consolidated financial statements



9



---

##### Table of Contents



Danka Business Systems PLC

Consolidated Statements of Cash Flows for the nine months ended December 31, 2002 and 2001

(In Thousands)

(Unaudited)



|                                                                         |  | December 31, 2002 |         |   | December 31, 2001 |  
|------------------------------------------------------------------------ |  | ----------------- | ------- | - | ----------------- | -
|Operating activities:                                                    |  |                   |         |   |                   |  
|Net earnings (loss)                                                      |  | $                 | 10,791  |   |                   | $
|Adjustments to reconcile net earnings (loss) to net cash provided:       |  |                   |         |   |                   |  
|Extraordinary gain on debt retirement                                    |  |                   |        |   |                   |  
|Net earnings and gain from sale of discontinued operations               |  |                   |        |   |                   |  
|Depreciation and amortization                                            |  |                   | 43,112  |   |                   |  
|Deferred income taxes                                                    |  |                   | (5,455  | ) |                   |  
|Amortization of debt issuance costs                                      |  |                   | 7,090   |   |                   |  
|Loss on sale of property and equipment and equipment on operating
leases |  |                   | 3,589   |   |                   |  
|Proceeds from sale of equipment on operating leases                      |  |                   | 1,922   |   |                   |  
|Restructuring and other special charges (credits)                        |  |                   |        |   |                   |  
|Changes in net assets and liabilities:                                   |  |                   |         |   |                   |  
|Accounts receivable                                                      |  |                   | 40,358  |   |                   |  
|Inventories                                                              |  |                   | 22,020  |   |                   |  
|Prepaid expenses and other current assets                                |  |                   | 5,280   |   |                   |  
|Other non-current assets                                                 |  |                   | 5,938   |   |                   |  
|Accounts payable                                                         |  |                   | 3,149   |   |                   |  
|Accrued expenses and other current liabilities                           |  |                   | (15,629 | ) |                   |  
|Deferred revenue                                                         |  |                   | (2,329  | ) |                   |  
|Other long-term liabilities                                              |  |                   | 2,013   |   |                   |  
|                                                                         |  |                   |         |   |                   |  
|Net cash provided by operating activities                                |  |                   | 121,849 |   |                   |  
|                                                                         |  |                   |         |   |                   |  
|Investing activities:                                                    |  |                   |         |   |                   |  
|Capital expenditures                                                     |  |                   | (32,054 | ) |                   |  
|Proceeds from the sale of property and equipment                         |  |                   | 463     |   |                   |  
|Net proceeds from the sale of business                                   |  |                   |        |   |                   |  
|                                                                         |  |                   |         |   |                   |  
|Net cash provided by (used in) investing activities                      |  |                   | (31,591 | ) |                   |  
|                                                                         |  |                   |         |   |                   |  
|Financing activities:                                                    |  |                   |         |   |                   |  
|Net payments under line of credit agreements                             |  |                   | (50,223 | ) |                   |  
|Principal payments of debt                                               |  |                   | (14,490 | ) |                   |  
|Payment of debt issue costs                                              |  |                   | (17,162 | ) |                   |  
|                                                                         |  |                   |         |   |                   |  
|Net cash used in financing activities                                    |  |                   | (81,875 | ) |                   |  
|                                                                         |  |                   |         |   |                   |  
|Effect of exchange rates                                                 |  |                   | 3,789   |   |                   |  
|                                                                         |  |                   |         |   |                   |  
|Net increase (decrease) in cash                                          |  |                   | 12,172  |   |                   |  
|Cash and cash equivalents, beginning of period                           |  |                   | 59,470  |   |                   |  
|                                                                         |  |                   |         |   |                   |  
|Cash and cash equivalents, end of period                                 |  | $                 | 71,642  |   |                   | $
|                                                                         |  |                   |         |   |                   |  

See accompanying notes to the consolidated financial statement



10



---

##### Table of Contents



Danka Business Systems PLC

Consolidated Statements of Shareholders Equity and Accumulated Other Comprehensive Losses for the nine months ended December 31, 2002 and 2001

(In Thousands)

(Unaudited)



|                                                |  | Number of Ordinary Shares (4 Ordinary Shares Equal 1 ADS) |  | Ordinary Shares |       | Additional Paid-In Capital |   | Retained Earnings (Accumulated Deficit) |  |   | Accumulated Other Comprehensive (Loss) Income |   |  | Total |         
|----------------------------------------------- |  | --------------------------------------------------------- |  | --------------- | ----- | -------------------------- | - | --------------------------------------- |  | - | --------------------------------------------- | - |  | ----- | --------
|Balances at March 31, 2002                      |  | 248,085                                                   |  | $               | 5,139 |                            | $ | 325,880                                 |  | $ | (181,872                                      | ) |  | $     | (101,098
|Net earnings                                    |  |                                                          |  |                 |      |                            |   |                                        |  |   | 10,791                                        |   |  |       |        
|Currency translation adjustment                 |  |                                                          |  |                 |      |                            |   |                                        |  |   |                                              |   |  |       | 29,557  
|                                                |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|Comprehensive income                            |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|Dividends and accretion on participating shares |  |                                                          |  |                 |      |                            |   |                                        |  |   | (13,291                                       | ) |  |       |        
|Shares issued under employee stock plans        |  | 1,109                                                     |  |                 | 21    |                            |   | 1,007                                   |  |   |                                              |   |  |       |        
|                                                |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|Balances at December 31, 2002                   |  | 249,194                                                   |  | $               | 5,160 |                            | $ | 326,887                                 |  | $ | (184,372                                      | ) |  | $     | (71,541 
|                                                |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|                                               
|Balances at March 31, 2001                      |  | 247,571                                                   |  | $               | 5,130 |                            | $ | 325,399                                 |  | $ | (302,619                                      | ) |  | $     | (93,552 
|Net earnings                                    |  |                                                          |  |                 |      |                            |   |                                        |  |   | 122,324                                       |   |  |       |        
|Currency translation adjustment                 |  |                                                          |  |                 |      |                            |   |                                        |  |   |                                              |   |  |       | (2,320  
|                                                |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|Comprehensive income                            |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|Dividends and accretion on participating shares |  |                                                          |  |                 |      |                            |   |                                        |  |   | (12,556                                       | ) |  |       |        
|Shares issued under employee stock plans        |  | 514                                                       |  |                 | 8     |                            |   | 481                                     |  |   |                                              |   |  |       |        
|                                                |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         
|Balances at December 31, 2001                   |  | 248,085                                                   |  | $               | 5,138 |                            | $ | 325,880                                 |  | $ | (192,851                                      | ) |  | $     | (95,872 
|                                                |  |                                                           |  |                 |       |                            |   |                                         |  |   |                                               |   |  |       |         



See
accompanying notes to the consolidated financial statements



11



---

##### Table of Contents



Danka Business Systems PLC

Notes to Consolidated Financial Statements

(Unaudited)



Note 1. Basis of Presentation



The accompanying condensed consolidated balance sheet as of December 31, 2002,
the consolidated statements of operations for the three and nine months ended December 31, 2002 and 2001, the consolidated statements of cash flows for the nine months ended December 31, 2002 and 2001, and the consolidated statement of
shareholders equity and accumulated other comprehensive losses for the nine months ended December 31, 2002 and 2001 are unaudited. 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 financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report contained in Form 10-K for the year ended March 31, 2002. Certain prior year amounts
have been reclassified to conform to current year presentations.



The financial statements contained herein for the three and nine months ended December 31, 2002 and December 31, 2001 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, 2002 have been delivered to the Registrar of Companies for England and Wales. 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.



Note 2. Intangible Assets



In June 2001,
the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 revises the standards of accounting for
goodwill and indefinite-lived intangible assets by replacing the regular amortization of these assets with the requirement that they be reviewed annually for possible impairment or more frequently if impairment indicators arise. Separable intangible
assets that have finite lives will continue to be amortized over their estimated useful lives. We adopted SFAS 142 effective April 1, 2002. During the first quarter of the fiscal year ending March 31, 2003, we finalized the required transitional
impairment tests of goodwill and indefinite-lived intangible assets under the requirements of SFAS 142. Based on the results of the transitional impairment tests, no adjustments for impairment were necessary.



The following table reflects our unaudited pro forma results of operations
giving effect to SFAS 142 as if it were adopted on April 1, 2001 (in thousands, except per share amounts):



|                                                                  |  | For the Three Months Ended |        |   | For the Nine Months Ended
|----------------------------------------------------------------- |  | -------------------------- | ------ | - | -------------------------
|                                                                  |  | December 31, 2002          |        |   | December 31, 2001        
|Reported net earnings (loss)                                      |  | $                          | 3,284  |   |                          
|Add-back goodwill amortization, net of taxes                      |  |                            |       |   |                          
|                                                                  |  |                            |        |   |                          
|Adjusted net earnings (loss)                                      |  | $                          | 3,284  |   |                          
|                                                                  |  |                            |        |   |                          
|Basic (loss) earnings available to common shareholders per ADS:   |  |                            |        |   |                          
|Reported net earnings (loss) per ADS                              |  | $                          | (0.02  | ) |                          
|Add-back goodwill amortization, net of taxes                      |  |                            |       |   |                          
|                                                                  |  |                            |        |   |                          
|Adjusted net earnings (loss) per ADS                              |  | $                          | (0.02  | ) |                          
|                                                                  |  |                            |        |   |                          
|Weighted average ADSs                                             |  |                            | 62,194 |   |                          
|Diluted (loss) earnings available to common shareholders per
ADS: |  |                            |        |   |                          
|Reported net earnings (loss) per ADS                              |  | $                          | (0.02  | ) |                          
|Add-back goodwill amortization, net of taxes                      |  |                            |       |   |                          
|                                                                  |  |                            |        |   |                          
|Adjusted net earnings (loss) per ADS                              |  | $                          | (0.02  | ) |                          
|                                                                  |  |                            |        |   |                          
|Weighted average ADSs                                             |  |                            | 62,194 |   |                          



12



---

##### Table of Contents



As of December 31, 2002,
goodwill amounted to $255.4 million. Changes to goodwill for the nine months ended December 31, 2002 resulted primarily from fluctuations in foreign currency exchange rates and an adjustment related to a prior year acquisition. Non-compete
agreements, net amounted to $0.8 million, which included $2.9 million of accumulated amortization.



Aggregate amortization expense of non-compete agreements for the first nine months of fiscal 2003 amounted to $0.2 million. Estimated amortization expense for the current fiscal year is $0.3 million
and the succeeding five fiscal years is between $0.1 million and $0.2 million per year.



Goodwill by operating segment as of December 31, 2002 (in thousands):



|              |  | Goodwill
|------------- |  | --------
|United States |  | $       
|Europe        |  |         
|International |  |         
|              |  |         
|Total         |  | $       
|              |  |         



Note 3. Recent
Accounting Pronouncements



SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets requires long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. Statement 144 also broadens the reporting of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of Statement 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The impact of adoption of this statement on our financial position and results of operations were not material.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS 145) which is effective for fiscal years beginning after May 15, 2002. This Statement rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, as well as SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. As a result, the gains or losses from debt extinguishments will no longer be classified as extraordinary
items unless they meet the requirements in APB 30 of being unusual and infrequently occurring. Additionally, this Statement amends SFAS No. 13, Accounting for Leases, to eliminate any inconsistency between the reporting requirements for
sale-leaseback transactions and certain lease modifications that have similar economic effects. We will adopt the provisions of Statement 145 no later than the first quarter of our fiscal year 2004. Upon adoption, the prior years gains from
debt extinguishment will be reclassified to continuing operations.



SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.



4. Restructuring and Other Special Charges



Fiscal Year 2002 Charge:Our fiscal year 2002 restructuring charge included $4.9 million related to severance for 355 employees in the U.S., Canada
and Europe. Cash outlays for the reductions during the first nine months of fiscal year 2003 totaled $0.7 million. We expect substantially all of these reductions to be completed by March 31, 2003. The restructuring charge also included $6.1 million
for future lease obligations on 39 facilities that were vacated by March 31, 2002. Cash outlays for the facilities during the first nine months of fiscal year 2003 totaled $2.8 million. The following table summarizes the fiscal year 2002
restructuring charge:



2002 Restructuring Charge:



|(in 000s)                                    |  | Fiscal 2002 Expense |        | Reserve at March 31, 2002 |   | Cash Outlays |  |   | Other Non-Cash Changes |   |  | Reserve at December 31, 2002
|--------------------------------------------- |  | ------------------- | ------ | ------------------------- | - | ------------ |  | - | ---------------------- | - |  | ----------------------------
|Severance                                     |  | $                   | 4,967  |                           | $ | 1,210        |  | $ | (651                   | ) |  | $                           
|Future lease obligations on facility closures |  |                     | 6,074  |                           |   | 3,426        |  |   | (2,844                 | ) |  |                             
|                                              |  |                     |        |                           |   |              |  |   |                        |   |  |                             
|Total                                         |  | $                   | 11,041 |                           | $ | 4,636        |  | $ | (3,495                 | ) |  | $                           
|                                              |  |                     |        |                           |   |              |  |   |                        |   |  |                             



13



---

##### Table of Contents



Fiscal Year 2001 Charge:Our fiscal year 2001 restructuring charge included $21.8 million related to severance, which represented the anticipated reduction of approximately 1,200 positions worldwide. Cash outlays related to these reductions during the first nine months
of fiscal year 2003 totaled $0.2 million. We expect cash outlays for the workforce reductions to be completed by March 31, 2003.



The fiscal year 2001 restructuring charge also included $4.3 million for future lease obligations on facility closures and exit costs. Cash outlays for
facilities during the first nine months of fiscal year 2003 totaled $0.02 million. Due to a change in estimate, we reversed $0.3 million of fiscal year 2001 facility charges during fiscal year 2003. The following table summarizes the fiscal year
2001 restructuring charge:



2001 Restructuring Charge:



|(in 000s)                                                         |  | Fiscal 2001 Expense |        | Reserve at March 31, 2002 |   | Cash Outlays |  |   | Other Non-Cash Changes |   |  | Reserve at December 31, 2002
|------------------------------------------------------------------ |  | ------------------- | ------ | ------------------------- | - | ------------ |  | - | ---------------------- | - |  | ----------------------------
|Severance                                                          |  | $                   | 21,766 |                           | $ | 414          |  | $ | (183                   | ) |  | $                           
|Future lease obligations on facility closures and other exit costs |  |                     | 4,295  |                           |   | 475          |  |   | (28                    | ) |  |                             
|                                                                   |  |                     |        |                           |   |              |  |   |                        |   |  |                             
|Total                                                              |  | $                   | 26,061 |                           | $ | 889          |  | $ | (211                   | ) |  | $                           
|                                                                   |  |                     |        |                           |   |              |  |   |                        |   |  |                             



Fiscal Year
1999: We recorded certain restructuring and other non-cash special charges during the third and fourth quarters of the fiscal year ended March 31, 1999. The restructuring charge included $19.8 million related to severance, representing the
reduction of approximately 1,400 positions worldwide and the elimination of excess facilities. Special charges included the write-off of goodwill and other long-lived assets, as well as the write-down of assets, which were impacted as a result of
the termination of certain agreements between Kodak and us. Due to a change in estimate, we reversed $0.2 million of fiscal year 1999 facility charges during fiscal year 2003 which left a remaining balance as of December 31, 2002 of $0.2 million.



Note 5. Discontinued Operations



On June 29, 2001, we completed the sale of Danka Services International
(DSI) to Pitney Bowes Inc. for $290 million in cash, pursuant to an asset purchase agreement dated April 9, 2001. DSI was our facilities management and outsourcing business. Our shareholders approved the sale at an extraordinary general
meeting on June 29, 2001. We also entered into agreements to provide services and supplies to Pitney Bowes, Inc. on a worldwide basis for an initial term of two years.



The sale of DSI resulted in a gain in the first nine months of fiscal year 2002 of $104.8 million after income taxes of $67.9
million. During the three months ended December 31, 2001, we incurred an additional $2.9 million of purchase price adjustments and expenses related to the sale of DSI. A summary of the operating results of discontinued operations are as follows:



|(in 000s)                                                                                                               |  | For the three months ended December 31, 2001 |        |   | For the nine months ended December 31, 2001
|------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------- | ------ | - | -------------------------------------------
|Revenue                                                                                                                  |  | $                                            |       |   |                                            
|Earnings before income taxes                                                                                             |  | $                                            |       |   |                                            
|Provision for income taxes                                                                                               |  |                                              |       |   |                                            
|                                                                                                                         |  |                                              |        |   |                                            
|Net earnings (loss) from discontinued operations                                                                         |  |                                              |       |   |                                            
|Gain (loss) from sale of discontinued operations after income taxes (benefits) of
($1.9) and $67.9 million, respectively |  |                                              | (2,901 | ) |                                            
|                                                                                                                         |  |                                              |        |   |                                            
|Discontinued operations, net of tax                                                                                      |  | $                                            | (2,901 | ) |                                            
|                                                                                                                         |  |                                              |        |   |                                            



14



---

##### Table of Contents



Note 6. Earnings Per Share



The following table reconciles the numerator and denominator
of the basic and diluted earnings (loss) from continuing operations available to common shareholders per ADS computations for the three and nine months ended December 31, 2002 and 2001:



|                                                                  |  | For the three months ended December 31, 2002           |        |   | For the three months ended December 31, 2001 |       
|----------------------------------------------------------------- |  | ------------------------------------------------------ | ------ | - | -------------------------------------------- | ------
|(In 000s except per share amounts)                               |  | Earnings (loss) from Continuing Operations (Numerator) |        |   | Shares (Denominator)                         |       
|Basic earnings (loss) available to common shareholders per ADS:   |  |                                                        |        |   |                                              |       
|Earnings (loss) from continuing operations                        |  | $                                                      | 3,284  |   |                                              |       
|Dividends and accretion on participating shares                   |  |                                                        | (4,528 | ) |                                              |       
|                                                                  |  |                                                        |        |   |                                              |       
|Earnings (loss)                                                   |  |                                                        | (1,244 | ) |                                              | 62,194
|                                                                  |  |                                                        |        |   |                                              |       
|Effect of dilutive securities:                                    |  |                                                        |        |   |                                              |       
|Stock options                                                     |  |                                                        |       |   |                                              |      
|                                                                  |  |                                                        |        |   |                                              |       
|Diluted earnings (loss) available to common shareholders per
ADS: |  |                                                        |        |   |                                              |       
|Earnings (loss)                                                   |  | $                                                      | (1,244 | ) |                                              | 62,194
|                                                                  |  |                                                        |        |   |                                              |       



|                                                                  |  | For the nine months ended December 31, 2002            |         |   | For the nine months ended December 31, 2001 |       
|----------------------------------------------------------------- |  | ------------------------------------------------------ | ------- | - | ------------------------------------------- | ------
|(In 000s except per share amounts)                               |  | Earnings (loss) from Continuing Operations (Numerator) |         |   | Shares (Denominator)                        |       
|Basic earnings (loss) available to common shareholders per ADS:   |  |                                                        |         |   |                                             |       
|Earnings (loss) from continuing operations                        |  | $                                                      | 10,791  |   |                                             |       
|Dividends and accretion on participating shares                   |  |                                                        | (13,384 | ) |                                             |       
|                                                                  |  |                                                        |         |   |                                             |       
|Earnings (loss)                                                   |  |                                                        | (2,593  | ) |                                             | 62,078
|                                                                  |  |                                                        |         |   |                                             |       
|Effect of dilutive securities:                                    |  |                                                        |         |   |                                             |       
|Stock options                                                     |  |                                                        |        |   |                                             |      
|                                                                  |  |                                                        |         |   |                                             |       
|Diluted earnings (loss) available to common shareholders per
ADS: |  |                                                        |         |   |                                             |       
|Earnings (loss)                                                   |  | $                                                      | (2,593  | ) |                                             | 62,078
|                                                                  |  |                                                        |         |   |                                             |       



The effect of our 6.5%
convertible participating shares are not included in the computation of diluted earnings per share for the three and nine months ended December 31, 2002 and 2001 and the effect of our 6.75% convertible subordinated notes are not included in the
computation of diluted earnings per share for the three and nine months ended December 31, 2001 because they are not dilutive.



Note 7. Segment Reporting



Our reportable segments are Danka United States, Danka Europe and Danka International. Our reportable segments do not include the discontinued operations
of DSI. Danka United States, Danka Europe and Danka International provide office imaging solutions together with related parts, supplies and services on a direct basis to retail customers. The geographical areas covered by Danka International
include Canada, Latin America and Australia. Danka Europe also provides office imaging equipment and supplies on a wholesale basis to independent dealers. We measure segment performance as earnings from operations, which is defined as earnings
before interest expense and income taxes as shown on our consolidated statements of operations. The following tables present information about our segments.



15



---

##### Table of Contents



Danka Business Systems PLC

Segmented Statement of Operations for the three months and nine months ended December 31, 2002 and 2001

(Unaudited)

|Three Months Ended December 31,                                       |  | Danka United States $000 |         | Danka Europe $000 |   | Danka International $000 |  |   | Other $000 |   |  | Total $000 |       
|--------------------------------------------------------------------- |  | ------------------------ | ------- | ----------------- | - | ------------------------ |  | - | ---------- | - |  | ---------- | ------
|2002                                                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Total revenue                                                         |  | $                        | 185,143 |                   | $ | 138,135                  |  | $ | 29,837     |   |  | $          |      
|                                                                     
|Gross profit                                                          |  | $                        | 78,150  |                   | $ | 43,722                   |  | $ | 9,381      |   |  | $          |      
|                                                                     
|Operating earnings (loss) from continuing operations                  |  |                          | 9,668   |                   |   | 7,529                    |  |   | (1,204     | ) |  |            | (3,175
|Interest expense                                                      |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Provision (benefit) for income taxes                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Earnings (loss) from continuing operations before extraordinary
items |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|                                                                     
|2001                                                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Total revenue                                                         |  | $                        | 225,902 |                   | $ | 136,793                  |  | $ | 37,361     |   |  | $          | 498   
|                                                                     
|Gross profit                                                          |  | $                        | 84,960  |                   | $ | 41,889                   |  | $ | 13,468     |   |  | $          | 492   
|                                                                     
|Operating earnings (loss) from continuing operations                  |  |                          | 6,180   |                   |   | 1,563                    |  |   | 1,833      |   |  |            | (479  
|Interest expense                                                      |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Provision (benefit) for income taxes                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Earnings (loss) from continuing operations before extraordinary
items |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|                                                                     
|Nine Months Ended December 30,                                        |  | Danka United States $000 |         | Danka Europe $000 |   | Danka International $000 |  |   | Other $000 |   |  | Total $000 |       
|2002                                                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Total revenue                                                         |  | $                        | 560,637 |                   | $ | 391,263                  |  | $ | 92,026     |   |  | $          |      
|                                                                     
|Gross profit                                                          |  | $                        | 237,844 |                   | $ | 125,561                  |  | $ | 25,677     |   |  | $          |      
|                                                                     
|Operating earnings (loss) from continuing operations                  |  |                          | 32,225  |                   |   | 20,489                   |  |   | (9,561     | ) |  |            | (6,073
|Interest expense                                                      |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Provision (benefit) for income taxes                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Earnings (loss) from continuing operations before extraordinary
items |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|                                                                     
|2001                                                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Total revenue                                                         |  | $                        | 667,431 |                   | $ | 407,427                  |  | $ | 112,378    |   |  | $          | (3,704
|                                                                     
|Gross profit                                                          |  | $                        | 248,733 |                   | $ | 124,042                  |  | $ | 38,186     |   |  | $          | (722  
|                                                                     
|Operating earnings (loss) from continuing operations                  |  |                          | 12,633  |                   |   | 4,781                    |  |   | 1,121      |   |  |            | (6,412
|Interest expense                                                      |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Provision (benefit) for income taxes                                  |  |                          |         |                   |   |                          |  |   |            |   |  |            |       
|Earnings (loss) from continuing operations before extraordinary
items |  |                          |         |                   |   |                          |  |   |            |   |  |            |       





16



---

##### Table of Contents

Note 8. Debt



Debt consisted of the following at December 31, 2002 and March 31, 2002:



|(in 000s)                                                                                                                                                           |  | December 31, 2002 |         | March 31, 2002
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | --------------
|Credit facility (limited to $212.0 million) interest at LIBOR plus an applicable margin
(7.7% average interest rate for fiscal year 2003) due March 2006  see below |  | $                 | 117,000 |               
|Zero coupon senior subordinated notes due April 2004                                                                                                                 |  |                   | 47,593  |               
|10% subordinated notes due April 2008                                                                                                                                |  |                   | 64,520  |               
|6.75% convertible subordinated notes  see below                                                                                                                     |  |                   |        |               
|Various notes payable bearing interest from prime to 14.0% maturing principally over
the next 5 years                                                                |  |                   | 11,314  |               
|                                                                                                                                                                     |  |                   |         |               
|Total long-term debt and notes payable                                                                                                                               |  |                   | 240,427 |               
|Less current maturities of long-term debt and notes payable                                                                                                          |  |                   | 38,163  |               
|                                                                                                                                                                     |  |                   |         |               
|Long-term debt and notes payable, less current maturities                                                                                                            |  | $                 | 202,264 |               
|                                                                                                                                                                     |  |                   |         |               



We entered into an
amended and restated credit facility on June 14, 2002 with our existing senior bank lenders to provide us with financing through March 31, 2006. Total commitments under the facility are $212.0 million consisting of a $65.0 million revolver
commitment, a $117.0 million term loan and a $30 million letter of credit commitment. At December 31, 2002, we had an outstanding balance of $117.0 million under the credit facility, with no amount due under the revolver.



On June 30, 2002, we paid a $4.1 million fee to our senior bank lenders for an
option to extend the credit facility for an additional two years through March 31, 2006. We exercised that option by paying an additional fee of $2.8 million in September 2002. On December 31, 2002, we paid $4.3 million to modify the credit
facility, among other things, to allow for the early repurchase of up to $20 million in principal amount of our senior subordinated notes subject to certain purchase price discount requirements and to allow us to apply up to 75% of the proceeds of
any equity offering to the early repurchase of our senior subordinated notes.



The term loan component of the facility, as extended, requires principal repayments in installments of $16.0 million in fiscal year 2003 ($4 million at the end of each quarter), $32 million in fiscal years 2004 and 2005 ($8 million
at the end of each quarter), and $24 million in fiscal year 2006 ($8 million at the end of the first three quarters), with the balance due March 31, 2006. The interest rate on the revolver and term loan components of the credit facility effective
September 30, 2002 was LIBOR plus 7.5% through November 30, 2002. The interest rate for each interest period (as defined in the credit facility) commencing on or after November 30, 2002 is LIBOR plus 8.25%. However, if we receive a credit rating
from Moodys for our indebtedness under the credit facility of at least B2 during any such interest period, then the interest rate for the interest period will be LIBOR plus 7.5%



On March 18, 2002, we entered into a one year interest rate cap agreement with Bank of America. The interest rate cap will
pay us the excess, if any, of quarterly LIBOR over 3.99% on a notional amount of $80 million for the period March 18, 2002 to March 18, 2003. If we were to have settled the commitment related to our interest rate swap on December 31, 2002, the
amount due to us would have been de minimis.



Our indebtedness
under the credit facility is secured by substantially all of our assets in the United States, Canada, United Kingdom, Netherlands, and Germany. The credit facility contains negative and affirmative covenants which place restrictions on us regarding,
among other things, the disposition of assets, capital expenditures, additional indebtedness and permitted liens, and prohibits the payment of dividends (other than payment-in-kind dividends on our participating shares). The credit facility requires
that we maintain minimum levels of adjusted consolidated net worth and cumulative consolidated EBITDA, a minimum ratio of consolidated EBITDA to interest expense and contains limitations on the amounts of annual capital expenditures, each as defined
in the credit facility. The December 31, 2002 modification to the credit agreement included a reduction in the level of consolidated cumulative EBITDA required for periods ending on or after December 31, 2002 and decreased the amount of permitted
annual capital expenditures. We were in compliance with the covenants at December 31, 2002.



We incurred $11.2 million in bank fees and $6.6 million in third party fees in the prior year relating to the fiscal year 2002 amended and restated facility. We have paid $17.2 million in bank fees
related to the credit facility during fiscal 2003. These fees are being amortized over the term of the facility and at December 31, 2002, we had $23.1 million of unamortized debt issuance costs. We are also required to pay fees of 1% of total
commitments at March 31, 2003, June 30, 2003, December 31, 2003, March



17



---

##### Table of Contents



31, 2004, December 31, 2004,
March 31, 2005 and June 30, 2005, and a fee of 2% of the total commitments at June 30, 2004.



We have $47,593,000 in principal amount of zero coupon senior subordinated notes due April 1, 2004 and $64,520,000 in principal amount of 10% subordinated notes due April 1, 2008. The senior
subordinated notes are guaranteed by Danka Holding Company and Danka Office Imaging Company, which are both our 100% owned U.S. subsidiaries. The 6.75% convertible subordinated notes were due April 2002 and were fully repaid at that time.



Note 9. Supplemental Consolidating Financial Data for
Subsidiary Guarantors



On June 29, 2001, we completed an
exchange offer for 92% of our 6.75% convertible subordinated notes due April 1, 2002. We issued zero coupon senior subordinated notes due April 1, 2004 as partial consideration. The zero coupon senior subordinated notes are fully and unconditionally
guaranteed on a joint and several basis by our 100% owned subsidiaries, Danka Holding Company and Danka Office Imaging Company (collectively, the Subsidiary Guarantors). The Subsidiary Guarantors represent substantially all of our
operations conducted in the United States of America.



The
following supplemental consolidating financial data includes the combined Subsidiary Guarantors. Management believes separate complete financial statements of the respective Subsidiary Guarantors would not provide additional material information
that would be useful in assessing the financial composition of the Subsidiary Guarantors. No single Subsidiary Guarantor has any significant legal restriction on the ability of investors or creditors to obtain access to its assets in the event of
default on the guarantee other than subordination of the guarantee to our senior indebtedness. The indenture governing the zero coupon senior subordinated notes contains limitations on the amount of additional indebtedness, including senior
indebtedness, that we may incur.



We account for investment in
subsidiaries on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are therefore reflected in Danka Business Systems PLCs (Parent Company) investment in subsidiaries. The
principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.



18



---

##### Table of Contents



Supplemental
Consolidating Statement of Operations



|                                                                      |  | For the Three Months Ended December 31, 2002 |        
|--------------------------------------------------------------------- |  | -------------------------------------------- | -------
|                                                                      |  | Parent Company (1)                           |        
|                                                                      |  | $000                                         |        
|Revenue:                                                              |  |                                              |        
|Retail equipment sales                                                |  | $                                            |       
|Retail service, supplies and rentals                                  |  |                                              |       
|Wholesale                                                             |  |                                              |       
|                                                                      |  |                                              |        
|Total revenue                                                         |  |                                              |       
|                                                                      |  |                                              |        
|Costs and operating expenses:                                         |  |                                              |        
|Cost of retail equipment sales                                        |  |                                              |       
|Retail service, supplies and rental costs                             |  |                                              |       
|Wholesale costs of revenue                                            |  |                                              |       
|Selling, general and administrative expenses                          |  |                                              | 721    
|Amortization of intangible assets                                     |  |                                              |       
|Restructuring charges (credits)                                       |  |                                              |       
|Equity (income) loss                                                  |  |                                              | (29,366
|Other (income) expense                                                |  |                                              | 40,718 
|                                                                      |  |                                              |        
|Total costs and operating expenses                                    |  |                                              | 12,073 
|                                                                      |  |                                              |        
|Operating earnings (loss) from continuing operations                  |  |                                              | (12,073
|Interest expense                                                      |  |                                              | (8,384 
|Interest income                                                       |  |                                              | 14,109 
|                                                                      |  |                                              |        
|Earnings (loss) from continuing operations before income taxes        |  |                                              | (6,348 
|Provision (benefit) for income taxes                                  |  |                                              | (9,632 
|                                                                      |  |                                              |        
|Earnings (loss) from continuing operations before extraordinary items |  |                                              | 3,284  
|                                                                      |  |                                              |        



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

Supplemental Consolidating Statement of Operations



|                                                                      |  | For the Three Months Ended December 31, 2001 |       
|--------------------------------------------------------------------- |  | -------------------------------------------- | ------
|                                                                      |  | Parent Company (1)                           |       
|                                                                      |  | $000                                         |       
|Revenue:                                                              |  |                                              |       
|Retail equipment sales                                                |  | $                                            |      
|Retail service, supplies and rentals                                  |  |                                              |      
|Wholesale                                                             |  |                                              |      
|                                                                      |  |                                              |       
|Total revenue                                                         |  |                                              |      
|                                                                      |  |                                              |       
|Costs and operating expenses:                                         |  |                                              |       
|Cost of retail equipment sales                                        |  |                                              |      
|Retail service, supplies and rental costs                             |  |                                              |      
|Wholesale costs of revenue                                            |  |                                              |      
|Selling, general and administrative expenses                          |  |                                              | 1,065 
|Amortization of intangible assets                                     |  |                                              |      
|Restructuring charges (credits)                                       |  |                                              |      
|Equity (income)/loss                                                  |  |                                              | 11,133
|Other (income)/expense                                                |  |                                              | (7,266
|                                                                      |  |                                              |       
|Total costs and operating expenses                                    |  |                                              | 4,932 
|                                                                      |  |                                              |       
|Operating earnings (loss) from continuing operations                  |  |                                              | (4,932
|Interest expense                                                      |  |                                              | (6,228
|Interest income                                                       |  |                                              | 13,229
|                                                                      |  |                                              |       
|Earnings (loss) from continuing operations before income taxes        |  |                                              | 2,069 
|Provision (benefit) for income taxes                                  |  |                                              | 4,410 
|                                                                      |  |                                              |       
|Earnings (loss) from continuing operations before extraordinary
items |  |                                              | (2,341
|Discontinued operations, net of tax                                   |  |                                              |      
|Extraordinary gain early retirement of debt, net of tax               |  |                                              | 1,415 
|                                                                      |  |                                              |       
|Net (loss) earnings                                                   |  | $                                            | (926  
|                                                                      |  |                                              |       



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------------------------------------------------------------





20



---

##### Table of Contents



Supplemental
Consolidating Statement of Operations



|                                                                      |  | For the Nine Months Ended December 31, 2002 |        
|--------------------------------------------------------------------- |  | ------------------------------------------- | -------
|                                                                      |  | Parent Company (1)                          |        
|                                                                      |  | $000                                        |        
|Revenue:                                                              |  |                                             |        
|Retail equipment sales                                                |  | $                                           |       
|Retail service, supplies and rentals                                  |  |                                             |       
|Wholesale                                                             |  |                                             |       
|                                                                      |  |                                             |        
|Total revenue                                                         |  |                                             |       
|Costs and operating expenses:                                         |  |                                             |        
|Cost of retail equipment sales                                        |  |                                             |       
|Retail service, supplies and rental costs                             |  |                                             |       
|Wholesale costs of revenue                                            |  |                                             |       
|Selling, general and administrative expenses                          |  |                                             | 2,903  
|Amortization of intangible assets                                     |  |                                             |       
|Restructuring charges (credits)                                       |  |                                             |       
|Equity (income) loss                                                  |  |                                             | (17,518
|Other (income) expense                                                |  |                                             | 25,492 
|                                                                      |  |                                             |        
|Total costs and operating expenses                                    |  |                                             | 10,877 
|                                                                      |  |                                             |        
|Operating earnings (loss) from continuing operations                  |  |                                             | (10,877
|Interest expense                                                      |  |                                             | (22,026
|Interest income                                                       |  |                                             | 41,207 
|                                                                      |  |                                             |        
|Earnings (loss) from continuing operations before income taxes        |  |                                             | 8,304  
|Provision (benefit) for income taxes                                  |  |                                             | (2,487 
|                                                                      |  |                                             |        
|Earnings (loss) from continuing operations before extraordinary items |  | $                                           | 10,791 
|                                                                      |  |                                             |        



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------------------------------------------------------------





21



---

##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Nine Months Ended

December 31, 2001



|                                                                      |  | Parent Company(1) |         |   | Subsidiary Guarantors (2) |   |         | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |         
|--------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------------- | - | ------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | --------
|                                                                      |  | $000              |         |   | $000                      |   |         | $000                          |  |   | $000         |   |  | $000               |         
|Revenue:                                                              |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Retail equipment sales                                                |  | $                 |        |   |                           | $ | 230,854 |                               |  | $ | 177,630      |   |  | $                  |        
|Retail service, supplies and rentals                                  |  |                   |        |   |                           |   | 430,361 |                               |  |   | 286,257      |   |  |                    |        
|Wholesale                                                             |  |                   |         |   |                           |   |         |                               |  |   | 58,430       |   |  |                    |         
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Total revenue                                                         |  |                   |        |   |                           |   | 661,215 |                               |  |   | 522,317      |   |  |                    |        
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|                                                                     
|Costs and operating expenses:                                         |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Cost of retail equipment sales                                        |  |                   |        |   |                           |   | 185,543 |                               |  |   | 124,717      |   |  |                    |        
|Retail service, supplies and rental costs                             |  |                   |        |   |                           |   | 228,198 |                               |  |   | 187,337      |   |  |                    |        
|Wholesale costs of revenue                                            |  |                   |         |   |                           |   |         |                               |  |   | 47,498       |   |  |                    |         
|Selling, general and administrative expenses                          |  |                   | 3,132   |   |                           |   | 246,278 |                               |  |   | 144,705      |   |  |                    |        
|Amortization of intangible assets                                     |  |                   |        |   |                           |   | 2,836   |                               |  |   | 5,227        |   |  |                    |        
|Restructuring charges (credits)                                       |  |                   |        |   |                           |   | (1,992  | )                             |  |   |             |   |  |                    |        
|Equity (income)/loss                                                  |  |                   | (89,109 | ) |                           |   |        |                               |  |   |             |   |  |                    | 89,109  
|Other (income)/expense                                                |  |                   | (12,256 | ) |                           |   |        |                               |  |   | 9,537        |   |  |                    | 649     
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Total costs and operating expenses                                    |  |                   | (98,233 | ) |                           |   | 660,863 |                               |  |   | 519,021      |   |  |                    | 89,758  
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Operating earnings (loss) from continuing operations                  |  |                   | 98,233  |   |                           |   | 352     |                               |  |   | 3,296        |   |  |                    | (89,758 
|Interest expense                                                      |  |                   | (29,138 | ) |                           |   | (57,149 | )                             |  |   | (50,218      | ) |  |                    | 101,714 
|Interest income                                                       |  |                   | 40,616  |   |                           |   | 690     |                               |  |   | 61,765       |   |  |                    | (101,714
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Earnings (loss) from continuing operations before income taxes        |  |                   | 109,711 |   |                           |   | (56,107 | )                             |  |   | 14,843       |   |  |                    | (89,758 
|Provision (benefit) for income taxes                                  |  |                   | 6,615   |   |                           |   | (18,011 | )                             |  |   | 4,765        |   |  |                    | (209    
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Earnings (loss) from continuing operations before extraordinary
items |  |                   | 103,096 |   |                           |   | (38,096 | )                             |  |   | 10,078       |   |  |                    | (89,549 
|Discontinued operations, net of tax                                   |  |                   | (8,708  | ) |                           |   | 80,883  |                               |  |   | 36,684       |   |  |                    |        
|Extraordinary gain early retirement of debt, net of tax               |  |                   | 27,936  |   |                           |   |        |                               |  |   |             |   |  |                    |        
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         
|Net (loss) earnings                                                   |  | $                 | 122,324 |   |                           | $ | 42,787  |                               |  | $ | 46,762       |   |  | $                  | (89,549 
|                                                                      |  |                   |         |   |                           |   |         |                               |  |   |              |   |  |                    |         



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------------------------------------------------------------



22



---

##### Table of Contents

Supplemental Condensed Consolidating Balance Sheet Information

December 31, 2002



|                                                                 |  | Parent Company (1) |          |   | Subsidiary Guarantors (2) |   |          | Subsidiary Non-Guarantors (3) |  |   | Eliminations |   |  | Consolidated Total |         
|---------------------------------------------------------------- |  | ------------------ | -------- | - | ------------------------- | - | -------- | ----------------------------- |  | - | ------------ | - |  | ------------------ | --------
|                                                                 |  | $000               |          |   | $000                      |   |          | $000                          |  |   | $000         |   |  | $000               |         
|Assets                                                           |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Current assets:                                                  |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Cash and cash equivalents                                        |  | $                  | 11,394   |   |                           | $ | 21,804   |                               |  | $ | 38,444       |   |  | $                  |        
|Accounts receivable, net                                         |  |                    |         |   |                           |   | 114,952  |                               |  |   | 137,040      |   |  |                    |        
|Inventories                                                      |  |                    |         |   |                           |   | 43,956   |                               |  |   | 64,623       |   |  |                    |        
|Prepaid expenses, deferred income taxes and other current assets |  |                    | 13,547   |   |                           |   | 18,915   |                               |  |   | 13,845       |   |  |                    |        
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Total current assets                                             |  |                    | 24,941   |   |                           |   | 199,627  |                               |  |   | 253,952      |   |  |                    |        
|                                                                
|Equipment on operating leases, net                               |  |                    |         |   |                           |   | 23,224   |                               |  |   | 20,952       |   |  |                    |        
|Property and equipment, net                                      |  |                    |         |   |                           |   | 50,221   |                               |  |   | 10,793       |   |  |                    |        
|Intangible assets, net                                           |  |                    |         |   |                           |   | 94,371   |                               |  |   | 161,812      |   |  |                    |        
|Investment in subsidiaries                                       |  |                    | 649,090  |   |                           |   | 282      |                               |  |   | 1            |   |  |                    | (649,373
|Other assets                                                     |  |                    | 9,359    |   |                           |   | 80,305   |                               |  |   | 6,789        |   |  |                    |        
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Total assets                                                     |  | $                  | 683,390  |   |                           | $ | 448,030  |                               |  | $ | 454,299      |   |  | $                  | (649,373
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|                                                                
|Liabilities and shareholders equity (deficit)                   |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Current liabilities:                                             |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Current maturities of long-term debt and notes payable           |  | $                  | 27,963   |   |                           | $ | 3,440    |                               |  | $ | 6,760        |   |  | $                  |        
|Accounts payable                                                 |  |                    | 161      |   |                           |   | 62,081   |                               |  |   | 51,493       |   |  |                    |        
|Accrued expenses and other current liabilities                   |  |                    | 26,141   |   |                           |   | 46,174   |                               |  |   | 18,024       |   |  |                    | (1      
|Taxes Payable                                                    |  |                    |         |   |                           |   | 61,676   |                               |  |   | 34,784       |   |  |                    |        
|Deferred revenue                                                 |  |                    |         |   |                           |   | 15,397   |                               |  |   | 24,617       |   |  |                    |        
|Due to/(from) affiliate                                          |  |                    | 98,029   |   |                           |   | 123,704  |                               |  |   | (217,688     | ) |  |                    | (4,045  
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Total current liabilities                                        |  |                    | 152,294  |   |                           |   | 312,472  |                               |  |   | (82,010      | ) |  |                    | (4,046  
|                                                                
|Due to/(from) affiliateslong-term                               |  |                    |          |   |                           |   | 200,000  |                               |  |   | (200,000     | ) |  |                    |        
|Long-term debt and notes payables, less current maturities       |  |                    | 201,151  |   |                           |   | 697      |                               |  |   | 416          |   |  |                    |        
|Deferred income taxes and other long-term liabilities            |  |                    |         |   |                           |   | 5,887    |                               |  |   | 19,540       |   |  |                    |        
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Total liabilities                                                |  |                    | 353,445  |   |                           |   | 519,056  |                               |  |   | (262,054     | ) |  |                    | (4,046  
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|                                                                
|6.5% convertible participating shares                            |  |                    | 253,811  |   |                           |   |         |                               |  |   |             |   |  |                    |        
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|                                                                
|Shareholders equity (deficit):                                  |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Ordinary shares, 1.25 pence stated value                         |  |                    | 5,160    |   |                           |   | 258      |                               |  |   | 608,999      |   |  |                    | (609,257
|Additional paid-in capital                                       |  |                    | 326,887  |   |                           |   | 306,202  |                               |  |   | (96,703      | ) |  |                    | (209,499
|Retained earnings (accumulated deficit)                          |  |                    | (184,372 | ) |                           |   | (377,486 | )                             |  |   | 472,186      |   |  |                    | (94,700 
|Accumulated other comprehensive (loss) income                    |  |                    | (71,541  | ) |                           |   |         |                               |  |   | (268,129     | ) |  |                    | 268,129 
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Total shareholders equity (deficit)                             |  |                    | 76,134   |   |                           |   | (71,026  | )                             |  |   | 716,353      |   |  |                    | (645,327
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         
|Total liabilities & shareholders equity (deficit)               |  | $                  | 683,390  |   |                           | $ | 448,030  |                               |  | $ | 454,299      |   |  | $                  | (649,373
|                                                                 |  |                    |          |   |                           |   |          |                               |  |   |              |   |  |                    |         



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company`
|--- |  | -------------------------------------------------------------------------------------------------------------



23



---

##### Table of Contents



|                                                                 |  | Supplemental Condensed Consolidating Balance Sheet Information March 31,
2002 |         
|---------------------------------------------------------------- |  | ----------------------------------------------------------------------------- | --------
|                                                                 |  | Parent Company(1)                                                             |         
|                                                                 |  | $                                                                             | 000     
|Assets                                                           |  |                                                                               |         
|Current assets:                                                  |  |                                                                               |         
|Cash and cash equivalents                                        |  | $                                                                             | 8,420   
|Accounts receivable, net                                         |  |                                                                               |        
|Inventories                                                      |  |                                                                               |        
|Prepaid expenses, deferred income taxes and other current assets |  |                                                                               | 5,060   
|                                                                 |  |                                                                               |         
|Total current assets                                             |  |                                                                               | 13,480  
|Equipment on operating leases, net                               |  |                                                                               |        
|Property and equipment, net                                      |  |                                                                               |        
|Intangible assets, net                                           |  |                                                                               |        
|Investment in subsidiaries                                       |  |                                                                               | 631,572 
|Other assets                                                     |  |                                                                               | 13,183  
|                                                                 |  |                                                                               |         
|Total assets                                                     |  | $                                                                             | 658,235 
|                                                                 |  |                                                                               |         
|Liabilities and shareholders equity (deficit)                   |  |                                                                               |         
|Current liabilities:                                             |  |                                                                               |         
|Current maturities of long-term debt and notes payable           |  | $                                                                             | 31,988  
|Accounts payable                                                 |  |                                                                               | 5,822   
|Accrued expenses and other current liabilities                   |  |                                                                               | 6,155   
|Deferred revenue                                                 |  |                                                                               |        
|Due to/(from) affiliate                                          |  |                                                                               | 59,591  
|                                                                 |  |                                                                               |         
|Total current liabilities                                        |  |                                                                               | 103,556 
|Due to/(from) affiliateslong-term                               |  |                                                                               |         
|Long-term debt and notes payables, less current maturities       |  |                                                                               | 266,114 
|Deferred income taxes and other long-term liabilities            |  |                                                                               |        
|                                                                 |  |                                                                               |         
|Total liabilities                                                |  |                                                                               | 369,670 
|                                                                 |  |                                                                               |         
|6.5% convertible participating shares                            |  |                                                                               | 240,520 
|                                                                 |  |                                                                               |         
|Shareholders equity (deficit):                                  |  |                                                                               |         
|Ordinary shares, 1.25 pence stated value                         |  |                                                                               | 5,139   
|Additional paid-in capital                                       |  |                                                                               | 325,880 
|Retained earnings (accumulated deficit)                          |  |                                                                               | (181,876
|Accumulated other comprehensive (loss) income                    |  |                                                                               | (101,098
|                                                                 |  |                                                                               |         
|Total shareholders equity (deficit)                             |  |                                                                               | 48,045  
|                                                                 |  |                                                                               |         
|Total liabilities & shareholders equity (deficit)               |  | $                                                                             | 658,235 
|                                                                 |  |                                                                               |         



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

Supplemental Condensed Consolidating Statement of Cash Flows



|                                                    |  | For the Nine Months Ended December 31, 2002 |        
|--------------------------------------------------- |  | ------------------------------------------- | -------
|                                                    |  | Parent Company (1)                          |        
|                                                    |  | $000                                        |        
|Net cash provided by (used in) operating activities |  | $                                           | 86,021 
|Investing activities                                |  |                                             |        
|Capital expenditures                                |  |                                             |       
|Proceeds from sale of property and equipment        |  |                                             |       
|Proceeds from sale of business                      |  |                                             |       
|                                                    |  |                                             |        
|Net cash provided by (used in) investing activities |  |                                             |       
|                                                    |  |                                             |        
|Financing activities                                |  |                                             |        
|Net (payment) borrowing of debt                     |  |                                             | (69,674
|Payment of debt issue costs                         |  |                                             | (17,162
|                                                    |  |                                             |        
|Net cash provided by (used in) financing activities |  |                                             | (86,836
|                                                    |  |                                             |        
|Effect of exchange rates                            |  |                                             | 3,789  
|                                                    |  |                                             |        
|Net increase (decrease) in cash                     |  |                                             | 2,974  
|Cash and cash equivalents, beginning of period      |  |                                             | 8,420  
|                                                    |  |                                             |        
|Cash and cash equivalents, end of period            |  | $                                           | 11,394 
|                                                    |  |                                             |        



|                                                    |  | For the Nine Months Ended December 31, 2001 |         
|--------------------------------------------------- |  | ------------------------------------------- | --------
|                                                    |  | Parent Company (1)                          |         
|                                                    |  | $000                                        |         
|Net cash provided by (used in) operating activities |  | $                                           | 308,688 
|Investing activities                                |  |                                             |         
|Capital expenditures                                |  |                                             |        
|Proceeds from sale of property and equipment        |  |                                             |        
|Proceeds from sale of business                      |  |                                             |        
|                                                    |  |                                             |         
|Net cash provided by (used in) investing activities |  |                                             |        
|                                                    |  |                                             |         
|Financing activities                                |  |                                             |         
|Net (payment) borrowing of debt                     |  |                                             | (283,483
|Payment of debt issue costs                         |  |                                             | (26,037 
|                                                    |  |                                             |         
|Net cash provided by (used in) financing activities |  |                                             | (309,520
|                                                    |  |                                             |         
|Effect of exchange rates                            |  |                                             | 93      
|                                                    |  |                                             |         
|Net increase (decrease) in cash                     |  |                                             | (739    
|Cash and cash equivalents, beginning of period      |  |                                             | 5,471   
|                                                    |  |                                             |         
|Cash and cash equivalents, end of period            |  | $                                           | 4,732   
|                                                    |  |                                             |         



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

|(2) |  | Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------

|(3) |  | Subsidiaries of Danka Business Systems PLC other than Danka Holding Company and Danka Office Imaging Company
|--- |  | ------------------------------------------------------------------------------------------------------------



25



---

##### Table of Contents

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



We are one of the worlds leading providers of office imaging equipment, solutions and related services and supplies. We primarily market office
imaging equipment, solutions and related services, parts and supplies directly to customers in 25 countries. Canon, Heidelberg/Nexpress and Toshiba manufacture most of the products that we distribute. Throughout Europe, we also market private label
office imaging equipment from Ricoh and related supplies directly to customers under our Infotec trademark and on a wholesale basis to independent dealers.



On June 29, 2001 we completed a three part financial restructuring plan that reduced and refinanced our indebtedness. The three parts of the plan were the
sale of our Danka Services International (DSI) business, an exchange offer for our 6.75% convertible subordinated notes due April 1, 2002, and the refinancing of our senior bank debt.



We sold DSI to Pitney Bowes for $290 million in cash, subject to an adjustment
depending on the value of DSIs net assets on closing. We used the net proceeds from the sale of DSI to repay part of our senior bank debt, to finance cash payable under an exchange offer for our 6.75% subordinated notes due 2002, to finance
the cost of the exchange offer and to finance costs associated with the refinancing of our senior bank debt.



We accepted tenders from holders of a total of $184.0 million in aggregate principal amount (92%) of our 6.75% convertible subordinated notes pursuant to the exchange offer for $24.0 million in cash
and approximately $112.1 million in new subordinated notes with extended maturities. We refinanced the remaining balance of our senior bank debt through an amended and restated credit facility with our existing senior bank lenders.



Our reportable segments are Danka United States, Danka Europe and Danka
International. Our reportable segments do not include the discontinued operations of DSI. Our Danka International segment includes operations in several Latin American countries that are experiencing political, social and economic upheaval. We
continue to evaluate the viability and future prospects of these businesses in those countries in light of uncertain conditions. Should we decide to downsize or exit any of these businesses, we could incur costs in respect of severance and closure
of facilities and we may also be required to recognize cumulative translation losses that would reduce our net worth, all or any of which may be material.



26



---

##### Table of Contents

Results of Continuing 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:



|                                                                      |  | For the Three Months Ended |   |  | For the Nine Months Ended |  
|--------------------------------------------------------------------- |  | -------------------------- | - |  | ------------------------- | -
|                                                                      |  | December 31, 2002          |   |  | December 31, 2001         |  
|Revenue:                                                              |  |                            |   |  |                           |  
|Retail equipment sales                                                |  | 34.5                       | % |  | 35.8                      | %
|Retail service, supplies and rentals                                  |  | 59.2                       |   |  | 59.1                      |  
|Wholesale                                                             |  | 6.3                        |   |  | 5.1                       |  
|                                                                      |  |                            |   |  |                           |  
|Total revenue                                                         |  | 100.0                      |   |  | 100.0                     |  
|                                                                      |  |                            |   |  |                           |  
|Cost of revenue                                                       |  | 62.8                       |   |  | 64.8                      |  
|Gross profit                                                          |  | 37.2                       |   |  | 35.2                      |  
|Selling, general and administrative expenses                          |  | 34.0                       |   |  | 32.7                      |  
|Amortization of intangible assets                                     |  |                           |   |  | 0.7                       |  
|Restructuring charges (credits)                                       |  |                           |   |  |                          |  
|Other (income) expense                                                |  | (0.4                       | ) |  | (0.5                      | )
|                                                                      |  |                            |   |  |                           |  
|Operating earnings (loss) from continuing operations                  |  | 3.6                        |   |  | 2.3                       |  
|Interest expense                                                      |  | (2.5                       | ) |  | (2.0                      | )
|Interest income                                                       |  | 0.1                        |   |  |                          |  
|                                                                      |  |                            |   |  |                           |  
|Earnings (loss) from continuing operations before income taxes        |  | 1.2                        |   |  | 0.3                       |  
|Provision (benefit) for income taxes                                  |  | 0.3                        |   |  | 0.2                       |  
|                                                                      |  |                            |   |  |                           |  
|Earnings (loss) from continuing operations before extraordinary items |  | 0.9                        |   |  | 0.1                       |  
|                                                                      |  |                            |   |  |                           |  



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



|                                     |  | For the Three Months Ended |   |  | For the Nine Months Ended |  
|------------------------------------ |  | -------------------------- | - |  | ------------------------- | -
|                                     |  | December 31, 2002          |   |  | December 31, 2001         |  
|Retail equipment sales               |  | 34.0                       | % |  | 25.0                      | %
|Retail service, supplies and rentals |  | 41.0                       |   |  | 42.7                      |  
|Wholesale                            |  | 18.5                       |   |  | 18.8                      |  



27



---

##### Table of Contents



The following table sets forth
for the periods indicated the gross profit margin percentage and operating earnings (loss) from continuing operations margin percentage for each of our operating segments:



|                                                            |  | For the Three Months Ended |   |  | For the Nine Months Ended |  
|----------------------------------------------------------- |  | -------------------------- | - |  | ------------------------- | -
|                                                            |  | December 31,               |   |  | December 31,              |  
|                                                            |  | 2002                       |   |  | 2001                      |  
|Gross profit margin                                         |  |                            |   |  |                           |  
|United States                                               |  | 42.2                       | % |  | 37.6                      | %
|Europe                                                      |  | 31.7                       |   |  | 30.6                      |  
|International                                               |  | 31.4                       |   |  | 36.0                      |  
|                                                           
|Operating earnings (loss) from continuing operations margin |  |                            |   |  |                           |  
|United States                                               |  | 5.2                        | % |  | 2.7                       | %
|Europe                                                      |  | 5.5                        |   |  | 1.1                       |  
|International                                               |  | -4.0                       |   |  | 4.9                       |  



Three Months Ended December 31, 2002 compared to the Three Months Ended December 31, 2001



The comparative information included in this section represents results from continuing operations. In our consolidated statement of operations, the
operating results and the gain from the sale of DSI are presented as discontinued operations and the gain resulting from the exchange offer of our 6.75% convertible subordinated notes is presented as an extraordinary item.



Revenue



Total revenue for the third quarter of fiscal 2003 declined by $47.4 million or 11.8% to $353.1 million from $400.6 million
in the prior year third quarter with the United States segment down 18.0%, the European segment up 1.0% and the International segment down 20.1%. Approximately 52.4% of our revenue during the third quarter of fiscal year 2003 was generated by our
United States segment, 39.1% by our European segment and 8.5% by our International segment. Our total revenue in the current year third quarter was positively impacted by a $13.6 million foreign currency movement of which Europe had a $13.8 million
positive and International had a $0.2 million negative foreign currency movement. Absent the positive foreign currency movement, Europes total revenues for the quarter would have decreased by 9.1%.



Retail equipment sales declined across all operating segments by $21.6 million
or 15.1% with the United States segment down 18.7%, the European segment down 3.0% and the International segment down 28.6%. This overall decrease was primarily due to technology convergence, a global slowdown in capital spending, and our continuing
focus on higher-margin sales, offset by a positive $4.4 million foreign currency movement. Retail service, supplies and rentals revenue declined by $27.6 million or 11.6 %, with the United States segment down 17.6% and the International segment down
14.4%. These decreases were primarily due to selling a reduced number of machines as the market transitions away from analog machines to digital machines and the impact of technology convergence on service revenues. These decreases were partially
offset by a positive $6.8 million foreign currency movement which resulted in retail service, supplies and rental revenues for our European segment exceeding the prior year by 1.2%. Wholesale revenue for the third quarter of fiscal 2003 increased by
$1.7 million or 8.6%, primarily due to a positive $2.4 million foreign currency movement offset by decreased sales activity as Europe was adversely affected by the current business slowdown.



Gross Profit



Our total gross profit margin increased to 37.2% in the third quarter ended
December 31, 2002 from 35.2 % in the prior year third quarter. The increase in our profit margin is primarily due to higher margin retail equipment transactions in the United States, a positive foreign currency movement, an increase in equipment
leasing income of approximately $1.4 million related to lease and residual equipment payments from an external lease funding program and the reversal of a $1.5 million penalty payment to GE Capital Corporation under a lease financing agreement
recorded in previous quarters. The gross profit margin for the United States segment increased to 42.2% from 37.6%, while the European segment increased to 31.7% from 30.6% and the International segment decreased to 31.4% from 36.0%.



The retail equipment margin increased to 34.0% in the third quarter from 25.0%
in the prior year third quarter, primarily due to an emphasis on higher margin transactions in the United States and Europe and higher leasing income in the United States. Retail



28



---

##### Table of Contents

service, supplies and rental margins declined to 41.0% in the third quarter from 42.7% in the prior year
third quarter due primarily to higher costs in the United States and International segments. Wholesale margins decreased to 18.5% in the third quarter from 18.8% in the prior year third quarter, primarily due to higher costs in the current quarter.



Selling, General and Administrative Expenses



Selling, general and administrative expenses
(SG&A) in the third quarter of fiscal 2003 declined by $11.1 million or 8.4% to $119.9 million from $131.0 million in the prior year third quarter. As a percentage of total revenue, SG&A expenses increased to 34.0% from 32.7% due
to rising personnel expenses as a percentage of revenue and an increase in bad debt expense of $4.5 million offset, in part, by a $1.7 million workers compensation premium refund. The increase in bad debt expense was due, in part, to our increased
emphasis on the improvement of our U.S. financial and credit policies. These new policies have been enabled, in part by the implementation of the new Vision 21/Oracle financial information systems. The overall decrease in SG&A in the third
quarter as compared to the prior year third quarter was primarily due to lower employee costs resulting from our restructuring efforts and reduced depreciation expense for software costs.



Amortization of Intangible Assets



Amortization of our intangible assets decreased to $0.1 million in the third quarter of fiscal 2003 from $2.7 million in the
prior year third quarter. This difference was primarily due to the discontinuance of amortization of goodwill under SFAS 142.



Other (Income) Expense



Other income decreased to $1.6 million for the third quarter of fiscal 2003 from $2.0 million in the prior year third quarter. Other income included a
foreign currency gain of $1.6 million for the current quarter and $1.6 million for the prior year quarter.



Operating Earnings (Loss) from Continuing Operations



For the third quarter of fiscal 2003, operating earnings from continuing operations increased by $3.7 million to $12.8 million, compared to earnings of $9.1 million in the prior year third quarter.



Interest Expense and Interest Income



Interest expense increased by $0.9 million to $8.7 million for the third
quarter of fiscal 2003 from $7.9 million in the prior year third quarter. The increase was the result of higher interest rates offset, in part, by reduced debt. Interest income increased by $0.2 million from the prior year third quarter due to
higher cash balances.



Income Taxes



We recorded an income tax provision of $1.2 million for the third quarter of
fiscal 2003 compared to a $0.9 million income tax provision for the comparable prior year period. The combined effective income tax rate was 27.0% for the third quarter as compared to 60.8% for the prior year third quarter. The change from the
statutory tax rate of 34% is primarily due to changes in the mix of earnings and losses from continuing operations before extraordinary items in certain tax jurisdictions year to date.



Earnings (Loss) from Continuing Operations, before Extraordinary Items



For the third quarter of fiscal 2003, we generated net earnings from
continuing operations of $3.3 million compared to net earnings from continuing operations of $0.6 million in the prior year third quarter. After allowing for the dilutive effect of dividends on our participating shares, we generated a net loss from
continuing operations available to common shareholders of $0.02 per ADS in the third quarter of fiscal 2003 compared to a net loss from continuing operations available to common shareholders of $0.06 per ADS in the prior year third quarter.



Discontinued Operations, Net of Tax



During the third quarter of fiscal 2002, we recorded an additional $2.9
million of purchase price adjustments, and expenses related to the sale of DSI. Net losses from discontinued operations were $0.04 per ADS in the prior year third quarter.



29



---

##### Table of Contents



Extraordinary Gain, Net of
Tax



During the third quarter of fiscal 2002, we adjusted
the extraordinary gain on the early retirement of debt by $1.4 million, net of tax to reflect additional earnings associated with the early retirement of debt. Net earnings from the extraordinary gain on early retirement of debt, net of tax was
$0.02 per ADS in the prior year third quarter.



Nine months Ended December 31, 2002 compared to the Nine months Ended December 31, 2001



The comparative information included in this section represents results from continuing operations. In our consolidated statement of operations, the
operating results and the gain from the sale of DSI are presented as discontinued operations and the gain resulting from the exchange offer of our 6.75% convertible subordinated notes is presented as an extraordinary item.



Revenue



Total revenue for the first nine months of fiscal 2003, declined by $139.6 million or 11.8% to $1,043.9 million from $1,183.5
million in the comparable prior year period with the United States segment down 16.0%, the European segment down 4.0% and the International segment down 18.1%. Approximately 53.7% of our revenue during the first nine months of fiscal year 2003 was
generated by our United States segment, 37.4% by our European segment and 8.8% by our International segment. Our total revenue in the first nine months was positively impacted by a $30.0 million foreign currency movement of which Europe had a $30.6
million positive and International had a $0.6 million negative foreign currency movement. Absent the positive foreign currency movement, Europes total revenues for the nine months would have decreased by 11.5%.



Retail equipment sales declined across all segments by a total of $58.6
million or 14.3% with the United States segment down 15.7%, the European segment down 12.9% and the International segment down 20.6%. The overall decrease was primarily due to technology convergence, a global slowdown in capital spending, our
continuing focus on higher-margin sales and a reduction of our sales force offset by a positive $9.7 million foreign currency movement. Retail service, supplies and rentals revenue declined by $84.0 million or 11.7%, with the United States segment
down 16.2%, the European segment down 0.9% and the International segment down 16.6%. These decreases were primarily the result of selling a reduced number of machines as the market transitions away from analog office imaging machines to digital
machines and the impact of technology convergence on service revenues, offset by a positive $15.2 million foreign currency movement. Wholesale revenue for the first nine months of fiscal 2003 increased by $3.0 million or 5.1%, primarily due to a
positive $5.1 million foreign currency movement offset by decreased sales activity as Europe was adversely affected by the current business slowdown.



Gross Profit



Our total gross profit margin increased to 37.3% in the first nine months of fiscal 2003 from 34.7% in the comparable prior year period. The increase in
our profit margin is primarily due to higher margin transactions in the United States and an increase in equipment leasing income of approximately $8.4 million related to lease and residual equipment payments from an external lease funding program.
This increase was partially offset by a $3.4 million charge that consists primarily of inventory and residual write-downs in Canada. The gross profit margin for the United States segment increased to 42.4% from 37.3%, while the European segment
increased to 32.1% from 30.4% and the International segment decreased to 27.9% from 34.0%.



The retail equipment margin increased to 33.9% in the first nine months of fiscal 2003 from 24.0% in the comparable prior year period, primarily due to an emphasis on higher margin transactions in the
United States and Europe and higher leasing income. Retail service, supplies and rental margins declined to 40.9% in the first nine months of fiscal 2003 from 42.0% in the comparable prior year period due to higher costs in Europe and a $1.5 million
write-down of inventory and residuals in Canada. Wholesale margins increased to 19.0% in the first nine months of fiscal 2003 from 18.7% in the comparable prior year period, primarily due to higher margin transactions in the current year.



Selling, General and Administrative Expenses



Selling, general and administrative expenses
(SG&A) in the first nine months of fiscal 2003 declined by $36.5 million or 9.3% to $357.6 million from $394.1 million in the comparable prior year period. As a percentage of total revenue, SG&A expenses increased to 34.3% from
33.3% primarily due to lower revenues, $1.5 million of severance and consolidation costs for our International division and $6.9 million of expenses associated with the implementation of our Vision 21 reengineering initiative, which includes our
U.S. management information system. The overall decrease in SG&A in the current period as compared to the comparable prior year period was primarily due to lower employee costs resulting from our restructuring efforts, lower facility related
costs in the United States, a $1.7 million workers compensation refund, the reversal of $3.9 million in sales and property



30



---

##### Table of Contents

tax reserves, $6.0 million of facility charges associated with our tax retention operating lease (TROL)
facility incurred in the first quarter of the prior year, the reversal of $3.5 million of a prior year first quarter charge associated with the sale by our TROL facility of several properties, offset by higher than expected expenses associated with
implementing our Vision 21 reengineering initiative.



Amortization of Intangible Assets



Amortization of our intangible assets decreased to $0.4 million in the first nine months of fiscal 2003 from $8.1 million in the comparable prior year period. This difference was primarily due to the discontinuance of amortization of
goodwill under SFAS 142.



Restructuring Charges



We reversed $0.6 million of restructuring charges for
facilities and severance during the second quarter of fiscal year 2003 due to employee attrition and a lower estimate of facility charges. This reversal included $0.3 million for facilities within the 2001 plan and $0.3 million for facilities within
the 1999 plan. In the second quarter of the prior year, senior management reviewed the existing restructuring plan and as a result of the changing business conditions in the U.S. and Europe and revisions to our business strategies, the decision was
reached to modify the 2001 restructuring plan. Additionally, higher than anticipated employee attrition reduced cash outlay requirements for severance. As a result of these actions, we reversed $9.4 million of severance and facility restructuring
reserves in the second quarter of fiscal year 2002 while recording a pre-tax restructuring charge of $7.4 million in the second quarter of fiscal year 2002, which included $1.3 million for severance and $6.1 million for the exit of facilities.



Other (Income) Expense



Other income increased to $5.5 million for the first nine months of fiscal
2003 from $2.1 million in the prior year. The current period included a foreign currency gain of $6.0 million while the comparable prior year period included a foreign currency gain of $2.8 million and a $1.1 million provision relating to the sale
of a business.



Operating Earnings (Loss) from Continuing
Operations



For the first nine months of fiscal 2003,
operating earnings from continuing operations increased by $25.0 million to $37.1 million, compared to earnings of $12.1 million in the comparable prior year period.



Interest Expense and Interest Income



Interest expense decreased by $11.8 million to $23.0 million for the first nine months of fiscal 2003 from $34.8 million in
the prior year comparable period. The decrease was primarily the result of reduced outstanding debt over the past twelve months offset in part by increased interest rates. Interest income decreased by $0.6 million from the prior year due to lower
cash balances.



Income Taxes



We recorded an income tax provision of $4.0 million for the first nine months
of fiscal 2003 compared to a $6.8 million tax benefit for the comparable prior year period. The combined effective income tax rate was 27.0% for the current period as compared to 32.1% for the comparable prior year period. The change from the
statutory tax rate of 34% is primarily due to changes in the mix of earnings and losses from continuing operations before extraordinary items in certain tax jurisdictions.



Earnings (Loss) from Continuing Operations, before Extraordinary Items



For the first nine months of fiscal 2003, we generated net earnings from
continuing operations of $10.8 million compared to a net loss from continuing operations of $14.5 million in the comparable prior year period. After allowing for the dilutive effect of dividends on our participating shares, we generated a net loss
from continuing operations available to common shareholders of $0.04 per ADS in the first nine months of fiscal 2003 compared to a net loss from continuing operations available to common shareholders of $0.44 per ADS in the comparable prior year
period.



Discontinued Operations, Net of Tax



During the first nine months of fiscal 2002, we recorded a gain on the sale
of DSI of $104.8 million after tax and earnings from discontinued operations of $4.1 million, net of tax. Net earnings from discontinued operations were $1.76 per ADS in the



31



---

##### Table of Contents

comparable prior year period.



Extraordinary Gain, Net of Tax



During the first nine months of fiscal 2002, we generated a $27.9 million extraordinary gain on the early retirement of debt,
net of tax. Net earnings from extraordinary items were $0.45 per ADS in the prior year second quarter.



Exchange Rates



Fluctuations in the
exchange rates between the pound sterling and the United States dollar affect the dollar equivalent of the pound sterling market price of our ordinary shares on the London Stock Exchange and, as a result, are likely to affect the market price of our
American depositary shares.



We operate in 25 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.
|- |  | ----------------------------------------------------------------------------------------------



The results of operations are affected by the relative strength of currencies
in the countries where our products are sold. Approximately 47.5% of our revenue for the third quarter of fiscal 2003 was generated outside the United States with 31.6% of our revenue generated in Euro countries, 7.5% in the United Kingdom, and 8.4%
in other foreign locations. Approximately 43.5% of our revenue for the third quarter of fiscal 2002 was generated outside the United States with 27.4% generated in Euro countries, 6.8% in the United Kingdom, and 9.3% in other foreign locations. For
the first nine months of fiscal 2003, approximately 46.2% of our revenue was generated outside the United States with 29.9% of our revenue generated in Euro countries, 7.5% in the United Kingdom, and 8.8% in other foreign locations. For the first
nine months of fiscal 2002, approximately 43.9% of our revenue was generated outside the United States with 27.3% generated in Euro countries, 7.1% in the United Kingdom, and 9.5% in other foreign locations.



During the first nine months of fiscal 2003, the Euro currency and the United
Kingdom pound strengthened against the dollar by approximately 9.0% and 6.4 %, respectively. These changes positively impacted revenue over that period, by approximately $30.0 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-United States subsidiaries, including our European and Latin American subsidiaries, from local currencies to the dollar. Generally, we do not hedge our exposure to
changes in foreign currency and would not be able to do so economically.



Liquidity and Capital Resources



The
following summarizes our cash flows for the first nine months of fiscal year 2003 and 2002 as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:



|(In Thousands)                                      |  | December 31, 2002 |         |   | December 31, 2001 |  
|--------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Net cash provided by operating activities           |  |                   | 121,849 |   |                   |  
|Net cash provided by (used in) investing activities |  |                   | (31,591 | ) |                   |  
|Net cash used in financing activities               |  |                   | (81,875 | ) |                   |  
|Effect of exchange rates                            |  |                   | 3,789   |   |                   |  
|                                                    |  |                   |         |   |                   |  
|Net increase/(decrease) in cash                     |  |                   | 12,172  |   |                   |  
|Cash and cash equivalents, beginning of period      |  |                   | 59,470  |   |                   |  
|                                                    |  |                   |         |   |                   |  
|Cash and cash equivalents, end of period            |  | $                 | 71,642  |   |                   | $
|                                                    |  |                   |         |   |                   |  



32



---

##### Table of Contents



Cash provided by operations
continues to be the Companys primary source of funds to finance operating needs and capital expenditures. Our net cash flow provided by operating activities was $121.8 million and $90.2 million for the first nine months of fiscal year 2003 and
2002, respectively. The $31.6 million or 35% increase in fiscal 2003 operating cash flow was primarily due to the generation of earnings from continuing operations from our United States and European segments.



We have identified instances where our business processes and policies have
not been properly implemented and or followed in the past, which have resulted in, among other things, instances of poor billing practices, excessive and undisciplined issuance of customer credits, inaccurate customer data, inconsistent customer
contract terms and conditions and inadequate document retention. These system and process issues have impaired our ability, in some cases, to issue accurate and timely customer invoices, which has resulted in some customers refusing to make or
delaying payments. In conjunction with our Vision 21 initiative, we are implementing some policies and procedures to 1) require appropriate management review and execution of customer contracts; 2) address issues relating to inaccurate billing of
customers and correction of inaccurate customer invoices; 3) centralize the retention of customer contracts and data; 4) standardize the terms and conditions on which we do business with our customers, 5) improve our document retention and 6)
improve the collectibility of our accounts receivable. We anticipate the upgrading of our management information systems should significantly enhance our ability to improve our business processes and policies, although deficiencies may continue to
adversely affect our profitability and cash provided by operations in future periods.



Net cash flow provided by (used in) investing activities was ($31.6) million and $239.4 million for the first nine months of fiscal year 2003 and 2002, respectively. The decrease in fiscal 2003 cash flow from investing
activities was primarily due to the non-recurrence of the $273.2 million in cash proceeds received from the sale of DSI.



Net cash flow used in financing activities was $81.9 million and $355.6 million for the first nine months of fiscal year 2003 and 2002, respectively. The
decrease in fiscal 2003 cash flow from financing activities was due to the non-recurrence of proceeds from the sale of DSI to pay down debt and reduced payments of debt issuance costs.



The following table sets out our future payments for the following contractual obligations:



|Contractual Obligations       |  | Total |         | Payments due in Less Than 1 Year |   | Payments due in More Than 1 Year
|----------------------------- |  | ----- | ------- | -------------------------------- | - | --------------------------------
|(in 000s)                    |  |       |         |                                  |   |                                 
|Credit Facility               |  | $     | 117,000 |                                  | $ | 28,000                          
|Notes Payable                 |  |       | 112,114 |                                  |   |                                
|Capital Leases                |  |       | 3,849   |                                  |   | 3,415                           
|Other Long-Term Obligations   |  |       | 7,464   |                                  |   | 6,748                           
|                              |  |       |         |                                  |   |                                 
|Total Contractual Obligations |  | $     | 240,427 |                                  | $ | 38,163                          
|                              |  |       |         |                                  |   |                                 



We have a credit
facility with a consortium of international lenders through March 31, 2006. Total commitments under the facility are $212.0 million, consisting of a $65.0 million revolver commitment, a $117.0 million term loan and a $30.0 million letter of credit
commitment. At December 31, 2002, we had an outstanding balance of $117.0 million under the credit facility, with no amount due under the revolver. Availability of the revolver commitment is based on the amount of our receivables and inventory. The
available commitment as of December 31, 2002 was $50.1 million. During the first nine months of fiscal year 2003, we repaid $53.0 million of principal under the term loan.



On June 30, 2002, we paid a $4.1 million fee to our senior bank lenders for an option to extend the credit facility for an
additional two years through March 31, 2006. We exercised that option by paying an additional fee of $2.8 million in September 2002. On December 31, 2002, we paid $4.3 million to modify the credit facility, among other things, to allow for the early
repurchase of up to $20 million in principal amount of our of senior subordinated notes, subject to certain purchase price discount requirements and to allow us to apply up to 75% of any equity offering to the early repurchase of our senior
subordinated notes.



The credit facility requires that we
maintain minimum levels of adjusted consolidated net worth and cumulative consolidated EBITDA and a minimum ratio of consolidated EBITDA to interest expense and contains limitations on the amounts of our annual capital expenditures, each as defined
in the credit facility. The December 31, 2002 modification to the credit agreement included a reduction in the level of consolidated cumulative EBITDA required for periods ending on or after December 31, 2002 and decreased the amount of permitted
annual capital expenditures. We were in compliance with these covenants as of December 31, 2002.



We were incurring interest on our indebtedness under the credit facility during the third quarter and first nine months of fiscal 2003 at a weighted average rate of approximately 8.8% and 7.7% per
annum, respectively. The interest rate under the credit



33



---

##### Table of Contents

facility through September 30, 2002 was LIBOR, plus 4.75%. The interest rate on the revolver and term loan
components of the credit facility effective September 30, 2002 was LIBOR plus 7.5% through November 30, 2002. The interest rate for each interest period (as defined in the credit facility) commencing on or after November 30, 2002 is LIBOR plus
8.25%. However, if we receive a credit rating from Moodys for our indebtedness under the credit facility of at least B2 during any such interest period, then the interest rate for such interest period will be LIBOR plus 7.5%



On July 1, 2002 and December 31, 2002, we paid our banks a fee equal to 1% of
the total commitment under the credit facility. As described above, we also paid fees of $4.1 million in June 2002, $2.8 million in September 2002 and $4.3 million in December 2002 in connection with the extension of, and amendments to, the credit
facility. We paid $17.2 million in bank fees related to the credit facility during fiscal 2003 and at December 31, 2002, we had $23.1 million of unamortized debt issuance costs. We will be required to pay fees of 1% of total commitments at March 31,
2003, June 30, 2003, December 31, 2003, March 31, 2004, December 31, 2004, March 31, 2005 and June 30, 2005, and a fee of 2% of the total commitments at June 30, 2004.



The term component of the facility, as extended, requires repayment of $16 million in fiscal year 2003 ($4 million at the end
of each quarter), $32 million in fiscal years 2004 and 2005 ($8 million at the end of the each quarter) and $24 million in fiscal year 2006 ($8 million at the end of the first three quarters), with the balance due March 31, 2006. In addition, we are
required to make additional repayments of our indebtedness under the credit facility in amounts equal to 50% of our excess cash flow (as defined in the credit facility) for each of our fiscal years.



Our indebtedness under the credit facility is secured by substantially all of
our assets in the United States, Canada, the United Kingdom, the Netherlands and Germany. The credit facility contains negative and affirmative covenants which restrict, among other things, our ability to incur additional indebtedness and create
liens beyond certain agreed limits, prohibit the payment of dividends, other than payment-in-kind dividends on our participating shares, and require us to maintain certain financial ratios as described above.



In June 2001, we issued approximately $47.6 million of zero coupon senior
subordinated notes due April 1, 2004 and approximately $64.5 million of 10% subordinated notes due April 1, 2008 in exchange for 92% of our 6.75% convertible subordinated notes due April 1, 2004. The senior subordinated notes are guaranteed by Danka
Holding Company and Danka Office Imaging Company, which are both 100% owned U.S. subsidiaries. The senior subordinated notes and the 10% notes include covenants which restrict our ability to dispose of assets or merge. The senior subordinated notes
also include covenants which restrict us from incurring additional indebtedness or creating liens and limit the payment of dividends, other than payment-in-kind dividends on our participating shares.



We intend to refinance both our indebtedness under the credit facility and to
refinance our zero coupon notes prior to maturity, but general economic conditions and conditions in the capital markets have so far prevented us from doing so on terms we deem acceptable. Our ability to refinance this indebtedness will depend upon
our performance, our ability to access the capital markets and economic conditions generally, and no assurances can be given as to our ability to consummate any such refinancing or the terms of such refinancing.



In order to reduce future cash interest payments and future amounts due at
maturity or on redemption, we or our affiliates may from time to time purchase our subordinated indebtedness for cash, in exchange for our ordinary shares and/or American depositary shares, or for a combination of debt and equity, in open market
purchases and/or privately negotiated transactions. The amounts involved may be material. However, such repurchases and/or exchanges, if any, will depend upon prevailing market conditions, the price at which the subordinated indebtedness is
available for purchase and/or exchange, our liquidity requirements and prospects for future access to capital, contractual restrictions, bank group approval and other factors, and may, in certain cases, require the prior approval of our
shareholders. We can give no assurances as to our, or to our affiliates ability to consummate any such purchase or exchange or the terms of any such purchase or exchange.



On September 27, 2002, we entered into a long-term operating lease for facilities to house the headquarters of our U.S.
operations. The lease is for 15 years at a rate that we believe is a competitive market rate.



Other Financing Arrangements



Danka
Holding Company (DHC), one of our subsidiaries, is, and has been a party to a number of TROLs. The TROL facility sold two properties during September 2002 for approximately $31.4 million and three properties in October 2002 for $3.5
million. The proceeds from these sales were used to repay the entire outstanding obligation under the TROL facility of approximately $24.4 million. Following those sales, DHC continues as lessee of one remaining property under the TROL, which is
currently being offered for sale. Under the terms of the TROL agreement, we are entitled to receive the net proceeds from the sale of that



34



---

##### Table of Contents

property. We estimate the value of that property to be $0.6 million.



On December 17, 1999, we issued 218,000 6.50% senior convertible 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. Dividends are cumulative and are paid in the form of additional participating
shares through December 2004. The participating shares are currently convertible into ordinary shares at a conversion price of $3.11 per ordinary share (equal to $12.44 per American depositary share), subject to adjustment in certain circumstances
to avoid dilution of the interests of participating shareholders. The participating shares have voting rights, on an as converted basis, currently corresponding to approximately 25.6% of the total voting power of our capital stock. As of December
31, 2002, we had issued an additional 45,064 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, to redeem the participating shares for cash
at 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.



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 not permitted to pay dividends (other than payment-in-kind dividends on
our participating shares) under our credit facility and we do not anticipate the payment of a dividend on our ordinary shares in the foreseeable future.



We are an English company and, under English law, we are allowed to pay dividends to shareholders only if as determined by reference to our financial
statements prepared in accordance with U.K. GAAP:



|· |  | 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, dividends or other
distributions.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At this time, we have insufficient,
accumulated realized profits to pay dividends to shareholders. Since December 2000, we have satisfied our obligation to make payment-in-kind dividends on our participating shares by capitalizing part of our share premium account, which is a reserve
required by English company law and which consists of premiums paid to us on the issuance of our shares.



We have an agreement with General Electric Capital Corporation (GECC) under which GECC agrees to provide financing to our United States customers to purchase equipment, which was recently
extended until March 31, 2009. In connection with this agreement, we are obligated to provide a minimum level of customer leases to GE Capital. The minimum level of customer leases is equal to a specified percentage of U.S. hardware revenues. If we
fail to provide a minimum level of customer leases under the agreement, we are required to pay penalty payments to GECC. For the year ended March 31, 2002 we were obligated for penalty payments of approximately $0.2 million to GE Capital. We do not
anticipate incurring any penalty payments for the year ended March 31, 2003.



Fiscal authorities in the Netherlands are engaged in an audit of our Dutch operations. We do not believe that this audit, or any result thereof, will have a material impact on our financial position, results of operations or
liquidity.



Market Risk Management



Interest Rate Risk



Our exposure to interest rate risk primarily relates to our variable rate
bank debt. As outlined above in Liquidity and Capital Resources, at December 31, 2002 we had an outstanding balance of $117.0 million under our credit facility. We incurred interest on our credit facility at a weighted average rate of
8.8% per annum during the third quarter fiscal 2003 and 7.7% for the first nine



35



---

##### Table of Contents

months of fiscal 2003. Pursuant to our credit agreement, we entered into an interest rate cap agreement
with Bank of America. The interest rate cap will pay us the excess, if any, of quarterly LIBOR over 3.99% on a notional amount of $80 million for the period March 18, 2002 to March 18, 2003. The three month LIBOR rate at December 31, 2002 was 1.42%.



Based on the outstanding balance at December 31, 2002 under our
credit facility, a change of 100 basis points in the average interest rate, with all other variables remaining constant, would cause an increase/decrease in our interest expense of approximately $1.2 million on an annual basis, subject to the
interest rate cap discussed above.



Currency exchange risk



We are a multinational corporation. Therefore, foreign
exchange risk arises as a normal part of our business. We strive to reduce this risk by transacting our international business in local currencies. In this manner, 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 recent results have been positively impacted by a $30.0 million foreign currency
movements, in particular the strengthening of the euro and the United Kingdom pound against the dollar.



Generally, we are not able to economically enter into forward and option contracts to manage our exposure to foreign currency fluctuations. At December 31, 2002, we had no outstanding forward contracts
or option contracts to buy or sell foreign currency.



Seasonality



We have experienced some
seasonality in our business. Our European and Canadian operations have historically experienced lower revenue for the second quarter of our fiscal year, which is the three month period ended September 30. This is primarily due to increased vacation
time by Europeans and Canadians during July and August. This has resulted in reduced sales activity and reduced usage of photocopiers, facsimiles and other office imaging equipment during that period.



Critical Accounting Policies and Estimates



Our management strives to report our financial results in a clear and understandable manner, even though in some cases accounting and disclosure rules are complex and require technical terminology. We follow accounting principles
generally accepted in the U.S. in preparing our consolidated financial statements contained herein, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. Our management
continually reviews our accounting policies, how they are applied and how they are reported and disclosed in the financial statements. Following is a summary of our critical accounting policies and how they are applied in preparation of the
financial statements.



Allowances for Accounts Receivable
 We provide allowances for doubtful accounts on our accounts receivable for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of any of our customers were to deteriorate, which
may result in the impairment of their ability to make payments, additional allowances may be required. Our estimates are influenced by a number of considerations, including but not limited to the following: our large number of customers and their
dispersion across wide geographic areas, the fact that no single customer accounts for 5% or more of our net sales, our continuing credit evaluation of our customers financial conditions, credit insurance coverage in certain countries and
collateral requirements from our customers in certain circumstances. The following table summarizes our net accounts receivable.



|                                        |  | December 31, 2002 |         |   | March 31, 2002 |  
|--------------------------------------- |  | ----------------- | ------- | - | -------------- | -
|Accounts Receivable                     |  | $                 | 286,731 |   |                | $
|Bad Debt Reserve                        |  |                   | (34,739 | ) |                |  
|                                        |  |                   |         |   |                |  
|Net Accounts Receivable                 |  | $                 | 251,992 |   |                | $
|                                        |  |                   |         |   |                |  
|Bad Debt Reserve as a        % of
Total |  |                   | 12.1    | % |                |  



Inventories
 Our inventory levels are based on our projections of future demand and market conditions. Any sudden decline in demand and/or rapid product improvements or technological changes may cause us to have excess and/or obsolete inventories. The
transition of our industry from analog to digital photocopiers has resulted in the obsolescence of some of our retail equipment, supplies and parts. Additional obsolescence could occur for some of our remaining retail equipment, supplies and parts,
particularly as it relates to our Kodak installed base, which is primarily analog. We have taken reserves against these items in 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



36



---

##### Table of Contents

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: sudden 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. The following table summarizes our net inventory.



|                                  |  | December 31, 2002 |         |   | March 31, 2002 |  
|--------------------------------- |  | ----------------- | ------- | - | -------------- | -
|Inventory                         |  | $                 | 149,265 |   |                | $
|Inventory Reserve                 |  |                   | (40,686 | ) |                |  
|                                  |  |                   |         |   |                |  
|Net Inventory                     |  | $                 | 108,579 |   |                | $
|                                  |  |                   |         |   |                |  
|Inventory Reserve as a % of Total |  |                   | 27.3    | % |                |  



Revenue
Recognition  Equipment sales are generally recognized upon acceptance of delivery by the customer and, in the case of equipment sales financed by third party leasing companies, at the time of credit acceptance by the leasing company, if
later. However, for the sale of equipment that requires setup by Danka before it can be used by a customer, such as a Heidelberg 9110 or equivalent type of equipment, revenue is recognized upon acceptance of delivery by the customer and
installation. Supply sales to customers are recognized at the time of shipment. In the case of service contracts, which include supplies, supply sales are recognized upon usage by the customer.



Operating lease income is recognized as earned over the lease term.
Maintenance contract service revenues are recognized ratably over the term of the underlying maintenance contracts. Deferred revenue consists of unearned maintenance contract revenue that is recognized using the straight-line method over the life of
the related contract, generally three to twelve months.



Residual Values  We perform an annual review of the unguaranteed residual values of leased equipment to verify that the recorded residual values do not exceed market valuations. If the residual value is below the market
value, a reserve is charged to cost of goods sold. No residual value is recorded for used equipment. Residual values at December 31, 2002 and March 31, 2002 were $3.8 million and $8.1 million, respectively.



Income Taxes As part of the process of preparing our
consolidated financial statements, we have to estimate our income taxes in each of the taxing jurisdictions in which we operate. This process involves estimating our actual current tax expense 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 may result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet.



In accordance with Statement of
Financial Accounting Standards No. 109, we evaluate, quarterly, the likelihood that our deferred tax assets, which include net operating loss carryforwards and temporary differences that are expected to be deductible in future years, will be
recoverable from future taxable income or other tax planning strategies. If recovery is not likely, we have to provide a valuation allowance based on our estimates of future taxable income in the various taxing jurisdictions, and the amount of
deferred taxes that are ultimately realizable. The provision for current and deferred tax liabilities involves evaluations and judgments of uncertainties in the interpretation of complex tax regulations by various taxing authorities.



At December 31, 2002 and March 31, 2002, we had deferred tax assets in excess
of deferred tax liabilities of $119.9 million and $127.1 million respectively. For the reasons cited below, management determined that it is more likely than not that $81.1 million and $88.4 million, respectively, of such assets will be realized,
resulting in a valuation allowance of $38.8 million and $38.7 million, respectively.



Approximately $207 million of future taxable income ultimately is needed to realize the net deferred tax assets at December 31, 2002. Failure to achieve forecasted taxable income might affect the ultimate realization of the
net deferred tax assets. Factors that may affect our ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: increased competition, a decline in sales or margins, loss of market share, delays in
product availability or technological obsolescence.



In addition,
the company operates within multiple taxing jurisdictions and is 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 taxes have been made for all years.



37



---

##### Table of Contents



Goodwill  We
review our goodwill and indefinite-lived intangible assets annually, as described in note 2 to our consolidated financial statements, for possible impairment, or more frequently if impairment indicators arise. Separable intangible assets that have
finite lives will continue to be amortized over their estimated useful lives.



During the first quarter of the fiscal year ending March 31, 2003, we finalized the required transitional impairment tests of goodwill and indefinite-lived intangible assets under the requirements of Statement of Financial Accounting
Standards No. 142. Based on the results of the transitional impairment tests, no adjustments for impairment were necessary.



We have goodwill of $255.4 million as of December 31, 2002. If it were determined under SFAS 142 that goodwill was impaired, we would be required to
write-down the value of such goodwill in amounts which could be material.



Item 3. Quantitative and Qualitative Analysis About Market Risk



The information set forth under the caption Market Risk Management on page 35 of this Quarterly Report on Form 10-Q is hereby incorporated by reference in answer to this item.



Item 4. Controls and Procedures



We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports 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 the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management
necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding managements control objectives.



Within 90 days prior to the date of this report, we carried out an evaluation
under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known
to them in a timely fashion.



There have been no significant
changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.



APPROVAL OF NON-AUDIT SERVICES



The audit committee has approved KPMG to perform services regarding local statutory audits and assist in certain tax issues during the nine months ended
December 31, 2002.



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 managements plans or objectives, forecasts of market trends and other
matters, are forward looking statements, and contain information relating to us that is based on the beliefs of our management as well as assumptions, made by, and information currently available to, our management. The words goal,
anticipate, expect, believe and similar expressions as they relate to us or our management are intended to identify forward looking statements. 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 in the Private Securities Litigation Reform Act of 1995. 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 material adverse change in financial markets or in our own position, (ii) any inability to achieve or maintain cost
savings, (iii) increased competition from other high-volume and digital copier distributors and the discounting of such copiers by our competitors, (iv) any inability by us to procure, or any inability by us to continue to gain access to and
successfully distribute, new products, including digital products and high-volume copiers, or to continue to bring current products to the marketplace at competitive costs and prices, (v) any negative impact from the loss of any of our key upper
management personnel, (vi) fluctuations in foreign currencies and (vii) any change in economic conditions in domestic or international markets where we operate or have material investments which may affect demand for our services. 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. 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



38



---

##### Table of Contents



projections as to future
earnings nor do we endorse any projections regarding future performance, which may be made by others outside our company.



PART II  OTHER INFORMATION



Item 1. Legal Proceedings



We are
subject to legal proceedings and claims which arise in the ordinary course of business and should not have a material adverse effect upon our financial position, results of operation or liquidity.



Item 2. Changes in Securities

Not applicable.



Item 3. Defaults Upon Senior Securities

Not applicable.



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

Not applicable



Item 5. Other Information

Not applicable.



Item 6. Exhibits and Reports on Form 8-K

| | (a) |  | Exhibits.
| | --- |  | ---------



10.40

Fourth Amendment to Amended and Restated Global Operating Agreement dated December 20, 2002 between Danka and General
Electric Capital Corporation.99.1

Certification of P. Lang Lowrey, III Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200299.2

Certification of F. Mark Wolfinger Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002




| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------



Form 8-K filed on January 2, 2003 regarding the December 31, 2002 amendment to our senior credit facility.





39



---

##### Table of Contents



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 14, 2003 |  |  |  |  |  | /s/ F. Mark Wolfinger
|                        |  |  |  |  |  |                       |  | F. Mark Wolfinger                                                                                              
|                        |  |  |  |  |  |                       |  | Executive Vice-President and Chief Financial Officer (Chief Financial Officer and Principal Accounting Officer)



40



---

##### Table of Contents

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002



I, P. Lang Lowrey, III, Chief Executive Officer of the Company, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Danka Business Systems PLC;
|-- |  | ---------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date:
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weakness in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|/s/ P. Lang Lowrey     
|-----------------------
|P. Lang Lowrey         
|Chief Executive Officer
|February 14, 2003      





41



---

##### Table of Contents

CERTIFICATION PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002



I, F. Mark Wolfinger, Chief Financial Officer of the Company, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Danka Business Systems PLC;
|-- |  | ---------------------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date:
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weakness in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|/s/ F. Mark Wolfinger  
|-----------------------
|F. Mark Wolfinger      
|Chief Financial Officer
|February 14, 2003      





42