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United States

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q /A

(Amendment No. 1)



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(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

OR



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

FOR THE TRANSITION PERIOD FROM  TO

Commission file number: 0-20828



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DANKA
BUSINESS SYSTEMS PLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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



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

(727) 622-2100 in the United States

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



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

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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of August 1, 2006: The registrant had 256,529,024
ordinary shares outstanding with par value of 1.25 pence, including 57,321,987 represented by American Depositary Shares ADS. Each ADS represents four ordinary shares. The ADSs are evidenced by American Depositary receipts.



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INDEX



|                                                                                                  |  |   
|------------------------------------------------------------------------------------------------- |  | --
|Amendment No. 1 Explanatory Note                                                                  |  | 4 
|                                                                                                  | 
|RISK FACTORS                                                                                      |  | 4 
|                                                                                                  | 
|PART I 
FINANCIAL INFORMATION                                                                    |  | 11
|                                                                                                  | 
|ITEM1.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS                                                |  | 11
|Consolidated Condensed Statements of Operations for the Three Months Ended June 30, 2006 and 2005 |  | 11
|Consolidated Condensed Balance Sheets as of June 30, 2006 and March 31, 2006                      |  | 12
|Consolidated Condensed Statements of Cash Flows for the Three Months Ended June 30, 2006 and 2005 |  | 13
|                                                                                                  | 
|Notes to Consolidated Condensed Financial Statements                                              |  | 14
|ITEM2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS      |  | 34
|ITEM3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |  | 52
|ITEM4.
CONTROLS AND PROCEDURES                                                                    |  | 53
|                                                                                                  | 
|PART II 
OTHER INFORMATION                                                                       |  | 54
|                                                                                                  | 
|ITEM1.
LEGAL PROCEEDINGS                                                                          |  | 54
|ITEM2.
CHANGES IN SECURITIES AND USE OF PROCEEDS                                                  |  | 54
|ITEM3.
DEFAULTS UPON SENIOR SECURITIES                                                            |  | 54
|ITEM4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |  | 55
|ITEM5.
OTHER INFORMATION                                                                          |  | 55
|ITEM6.
EXHIBITS                                                                                   |  | 55
|                                                                                                  | 
|SIGNATURE                                                                                         |  | 56



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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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



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Amendment No. 1 Explanatory Note

On February 5, 2007, management concluded, after review of its interpretation of
Financial Accounting Standard No. 109, Accounting for Income Taxes and discussions with the Audit Committee of our Board of Directors, that we should restate our previously filed financial statements for fiscal years ended
March 31, 2006, 2005 and 2004, and for the interim quarterly periods in fiscal year 2007, to correct the accounting for our domestic income tax valuation allowance. We had previously established our valuation allowances assuming future taxable
income would be generated from the turnaround of non-reversing book/tax timing differences for goodwill. It has been determined that the valuation allowances on Deferred Tax Assets should have been increased by $1.4 million for the fiscal year ended
March 31, 2006 and by approximately $2.0 million for the year ended March 31, 2005 and prior.

In addition, we are also restating those
previously issued financial statements to record the reduction to selling, general and administrative expenses of $4.6 million relating to the recovery of workers compensation insurance costs, originally recorded by us in fiscal year 2006, in
the proper accounting periods. It has been determined that selling, general and administrative expense should have been decreased by approximately $0.7 million and $1.0 million in the fiscal years ended March 31, 2005 and 2004, respectively,
and by approximately $2.9 million in prior years. These adjustments were identified in fiscal year 2006 and correctly disclosed at that time as a correction of an error that was not material to our prior financial statements.

This Amendment No. 1 on Form 10-Q/A which amends and restates the Companys Form 10-Q for the quarter ended June 30, 2006, initially filed with the
Securities and Exchange Commission (the SEC) on August 9, 2006 (the Original Filing), is being filed to reflect the restatement of the condensed consolidated financial statements and other financial information of the
Company as presented herein.

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety with the only changes made
being related to the restatement. This Form 10-Q/A includes such restated condensed consolidated financial statements and related notes thereto and other information related to such restated condensed consolidated financial statements, including
revisions to Item 4 of Part II, Controls and Procedures and Item 6 of Part II, Exhibits. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures
affected by subsequent events. Pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to include a letter of awareness from the Companys independent registered public accounting firm and
certifications re-executed as of the date of this Form 10-Q/A from the Companys Chief Executive Officer and Chief Financial Officer. The certifications of the Chief Executive Officer and Chief Financial Officer are included in this Form 10-Q/A
as Exhibits 31.1, 31.2, 32.1 and 32.2.

Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of
the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other
things, forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to the Company after the date of the Original Filing (other than the
restatement), and such forward looking statements should be read in their historical context.

RISK FACTORS

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

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



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



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



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



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

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



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Operating EarningsWe generated an operating loss for the first three months of fiscal year 2007 of $5.3
million due to decreased revenue, increased restructuring charges and a loss on the sale of a subsidiary. The operating losses for the period included $12.4 million in restructuring charges. If we are not able to increase our revenue and improve our
gross margins or reduce our operating costs, these operating losses may continue in the future. As we continue to evaluate our business and strategies, we could incur future operating losses and/or restructuring charges which may materially and
adversely affect our operations, financial position, liquidity and results of operations. If we incur operating losses or do not generate sufficient profitability in the future, our growth potential and our ability to execute our business strategy
may be limited. In addition, our ability to service our indebtedness may be impaired because we may not generate sufficient cash flow from operations to pay principal or interest when due.

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

IndebtednessAt June 30, 2006, we had consolidated indebtedness of $250.3 million, including
current maturities of long-term debt and notes payable of $12.3 million. Our long-term indebtedness includes $64.5 million in principal amount of 10.0% subordinated notes due April 1, 2008 and $175.0 million in principal amount of 11.0% senior
notes due June 15, 2010, less unamortized discount of $2.7 million. The subordinated notes accrue interest which is paid every six months on April 1 and October 1 while the senior notes accrue interest which is paid every six months
on June 15 and December 15.

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



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



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



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



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



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

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

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

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



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

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

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

Vendor RelationshipsWe primarily have relationships with Canon, Ricoh, Toshiba, Kodak,
Hewlett-Packard and Konica-Minolta. These companies manufacture equipment, parts, supplies and software for resale by us in the markets in which we operate. We also rely on our equipment suppliers for related parts and supplies, vendor rebates and
significant levels of vendor trade creditor financing for our purchases of products from them. Any inability to obtain equipment, parts, supplies or software in the volumes required and at competitive prices from our major vendors, or the loss of
any major vendor, or the discontinuation of vendor rebate programs or adequate levels of vendor financing may seriously harm our business because we may not be able to supply those vendors products to our customers on a timely basis in
sufficient quantities or at all. In addition, we rely on our vendors to effectively respond to changing technology and manufacture new products to meet the demands of evolving customer needs. There is no guarantee that these vendors or any of our
other vendors will effectively respond to changing technology, continue to sell their products and services to us, or that they will do so at competitive prices. Other factors, including reduced access to credit by our vendors resulting from
economic conditions, may impair our vendors ability to effectively respond to changing technology or provide products in a timely manner or at competitive prices. We also rely on non-equipment vendors for critical services such as
transportation, supply chain and professional services. Any negative impacts to our business or liquidity could adversely impact our ability to establish or maintain these relationships.

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

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

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



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within the industry in arranging third party financing to our customers, which could negatively affect our operating results. With respect to our customers
outside the United States, we have country by country arrangements with various third party finance and leasing companies.

Our largest third party
financing company in Europe, which is centrally organized, is De Lage Landen International B.V. (DLL), a 100% owned subsidiary of Rabobank. In December 2005, DLL issued notice of termination of its existing local operating agreements.
These terminations are effective October 1, 2006. We are currently in discussions with DLL to negotiate new agreements on or before the expiration of the existing agreements. While we currently have meaningful alternative lease funding sources
available in most of Europe (including ING Group, BNP Paribas and GECC), failure to negotiate a new agreement with DLL could adversely impact our revenue and profitability as a change in lease companies can involve higher costs and early lease
termination penalties compared to the existing DLL agreements.

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

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

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

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

Business Processes and PoliciesWe have identified instances where we do not have adequate processes in place or our business processes and policies have not
been properly implemented or followed in the past, which have resulted in, among other things, poor billing and credit practices, weak customer contract management, excessive and undisciplined issuances of customer credits, inaccurate customer data,
inconsistent customer contract terms and conditions and inadequate document retention. We continue to address these issues and are in the process of implementing the following steps to remediate:



| |  |  | Review existing contract terms and verify that such terms agree with our customers understanding and the information in our accounting system;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Improve our meter reading capabilities by increasing the automation of key processes;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Take steps to systematically gather information to allow for analysis and development of targeted control improvements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Establish a cross functional team to study errors identified and design and aid in the implementation of improved controls; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Provide additional training and increased responsibility to account managers to better ensure that customers receive billings that are free from error or
inaccuracies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

While these steps are currently underway, there is no assurance that all of these issues will be completely rectified. See
our discussion in Item 4-Controls and Procedures regarding a material weakness in our revenue and billing process.

Additionally, on February 5,
2007, management concluded that the Company should restate its previously filed financial statements for fiscal years ended March 31, 2006, 2005 and 2004, and for the interim quarterly periods in fiscal year 2007, to correct the accounting for
its domestic income tax valuation allowance. As a result of this restatement, management identified a material weakness in its controls over the accounting for of its domestic income tax valuation allowance.

As a result of the material weakness in our income tax controls, we have implemented a formal review to ensure the proper accounting for our domestic income tax
valuation allowance and we continue to monitor new and emerging accounting guidance and industry interpretations to assist in our application of generally accepted accounting principles. Additionally, we recorded an increase to our valuation
allowance and related income tax expense and restated our previously filed financial statements for the years ended March 31, 2006 and 2005 and the quarters ended June 30, 2006 and September 30, 2006. Accordingly we are confident that, as of the
date of this filing, we have fully remediated this material weakness in our internal controls over financial reporting..

For further detail regarding the
above restatement and resulting material weakness, please see our discussion on Item 4  Controls and Procedures.

International Scope of
OperationsWe are incorporated under the laws of England and Wales, and we conduct a significant portion of our business outside of the United States. We generated 53.1% of our revenue outside the United States during the first three months
of fiscal year 2007. We market office imaging equipment, document solutions and related services and supplies directly to customers in over 15 countries. The international scope of our operations may lead to volatile financial results and
difficulties in managing our operations because of, but not limited to, the following:



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



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



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



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



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



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



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



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



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



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

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

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

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



8



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The majority of our revenues outside the United States are denominated in either the euro or the British pound sterling.
During the first three months of fiscal year 2007, the euro and the British pound sterling strengthened 5.3% and 6.3%, respectively, against the United States, resulting in higher revenues.

Further, our intercompany loans are subject to fluctuations in exchange rates between the United States dollar and the currencies in each of the countries in which we
operate, primarily the euro and the British pound sterling. Based on the outstanding balance of our intercompany loans at June 30, 2006, an increase of 1% in the exchange rate for the euro and British pound sterling versus the United States
dollar would cause a foreign exchange loss of less than $0.1 million, while a decrease of 1% in the exchange rate of the euro and the British pound sterling versus the U.S. dollar would cause a foreign exchange gain of less than $0.1 million.

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

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

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

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

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

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

Compliance with Sarbanes-Oxley Act of 2002  Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on, and our independent auditors are required to attest to, the effectiveness of
our internal controls over financial reporting on an annual basis. Testing and evaluation of the design and operating effectiveness of our internal control over financial reporting continued on an ongoing basis. As a result of our assessment
conducted as of March 31, 2006, we identified a material weakness in our revenue and billing process in the United States. Additionally, on February 5, 2007, the Company identified an error in its accounting for its domestic income tax
valuation allowance and determined that it needed to restate its previously filed financial statements to correct the error. Based on this restatement, management concluded that another material weakness existed at March 31, 2006 related to its
income tax accounting process.

We are committed to addressing these material weaknesses. However, if we are unsuccessful in our focused effort to
permanently and effectively remediate these material weaknesses, or otherwise fail to maintain adequate internal controls



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over financial reporting, our ability to accurately and timely report our financial condition may be adversely impacted. In addition, if we do not remediate
these weaknesses, we will not be able to conclude, pursuant to Section 404 of the Sarbanes-Oxley Act and Item 308 of Regulation S-K, that our internal controls over financial reporting are effective in the current fiscal year. It is not
possible to say at this time what conclusions our management or independent registered certified public accounting firm might reach with respect to the effectiveness of our internal controls over financial reporting at the end of fiscal year 2007.
In the event of non-compliance, we may lose the trust of our customers, suppliers and security holders, and our stock price could be adversely impacted. For more information, see Controls and Procedures in Item 4. Controls and
Procedures, included in this report.

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

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

Dividends on Ordinary SharesWe have not
paid any cash or other dividends on our ordinary shares since 1998 and we do not expect to do so for the foreseeable future. We are an English company and, under English law, we are allowed to pay dividends to shareholders only if, as determined by
reference to our financial statements prepared in accordance with International Financial Reporting Standards;



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



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

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

ADDITIONAL INFORMATION
AVAILABLE ON COMPANY WEB-SITE

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



10



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PART I  FINANCIAL INFORMATION

Item 1. Consolidated Condensed Financial Statements

Danka Business Systems PLC

Consolidated Condensed Statements of Operations for the Three Months Ended
June 30, 2006 and 2005

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

(Unaudited)



|                                                                                   |  |                            |         |   |                   |   |         |  
|---------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                   |  | Three months ended June 30 |        
|                                                                                   |  | 2006 (Restated *)          |         |   | 2005 (Restated *) |  
|Revenue:                                                                           |  |                            |         |   |                   |   |         |  
|Retail equipment and related sales                                                 |  | $                          | 92,080  |   |                   | $ | 114,052 |  
|Retail service                                                                     |  |                            | 124,611 |   |                   |   | 132,305 |  
|Retail supplies and rentals                                                        |  |                            | 19,852  |   |                   |   | 22,248  |  
|Wholesale                                                                          |  |                            | 23,662  |   |                   |   | 23,973  |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Total revenue                                                                      |  |                            | 260,205 |   |                   |   | 292,578 |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Cost of sales:                                                                     |  |                            |         |   |                   |   |         |  
|Retail equipment and related sales costs                                           |  |                            | 63,143  |   |                   |   | 77,714  |  
|Retail service costs                                                               |  |                            | 78,352  |   |                   |   | 83,537  |  
|Retail supplies and rental costs, including depreciation on rental assets          |  |                            | 11,290  |   |                   |   | 13,414  |  
|Wholesale costs                                                                    |  |                            | 19,529  |   |                   |   | 19,591  |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Total cost of sales                                                                |  |                            | 172,314 |   |                   |   | 194,256 |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Gross profit                                                                       |  |                            | 87,891  |   |                   |   | 98,322  |  
|Operating expenses:                                                                |  |                            |         |   |                   |   |         |  
|Selling, general and administrative expenses                                       |  |                            | 78,833  |   |                   |   | 102,829 |  
|Restructuring charges                                                              |  |                            | 12,351  |   |                   |   | 6,087   |  
|Loss on sale of subsidiary                                                         |  |                            | 2,507   |   |                   |   |        |  
|Other expense (income)                                                             |  |                            | (539    | ) |                   |   | (1,309  | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Total operating expenses                                                           |  |                            | 93,152  |   |                   |   | 107,607 |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Operating earnings (loss) from continuing operations                               |  |                            | (5,261  | ) |                   |   | (9,285  | )
|Interest expense                                                                   |  |                            | (7,961  | ) |                   |   | (7,912  | )
|Interest income                                                                    |  |                            | 213     |   |                   |   |        |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Earnings (loss) from continuing operations before income taxes                     |  |                            | (13,009 | ) |                   |   | (17,197 | )
|Provision (benefit) for income taxes                                               |  |                            | (1,070  | ) |                   |   | 1,368   |  
|                                                                                   |  |                            |         |   |                   |   |         |  
|Earnings (loss) from continuing operations                                         |  |                            | (11,939 | ) |                   |   | (18,565 | )
|Earnings (loss) from discontinued operations, net of tax                           |  |                            | (263    | ) |                   |   | (1,503  | )
|Gain (loss) on sale of discontinued operations, net of tax                         |  |                            |        |   |                   |   | (321    | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Net earnings (loss)                                                                |  | $                          | (12,202 | ) |                   | $ | (20,389 | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Net earnings (loss) attributable to common shareholders                            |  |                            |         |   |                   |   |         |  
|Net earnings (loss) from continuing operations                                     |  | $                          | (11,939 | ) |                   | $ | (18,565 | )
|Dividends and accretion on participating shares                                    |  |                            | (5,606  | ) |                   |   | (5,326  | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Net earnings (loss) from continuing operations attributable to common shareholders |  | $                          | (17,545 | ) |                   | $ | (23,891 | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Basic and diluted net earnings (loss) attributable to common shareholders per ADS: |  |                            |         |   |                   |   |         |  
|Net earnings (loss) from continuing operations                                     |  | $                          | (0.27   | ) |                   | $ | (0.38   | )
|Net earnings (loss) from discontinued operations                                   |  |                            |        |   |                   |   | (0.02   | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Net earnings (loss)                                                                |  | $                          | (0.27   | ) |                   | $ | (0.40   | )
|                                                                                   |  |                            |         |   |                   |   |         |  
|Weighted average ADSs                                                              |  |                            | 64,132  |   |                   |   | 63,556  |  
|                                                                                   |  |                            |         |   |                   |   |         |  

---

|* | See Note 1  Restatement and Basis of Presentation  Restatement
|- | ------------------------------------------------------------------

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



11



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##### Table of Contents

Danka Business Systems PLC

Consolidated Condensed Balance Sheets as of June 30, 2006 and March 31,
2006

(In thousands except per share data)



|                                                                 |  |                            |          |   |                             |   |          |  
|---------------------------------------------------------------- |  | -------------------------- | -------- | - | --------------------------- | - | -------- | -
|                                                                 |  | June 30, 2006 (Restated *) |          |   | March 31, 2006 (Restated *) |  
|                                                                 |  | (Unaudited)                |          |   |                             |  
|Assets                                                           |  |                            |          |   |                             |   |          |  
|Current assets:                                                  |  |                            |          |   |                             |   |          |  
|Cash and cash equivalents                                        |  | $                          | 40,465   |   |                             | $ | 54,468   |  
|Restricted cash                                                  |  |                            | 21,285   |   |                             |   | 20,529   |  
|Accounts receivable, net of allowance for doubtful accounts      |  |                            | 189,275  |   |                             |   | 189,354  |  
|Inventories                                                      |  |                            | 86,733   |   |                             |   | 79,967   |  
|Prepaid expenses, deferred income taxes and other current assets |  |                            | 10,874   |   |                             |   | 8,251    |  
|                                                                 |  |                            |          |   |                             |   |          |  
|Total current assets                                             |  |                            | 348,632  |   |                             |   | 352,569  |  
|Equipment on operating leases, net                               |  |                            | 11,780   |   |                             |   | 12,138   |  
|Property and equipment, net                                      |  |                            | 35,167   |   |                             |   | 37,098   |  
|Goodwill                                                         |  |                            | 211,184  |   |                             |   | 206,174  |  
|Other intangible assets, net of accumulated amortization         |  |                            | 629      |   |                             |   | 1,861    |  
|Deferred income taxes                                            |  |                            | 1,373    |   |                             |   | 87       |  
|Other assets                                                     |  |                            | 18,148   |   |                             |   | 18,865   |  
|                                                                 |  |                            |          |   |                             |   |          |  
|Total assets                                                     |  | $                          | 626,913  |   |                             | $ | 628,792  |  
|                                                                 |  |                            |          |   |                             |   |          |  
|Liabilities and shareholders equity (deficit)                   |  |                            |          |   |                             |   |          |  
|Current liabilities:                                             |  |                            |          |   |                             |   |          |  
|Current maturities of long-term debt and notes payable           |  | $                          | 12,287   |   |                             | $ | 11,516   |  
|Accounts payable                                                 |  |                            | 171,600  |   |                             |   | 165,667  |  
|Accrued expenses and other current liabilities                   |  |                            | 86,621   |   |                             |   | 93,644   |  
|Taxes payable                                                    |  |                            | 23,732   |   |                             |   | 21,247   |  
|Deferred revenue                                                 |  |                            | 33,328   |   |                             |   | 33,027   |  
|                                                                 |  |                            |          |   |                             |   |          |  
|Total current liabilities                                        |  |                            | 327,568  |   |                             |   | 325,101  |  
|Long-term debt and notes payable, less current maturities        |  |                            | 238,028  |   |                             |   | 238,081  |  
|Deferred income taxes and other long-term liabilities            |  |                            | 56,526   |   |                             |   | 55,301   |  
|                                                                 |  |                            |          |   |                             |   |          |  
|Total liabilities                                                |  |                            | 622,122  |   |                             |   | 618,483  |  
|                                                                 |  |                            |          |   |                             |   |          |  
|6.5% senior convertible participating shares                     |  |                            | 327,147  |   |                             |   | 321,541  |  
|Shareholders equity (deficit):                                  |  |                            |          |   |                             |   |          |  
|Ordinary shares, 1.25 pence stated value                         |  |                            | 5,330    |   |                             |   | 5,330    |  
|Additional paid-in capital                                       |  |                            | 329,745  |   |                             |   | 329,745  |  
|Accumulated deficit                                              |  |                            | (618,003 | ) |                             |   | (600,195 | )
|Accumulated other comprehensive loss                             |  |                            | (39,428  | ) |                             |   | (46,112  | )
|                                                                 |  |                            |          |   |                             |   |          |  
|Total shareholders equity (deficit)                             |  |                            | (322,356 | ) |                             |   | (311,232 | )
|                                                                 |  |                            |          |   |                             |   |          |  
|Total liabilities and shareholders equity (deficit)             |  | $                          | 626,913  |   |                             | $ | 628,792  |  
|                                                                 |  |                            |          |   |                             |   |          |  

---

|* | See Note 1  Restatement and Basis of Presentation  Restatement
|- | ------------------------------------------------------------------

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



12



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##### Table of Contents

Danka Business Systems PLC

Consolidated Condensed Statements of Cash Flows for the Three Months Ended
June 30, 2006 and 2005

(In thousands)

(Unaudited)



|                                                                                                     |  |                            |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                     |  | Three Months EndedJune 30, |        
|                                                                                                     |  | 2006 (Restated *)          |         |   | 2005 (Restated *) |  
|Operating activities:                                                                                |  |                            |         |   |                   |   |         |  
|Net earnings (loss)                                                                                  |  | $                          | (12,202 | ) |                   | $ | (20,389 | )
|Loss from discontinued operations                                                                    |  |                            | (263    | ) |                   |   | (1,824  | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Earnings (loss) from continuing operations                                                           |  |                            | (11,939 | ) |                   |   | (18,565 | )
|Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |  |                            |         |   |                   |   |         |  
|Depreciation and amortization                                                                        |  |                            | 6,000   |   |                   |   | 7,801   |  
|Deferred income taxes                                                                                |  |                            | (647    | ) |                   |   | 296     |  
|Amortization of debt issuance costs                                                                  |  |                            | 476     |   |                   |   | 521     |  
|(Gain) loss on sale of property & equipment and equipment on operating leases                        |  |                            | (101    | ) |                   |   | 205     |  
|Loss on sale of subsidiary, net of cash                                                              |  |                            | 2,103   |   |                   |   |        |  
|Proceeds from sale of equipment on operating leases                                                  |  |                            | 193     |   |                   |   | 3       |  
|Restructuring charges                                                                                |  |                            | 12,351  |   |                   |   | 6,087   |  
|Changes in net assets and liabilities:                                                               |  |                            |         |   |                   |   |         |  
|Accounts receivable                                                                                  |  |                            | (538    | ) |                   |   | 15,628  |  
|Inventories                                                                                          |  |                            | (7,002  | ) |                   |   | (14,645 | )
|Prepaid expenses and other current assets                                                            |  |                            | (2,633  | ) |                   |   | (1,286  | )
|Other non-current assets                                                                             |  |                            | (3,154  | ) |                   |   | 6,169   |  
|Accounts payable                                                                                     |  |                            | 6,301   |   |                   |   | 15,531  |  
|Accrued expenses and other current liabilities                                                       |  |                            | (16,610 | ) |                   |   | (28,153 | )
|Deferred revenue                                                                                     |  |                            | 475     |   |                   |   | (930    | )
|Other long-term liabilities                                                                          |  |                            | 584     |   |                   |   | (1,307  | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net cash used in continuing operations                                                               |  |                            | (14,141 | ) |                   |   | (12,645 | )
|Net cash used in discontinued operations                                                             |  |                            |        |   |                   |   | (535    | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net cash used in operating activities                                                                |  |                            | (14,141 | ) |                   |   | (13,180 | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Investing activities:                                                                                |  |                            |         |   |                   |   |         |  
|Capital expenditures                                                                                 |  |                            | (3,185  | ) |                   |   | (3,331  | )
|Proceeds from sale of discontinued operations, net of cash                                           |  |                            |        |   |                   |   | 11,972  |  
|Proceeds from the sale of property and equipment                                                     |  |                            | 23      |   |                   |   | 84      |  
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net cash (used in) provided by continuing investing activities                                       |  |                            | (3,162  | ) |                   |   | 8,725   |  
|Net cash used in discontinued investing activities                                                   |  |                            |        |   |                   |   | (326    | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net cash (used in) provided by investing activities                                                  |  |                            | (3,162  | ) |                   |   | 8,399   |  
|Financing activities:                                                                                |  |                            |         |   |                   |   |         |  
|Borrowings under line of credit agreements                                                           |  |                            | 17,000  |   |                   |   | 816     |  
|Payments under line of credit agreements                                                             |  |                            | (16,007 | ) |                   |   | (52     | )
|Payments under capital lease arrangements                                                            |  |                            | (430    | ) |                   |   | (810    | )
|Proceeds from stock options exercised                                                                |  |                            |        |   |                   |   | 16      |  
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net cash provided by (used in) continuing financing activities                                       |  |                            | 563     |   |                   |   | (30     | )
|Net cash used in discontinued financing activities                                                   |  |                            |        |   |                   |   | (25     | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net cash provided by (used in) financing activities                                                  |  |                            | 563     |   |                   |   | (55     | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Effect of exchange rates                                                                             |  |                            | 2,737   |   |                   |   | (3,093  | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Net decrease in cash and cash equivalents                                                            |  |                            | (14,003 | ) |                   |   | (7,929  | )
|Cash and cash equivalents from continuing operations, beginning of period                            |  |                            | 54,468  |   |                   |   | 76,969  |  
|Cash and cash equivalents from discontinued operations, beginning of period                          |  |                            |        |   |                   |   | 6,191   |  
|Cash and cash equivalents from discontinued operations, end of period                                |  |                            |        |   |                   |   | (4,747  | )
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Cash and cash equivalents, end of period                                                             |  | $                          | 40,465  |   |                   | $ | 70,484  |  
|                                                                                                     |  |                            |         |   |                   |   |         |  
|Supplemental disclosures - cash flow information:                                                    |  |                            |         |   |                   |   |         |  
|Interest paid                                                                                        |  | $                          | 13,912  |   |                   | $ | 13,902  |  
|Income taxes paid                                                                                    |  |                            | 333     |   |                   |   | 261     |  

---

|* | See Note 1  Restatement and Basis of Presentation  Restatement
|- | ------------------------------------------------------------------

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



13



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##### Table of Contents

Danka Business Systems PLC

Notes to Consolidated Condensed Financial Statements

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

(Unaudited)

Note 1. Restatement and Basis of Presentation

Restatement

On February 5, 2007, management concluded, after review of
its interpretation of Financial Accounting Standard No. 109, Accounting for Income Taxes and discussions with the Audit Committee of our Board of Directors, that we should restate our previously filed financial statements for fiscal
years ended March 31, 2006, 2005 and 2004, and for the interim quarterly periods in fiscal year 2007, to correct the accounting for our domestic income tax valuation allowance. We had previously established our valuation allowances assuming
future taxable income would be generated from the turnaround of non-reversing book/tax timing differences for goodwill. It has been determined that the valuation allowances on Deferred Tax Assets should have been increased by $1.4 million for the
fiscal year ended March 31, 2006 and by approximately $2.0 million for the year ended March 31, 2005.

In addition, we are also restating those
previously issued financial statements to record the reduction to selling, general and administrative expenses of $4.6 million relating to the recovery of workers compensation insurance costs, originally recorded by us in fiscal year 2006, in
the proper accounting periods. It has been determined that selling, general and administrative expense should have been decreased by approximately $0.7 million and $1.0 million in the fiscal years ended March 31, 2005 and 2004, respectively,
and by approximately $2.9 million in prior years. These adjustments were identified in fiscal year 2006 and correctly disclosed at that time as a correction of an error that was not material to our prior financial statements.

For the actual impact of these financial statement adjustments to the periods presented, see the tables below.

Impact of the Financial Statement Adjustments on the Consolidated Condensed Statements of Operations

The table below presents the impact of the financial statement adjustments related to the restatement of our previously reported Consolidated Condensed
Statements of Operations for the three months ended June 30, 2006 and 2005:



|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------- | - | ---- | ----------- |  | - | -------------------- | - |  | ----------- | ------- | - | ----------- | - | ---- | - |  | - | ------- | -
|                                                                                   |  | Three months ended June 30, |        
|                                                                                   |  | 2006                        |         |   | 2005        |  
|                                                                                   |  | Aspreviouslyreported        |         |   | Adjustments |   |      | As Restated |  |   | Aspreviouslyreported |   |  | Adjustments |         |   | As Restated |  
|Operating expenses:                                                                |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Selling, general and administrative expenses                                       |  | $                           | 78,833  |   |             | $ |     |             |  | $ | 78,833               |   |  | $           | 102,912 |   |             | $ | (83  | ) |  | $ | 102,829 |  
|Restructuring charges                                                              |  |                             | 12,351  |   |             |   |     |             |  |   | 12,351               |   |  |             | 6,087   |   |             |   |     |   |  |   | 6,087   |  
|Loss on sale of subsidiary                                                         |  |                             | 2,507   |   |             |   |     |             |  |   | 2,507                |   |  |             |        |   |             |   |     |   |  |   |        |  
|Other Expense (income)                                                             |  |                             | (539    | ) |             |   |     |             |  |   | (539                 | ) |  |             | (1,309  | ) |             |   |     |   |  |   | (1,309  | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Total operating expenses                                                           |  |                             | 93,152  |   |             |   |     |             |  |   | 93,152               |   |  |             | 107,690 |   |             |   | (83  | ) |  |   | 107,607 |  
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Operating profit from continuing operations                                        |  |                             | (5,261  | ) |             |   |     |             |  |   | (5,261               | ) |  |             | (9,368  | ) |             |   | 83   |   |  |   | (9,285  | )
|Interest Expense                                                                   |  |                             | (7,961  | ) |             |   |     |             |  |   | (7,961               | ) |  |             | (7,912  | ) |             |   |     |   |  |   | (7,912  | )
|Interest Income                                                                    |  |                             | 213     |   |             |   |     |             |  |   | 213                  |   |  |             |        |   |             |   |     |   |  |   |        |  
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Earnings (loss) from continuing operations before tax                              |  |                             | (13,009 | ) |             |   |     |             |  |   | (13,009              | ) |  |             | (17,280 | ) |             |   | 83   |   |  |   | (17,197 | )
|Provision (benefit) for income taxes                                               |  |                             | (1,438  | ) |             |   | 368  |             |  |   | (1,070               | ) |  |             | 1,016   |   |             |   | 352  |   |  |   | 1,368   |  
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Earnings (loss) from continuing ops                                                |  |                             | (11,571 | ) |             |   | (368 | )           |  |   | (11,939              | ) |  |             | (18,296 | ) |             |   | (269 | ) |  |   | (18,565 | )
|Earnings (loss) from discontinued operations, net of tax                           |  |                             | (263    | ) |             |   |     |             |  |   | (263                 | ) |  |             | (1,503  | ) |             |   |     |   |  |   | (1,503  | )
|Gain (loss) on sale of discontinued operations, net of tax                         |  |                             |        |   |             |   |     |             |  |   |                     |   |  |             | (321    | ) |             |   |     |   |  |   | (321    | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net Earnings (loss)                                                                |  | $                           | (11,834 | ) |             | $ | (368 | )           |  | $ | (12,202              | ) |  | $           | (20,120 | ) |             | $ | (269 | ) |  | $ | (20,389 | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net earnings (loss) attributable to common shareholders                            |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net earnings (loss) from continuing operations                                     |  | $                           | (11,571 | ) |             | $ | (368 | )           |  | $ | (11,939              | ) |  | $           | (18,296 | ) |             | $ | (269 | ) |  | $ | (18,565 | )
|Dividends and accretion on participating shares                                    |  |                             | (5,606  | ) |             |   |     |             |  |   | (5,606               | ) |  |             | (5,326  | ) |             |   |     |   |  |   | (5,326  | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net earnings (loss) from continuing operations attributable to common shareholders |  | $                           | (17,177 | ) |             | $ | (368 | )           |  | $ | (17,545              | ) |  | $           | (23,622 | ) |             | $ | (269 | ) |  | $ | (23,891 | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Basic and diluted net earnings (loss) attributable to common shareholders per ADS: |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net earnings (loss) from continuing operations                                     |  | $                           | (0.27   | ) |             | $ |     |             |  | $ | (0.27                | ) |  | $           | (0.37   | ) |             | $ | (.01 | ) |  | $ | (0.38   | )
|Net earnings (loss) from discontinued operations                                   |  |                             |        |   |             |   |     |             |  |   |                     |   |  |             | (0.03   | ) |             | $ | .01  |   |  |   | (0.02   | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net earnings (loss)                                                                |  | $                           | (0.27   | ) |             | $ |     |             |  | $ | (0.27                | ) |  | $           | (0.40   | ) |             | $ |     |   |  | $ | (0.40   | )
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Weighted average ADSs                                                              |  |                             | 64,132  |   |             |   |     |             |  |   | 64,132               |   |  |             | 63,556  |   |             |   |     |   |  |   | 63,556  |  
|                                                                                   |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  



14



---

##### Table of Contents

Impact of the Financial Statement Adjustments on the Consolidated Condensed Balance Sheets

The table below presents the impact of the financial statement adjustments related to the restatement of our previously reported Consolidated Condensed
Balance Sheets as of June 30, 2006 and March 31, 2006:



|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|---------------------------------------------------------------- |  | -------------------- | -------- | - | -------------- | - | ------ | ----------- |  | - | -------------------- | - |  | ----------- | -------- | - | ----------- | - | ------ | - |  | - | -------- | -
|                                                                 |  | June 30, 2006        |          |   | March 31, 2006 |  
|                                                                 |  | Aspreviouslyreported |          |   | Adjustments    |   |        | As Restated |  |   | Aspreviouslyreported |   |  | Adjustments |          |   | As Restated |  
|Assets                                                           |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Current assets                                                   |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Cash and cash equivalents                                        |  | $                    | 40,465   |   |                | $ |       |             |  | $ | 40,465               |   |  | $           | 54,468   |   |             | $ |       |   |  | $ | 54,468   |  
|Restricted cash                                                  |  |                      | 21,285   |   |                |   |       |             |  |   | 21,285               |   |  |             | 20,529   |   |             |   |       |   |  |   | 20,529   |  
|Accounts receivable, net                                         |  |                      | 189,275  |   |                |   |       |             |  |   | 189,275              |   |  |             | 189,354  |   |             |   |       |   |  |   | 189,354  |  
|Inventories                                                      |  |                      | 86,733   |   |                |   |       |             |  |   | 86,733               |   |  |             | 79,967   |   |             |   |       |   |  |   | 79,967   |  
|Prepaid expenses, deferred income taxes and other current assets |  |                      | 10,874   |   |                |   |       |             |  |   | 10,874               |   |  |             | 8,251    |   |             |   |       |   |  |   | 8,251    |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Total current assets                                             |  |                      | 348,632  |   |                |   |       |             |  |   | 348,632              |   |  |             | 352,569  |   |             |   |       |   |  |   | 352,569  |  
|Equipment on operating leases, net                               |  |                      | 11,780   |   |                |   |       |             |  |   | 11,780               |   |  |             | 12,138   |   |             |   |       |   |  |   | 12,138   |  
|Property and equipment, net                                      |  |                      | 35,167   |   |                |   |       |             |  |   | 35,167               |   |  |             | 37,098   |   |             |   |       |   |  |   | 37,098   |  
|Goodwill                                                         |  |                      | 211,184  |   |                |   |       |             |  |   | 211,184              |   |  |             | 206,174  |   |             |   |       |   |  |   | 206,174  |  
|Other intangible assets, net                                     |  |                      | 629      |   |                |   |       |             |  |   | 629                  |   |  |             | 1,861    |   |             |   |       |   |  |   | 1,861    |  
|Deferred income taxes                                            |  |                      | 1,373    |   |                |   |       |             |  |   | 1,373                |   |  |             | 87       |   |             |   |       |   |  |   | 87       |  
|Other assets                                                     |  |                      | 18,148   |   |                |   |       |             |  |   | 18,148               |   |  |             | 18,865   |   |             |   |       |   |  |   | 18,865   |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Total assets                                                     |  | $                    | 626,913  |   |                | $ |       |             |  | $ | 626,913              |   |  | $           | 628,792  |   |             | $ |       |   |  | $ | 628,792  |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Liabilities and shareholders equity (deficit)                   |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Current liabilities                                              |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Current maturities of long-term debr and notes payable           |  | $                    | 12,287   |   |                | $ |       |             |  | $ | 12,287               |   |  | $           | 11,516   |   |             |   |       |   |  | $ | 11,516   |  
|Accounts payable                                                 |  |                      | 171,600  |   |                |   |       |             |  |   | 171,600              |   |  |             | 165,667  |   |             |   |       |   |  |   | 165,667  |  
|Accrued expenses and other current liabilities                   |  |                      | 86,621   |   |                |   |       |             |  |   | 86,621               |   |  |             | 93,644   |   |             |   |       |   |  |   | 93,644   |  
|Taxes payable                                                    |  |                      | 23,732   |   |                |   |       |             |  |   | 23,732               |   |  |             | 21,247   |   |             |   |       |   |  |   | 21,247   |  
|Deferred revenue                                                 |  |                      | 33,328   |   |                |   |       |             |  |   | 33,328               |   |  |             | 33,027   |   |             |   |       |   |  |   | 33,027   |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Total current liabilities                                        |  |                      | 327,568  |   |                |   |       |             |  |   | 327,568              |   |  |             | 325,101  |   |             |   |       |   |  |   | 325,101  |  
|Long-term debt and notes payable, less current maturities        |  |                      | 238,028  |   |                |   |       |             |  |   | 238,028              |   |  |             | 238,081  |   |             |   |       |   |  |   | 238,081  |  
|Deferred income taxes and other long-term liabilities            |  |                      | 52,786   |   |                |   | 3,740  |             |  |   | 56,526               |   |  |             | 51,929   |   |             |   | 3,372  |   |  |   | 55,301   |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Total liabilites                                                 |  |                      | 618,382  |   |                |   | 3,740  |             |  |   | 622,122              |   |  |             | 615,111  |   |             |   | 3,372  |   |  |   | 618,483  |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|6.5% senior convertible participating shares                     |  |                      | 327,147  |   |                |   |       |             |  |   | 327,147              |   |  |             | 321,541  |   |             |   |       |   |  |   | 321,541  |  
|Shareholders equity (deficit)                                   |  |                      |          |   |                |   |       |             |  |   |                      |   |  |             |          |   |             |   |       |   |  |   |          |  
|Ordinary shares                                                  |  |                      | 5,330    |   |                |   |       |             |  |   | 5,330                |   |  |             | 5,330    |   |             |   |       |   |  |   | 5,330    |  
|Additional paid-in capital                                       |  |                      | 329,745  |   |                |   |       |             |  |   | 329,745              |   |  |             | 329,745  |   |             |   |       |   |  |   | 329,745  |  
|Accumulated deficit                                              |  |                      | (614,263 | ) |                |   | (3,740 | )           |  |   | (618,003             | ) |  |             | (596,823 | ) |             |   | (3,372 | ) |  |   | (600,195 | )
|Accumulated other comprehensive loss                             |  |                      | (39,428  | ) |                |   |       |             |  |   | (39,428              | ) |  |             | (46,112  | ) |             |   |       |   |  |   | (46,112  | )
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Total shareholders equity (deficit)                             |  |                      | (318,616 | ) |                |   | (3,740 | )           |  |   | (322,356             | ) |  |             | (307,860 | ) |             |   | (3,372 | ) |  |   | (311,232 | )
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  
|Total liabilites and shareholders equity (deficit)              |  | $                    | 626,913  |   |                | $ |       |             |  | $ | 626,913              |   |  | $           | 628,792  |   |             | $ |       |   |  | $ | 628,792  |  
|                                                                 |  |                      |          |   |                |   |        |             |  |   |                      |   |  |             |          |   |             |   |        |   |  |   |          |  



15



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##### Table of Contents

Impact of the Financial Statement Adjustments on the Consolidated Condensed Statements of Cash Flows

The restatement of the Consolidated Condensed Statements of Cash Flows for the three months ended June 30, 2006 and 2005 did not affect our cash
flows from financing or investing activities. The table below reflects adjustments to our cash flows from operating activities:



|                                                                                                     |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------- | - | ---- | ----------- |  | - | -------------------- | - |  | ----------- | ------- | - | ----------- | - | ---- | - |  | - | ------- | -
|                                                                                                     |  | Three months ended June 30, |        
|                                                                                                     |  | 2006                        |         |   | 2005        |  
|                                                                                                     |  | Aspreviouslyreported        |         |   | Adjustments |   |      | As Restated |  |   | Aspreviouslyreported |   |  | Adjustments |         |   | As Restated |  
|Operating activities:                                                                                |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net earnings (loss)                                                                                  |  | $                           | (11,834 | ) |             | $ | (368 | )           |  | $ | (12,202              | ) |  | $           | (20,120 | ) |             | $ | (269 | ) |  | $ | (20,389 | )
|Loss from discontinued operations                                                                    |  |                             | (263    | ) |             |   |     |             |  |   | (263                 | ) |  |             | (1,824  | ) |             |   |     |   |  |   | (1,824  | )
|                                                                                                     |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Earnings (loss) from continuing operations                                                           |  |                             | (11,571 | ) |             |   | (368 | )           |  |   | (11,939              | ) |  |             | (18,296 | ) |             |   | (269 | ) |  |   | (18,565 | )
|                                                                                                     |  |                             |         |   |             |  
|Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Depreciation and amortization                                                                        |  |                             | 6,000   |   |             |   |     |             |  |   | 6,000                |   |  |             | 7,801   |   |             |   |     |   |  |   | 7,801   |  
|Deferred income taxes                                                                                |  |                             | (1,015  | ) |             |   | 368  |             |  |   | (647                 | ) |  |             | (56     | ) |             |   | 352  |   |  |   | 296     |  
|Amortization of debt issuance costs                                                                  |  |                             | 476     |   |             |   |     |             |  |   | 476                  |   |  |             | 521     |   |             |   |     |   |  |   | 521     |  
|(Gain) Loss on sale of property and equipment and equipment on operating leases                      |  |                             | (101    | ) |             |   |     |             |  |   | (101                 | ) |  |             | 205     |   |             |   |     |   |  |   | 205     |  
|Loss on sale of subsidiary, net                                                                      |  |                             | 2,103   |   |             |   |      |             |  |   | 2,103                |   |  |             |        |   |             |   |      |   |  |   |        |  
|Proceeds from sale of equipment on operating leases                                                  |  |                             | 193     |   |             |   |     |             |  |   | 193                  |   |  |             | 3       |   |             |   |     |   |  |   | 3       |  
|Restructuring charges                                                                                |  |                             | 12,351  |   |             |   |     |             |  |   | 12,351               |   |  |             | 6,087   |   |             |   |     |   |  |   | 6,087   |  
|                                                                                                     |  |                             |         |   |             |  
|Changes in net assets and liabilities:                                                               |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Accounts receivable                                                                                  |  |                             | (538    | ) |             |   |     |             |  |   | (538                 | ) |  |             | 15,628  |   |             |   |     |   |  |   | 15,628  |  
|Inventories                                                                                          |  |                             | (7,002  | ) |             |   |     |             |  |   | (7,002               | ) |  |             | (14,645 | ) |             |   |     |   |  |   | (14,645 | )
|Prepaid expenses and other current assets                                                            |  |                             | (2,633  | ) |             |   |     |             |  |   | (2,633               | ) |  |             | (1,286  | ) |             |   |     |   |  |   | (1,286  | )
|Other non-current assets                                                                             |  |                             | (3,154  | ) |             |   |     |             |  |   | (3,154               | ) |  |             | 6,169   |   |             |   |     |   |  |   | 6,169   |  
|Accounts payable                                                                                     |  |                             | 6,301   |   |             |   |     |             |  |   | 6,301                |   |  |             | 15,531  |   |             |   |     |   |  |   | 15,531  |  
|Accrued expenses and other current liabilities                                                       |  |                             | (16,610 | ) |             |   |     |             |  |   | (16,610              | ) |  |             | (28,070 | ) |             |   | (83  | ) |  |   | (28,153 | )
|Deferred revenue                                                                                     |  |                             | 475     |   |             |   |     |             |  |   | 475                  |   |  |             | (930    | ) |             |   |     |   |  |   | (930    | )
|Other long-term liabilities                                                                          |  |                             | 584     |   |             |   |     |             |  |   | 584                  |   |  |             | (1,307  | ) |             |   |     |   |  |   | (1,307  | )
|                                                                                                     |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net cash provided by (used in) continuing operations                                                 |  |                             | (14,141 | ) |             |   |     |             |  |   | (14,141              | ) |  |             | (12,645 | ) |             |   |     |   |  |   | (12,645 | )
|Net cash provided by (used in) discontinued operations                                               |  |                             |        |   |             |   |     |             |  |   |                     |   |  |             | (535    | ) |             |   |     |   |  |   | (535    | )
|                                                                                                     |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  
|Net cash provided by (used in) operating activities                                                  |  | $                           | (14,141 | ) |             | $ |     |             |  | $ | (14,141              | ) |  | $           | (13,180 | ) |             |   |     |   |  | $ | (13,180 | )
|                                                                                                     |  |                             |         |   |             |   |      |             |  |   |                      |   |  |             |         |   |             |   |      |   |  |   |         |  

Basis of Presentation

The accompanying consolidated condensed financial statements of Danka Business Systems PLC (the Company) are unaudited as of and for the three months ended June 30, 2006 and 2005. In the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily
indicative of the results which may be expected for the entire fiscal year. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys
restated Annual Report on Form 10-K/A for the year ended March 31, 2006. Accordingly, the results of operations for the interim periods are not necessarily indicative of the results which may be expected for the entire fiscal year.

The consolidated condensed financial statements contained herein as of and for the three months ended June 30, 2006 and June 30, 2005 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, 2006 will be delivered to the Registrar of Companies for England and Wales following the
Companys 2006 annual general meeting. The independent auditors report on those statutory accounts was unqualified and did not contain a statement under Section 237(2) or 237(3) of the United Kingdom Companies Act 1985.

In June 2006, the Company sold a wholly-owned subsidiary, which was located in the United States and engaged in the sale and servicing of office imaging equipment. A
loss of $2.5 million was recorded during the period and is included in operating expenses.

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

Note 2. Interim Period Stock Compensation Disclosures

Effective April 1, 2006, the Company adopted FASB Statement No. 123R, Share-Based Payment (SFAS 123R), using the modified prospective transition method to account for its employee
stock-options. Under that transition method, compensation costs for the portion of awards for which the requisite service had not yet been rendered, and that were outstanding as of the adoption date, will be recognized as the service is rendered
based on the grant date fair value of those



16



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##### Table of Contents

awards calculated under SFAS 123R. Prior period results are not restated. Since all options were fully vested on April 1, 2006 and no new options were
granted during the first three months of fiscal year 2007, the adoption of SFAS 123R had no impact on net income or earnings per share.

Prior to the
April 1, 2006 adoption of SFAS 123R, the Company accounted for its stock option to employees and stock grants to directors using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees(APB 25). Under APB 25, no compensation costs were recognized relating to the stock option grants to employees if the exercise price of the options awarded was equal to or greater than the fair value of the
common stock on the dates of grant. The Company used and will continue to use under SFAS 123R the accelerated method to recognize compensation expense of our equity-based awards with graded vesting whereby the compensation cost will be recognized on
a straight-line basis over the requisite service period for each separately vesting portion of the award. In connection with the adoption of SFAS 123R, the Company accelerated the vesting on all outstanding unvested stock options as of
January 31, 2006. The acceleration of the options took place on March 15, 2006. As a result of the accelerated vesting of the options, the Company recorded an immaterial charge to earnings under APB 25 during fiscal year 2006.

The following table illustrates the effect on net earnings (loss) attributable and earnings (loss) attributable per ADS shareholder if the Company had applied the
fair value recognition provisions of SFAS 123R to employee stock benefits, including shares and options issued under the stock option plans at June 30, 2005 had compensation costs for employee stock option activity been determined based on the
fair value at the dates of grant for the periods prior to April 1, 2006.



|                                                                                                                                         |  |                                |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | -
|                                                                                                                                         |  | Three monthsended June 30,2005 |        
|Net earnings (loss) from continuing operations, as reported                                                                              |  | $                              | (18,565 | )
|Less: total stock-based employee compensation expense determined under the fair value provisions of SFAS 123R for all awards, net of
tax |  |                                | (1,038  | )
|                                                                                                                                         |  |                                |         |  
|Pro forma earnings (loss) from continuing operations                                                                                     |  |                                | (19,603 | )
|Dividends and accretion on participating shares                                                                                          |  |                                | (5,326  | )
|                                                                                                                                         |  |                                |         |  
|Pro forma earnings (loss) from continuing operations attributable to common shareholders                                                 |  |                                | (24,929 | )
|Earnings (loss) from discontinued operations                                                                                             |  |                                | (1,824  | )
|                                                                                                                                         |  |                                |         |  
|Pro forma net earnings (loss) attributable to common shareholders                                                                        |  | $                              | (26,753 | )
|                                                                                                                                         |  |                                |         |  
|Basic and diluted earnings (loss) from continuing operations attributable to common shareholders per ADS                                 |  |                                |         |  
|As reported                                                                                                                              |  | $                              | (0.38   | )
|Pro forma                                                                                                                                |  |                                | (0.39   | )
|Basic and diluted net earnings (loss) attributable to common shareholders per ADS                                                        |  |                                |         |  
|As reported                                                                                                                              |  | $                              | (0.40   | )
|Pro forma                                                                                                                                |  |                                | (0.42   | )
|Weighted average ADS                                                                                                                     |  |                                | 63,556  |  

The Company has four share option and stock compensation plans, the 1996 Share Option Plan, the 1999 Share Option
Plan, the 2001 Long-Term Incentive Plan and the 2002 Outside Director Stock Compensation Plan. Awards may be made under the first three plans to its officers and key employees. Under all of the stock option plans, the option exercise price is equal
to the fair market value of the Companys ordinary shares or ADS stock at the date of grant. Options granted by the Company currently expire no later than 10 years from the date of grant and generally fully vest within three years.

1996 Share Option Plan

The Companys 1996 share option plan
authorizes the granting of both incentive and non-incentive share options over an aggregate of 22,000,000 ordinary shares (5,500,000 ADS equivalents). The option balance outstanding at March 31, 2006 also includes options issued pursuant to a
plan that preceded the 1996 share option plan. There are no shares available for issuance under this plan. Options were granted at prices not less than market value on the date of grant and the maximum term of an option may not exceed ten years.
Share options granted under the 1996 share option plan generally vest ratably in equal tranches over three years beginning on the first anniversary of the date of grant.

1999 Share Option Plan

In October 1999, shareholders approved a share option plan authorizing the granting of both
incentive and non-incentive share options for an aggregate of 12,000,000 ordinary shares (3,000,000 ADS equivalents). In October 2001, shareholders approved the issuance of an additional 20,000,000 ordinary shares (5,000,000 ADS equivalents)
pursuant to the 1999 plan.



17



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##### Table of Contents

Share options granted under the 1999 share option plan generally have the same terms as those granted under the 1996 share option plan. There were 300,000
ADS equivalent stock options granted during fiscal year 2006 that include a provision for a guaranteed intrinsic value of $0.8 million after three years.

2001 Long Term Incentive Plan

In October 2001, shareholders approved the Danka 2001 Long Term Incentive Plan, under which the Company may
make awards of a variety of equity-related incentives to its executive directors, officers and employees. Awards under the 2001 plan may take the form of non-vested stock unit awards (restricted stock), stock appreciation rights and
other share-based awards. The 2001 plan is administered by the Companys human resources committee, which determines the persons to whom awards may be made, the form of the awards, the terms and conditions of the awards, the number of shares
subject to each award and the dates of grant. The total number of ordinary shares in respect of which awards may be made under the 2001 plan is 18,000,000 ordinary shares (4,500,000 ADS equivalents). Awards may be made in ordinary shares or ADSs. As
of June 30, 2006, no awards had been made under the 2001 plan.

2002 Outside Director Stock Compensation Plan

In October 2002, the shareholders approved the 2002 Outside Director Stock Compensation Plan which allows the Company to pay part of its outside (non-executive)
directors compensation in shares. The total number of shares in respect of which awards may be made under the 2002 Plan are 2,000,000 ordinary shares or 500,000 ADS. For the fiscal years ended March 31, 2006 and 2005, 342,664 and 210,924
ordinary shares, respectively were issued under the 2002 Plan. As of June 30, 2006, 823,060 ordinary shares or 205,765 ADS had been issued under the 2002 Plan.

As of June 30, 2006, there were 44,525,924 ordinary shares (11,131,481 ADS equivalents) available to grant under all of the Companys existing equity compensation plans. The Company is obligated under
executive employment agreements to issue 1,000,000 ADS equivalent stock options during fiscal year 2007. In addition, under those agreements, there may be additional restricted stock issued.

Additional information with respect to all stock option plan activity during the three months ended June 30, 2006 was as follows in ADSs:



|                                         |  |         |   |  |                                 |     
|---------------------------------------- |  | ------- | - |  | ------------------------------- | ----
|                                         |  | Options |   |  | Weighted-average exercise price
|Options outstanding at April 1           |  | 6,146   |   |  | $                               | 3.78
|Granted                                  |  |        |   |  |                                 |    
|Exercised                                |  |        |   |  |                                 |    
|Forfeited                                |  | (519    | ) |  |                                 | 4.74
|                                         |  |         |   |  |                                 |     
|Options outstanding at June 30           |  | 5,627   |   |  |                                 | 3.69
|                                         |  |         |   |  |                                 |     
|Options exercisable at June 30           |  | 5,627   |   |  |                                 | 3.69
|                                         |  |         |   |  |                                 |     
|Shares available for issuance at June 30 |  | 6,337   |   |  |                                 |     
|                                         |  |         |   |  |                                 |     

The following table summarizes information about options outstanding at June 30, 2006.



|                       |  |                     |  |                                                       |  |                                            |       |                  |       |                                            |   |      
|---------------------- |  | ------------------- |  | ----------------------------------------------------- |  | ------------------------------------------ | ----- | ---------------- | ----- | ------------------------------------------ | - | -----
|                       |  | Outstanding Options |  | Exercisable Options                                  
|Price Range in dollars |  | Number of shares    |  | Weighted average remaining contractuallife (In Years) |  | Weighted average exercise price in dollars |       | Number of shares |       | Weighted average exercise price in dollars
|$0.54  $1.88          |  | 1,461               |  | 6.5                                                   |  | $                                          | 1.30  |                  | 1,461 |                                            | $ | 1.30 
|1.89  2.62            |  | 756                 |  | 7.9                                                   |  |                                            | 2.27  |                  | 756   |                                            |   | 2.27 
|2.63  3.19            |  | 625                 |  | 8.4                                                   |  |                                            | 3.02  |                  | 625   |                                            |   | 3.02 
|3.20  3.52            |  | 368                 |  | 6.4                                                   |  |                                            | 3.39  |                  | 368   |                                            |   | 3.39 
|3.53  4.10            |  | 1,417               |  | 7.3                                                   |  |                                            | 3.94  |                  | 1,417 |                                            |   | 3.94 
|4.11  4.35            |  | 20                  |  | 6.9                                                   |  |                                            | 4.18  |                  | 20    |                                            |   | 4.18 
|4.36  4.99            |  | 43                  |  | 6.1                                                   |  |                                            | 4.55  |                  | 43    |                                            |   | 4.55 
|5.00  9.19            |  | 786                 |  | 2.9                                                   |  |                                            | 5.74  |                  | 786   |                                            |   | 5.74 
|9.20  28.13           |  | 113                 |  | 1.3                                                   |  |                                            | 19.38 |                  | 113   |                                            |   | 19.38
|28.14  47.97          |  | 38                  |  | 1.3                                                   |  |                                            | 39.00 |                  | 38    |                                            |   | 39.00
|                       |  |                     |  |                                                       |  |                                            |       |                  |       |                                            |   |      
|                       |  | 5,627               |  | 6.5                                                   |  | $                                          | 3.69  |                  | 5,627 |                                            | $ | 3.69 
|                       |  |                     |  |                                                       |  |                                            |       |                  |       |                                            |   |      



18



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##### Table of Contents

The aggregate intrinsic value on all shares above was zero as the exercise price of the options was equal to or greater
than the fair value of the common stock on the dates of grant.

SFAS 123 Assumptions and Fair Value

The fair value of options granted during the first three months of fiscal year 2006 was estimated at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Dividend yield          |  | 0       | %
|Expected volatility (1) |  | 99.60   | %
|Risk-free interest rate |  | 3.87    | %
|Expected life           |  | 5 years |  

---

|(1) | Expected volatility is estimated using a five-year historical price volatility model
|--- | ------------------------------------------------------------------------------------

The weighted average fair value of ADSs at grant date for the first three months of fiscal year 2006 was $1.10. There were no new grants during the first three months of fiscal year 2007.

Exercise of options

Upon the exercise of options, new shares are
issued in settlement of the exercise.

Note 3. Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN
48 is effective for Danka beginning April 1, 2007. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as a cumulative adjustment to beginning retained earnings. The Company is currently
assessing the impact of FIN 48 on its consolidated financial position and results of operations.

Note 4. Comprehensive Income (Loss)

Comprehensive income (loss) consisted of the following for the three months ended June 30, 2006 and 2005:



|                                                          |  |                             |         |   |      |   |         |  
|--------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                          |  | Three months ended June 30, |        
|                                                          |  | 2006                        |         |   | 2005 |  
|Net earnings (loss)                                       |  | $                           | (12,202 | ) |      | $ | (20,389 | )
|Net foreign currency translation adjustment, net of taxes |  |                             | 6,685   |   |      |   | (4,879  | )
|                                                          |  |                             |         |   |      |   |         |  
|Comprehensive income (loss)                               |  | $                           | (5,517  | ) |      | $ | (25,268 | )
|                                                          |  |                             |         |   |      |   |         |  

Note 5. Restructuring Charges (Credits)

Fiscal Year 2007 Plan:In fiscal year 2007, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by
eliminating and consolidating back office functions, reduce sales and service personnel and exiting certain facilities. These charges were accounted for under the provisions of FASB Statement No. 112, Employers Accounting for
Postemployment Benefits (SFAS 112) and FASB Statement No. 146, Accounting for Cost Associated with Exit or Disposal Activities (SFAS 146).

As part of these plans, the Company recorded an $11.9 million restructuring charge in the first three months of fiscal year 2007 consisting of $7.4 million relating to severance charges due to additional cost
reduction efforts and $4.5 million in facility costs primarily related to the Companys United States and Corporate headquarters in St. Petersburg, Florida. Cash outlays for severance and facilities during the period were $0.4 million and $0.1
million, respectively. The other non-cash changes of $0.1 million represent foreign currency adjustments.

The remaining liability of the 2007 Plan
restructuring charge of $9.6 million and $1.9 million is categorized within Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities, respectively.



19



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##### Table of Contents

The following table summarizes the fiscal year 2007 Plan restructuring charge:

2007 Plan Restructuring Charge:



|                                              |  |                         |        |              |   |      |                        |  |                          |    |  |   |       
|--------------------------------------------- |  | ----------------------- | ------ | ------------ | - | ---- | ---------------------- |  | ------------------------ | -- |  | - | ------
|                                              |  | Charge to June 30, 2006 |        | Cash Outlays |   |      | Other Non-Cash Changes |  | Reserve at June 30, 2006
|Severance                                     |  | $                       | 7,352  |              | $ | (406 | )                      |  | $                        | 89 |  | $ | 7,035 
|Future lease obligations on facility closures |  |                         | 4,537  |              |   | (90  | )                      |  |                          | 8  |  |   | 4,455 
|                                              |  |                         |        |              |   |      |                        |  |                          |    |  |   |       
|Total                                         |  | $                       | 11,889 |              | $ | (496 | )                      |  | $                        | 97 |  | $ | 11,490
|                                              |  |                         |        |              |   |      |                        |  |                          |    |  |   |       

2007 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                         |       |              |   |      |                       |  |                          |    |  |   |      
|---------------- |  | ----------------------- | ----- | ------------ | - | ---- | --------------------- |  | ------------------------ | -- |  | - | -----
|                 |  | Charge to June 30, 2006 |       | Cash Outlays |   |      | Other Non-CashChanges |  | Reserve at June 30, 2006
|United States    |  | $                       | 1,939 |              | $ | (203 | )                     |  | $                        |   |  | $ | 1,736
|Europe/Australia |  |                         | 5,376 |              |   | (191 | )                     |  |                          | 89 |  |   | 5,274
|Other(1)         |  |                         | 37    |              |   | (12  | )                     |  |                          |   |  |   | 25   
|                 |  |                         |       |              |   |      |                       |  |                          |    |  |   |      
|Total            |  | $                       | 7,352 |              | $ | (406 | )                     |  | $                        | 89 |  | $ | 7,035
|                 |  |                         |       |              |   |      |                       |  |                          |    |  |   |      

---

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

2007 Plan Restructuring Facility Charge by
Operating Segment:



|                 |  |                         |       |              |   |     |                        |  |                          |   |  |   |      
|---------------- |  | ----------------------- | ----- | ------------ | - | --- | ---------------------- |  | ------------------------ | - |  | - | -----
|                 |  | Charge to June 30, 2006 |       | Cash Outlays |   |     | Other Non-Cash Changes |  | Reserve at June 30, 2006
|United States    |  | $                       | 3,979 |              | $ |    |                        |  | $                        |  |  | $ | 3,979
|Europe/Australia |  |                         | 558   |              |   | (90 | )                      |  |                          | 8 |  |   | 476  
|                 |  |                         |       |              |   |     |                        |  |                          |   |  |   |      
|Total            |  | $                       | 4,537 |              | $ | (90 | )                      |  | $                        | 8 |  | $ | 4,455
|                 |  |                         |       |              |   |     |                        |  |                          |   |  |   |      

Fiscal Year 2005 Plan:In fiscal year 2005, the Company formulated plans to continue to eliminate
inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions and exiting certain facilities. These charges were accounted for under the provisions of SFAS
112 and SFAS 146.

As part of these plans, the Company recorded a $15.2 million and $0.3 million restructuring charge related to severance and facilities,
respectively in fiscal year 2005. The severance charges were offset by a reduction of $3.3 million due to favorable severance negotiations and employee attrition. During fiscal year 2006, the Company recorded an additional charge of $10.6 million
and $1.4 million relating to severance and facilities, respectively, due to continued reduction efforts.

The Company recorded a $0.6 million restructuring
charge in fiscal year 2007 primarily relating to facility costs. Cash outlays for severance and facilities during the year were $2.3 million and $0.3 million, respectively. The other non-cash changes of $0.2 million represent foreign currency
adjustments.

The remaining liability of the 2005 Plan restructuring charge of $3.8 million and $5.2 million is categorized within Accrued expenses
and other current liabilities and Deferred income taxes and other long-term liabilities, respectively.



20



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##### Table of Contents

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

2005 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |        |   |                          |   |     |   |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | ---------------------- | ------ | - | ------------------------ | - | --- | - |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |        |   | Reserve at June 30, 2006
|Severance                                     |  | $                                         | 22,489 |                           | $ | 9,594                   |  | $ | (48          | ) |  | $                      | (2,290 | ) |                          | $ | 292 |   |  | $ | 7,548
|Future lease obligations on facility closures |  |                                           | 1,689  |                           |   | 1,117                   |  |   | 650          |   |  |                        | (250   | ) |                          |   | (48 | ) |  |   | 1,469
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |        |   |                          |   |     |   |  |   |      
|Total                                         |  | $                                         | 24,178 |                           | $ | 10,711                  |  | $ | 602          |   |  | $                      | (2,540 | ) |                          | $ | 244 |   |  | $ | 9,017
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |        |   |                          |   |     |   |  |   |      

2005 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                       |        |                          |  |   |     |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | --------------------- | ------ | ------------------------ |  | - | --- |  | - | -----
|                 |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-CashChanges |        | Reserve at June 30, 2006
|United States    |  | $                                         | 6,562  |                           | $ | 1,556                   |  | $ | 52           |   |  | $                     | (1,263 | )                        |  | $ |    |  | $ | 345  
|Europe/Australia |  |                                           | 15,927 |                           |   | 8,038                   |  |   | (100         | ) |  |                       | (1,027 | )                        |  |   | 292 |  |   | 7,203
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                       |        |                          |  |   |     |  |   |      
|Total            |  | $                                         | 22,489 |                           | $ | 9,594                   |  | $ | (48          | ) |  | $                     | (2,290 | )                        |  | $ | 292 |  | $ | 7,548
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                       |        |                          |  |   |     |  |   |      

2005 Plan Restructuring Facility Charge by Operating Segment:



|                 |  |                                           |       |                          |   |                         |  |              |     |  |                        |      |   |                          |   |     |   |  |   |      
|---------------- |  | ----------------------------------------- | ----- | ------------------------ | - | ----------------------- |  | ------------ | --- |  | ---------------------- | ---- | - | ------------------------ | - | --- | - |  | - | -----
|                 |  | Cumulative Expense through March 31, 2006 |       | Reserve atMarch 31, 2006 |   | Charge to June 30, 2006 |  | Cash Outlays |     |  | Other Non-Cash Changes |      |   | Reserve at June 30, 2006
|United States    |  | $                                         | 868   |                          | $ | 586                     |  | $            | 24  |  | $                      | (131 | ) |                          | $ |    |   |  | $ | 479  
|Europe/Australia |  |                                           | 821   |                          |   | 531                     |  |              | 626 |  |                        | (119 | ) |                          |   | (48 | ) |  |   | 990  
|                 |  |                                           |       |                          |   |                         |  |              |     |  |                        |      |   |                          |   |     |   |  |   |      
|Total            |  | $                                         | 1,689 |                          | $ | 1,117                   |  | $            | 650 |  | $                      | (250 | ) |                          | $ | (48 | ) |  | $ | 1,469
|                 |  |                                           |       |                          |   |                         |  |              |     |  |                        |      |   |                          |   |     |   |  |   |      

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

As part of these plans, the Company recorded a $47.3 million restructuring charge in fiscal year 2004
that included $24.1 million related to severance for employees and $23.2 million related to future lease obligations for facilities that were vacated by March 31, 2004. The fiscal year 2004 restructuring charge was partially offset by a $0.6
million reversal of prior years restructuring charges. The Company reversed $2.0 million of fiscal year 2004 Plan severance and facility charges during fiscal year 2005 as a result of employee attrition in its United States and
Europe/Australia segments, and a change in restructuring plans in Europe/Australia due to improved performance in certain markets partially offset by a higher estimate of facility charges in the United States due to its inability to sublease the
facilities. During fiscal year 2006, the Company reversed $0.3 million of severance costs due to employee attrition. In addition, the company incurred $0.9 million of facility charges as a result of broker commissions paid in the United States due
to the sublease of certain facilities.

Cash outlays for employee severance and facilities during fiscal year 2007 were $0.1 million and $0.5 million,
respectively. In addition, the Company reversed $0.1 million of facility costs during the period due to the early termination of lease agreements.

The
remaining liability of the 2004 Plan restructuring charge of $3.4 million and $2.5 million is categorized within Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities,
respectively.



21



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##### Table of Contents

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

2004 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | ---------------------- | ---- | ------------------------ |  | - | -- |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |      | Reserve at June 30, 2006
|Severance                                     |  | $                                         | 19,320 |                           | $ | 497                     |  | $ |             |   |  | $                      | (128 | )                        |  | $ | 2  |  |   | 371  
|Future lease obligations on facility closures |  |                                           | 25,985 |                           |   | 6,104                   |  |   | (140         | ) |  |                        | (459 | )                        |  |   | 11 |  |   | 5,516
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|Total                                         |  | $                                         | 45,305 |                           | $ | 6,601                   |  | $ | (140         | ) |  | $                      | (587 | )                        |  | $ | 13 |  | $ | 5,887
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      

2004 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                         |  |              |   |  |                        |      |                          |  |   |   |  |   |    
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | ------------ | - |  | ---------------------- | ---- | ------------------------ |  | - | - |  | - | ---
|                 |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  | Cash Outlays |   |  | Other Non-Cash Changes |      | Reserve at June 30, 2006
|United States    |  | $                                         | 5,699  |                           | $ |                        |  | $            |  |  | $                      |     |                          |  | $ |  |  | $ |   
|Europe/Australia |  |                                           | 13,573 |                           |   | 497                     |  |              |  |  |                        | (128 | )                        |  |   | 2 |  |   | 371
|Other (1)        |  |                                           | 48     |                           |   |                        |  |              |  |  |                        |     |                          |  |   |  |  |   |   
|                 |  |                                           |        |                           |   |                         |  |              |   |  |                        |      |                          |  |   |   |  |   |    
|Total            |  | $                                         | 19,320 |                           | $ | 497                     |  | $            |  |  | $                      | (128 | )                        |  | $ | 2 |  | $ | 371
|                 |  |                                           |        |                           |   |                         |  |              |   |  |                        |      |                          |  |   |   |  |   |    

---

|(2) | Includes corporate charges
|--- | --------------------------

2004 Plan Restructuring Facility Charge by
Operating Segment:



|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | ---------------------- | ---- | ------------------------ |  | - | -- |  | - | -----
|                 |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |      | Reserve at June 30, 2006
|United States    |  | $                                         | 15,555 |                           | $ | 2,719                   |  | $ | 34           |   |  | $                      | (318 | )                        |  | $ |   |  | $ | 2,435
|Europe/Australia |  |                                           | 5,985  |                           |   | 3,385                   |  |   | (174         | ) |  |                        | (141 | )                        |  |   | 11 |  |   | 3,081
|Other (1)        |  |                                           | 4,445  |                           |   |                        |  |   |             |   |  |                        |     |                          |  |   |   |  |   |     
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|Total            |  | $                                         | 25,985 |                           | $ | 6,104                   |  | $ | (140         | ) |  | $                      | (459 | )                        |  | $ | 11 |  | $ | 5,516
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      

---

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

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

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



|                                                             |  |                             |   |      |   |       |  
|------------------------------------------------------------ |  | --------------------------- | - | ---- | - | ----- | -
|                                                             |  | Three months ended June 30, |  
|                                                             |  | 2006                        |   | 2005 |  
|Revenues                                                     |  | $                           |  |      | $ | 7,669 |  
|Net earnings (loss) from discontinued operations, net of tax |  |                             |  |      |   | (792  | )
|Provision for income taxes on discontinued operations        |  |                             |  |      |   | (253  | )

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



22



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##### Table of Contents

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



|                                                                  |  |                             |      |   |      |   |       |  
|----------------------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ----- | -
|                                                                  |  | Three months ended June 30, |     
|                                                                  |  | 2006                        |      |   | 2005 |  
|Revenues                                                          |  | $                           |     |   |      | $ | 9,407 |  
|Net earnings (loss) from discontinued operations                  |  |                             | (263 | ) |      |   | (711  | )
|Income tax benefit on discontinued operations                     |  |                             |     |   |      |   |      |  
|Gain (loss) on sale of discontinued operations, net of tax of nil |  |                             |     |   |      |   | (321  | )

The loss on the sale of discontinued operations includes a write off of currency translation adjustments of $4.7
million and goodwill of $2.9 million. In addition, the purchase price is subject to adjustment based upon working capital, as defined in the purchase and sale agreement. Accordingly, the loss on the sale of discontinued operations may be adjusted
when the working capital adjustment is finalized.

Note 7. Earnings (Loss) Per Share

The effect of the Companys 6.5% senior convertible participating shares, which represent the number of ADSs shown in the table below are not included in the computation of diluted earnings per share for the
first three months ended June 30, 2006 and 2005, because they are anti-dilutive. ADS equivalents from stock options shown in the table below, presented using the treasury stock method, are not included in the computation of diluted earnings per
share for the three months ended June 30, 2006 and 2005, because they are anti-dilutive. The total number of outstanding shares related to stock options (all of which are anti-dilutive) was 5.6 million and 7.1 million at June 30,
2006 and 2005, respectively.



|                                             |  |                             |  |       
|-------------------------------------------- |  | --------------------------- |  | ------
|                                             |  | Three months ended June 30,
|                                             |  | 2006                        |  | 2005  
|Potential ADSs issuance from:                |  |                             |  |       
|                                             |  |                            
|6.5% senior convertible participating shares |  | 26,288                      |  | 24,645
|Stock options                                |  | 58                          |  | 277   

Note 8. Segment Reporting

The Company is organized into two reporting segments, United States and Europe/Australia. Dankas United States and Europe/Australia segments provide office imaging equipment, document solutions and related
services and supplies on a direct basis to retail customers. The Companys Europe/Australia segment also provides office imaging equipment and supplies on a wholesale basis to independent dealers. The Companys management relies on an
internal management reporting process that provides segment revenue and operating earnings. Management believes that this is an appropriate measure of evaluating the operating performance of its segments.



23



---

##### Table of Contents

The following tables present information about the Companys segments.

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



|                                                           |  |                             |         |   |      |   |         |  
|---------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Three months ended June 30, |        
|                                                           |  | 2006                        |         |   | 2005 |  
|Revenue                                                    |  |                             |         |   |      |   |         |  
|United States                                              |  | $                           | 122,049 |   |      | $ | 138,328 |  
|Europe/Australia                                           |  |                             | 138,156 |   |      |   | 154,250 |  
|                                                           |  |                             |         |   |      |   |         |  
|Total Revenue                                              |  | $                           | 260,205 |   |      | $ | 292,578 |  
|                                                           |  |                             |         |   |      |   |         |  
|Gross profit                                               |  |                             |         |   |      |   |         |  
|United States                                              |  | $                           | 45,232  |   |      | $ | 51,027  |  
|Europe/Australia                                           |  |                             | 42,659  |   |      |   | 47,295  |  
|                                                           |  |                             |         |   |      |   |         |  
|Total Gross profit                                         |  | $                           | 87,891  |   |      | $ | 98,322  |  
|                                                           |  |                             |         |   |      |   |         |  
|Operating earnings (loss) from continuing operations       |  |                             |         |   |      |   |         |  
|United States (1)                                          |  | $                           | 3,181   |   |      | $ | 784     |  
|Europe/Australia(2)                                        |  |                             | (1,440  | ) |      |   | (2,610  | )
|                                                           |  |                             |         |   |      |   |         |  
|Subtotal                                                   |  |                             | 1,741   |   |      |   | (1,826  | )
|Other (3)                                                  |  |                             | (7,002  | ) |      |   | (7,459  | )
|                                                           |  |                             |         |   |      |   |         |  
|Total Operating earnings (loss) from continuing operations |  | $                           | (5,261  | ) |      | $ | (9,285  | )
|                                                           |  |                             |         |   |      |   |         |  
|Interest expense                                           |  |                             |         |   |      |   |         |  
|United States                                              |  | $                           | (85     | ) |      | $ | (185    | )
|Europe/Australia                                           |  |                             | (601    | ) |      |   | (505    | )
|                                                           |  |                             |         |   |      |   |         |  
|Subtotal                                                   |  |                             | (686    | ) |      |   | (690    | )
|Other (3)                                                  |  |                             | (7,275  | ) |      |   | (7,222  | )
|                                                           |  |                             |         |   |      |   |         |  
|Total Interest expense                                     |  | $                           | (7,961  | ) |      | $ | (7,912  | )
|                                                           |  |                             |         |   |      |   |         |  

---

|(1) | Includes restructuring charges of $6.0 million and $0.3 million for the three months ended June 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes restructuring charges of $6.3 million and $5.8 million for the three months ended June 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(3) | Other primarily includes corporate expenses, loss on sale of subsidiary and foreign exchange gains/losses.
|--- | ----------------------------------------------------------------------------------------------------------

Approximately 53.1% of the Companys revenue for the three months ended June 30, 2006 was generated outside the United States while approximately 52.7% of the
companys revenue was generated outside the United States during the three months ended June 30, 2005.

Capital Expenditures and Depreciation
and Amortization



|                                    |  |                             |       |      |   |      
|----------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                    |  | Three months ended June 30,
|                                    |  | 2006                        |       | 2005
|Capital Expenditures                |  |                             |       |      |   |      
|United States                       |  | $                           | 1,448 |      | $ | 1,272
|Europe/Australia                    |  |                             | 1,729 |      |   | 2,059
|                                    |  |                             |       |      |   |      
|Subtotal                            |  |                             | 3,177 |      |   | 3,331
|Other (1)                           |  |                             | 8     |      |   |     
|                                    |  |                             |       |      |   |      
|Total Capital Expenditures          |  | $                           | 3,185 |      | $ | 3,331
|                                    |  |                             |       |      |   |      
|Depreciation and Amortization       |  |                             |       |      |   |      
|United States                       |  | $                           | 3,720 |      | $ | 5,003
|Europe/Australia                    |  |                             | 1,959 |      |   | 2,443
|                                    |  |                             |       |      |   |      
|Subtotal                            |  |                             | 5,679 |      |   | 7,446
|Other (2)                           |  |                             | 321   |      |   | 355  
|                                    |  |                             |       |      |   |      
|Total Depreciation and Amortization |  | $                           | 6,000 |      | $ | 7,801
|                                    |  |                             |       |      |   |      

---

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

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



24



---

##### Table of Contents

Assets and Long-lived Assets



|                        |  |               |         |                |   |        
|----------------------- |  | ------------- | ------- | -------------- | - | -------
|                        |  | June 30, 2006 |         | March 31, 2006
|Assets                  |  |               |         |                |   |        
|United States           |  | $             | 190,165 |                | $ | 204,400
|Europe/Australia        |  |               | 354,504 |                |   | 338,076
|                        |  |               |         |                |   |        
|Subtotal                |  |               | 544,669 |                |   | 542,476
|Other (1)               |  |               | 82,244  |                |   | 86,316 
|                        |  |               |         |                |   |        
|Total Assets            |  | $             | 626,913 |                | $ | 628,792
|                        |  |               |         |                |   |        
|Long-lived Assets (2)   |  |               |         |                |   |        
|United States           |  | $             | 87,250  |                | $ | 92,011 
|Europe/Australia        |  |               | 134,960 |                |   | 127,015
|                        |  |               |         |                |   |        
|Subtotal                |  |               | 222,210 |                |   | 219,026
|Other (1)               |  |               | 56,071  |                |   | 57,197 
|                        |  |               |         |                |   |        
|Total Long-lived Assets |  | $             | 278,281 |                | $ | 276,223
|                        |  |               |         |                |   |        

---

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

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

Note 9. Debt

Debt consists of the following as of June 30, 2006 and March 31, 2006:



|                                                                                                      |  |               |         |   |                |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                      |  | June 30, 2006 |         |   | March 31, 2006 |  
|10.0% subordinated notes due April 2008                                                               |  | $             | 64,520  |   |                | $ | 64,520  |  
|11.0% senior notes due June 2010                                                                      |  |               | 175,000 |   |                |   | 175,000 |  
|Capital lease obligations                                                                             |  |               | 2,075   |   |                |   | 2,490   |  
|Various notes payable bearing interest from prime to 12.0% maturing principally over the next 2 years |  |               | 11,433  |   |                |   | 10,434  |  
|                                                                                                      |  |               |         |   |                |   |         |  
|Total debt and notes payable                                                                          |  |               | 253,028 |   |                |   | 252,444 |  
|Less unamortized discount on senior notes                                                             |  |               | (2,713  | ) |                |   | (2,847  | )
|                                                                                                      |  |               |         |   |                |   |         |  
|Total debt and notes payable less unamortized discount                                                |  |               | 250,315 |   |                |   | 249,597 |  
|Less current maturities of long-term debt and notes payable                                           |  |               | (12,287 | ) |                |   | (11,516 | )
|                                                                                                      |  |               |         |   |                |   |         |  
|Long-term debt and notes payable, less current maturities                                             |  | $             | 238,028 |   |                | $ | 238,081 |  
|                                                                                                      |  |               |         |   |                |   |         |  

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

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

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

The Company incurred $7.2 million in debt issuance costs relating to the senior notes and is amortizing these costs over the term of the senior notes. The unamortized balance of these costs as of June 30, 2006 was $4.1 million. The
$4.1 million discount related to the senior notes is being accreted to interest expense using the effective interest method over the life of the related debt. The unamortized balance of the discount as of June 30, 2006 was $2.7 million.



25



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##### Table of Contents

The Company has a credit facility which expires on January 4, 2008 with Bank of America, who acquired Fleet Capital
Corporation, (the Fleet Credit Facility) to provide a $50.0 million, senior secured revolving credit facility, which includes a $30.0 million sub-limit for standby and documentary letters of credit. The Fleet Credit Facility bears
interest at an annual rate equal to, at our option, (a) the sum of the rate of interest publicly announced from time to time by Bank of America as its prime or base rate of interest plus the applicable margin thereon or (b) the sum of
LIBOR for interest periods at our option of one, two, three or nine months plus the applicable margin thereon. Under the terms of the Fleet Credit Facility, as amended, extensions of credit to the borrowers are further limited to the lesser of the
commitment and the borrowing base. In addition, the Fleet Credit Facility requires the Company to keep $5.0 million of cash in an operating account. As of June 30, 2006, the borrowing base for the credit facility was $36.1 million and the
Company had $11.0 million of borrowings under the Fleet Credit Facility. These amounts are included in Current maturities of long-term debt and notes payable on the consolidated condensed balance sheet. The borrowing base fluctuates each
month and is generally highest at the end of a quarter.

The Company incurred $1.6 million in debt issuance costs relating to the Fleet Credit Facility and
is amortizing these costs over the remaining term of the credit facility. The unamortized balance of these costs as of June 30, 2006 was $0.4 million.

On December 31, 2003, the Company entered into a one year letter of credit facility with ABN AMRO. On November 2, 2004, this agreement was amended to provide the Company a letter of credit facility for Euro 11.8 million (U.S.
$15.1 million) and an open term credit facility of Euro 1.0 million (U.S. $1.3 million) available for general working capital purposes, including overdrafts. The open term credit facility expired on November 15, 2005. The letter of credit
facility expired on December 31, 2005. The facilities were secured by the assets of certain of the Companys Netherlands subsidiaries and were also cash collateralized by Euro 5.0 million (U.S. $6.4 million).

On January 1, 2006, the Company opened a replacement letter of credit facility with ABN AMRO in favor of Ricoh in the amount of Euro 11.8 million (U.S. $15.1
million) that is fully cash collateralized and will expire on September 30, 2006. This agreement can be renewed. The Company is currently working with several banks to obtain financing for this letter of credit.

Note 10. Contingencies

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

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

Note 11. Income Taxes

The Company recorded an income tax benefit of $1.1 million in the first three months of fiscal year 2007 compared with a provision of $1.4 million in the prior year
period. The income tax benefit for the three month period resulted primarily from the reversal of valuation allowances on deferred tax assets in Belgium and Spain offset by minimum taxes in certain other jurisdictions. The income tax provision for
the prior year period resulted from minimum taxes for certain jurisdictions and an increase in accruals for tax audit contingencies.

In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Our past financial performance is a significant factor which contributes to our limited use, pursuant to Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109), of projections of future taxable income in assessing the realizability of deferred tax assets in most jurisdictions. Additionally, management considered the scheduled
reversal of deferred tax liabilities and tax planning strategies in making this assessment. Considering all relevant data, management concluded that it is not more likely than not the Company will realize the benefits of the deferred tax
assets at June 30, 2006 and 2005 in most jurisdictions and therefore a valuation allowance has been recorded to reserve a portion of its deferred tax assets at June 30, 2006 and 2005 in these jurisdictions.



26



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##### Table of Contents

Note 12. Subsequent Event

On July 7, 2006, the Company announced the sale of all the shares of its business unit in Australia for a purchase price of $12.6 million in cash. The following represents the Australian business units carrying amounts of the
major classes of assets and liabilities at June 30, 2006:



|                                                                 |  |                               |       
|---------------------------------------------------------------- |  | ----------------------------- | ------
|                                                                 |  | June 30, 2006 Carrying Amount
|Assets                                                           |  |                               |       
|Cash and cash equivalents                                        |  | $                             | 2,511 
|Accounts receivable, net                                         |  |                               | 6,213 
|Inventory                                                        |  |                               | 4,153 
|Prepaid expenses, deferred income taxes and other current assets |  |                               | 164   
|Property and equipment, net                                      |  |                               | 777   
|                                                                 |  |                               |       
|                                                                 |  | $                             | 13,818
|                                                                 |  |                               |       
|Liabilities                                                      |  |                               |       
|Accounts payable                                                 |  | $                             | 5,091 
|Accrued expenses and other current liabilities                   |  |                               | 3,362 
|Taxes payable                                                    |  |                               | 131   
|Deferred revenue                                                 |  |                               | 1,688 
|Deferred income taxes and other long-term liabilities            |  |                               | 405   
|                                                                 |  |                               |       
|                                                                 |  | $                             | 10,677
|                                                                 |  |                               |       

Note 13. Supplemental Consolidating Financial Data for Subsidiary Guarantors of 11.0% Senior Notes

On July 1, 2003, the Company issued its 11.0% senior notes. The senior notes are fully and unconditionally guaranteed on a joint and several basis
by all of the Companys Australian subsidiaries, a Luxembourg subsidiary, two United Kingdom subsidiaries, one of which is the primary United Kingdom operating subsidiary, and all of its United States subsidiaries other than certain dormant
entities (collectively, the Subsidiary Guarantors). All subsidiaries are 100% owned by the Company. The Subsidiary Guarantors generated 58.8% and 59.4% of the Companys total revenue during the first three months of fiscal years
2007 and 2006, respectively.



27



---

##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Three Months Ended June 30, 2006

(in thousands)

(Unaudited)



|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | -------------------------------------- | - | ------- | ------------------------------------------ |  | - | ------------------------- | - |  | ------------------------------- | ------- | - |  | - | ------- | -
|                                                                          |  | Parent Company (1) (Restated *) |         |   | Subsidiary Guarantors (2) (Restated *) |   |         | Subsidiary Non-Guarantors (3) (Restated *) |  |   | Eliminations (Restated *) |   |  | Consolidated Total (Restated
*) |        
|Revenue:                                                                  |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Retail equipment and related sales                                        |  | $                               |        |   |                                        | $ | 60,767  |                                            |  | $ | 31,313                    |   |  | $                               |        |   |  | $ | 92,080  |  
|Retail service                                                            |  |                                 |        |   |                                        |   | 75,765  |                                            |  |   | 48,846                    |   |  |                                 |        |   |  |   | 124,611 |  
|Retail supplies and rentals                                               |  |                                 |        |   |                                        |   | 16,456  |                                            |  |   | 3,396                     |   |  |                                 |        |   |  |   | 19,852  |  
|Wholesale                                                                 |  |                                 |        |   |                                        |   |        |                                            |  |   | 23,662                    |   |  |                                 |        |   |  |   | 23,662  |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Total revenue                                                             |  |                                 |        |   |                                        |   | 152,988 |                                            |  |   | 107,217                   |   |  |                                 |        |   |  |   | 260,205 |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Cost of sales:                                                            |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Retail equipment and related sales costs                                  |  |                                 |        |   |                                        |   | 42,269  |                                            |  |   | 20,874                    |   |  |                                 |        |   |  |   | 63,143  |  
|Retail service costs                                                      |  |                                 |        |   |                                        |   | 46,084  |                                            |  |   | 32,268                    |   |  |                                 |        |   |  |   | 78,352  |  
|Retail supplies and rental costs, including depreciation on rental assets |  |                                 |        |   |                                        |   | 10,026  |                                            |  |   | 1,264                     |   |  |                                 |        |   |  |   | 11,290  |  
|Wholesale costs                                                           |  |                                 |        |   |                                        |   |        |                                            |  |   | 19,529                    |   |  |                                 |        |   |  |   | 19,529  |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Total cost of sales                                                       |  |                                 |        |   |                                        |   | 98,379  |                                            |  |   | 73,935                    |   |  |                                 |        |   |  |   | 172,314 |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Gross profit                                                              |  |                                 |        |   |                                        |   | 54,609  |                                            |  |   | 33,282                    |   |  |                                 |        |   |  |   | 87,891  |  
|                                                                          |  |                                 |         |   |                                       
|Operating expenses:                                                       |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Selling, general and administrative expenses                              |  |                                 | 1,043   |   |                                        |   | 48,179  |                                            |  |   | 29,611                    |   |  |                                 |        |   |  |   | 78,833  |  
|Restructuring charges                                                     |  |                                 | 12      |   |                                        |   | 6,590   |                                            |  |   | 5,749                     |   |  |                                 |        |   |  |   | 12,351  |  
|Loss on sale of subsidiary                                                |  |                                 |        |   |                                        |   | 2,507   |                                            |  |   |                          |   |  |                                 |        |   |  |   | 2,507   |  
|Equity (income) loss                                                      |  |                                 | (8,480  | ) |                                        |   | 6       |                                            |  |   | (2,661                    | ) |  |                                 | 11,135  |   |  |   |        |  
|Other expense (income)                                                    |  |                                 | 27,863  |   |                                        |   | (14,860 | )                                          |  |   | (13,542                   | ) |  |                                 |        |   |  |   | (539    | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Total operating expenses                                                  |  |                                 | 20,438  |   |                                        |   | 42,422  |                                            |  |   | 19,157                    |   |  |                                 | 11,135  |   |  |   | 93,152  |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations                      |  |                                 | (20,438 | ) |                                        |   | 12,187  |                                            |  |   | 14,125                    |   |  |                                 | (11,135 | ) |  |   | (5,261  | )
|Interest expense                                                          |  |                                 | (18,728 | ) |                                        |   | (2,748  | )                                          |  |   | (27,630                   | ) |  |                                 | 41,145  |   |  |   | (7,961  | )
|Interest income                                                           |  |                                 | 26,964  |   |                                        |   | 3,093   |                                            |  |   | 11,301                    |   |  |                                 | (41,145 | ) |  |   | 213     |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes            |  |                                 | (12,202 | ) |                                        |   | 12,532  |                                            |  |   | (2,204                    | ) |  |                                 | (11,135 | ) |  |   | (13,009 | )
|Provision (benefit) for income taxes                                      |  |                                 |        |   |                                        |   | 467     |                                            |  |   | (1,537                    | ) |  |                                 |        |   |  |   | (1,070  | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                |  |                                 | (12,202 | ) |                                        |   | 12,065  |                                            |  |   | (667                      | ) |  |                                 | (11,135 | ) |  |   | (11,939 | )
|Earnings (loss) from discontinued operations, net of tax                  |  |                                 |        |   |                                        |   | (263    | )                                          |  |   |                          |   |  |                                 |        |   |  |   | (263    | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Net earnings (loss)                                                       |  | $                               | (12,202 | ) |                                        | $ | 11,802  |                                            |  | $ | (667                      | ) |  | $                               | (11,135 | ) |  | $ | (12,202 | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  

---

|* | Note 1  Restatement and Basis of Presentation
|- | ----------------------------------------------



28



---

##### Table of Contents

Supplemental Consolidating Statement of Operations

For the Three Months Ended June 30, 2005

(in thousands)

(Unaudited)



|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | -------------------------------------- | - | ------- | ------------------------------------------ |  | - | ------------------------- | - |  | ------------------------------- | ------- | - |  | - | ------- | -
|                                                                          |  | Parent Company (1) (Restated *) |         |   | Subsidiary Guarantors (2) (Restated *) |   |         | Subsidiary Non-Guarantors (3) (Restated *) |  |   | Eliminations (Restated *) |   |  | Consolidated Total (Restated
*) |        
|Revenue:                                                                  |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Retail equipment and related sales                                        |  | $                               |        |   |                                        | $ | 73,402  |                                            |  | $ | 40,650                    |   |  | $                               |        |   |  | $ | 114,052 |  
|Retail service                                                            |  |                                 |        |   |                                        |   | 82,472  |                                            |  |   | 49,833                    |   |  |                                 |        |   |  |   | 132,305 |  
|Retail supplies and rentals                                               |  |                                 |        |   |                                        |   | 17,914  |                                            |  |   | 4,334                     |   |  |                                 |        |   |  |   | 22,248  |  
|Wholesale                                                                 |  |                                 |        |   |                                        |   |        |                                            |  |   | 23,973                    |   |  |                                 |        |   |  |   | 23,973  |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Total revenue                                                             |  |                                 |        |   |                                        |   | 173,788 |                                            |  |   | 118,790                   |   |  |                                 |        |   |  |   | 292,578 |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Cost of sales:                                                            |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Retail equipment and related sales costs                                  |  |                                 |        |   |                                        |   | 49,272  |                                            |  |   | 28,442                    |   |  |                                 |        |   |  |   | 77,714  |  
|Retail service costs                                                      |  |                                 |        |   |                                        |   | 51,073  |                                            |  |   | 32,464                    |   |  |                                 |        |   |  |   | 83,537  |  
|Retail supplies and rental costs, including depreciation on rental assets |  |                                 |        |   |                                        |   | 11,382  |                                            |  |   | 2,032                     |   |  |                                 |        |   |  |   | 13,414  |  
|Wholesale costs                                                           |  |                                 |        |   |                                        |   |        |                                            |  |   | 19,591                    |   |  |                                 |        |   |  |   | 19,591  |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Total cost of sales                                                       |  |                                 |        |   |                                        |   | 111,727 |                                            |  |   | 82,529                    |   |  |                                 |        |   |  |   | 194,256 |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Gross profit                                                              |  |                                 |        |   |                                        |   | 62,061  |                                            |  |   | 36,261                    |   |  |                                 |         |   |  |   | 98,322  |  
|                                                                          |  |                                 |         |   |                                       
|Operating expenses:                                                       |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Selling, general and administrative expenses                              |  |                                 | 1,197   |   |                                        |   | 69,234  |                                            |  |   | 32,398                    |   |  |                                 |        |   |  |   | 102,829 |  
|Restructuring charges                                                     |  |                                 |        |   |                                        |   | 872     |                                            |  |   | 5,215                     |   |  |                                 |        |   |  |   | 6,087   |  
|Equity (income) loss                                                      |  |                                 | 25,973  |   |                                        |   | 17,385  |                                            |  |   | 10,807                    |   |  |                                 | (54,165 | ) |  |   |        |  
|Other (income) expense                                                    |  |                                 | 522     |   |                                        |   | (1,783  | )                                          |  |   | (48                       | ) |  |                                 |        |   |  |   | (1,309  | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Total operating expenses                                                  |  |                                 | 27,692  |   |                                        |   | 85,708  |                                            |  |   | 48,372                    |   |  |                                 | (54,165 | ) |  |   | 107,607 |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Operating earnings (loss) from continuing operations                      |  |                                 | (27,692 | ) |                                        |   | (23,647 | )                                          |  |   | (12,111                   | ) |  |                                 | 54,165  |   |  |   | (9,285  | )
|Interest expense                                                          |  |                                 | (6,784  | ) |                                        |   | (6,830  | )                                          |  |   | (17,649                   | ) |  |                                 | 23,351  |   |  |   | (7,912  | )
|Interest income                                                           |  |                                 | 14,087  |   |                                        |   | 7,223   |                                            |  |   | 2,041                     |   |  |                                 | (23,351 | ) |  |   |        |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Earnings (loss) from continuing operations before income taxes            |  |                                 | (20,389 | ) |                                        |   | (23,254 | )                                          |  |   | (27,719                   | ) |  |                                 | 54,165  |   |  |   | (17,197 | )
|Provision (benefit) for income taxes                                      |  |                                 |        |   |                                        |   | 1,338   |                                            |  |   | 30                        |   |  |                                 |        |   |  |   | 1,368   |  
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                |  |                                 | (20,389 | ) |                                        |   | (24,592 | )                                          |  |   | (27,749                   | ) |  |                                 | 54,165  |   |  |   | (18,565 | )
|Earnings (loss) from discontinued operations, net of tax                  |  |                                 |        |   |                                        |   | (1,658  | )                                          |  |   | 155                       |   |  |                                 |        |   |  |   | (1,503  | )
|Loss on sale of operations, net of tax                                    |  |                                 |        |   |                                        |   | (321    | )                                          |  |   |                          |   |  |                                 |        |   |  |   | (321    | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  
|Net earnings (loss)                                                       |  | $                               | (20,389 | ) |                                        | $ | (26,571 | )                                          |  | $ | (27,594                   | ) |  | $                               | 54,165  |   |  | $ | (20,389 | )
|                                                                          |  |                                 |         |   |                                        |   |         |                                            |  |   |                           |   |  |                                 |         |   |  |   |         |  

---

|* | Note 1  Restatement and Basis of Presentation
|- | ----------------------------------------------



29



---

##### Table of Contents

Supplemental Consolidating Balance Sheet Information

As of June 30, 2006

(in
thousands)

(Unaudited)



|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------------------- | -------- | - | -------------------------------------- | - | ------- | ------------------------------------------ |  | ------------------------- | ------- |  | ------------------------------- | ---------- | - |  | - | -------- | -
|                                                                 |  | Parent Company (1) (Restated *) |          |   | Subsidiary Guarantors (2) (Restated *) |   |         | Subsidiary Non-Guarantors (3) (Restated *) |  | Eliminations (Restated *) |         |  | Consolidated Total (Restated
*) |           
|Assets                                                           |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Current assets:                                                  |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Cash and cash equivalents                                        |  | $                               | 604      |   |                                        | $ | 22,497  |                                            |  | $                         | 17,364  |  | $                               |           |   |  | $ | 40,465   |  
|Restricted cash                                                  |  |                                 |         |   |                                        |   | 6,205   |                                            |  |                           | 15,080  |  |                                 |           |   |  |   | 21,285   |  
|Accounts receivable, net                                         |  |                                 |         |   |                                        |   | 87,108  |                                            |  |                           | 102,167 |  |                                 |           |   |  |   | 189,275  |  
|Inventories                                                      |  |                                 |         |   |                                        |   | 42,668  |                                            |  |                           | 44,065  |  |                                 |           |   |  |   | 86,733   |  
|Due (to)/from affiliates                                         |  |                                 | (514,094 | ) |                                        |   | 476,336 |                                            |  |                           | 37,745  |  |                                 | 13         |   |  |   |         |  
|Prepaid expenses, deferred income taxes and other current assets |  |                                 | 51       |   |                                        |   | 5,212   |                                            |  |                           | 5,611   |  |                                 |           |   |  |   | 10,874   |  
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total current assets                                             |  |                                 | (513,439 | ) |                                        |   | 640,026 |                                            |  |                           | 222,032 |  |                                 | 13         |   |  |   | 348,632  |  
|Equipment on operating leases, net                               |  |                                 |         |   |                                        |   | 7,224   |                                            |  |                           | 4,556   |  |                                 |           |   |  |   | 11,780   |  
|Property and equipment, net                                      |  |                                 | 21       |   |                                        |   | 30,580  |                                            |  |                           | 4,566   |  |                                 |           |   |  |   | 35,167   |  
|Goodwill                                                         |  |                                 |         |   |                                        |   | 128,055 |                                            |  |                           | 83,129  |  |                                 |           |   |  |   | 211,184  |  
|Other intangible assets, net                                     |  |                                 |         |   |                                        |   | 629     |                                            |  |                           |        |  |                                 |           |   |  |   | 629      |  
|Investment in subsidiaries                                       |  |                                 | 755,554  |   |                                        |   | (55,076 | )                                          |  |                           | 642,563 |  |                                 | (1,343,041 | ) |  |   |         |  
|Deferred income taxes                                            |  |                                 |         |   |                                        |   |        |                                            |  |                           | 1,373   |  |                                 |           |   |  |   | 1,373    |  
|Other assets                                                     |  |                                 | 4,118    |   |                                        |   | 10,387  |                                            |  |                           | 3,643   |  |                                 |           |   |  |   | 18,148   |  
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total assets                                                     |  | $                               | 246,254  |   |                                        | $ | 761,825 |                                            |  | $                         | 961,862 |  | $                               | (1,343,028 | ) |  | $ | 626,913  |  
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Liabilities and shareholders equity (deficit)                   |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Current liabilities:                                             |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Current maturities of long-term debt and notes payable           |  | $                               |         |   |                                        | $ | 12,073  |                                            |  | $                         | 214     |  | $                               |           |   |  | $ | 12,287   |  
|Accounts payable                                                 |  |                                 | 377      |   |                                        |   | 91,292  |                                            |  |                           | 79,931  |  |                                 |           |   |  |   | 171,600  |  
|Accrued expenses and other current liabilities                   |  |                                 | 4,061    |   |                                        |   | 43,067  |                                            |  |                           | 39,493  |  |                                 |           |   |  |   | 86,621   |  
|Taxes payable                                                    |  |                                 | 218      |   |                                        |   | 12,239  |                                            |  |                           | 11,275  |  |                                 |           |   |  |   | 23,732   |  
|Deferred revenue                                                 |  |                                 |         |   |                                        |   | 18,066  |                                            |  |                           | 15,262  |  |                                 |           |   |  |   | 33,328   |  
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total current liabilities                                        |  |                                 | 4,656    |   |                                        |   | 176,737 |                                            |  |                           | 146,175 |  |                                 |            |   |  |   | 327,568  |  
|Long-term debt and notes payables, less current maturities       |  |                                 | 236,807  |   |                                        |   | 1,174   |                                            |  |                           | 47      |  |                                 |           |   |  |   | 238,028  |  
|Deferred income taxes and other long-term liabilities            |  |                                 |         |   |                                        |   | 30,694  |                                            |  |                           | 25,832  |  |                                 |           |   |  |   | 56,526   |  
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total liabilities                                                |  |                                 | 241,463  |   |                                        |   | 208,605 |                                            |  |                           | 172,054 |  |                                 |           |   |  |   | 622,122  |  
|6.5% convertible participating shares                            |  |                                 | 327,147  |   |                                        |   |        |                                            |  |                           |        |  |                                 |           |   |  |   | 327,147  |  
|Total shareholders equity (deficit)                             |  |                                 | (322,356 | ) |                                        |   | 553,220 |                                            |  |                           | 789,808 |  |                                 | (1,343,028 | ) |  |   | (322,356 | )
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total liabilities & shareholders equity (deficit)               |  | $                               | 246,254  |   |                                        | $ | 761,825 |                                            |  | $                         | 961,862 |  | $                               | (1,343,028 | ) |  | $ | 626,913  |  
|                                                                 |  |                                 |          |   |                                        |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  

---

|* | Note 1  Restatement and Basis of Presentation
|- | ----------------------------------------------



30



---

##### Table of Contents

Supplemental Condensed Consolidating Balance Sheet Information

March 31, 2006

(in
thousands)



|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|---------------------------------------------------------------- |  | ------------------------------ | -------- | - | ------------------------------------- | - | ------- | ------------------------------------------ |  | ------------------------- | ------- |  | ------------------------------- | ---------- | - |  | - | -------- | -
|                                                                 |  | ParentCompany (1) (Restated *) |          |   | SubsidiaryGuarantors (2) (Restated *) |   |         | Subsidiary Non-Guarantors (3) (Restated
*) |  | Eliminations (Restated *) |         |  | Consolidated Total (Restated
*) |           
|                                                                 |  | $000                           |          |   | $000                                  |   |         | $000                                       |  | $000                      |         |  | $000                            |           
|Assets                                                           |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Current assets:                                                  |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Cash and cash equivalents                                        |  | $                              | 4,619    |   |                                       | $ | 22,512  |                                            |  | $                         | 27,337  |  | $                               |           |   |  | $ | 54,468   |  
|Restricted cash                                                  |  |                                |         |   |                                       |   | 6,205   |                                            |  |                           | 14,324  |  |                                 |           |   |  |   | 20,529   |  
|Accounts receivable, net                                         |  |                                |         |   |                                       |   | 92,997  |                                            |  |                           | 96,357  |  |                                 |           |   |  |   | 189,354  |  
|Inventories                                                      |  |                                |         |   |                                       |   | 43,874  |                                            |  |                           | 36,093  |  |                                 |           |   |  |   | 79,967   |  
|Due (to)/from affiliate                                          |  |                                | (513,135 | ) |                                       |   | 464,429 |                                            |  |                           | 48,706  |  |                                 |           |   |  |   |         |  
|Prepaid expenses, deferred income taxes and other current assets |  |                                | 29       |   |                                       |   | 3,437   |                                            |  |                           | 4,785   |  |                                 |           |   |  |   | 8,251    |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total current assets                                             |  |                                | (508,487 | ) |                                       |   | 633,454 |                                            |  |                           | 227,602 |  |                                 |           |   |  |   | 352,569  |  
|Equipment on operating leases, net                               |  |                                |         |   |                                       |   | 7,846   |                                            |  |                           | 4,292   |  |                                 |           |   |  |   | 12,138   |  
|Property and equipment, net                                      |  |                                | 16       |   |                                       |   | 32,428  |                                            |  |                           | 4,654   |  |                                 |           |   |  |   | 37,098   |  
|Goodwill, net                                                    |  |                                |         |   |                                       |   | 127,019 |                                            |  |                           | 79,155  |  |                                 |           |   |  |   | 206,174  |  
|Other intangible assets, net                                     |  |                                |         |   |                                       |   | 1,861   |                                            |  |                           |        |  |                                 |           |   |  |   | 1,861    |  
|Investment in subsidiaries                                       |  |                                | 761,885  |   |                                       |   | (55,438 | )                                          |  |                           | 639,534 |  |                                 | (1,345,981 | ) |  |   |         |  
|Deferred income taxes                                            |  |                                |         |   |                                       |   |        |                                            |  |                           | 87      |  |                                 |           |   |  |   | 87       |  
|Other assets                                                     |  |                                | 4,385    |   |                                       |   | 12,482  |                                            |  |                           | 1,998   |  |                                 |           |   |  |   | 18,865   |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total assets                                                     |  | $                              | 257,799  |   |                                       | $ | 759,652 |                                            |  | $                         | 957,322 |  | $                               | (1,345,981 | ) |  | $ | 628,792  |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Liabilities and shareholders equity (deficit)                   |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Current liabilities:                                             |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Current maturities of long-term debt and notes payable           |  | $                              |         |   |                                       | $ | 11,265  |                                            |  | $                         | 251     |  | $                               |           |   |  | $ | 11,516   |  
|Accounts payable                                                 |  |                                | 434      |   |                                       |   | 97,730  |                                            |  |                           | 67,503  |  |                                 |           |   |  |   | 165,667  |  
|Accrued expenses and other current liabilities                   |  |                                | 10,193   |   |                                       |   | 49,216  |                                            |  |                           | 34,235  |  |                                 |           |   |  |   | 93,644   |  
|Taxes Payable                                                    |  |                                | 190      |   |                                       |   | 11,356  |                                            |  |                           | 9,701   |  |                                 |           |   |  |   | 21,247   |  
|Deferred revenue                                                 |  |                                |         |   |                                       |   | 18,580  |                                            |  |                           | 14,447  |  |                                 |           |   |  |   | 33,027   |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total current liabilities                                        |  |                                | 10,817   |   |                                       |   | 188,147 |                                            |  |                           | 126,137 |  |                                 |           |   |  |   | 325,101  |  
|Long-term debt and notes payable, less current maturities        |  |                                | 236,673  |   |                                       |   | 1,330   |                                            |  |                           | 78      |  |                                 |           |   |  |   | 238,081  |  
|Deferred income taxes and other long-term liabilities            |  |                                |         |   |                                       |   | 30,714  |                                            |  |                           | 24,587  |  |                                 |           |   |  |   | 55,301   |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total liabilities                                                |  |                                | 247,490  |   |                                       |   | 220,191 |                                            |  |                           | 150,802 |  |                                 |           |   |  |   | 618,483  |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|6.5% convertible participating shares                            |  |                                | 321,541  |   |                                       |   |        |                                            |  |                           |        |  |                                 |           |   |  |   | 321,541  |  
|Total shareholders equity (deficit)                             |  |                                | (311,232 | ) |                                       |   | 539,461 |                                            |  |                           | 806,520 |  |                                 | (1,345,981 | ) |  |   | (311,232 | )
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  
|Total liabilities & shareholders equity (deficit)               |  | $                              | 257,799  |   |                                       | $ | 759,652 |                                            |  | $                         | 957,322 |  | $                               | (1,345,981 | ) |  | $ | 628,792  |  
|                                                                 |  |                                |          |   |                                       |   |         |                                            |  |                           |         |  |                                 |            |   |  |   |          |  



31



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Supplemental Condensed Consolidating Statements of Cash Flows

For the Three Months Ended June 30, 2006

(in thousands)

(Unaudited)



|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------------- | - | ------ | ------------------------------------------ |  | - | ------------------------------- | - |  | - | ------- | -
|                                                                          |  | Three Months Ended June 30, 2006 |       
|                                                                          |  | Parent Company (1) (Restated *)  |        |   | Subsidiary Guarantors (2) (Restated *) |   |        | Subsidiary Non-Guarantors (3) (Restated *) |  |   | Consolidated Total (Restated
*) |  
|Net cash (used in) provided by operating activities                       |  | $                                | (4,015 | ) |                                        | $ | 1,151  |                                            |  | $ | (11,277                         | ) |  | $ | (14,141 | )
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Investing activities                                                      |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Capital expenditures                                                      |  |                                  |       |   |                                        |   | (2,017 | )                                          |  |   | (1,168                          | ) |  |   | (3,185  | )
|Proceeds from sale of property and equipment                              |  |                                  |       |   |                                        |   | 23     |                                            |  |   |                                |   |  |   | 23      |  
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash used in continuing investing activities                          |  |                                  |       |   |                                        |   | (1,994 | )                                          |  |   | (1,168                          | ) |  |   | (3,162  | )
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Financing activities                                                      |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net borrowings (payments) of debt                                         |  |                                  |       |   |                                        |   | 648    |                                            |  |   | (85                             | ) |  |   | 563     |  
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash provided by (used in) continuing financing activities            |  |                                  |       |   |                                        |   | 648    |                                            |  |   | (85                             | ) |  |   | 563     |  
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Effect of exchange rates on cash                                          |  |                                  |       |   |                                        |   | 180    |                                            |  |   | 2,557                           |   |  |   | 2,737   |  
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net decrease in cash and cash equivalents                                 |  |                                  | (4,015 | ) |                                        |   | (15    | )                                          |  |   | (9,973                          | ) |  |   | (14,003 | )
|Cash and cash equivalents from continuing operations, beginning of period |  |                                  | 4,619  |   |                                        |   | 22,512 |                                            |  |   | 27,337                          |   |  |   | 54,468  |  
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Cash and cash equivalents, end of period                                  |  | $                                | 604    |   |                                        | $ | 22,497 |                                            |  | $ | 17,364                          |   |  | $ | 40,465  |  
|                                                                          |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  

---

|* | Note 1  Restatement and Basis of Presentation
|- | ----------------------------------------------



32



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Supplemental Condensed Consolidating Statements of Cash Flows

For the Three Months Ended June 30, 2005

(in thousands)

(Unaudited)



|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|--------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------------- | - | ------ | ------------------------------------------ |  | - | ------------------------------- | - |  | - | ------- | -
|                                                                            |  | Three Months Ended June 30, 2005 |       
|                                                                            |  | Parent Company (1) (Restated *)  |        |   | Subsidiary Guarantors (2) (Restated *) |   |        | Subsidiary Non-Guarantors (3) (Restated *) |  |   | Consolidated Total (Restated
*) |  
|Net cash used in continuing operations                                      |  | $                                | (9,329 | ) |                                        | $ | (1,856 | )                                          |  | $ | (1,460                          | ) |  | $ | (12,645 | )
|Net cash provided by (used in) discontinued operations                      |  |                                  |       |   |                                        |   | 1,268  |                                            |  |   | (1,803                          | ) |  |   | (535    | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash used in operating activities                                       |  |                                  | (9,329 | ) |                                        |   | (588   | )                                          |  |   | (3,263                          | ) |  |   | (13,180 | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Investing activities                                                        |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Capital expenditures                                                        |  |                                  |       |   |                                        |   | (1,583 | )                                          |  |   | (1,748                          | ) |  |   | (3,331  | )
|Proceeds from sale of discontinued operations, net of cash                  |  |                                  |       |   |                                        |   | 11,972 |                                            |  |   |                                |   |  |   | 11,972  |  
|Proceeds from sale of property and equipment                                |  |                                  |       |   |                                        |   | 78     |                                            |  |   | 6                               |   |  |   | 84      |  
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash provided by (used in) continuing investing activities              |  |                                  |       |   |                                        |   | 10,467 |                                            |  |   | (1,742                          | ) |  |   | 8,725   |  
|Net cash used in discontinued investing activities                          |  |                                  |       |   |                                        |   | (101   | )                                          |  |   | (225                            | ) |  |   | (326    | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash provided by (used in) investing activities                         |  |                                  |       |   |                                        |   | 10,366 |                                            |  |   | (1,967                          | ) |  |   | 8,399   |  
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Financing activities                                                        |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net (payments) borrowings of debt                                           |  |                                  |       |   |                                        |   | (326   | )                                          |  |   | 280                             |   |  |   | (46     | )
|Proceeds from stock options exercised                                       |  |                                  | 16     |   |                                        |   |       |                                            |  |   |                                |   |  |   | 16      |  
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash provided by (used in) continuing financing activities              |  |                                  | 16     |   |                                        |   | (326   | )                                          |  |   | 280                             |   |  |   | (30     | )
|Net cash used in discontinuing financing activities                         |  |                                  |       |   |                                        |   |       |                                            |  |   | (25                             | ) |  |   | (25     | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net cash provided by (used in) financing activities                         |  |                                  | 16     |   |                                        |   | (326   | )                                          |  |   | 255                             |   |  |   | (55     | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Effect of exchange rates on cash                                            |  |                                  |       |   |                                        |   | (207   | )                                          |  |   | (2,886                          | ) |  |   | (3,093  | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                        |  |                                  | (9,313 | ) |                                        |   | 9,245  |                                            |  |   | (7,861                          | ) |  |   | (7,929  | )
|Cash and cash equivalents from continuing operations, beginning of period   |  |                                  | 9,989  |   |                                        |   | 25,313 |                                            |  |   | 41,667                          |   |  |   | 76,969  |  
|Cash and cash equivalents from discontinued operations, beginning of period |  |                                  |       |   |                                        |   | 352    |                                            |  |   | 5,839                           |   |  |   | 6,191   |  
|Cash and cash equivalents from discontinued operations, end of period       |  |                                  |       |   |                                        |   |       |                                            |  |   | (4,747                          | ) |  |   | (4,747  | )
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                                | 676    |   |                                        | $ | 34,910 |                                            |  | $ | 34,898                          |   |  | $ | 70,484  |  
|                                                                            |  |                                  |        |   |                                        |   |        |                                            |  |   |                                 |   |  |   |         |  

---

| | Note 1  Restatement and Basis of Presentation
|- | ----------------------------------------------

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



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



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



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



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



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



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



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



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##### Table of Contents

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

Restatement

As discussed under the heading Amendment No. 1 Explanatory Note on page 4 and further
described in the Notes to the Consolidated Condensed Financial Statements, we have restated our consolidated condensed financial statements and other financial information.

Based on revenue, Danka Business Systems PLC (also referred to herein as Danka, the Company, we, us or our) is one of the largest independent providers of
print products and services in the United States and Europe. We provide comprehensive document solutions that include office imaging equipment, document related software, related services and supplies that assist our customers with the management of
their output requirements. These solutions are designed to improve business processes, reduce costs and increase productivity. We offer a broad selection of digital office imaging products including copiers, multi-function peripherals
(MFPs), facsimile machines and printers that we integrate with an open architecture portfolio of software that has been carefully selected and rigorously tested for optimum performance. We also provide a wide range of contract services,
including professional and consulting services, equipment maintenance, supplies, leasing arrangements, technical support and training primarily on the installed base of equipment created by our retail equipment and related sales.

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

Our strategy to accomplish our mission is to:



| |  |  | enhance customer relationships and make every customer a reference;
| | - |  | -------------------------------------------------------------------



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



| |  |  | optimize our internal processes and systems and reduce the opportunity for errors;
| | - |  | ----------------------------------------------------------------------------------



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



| |  |  | maximize return for our stakeholders.
| | - |  | -------------------------------------

We currently
operate in over 15 countries. Our reportable segments are the United States and Europe/Australia, which include operations that are experiencing political, social and/or economic difficulty. We continue to evaluate the viability and future prospects
of the operations in certain countries in light of uncertain conditions. Based on these evaluations, we sold our operations in Canada and Central and South America during fiscal year 2006. As discussed in Note 12. Subsequent Event to the
consolidated condensed financial statements, on July 7, 2006, we announced the sale of all the shares of our business unit in Australia. Should we decide to downsize or exit any of our other operations in the future, we could incur costs in
respect of severance and closure of facilities and we may also be required to realize cumulative translation losses and minimum pension liabilities that would reduce our earnings, all or any of which may have a material impact on our operating
results.

All tables presented herein are in thousands unless otherwise noted.

Critical Accounting Policies and Estimates

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

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



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



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##### Table of Contents

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

The following table summarizes our net accounts receivable:



|                                                                    |  |               |         |   |                |   |         |  
|------------------------------------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                                                    |  | June 30, 2006 |         |   | March 31, 2006 |  
|Accounts receivable, gross                                          |  | $             | 224,899 |   |                | $ | 224,445 |  
|Allowance for doubtful accounts                                     |  |               | (35,624 | ) |                |   | (35,091 | )
|                                                                    |  |               |         |   |                |   |         |  
|Accounts receivable, net                                            |  | $             | 189,275 |   |                | $ | 189,354 |  
|                                                                    |  |               |         |   |                |   |         |  
|Allowance for doubtful accounts as a % of gross accounts receivable |  |               | 15.8    | % |                |   | 15.6    | %

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

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

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

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



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

Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and customers (which may include, but are not
limited to, sales, use, value added and some excise taxes) are excluded from revenues.

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

Purchasing and receiving costs, inspection costs, warehousing costs and other distribution costs are included in selling, general and administrative costs
because no meaningful allocation of these expenses to equipment, supplies, rental and wholesale costs of sales is practicable. Accordingly, our gross margins may not be comparable to other companies, since some companies include all of the costs
related to their distribution network in cost of sales, while others exclude a portion of them from gross margin, including them instead in operating expense line items. These costs totaled $4.8 million and $6.9 million for the first three months of
fiscal years 2007 and 2006, respectively.

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

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

In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Our past financial performance is a significant factor which contributes to our limited use, pursuant to FASB Statement No. 109,
Accounting for Income Taxes (SFAS 109), of projections of future taxable income in assessing the realizability of deferred tax assets in most jurisdictions. Additionally, management considered the scheduled reversal of
deferred tax liabilities and tax planning strategies in making this assessment. Considering all relevant data, management concluded that it is not more likely than not we will realize the benefits of the deferred tax assets in most
jurisdictions at June 30, 2006. Consequently, we have a valuation allowance against net deferred tax assets in most jurisdictions at June 30, 2006.

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

GoodwillWe had goodwill of $211.2 million as of
June 30, 2006. We review our goodwill and indefinite-lived intangible assets annually for possible impairment, or more frequently if impairment indicators arise in accordance with FASB Statement No. 142, Goodwill and Other Intangible
Assets (SFAS 142). Separable intangible assets that have finite lives are amortized over their estimated useful lives.

Goodwill was
reviewed for possible impairment during each of the fourth quarter of our fiscal year 2006 in accordance with SFAS 142. In performing our impairment testing, we engaged an independent appraisal company to assist in the valuation of our reporting
units. The fair values of the reporting units were determined using a combination of a discounted cash flow model and a guideline company method using valuation multiples. The discounted cash flow model used estimates of future revenue and expenses
for each reporting unit as well as appropriate discount rates, and the estimates that were used are consistent with the plans and estimates the Company is using to manage the underlying business. Based on the analysis at January 1, 2006,
management determined that no impairment charge was needed for fiscal year 2006.



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Accounting for Stock Based Compensation Effective April 1, 2006, we adopted FASB Statement
No. 123R, Share-Based Payment (SFAS 123R), using the modified prospective transition method to account for our employee stock-options. Under that transition method, compensation costs for the portion of awards for which
the requisite service had not yet been rendered, and that were outstanding as of the adoption date, will be recognized as the service is rendered based on the grant date fair value of those awards calculated under SFAS 123R. Prior period results are
not restated. Since all options were fully vested on April 1, 2006 and no new options were granted during the first three months of fiscal year 2007, the adoption of SFAS 123R had no impact on net income or earnings per share. See Note 2.
Interim Period Stock Compensation Disclosures to the consolidated condensed financial statements for disclosures related to stock-based compensation.

Restructuring ChargesWe recognized restructuring charges for the consolidation of back office functions, exiting non-strategic real estate facilities and reducing headcount. These charges are recorded pursuant to formal plans
developed and approved by management. These charges are accounted for under the provisions of FASB Statement No. 112, Employers Accounting for Postemployment Benefits (SFAS 112) and FASB Statement No. 146,
Accounting for Cost Associated with Exit or Disposal Activities (SFAS 146) and the recognition of restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs
associated with these plans. The estimates of future liabilities may change, requiring additional restructuring charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances
to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with the restructuring programs. For further discussion of our restructuring programs, refer to Note 5.
Restructuring Charges (Credits) to the consolidated condensed financial statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.

Controls and Procedures

Management assessed the
effectiveness of our internal control over financial reporting as of March 31, 2006. Based upon this assessment and as more fully explained in Item 4Controls and Procedures, management identified a material weakness in our internal
control over financial reporting as of March 31, 2006 related to our revenue and billing process in the United States. During the testing phase, management began developing remediation plans and is in the process of finalizing those plans. Once
remediation plans are finalized, timelines (where determinable) will be established to complete those plans.

Additionally, on February 5, 2007,
management concluded that the Company should restate its previously filed financial statements for fiscal years ended March 31, 2006, 2005 and 2004, and for the interim quarterly periods in fiscal year 2007, to correct the accounting for its
domestic income tax valuation allowance. The Company had previously established its valuation allowances assuming future taxable income would be generated from the turnaround of non-reversing book/tax timing difference for goodwill. It has been
determined that the valuation allowance on Deferred Tax Assets should have been increased by $1.4 million for the fiscal year ended March 31, 2006 and by $2.0 million for fiscal year 2005 and prior. As a result of this restatement, management
identified a material weakness in its controls over the determination and recording of its domestic income tax valuation allowance.

As a
result of the material weakness in our income tax controls, we have implemented a formal review to ensure the proper accounting for our domestic income tax valuation allowance and we continue to monitor new and emerging accounting guidance and
industry interpretations to assist in our application of generally accepted accounting principles. Additionally, we recorded an increase to our valuation allowance and related income tax expense and restated our previously filed financial statements
for the years ended March 31, 2006 and 2005 and the quarters ended June 30, 2006 and September 30, 2006. Accordingly we are confident that, as of the date of this filing, we have fully remediated this material weakness in our internal controls over
financial reporting.

Financial Condition



|                                       |  |               |         |   |                |   |         |  
|-------------------------------------- |  | ------------- | ------- | - | -------------- | - | ------- | -
|                                       |  | June 30, 2006 |         |   | March 31, 2006 |  
|Total assets                           |  | $             | 626,913 |   |                | $ | 628,792 |  
|Total liabilities                      |  | $             | 622,122 |   |                | $ | 618,483 |  
|Working capital                        |  | $             | 21,064  |   |                | $ | 27,468  |  
|Liabilities to liabilities and capital |  |               | 99      | % |                |   | 98      | %
|Inventory turnover ratio               |  |               | 4       | x |                |   | 5       | x



37



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Total assets as of June 30, 2006 decreased $1.9 million or $0.3% compared to March 31, 2006. This decrease
primarily was the result of a decrease in cash used to fund operations offset, in part, by an increase in inventory purchases.

Total liabilities increased
$3.6 million from March 31, 2006, or 0.6%. This increase was the result of additional borrowings on our Fleet Credit Facility and an increase in accounts payable of $5.9 million due to inventory purchases. Theses increases were offset by the
reduction of accrued expenses due to the payout of accrued restructuring costs and professional fees.

Working capital, defined as current assets less
current liabilities, decreased $6.4 million from March 31, 2006 primarily resulting from the use of cash to fund operations.

Liabilities to
liabilities and capital remained stable at June 30, 2006 compared to March 31, 2006.

For the period ending June 30, 2006, our annualized
inventory turnover ratio decreased to 4x from 5x at March 31, 2006 due to increased inventory purchases at the end of the period and lower cost of sales due to decreased revenue.

Results of Operations

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



|                                                               |  |                            |    |  |       |   
|-------------------------------------------------------------- |  | -------------------------- | -- |  | ----- | --
|                                                               |  | Three months endedJune 30, |   
|                                                               |  | 2006                       |    |  | 2005  |   
|Revenue:                                                       |  |                            |    |  |       |   
|Retail equipment and related sales                             |  | 35.4                       | %  |  | 39.0  | % 
|Retail service                                                 |  | 47.9                       |    |  | 45.2  |   
|Retail supplies and rentals                                    |  | 7.6                        |    |  | 7.6   |   
|Wholesale                                                      |  | 9.1                        |    |  | 8.2   |   
|                                                               |  |                            |    |  |       |   
|Total revenue                                                  |  | 100.0                      |    |  | 100.0 |   
|Cost of sales                                                  |  | 66.2                       |    |  | 66.4  |   
|                                                               |  |                            |    |  |       |   
|Gross profit                                                   |  | 33.8                       |    |  | 33.6  |   
|                                                               |  |                            |    |  |       |   
|Selling, general and administrative expenses                   |  | 30.3                       |    |  | 35.1  |   
|Restructuring charges                                          |  | 4.7                        |    |  | 2.1   |   
|Loss on sale of subsidiary                                     |  | 1.0                        |    |  | 0.0   |   
|Other expense (income)                                         |  | (0.2                       | )  |  | (0.5  | ) 
|                                                               |  |                            |    |  |       |   
|Operating earnings (loss) from continuing operations           |  | (2.0                       | )  |  | (3.1  | ) 
|Interest expense                                               |  | (3.1                       | )  |  | (2.7  | ) 
|Interest income                                                |  | 0.1                        |    |  | 0.0   |   
|                                                               |  |                            |    |  |       |   
|Earnings (loss) from continuing operations before income taxes |  | (5.0                       | )  |  | (5.8  | ) 
|Provision (benefit) for income taxes                           |  | (0.4                       | )  |  | 0.5   |   
|                                                               |  |                            |    |  |       |   
|Net earnings (loss) from continuing operations                 |  | (4.6                       | )% |  | (6.3  | )%
|                                                               |  |                            |    |  |       |   

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



|                                   |  |                            |    |  |       |   
|---------------------------------- |  | -------------------------- | -- |  | ----- | --
|                                   |  | Three months endedJune 30, |   
|                                   |  | 2006                       |    |  | 2005  |   
|Retail equipment and related sales |  | (19.3                      | )% |  | 20.0  | % 
|Retail service                     |  | (5.8                       | )  |  | (12.0 | ) 
|Retail supplies and rentals        |  | (10.8                      | )  |  | (8.1  | ) 
|Wholesale                          |  | (1.3                       | )  |  | 0.3   |   
|Total revenue                      |  | (11.1                      | )% |  | (0.3  | )%



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



|                                   |  |                            |   |  |      |  
|---------------------------------- |  | -------------------------- | - |  | ---- | -
|                                   |  | Three months endedJune 30, |  
|                                   |  | 2006                       |   |  | 2005 |  
|Retail equipment and related sales |  | 31.4                       | % |  | 31.9 | %
|Retail service                     |  | 37.1                       |   |  | 36.9 |  
|Retail supplies and rentals        |  | 43.1                       |   |  | 39.7 |  
|Wholesale                          |  | 17.5                       |   |  | 18.3 |  
|Total gross margin                 |  | 33.8                       | % |  | 33.6 | %



39



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

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



|                                                           |  |                             |         |   |      |   |         |  
|---------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Three months ended June 30, |        
|                                                           |  | 2006                        |         |   | 2005 |  
|Revenue                                                    |  |                             |         |   |      |   |         |  
|United States                                              |  | $                           | 122,049 |   |      | $ | 138,328 |  
|Europe/Australia                                           |  |                             | 138,156 |   |      |   | 154,250 |  
|                                                           |  |                             |         |   |      |   |         |  
|Total Revenue                                              |  | $                           | 260,205 |   |      | $ | 292,578 |  
|                                                           |  |                             |         |   |      |   |         |  
|Gross profit                                               |  |                             |         |   |      |   |         |  
|United States                                              |  | $                           | 45,232  |   |      | $ | 51,027  |  
|Europe/Australia                                           |  |                             | 42,659  |   |      |   | 47,295  |  
|                                                           |  |                             |         |   |      |   |         |  
|Total Gross profit                                         |  | $                           | 87,891  |   |      | $ | 98,322  |  
|                                                           |  |                             |         |   |      |   |         |  
|Operating earnings (loss) from continuing operations       |  |                             |         |   |      |   |         |  
|United States(1)                                           |  | $                           | 3,181   |   |      | $ | 784     |  
|Europe/Australia(2)                                        |  |                             | (1,440  | ) |      |   | (2,610  | )
|                                                           |  |                             |         |   |      |   |         |  
|Subtotal                                                   |  |                             | 1,741   |   |      |   | (1,826  | )
|Other (3)                                                  |  |                             | (7,002  | ) |      |   | (7,459  | )
|                                                           |  |                             |         |   |      |   |         |  
|Total Operating earnings (loss) from continuing operations |  | $                           | (5,261  | ) |      | $ | (9,285  | )
|                                                           |  |                             |         |   |      |   |         |  
|Interest expense                                           |  |                             |         |   |      |   |         |  
|United States                                              |  | $                           | (85     | ) |      | $ | (185    | )
|Europe/Australia                                           |  |                             | (601    | ) |      |   | (505    | )
|                                                           |  |                             |         |   |      |   |         |  
|Subtotal                                                   |  |                             | (686    | ) |      |   | (690    | )
|Other (3)                                                  |  |                             | (7,275  | ) |      |   | (7,222  | )
|                                                           |  |                             |         |   |      |   |         |  
|Total Interest expense                                     |  | $                           | (7,961  | ) |      | $ | (7,912  | )
|                                                           |  |                             |         |   |      |   |         |  

---

|(1) | Includes restructuring charges of $6.0 million and $0.3 million for the three months ended June 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes restructuring charges of $6.3 million and $5.8 million for the three months ended June 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(3) | Other primarily includes corporate expenses, loss on sale of subsidiary and foreign exchange gains/losses.
|--- | ----------------------------------------------------------------------------------------------------------



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Approximately 53.1% of our revenue for the three months ended June 30, 2006 was generated outside the United States
while approximately 52.7% of our revenue was generated outside the United States during the year-ago period.

Capital Expenditures and Depreciation and
Amortization



|                                    |  |                             |       |      |   |      
|----------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                    |  | Three months ended June 30,
|                                    |  | 2006                        |       | 2005
|Capital Expenditures                |  |                             |       |      |   |      
|United States                       |  | $                           | 1,448 |      | $ | 1,272
|Europe/Australia                    |  |                             | 1,729 |      |   | 2,059
|                                    |  |                             |       |      |   |      
|Subtotal                            |  |                             | 3,177 |      |   | 3,331
|Other (1)                           |  |                             | 8     |      |   |     
|                                    |  |                             |       |      |   |      
|Total Capital Expenditures          |  | $                           | 3,185 |      | $ | 3,331
|                                    |  |                             |       |      |   |      
|Depreciation and Amortization       |  |                             |       |      |   |      
|United States                       |  | $                           | 3,720 |      | $ | 5,003
|Europe/Australia                    |  |                             | 1,959 |      |   | 2,443
|                                    |  |                             |       |      |   |      
|Subtotal                            |  |                             | 5,679 |      |   | 7,446
|Other (2)                           |  |                             | 321   |      |   | 355  
|                                    |  |                             |       |      |   |      
|Total Depreciation and Amortization |  | $                           | 6,000 |      | $ | 7,801
|                                    |  |                             |       |      |   |      

---

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

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

Assets and
Long-lived Assets



|                        |  |               |         |                |   |        
|----------------------- |  | ------------- | ------- | -------------- | - | -------
|                        |  | June 30, 2006 |         | March 31, 2006
|Assets                  |  |               |         |                |   |        
|United States           |  | $             | 190,165 |                | $ | 204,400
|Europe/Australia        |  |               | 354,504 |                |   | 338,076
|                        |  |               |         |                |   |        
|Subtotal                |  |               | 544,669 |                |   | 542,476
|Other (1)               |  |               | 82,244  |                |   | 86,316 
|                        |  |               |         |                |   |        
|Total Assets            |  | $             | 626,913 |                | $ | 628,792
|                        |  |               |         |                |   |        
|Long-lived Assets (2)   |  |               |         |                |   |        
|United States           |  | $             | 87,250  |                | $ | 92,011 
|Europe/Australia        |  |               | 134,960 |                |   | 127,015
|                        |  |               |         |                |   |        
|Subtotal                |  |               | 222,210 |                |   | 219,026
|Other (1)               |  |               | 56,071  |                |   | 57,197 
|                        |  |               |         |                |   |        
|Total Long-lived Assets |  | $             | 278,281 |                | $ | 276,223
|                        |  |               |         |                |   |        

---

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

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

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



|                 |  |                             |    |  |      |   
|---------------- |  | --------------------------- | -- |  | ---- | --
|                 |  | Three months ended June 30, |   
|                 |  | 2006                        |    |  | 2005 |   
|United States    |  | (11.8                       | )% |  | (4.6 | )%
|Europe/Australia |  | (10.4                       | )  |  | 3.9  |   



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



|                                                            |  |                             |   |  |      |  
|----------------------------------------------------------- |  | --------------------------- | - |  | ---- | -
|                                                            |  | Three months ended June 30, |  
|                                                            |  | 2006                        |   |  | 2005 |  
|Gross profit margin                                         |  |                             |   |  |      |  
|United States                                               |  | 37.1                        | % |  | 36.9 | %
|Europe/Australia                                            |  | 30.9                        |   |  | 30.7 |  
|                                                            |  |                            
|Operating earnings (loss) margin from continuing operations |  |                             |   |  |      |  
|United States                                               |  | 2.6                         | % |  | 0.6  | %
|Europe/Australia                                            |  | (1.0                        | ) |  | (1.7 | )

Three Months Ended June 30, 2006 compared to the Three Months Ended June 30, 2005

Revenue

Revenue includes customer purchases of office peripherals;
professional, consulting and maintenance services; supplies; software and related support products; and leasing arrangements. For the three months ended June 30, 2006, our revenue decreased by $32.4 million or 11.1% from the three months ended
June 30, 2005, with the United States segment decreasing $16.3 million or 11.8% and Europe/Australia decreasing $16.1 million or 10.4%. Our retail equipment and related sales declined due to increased pricing pressures and a planned worldwide
reduction in sales force. These issues combined with the advent of other competitive equipment from printer manufacturers may continue to hinder our progress in growing our retail equipment and related sales revenue. Service revenues continued to
decrease due in part to the continued conversion from analog devices to digital devices and a shift and decline in certain segments of our installed base. In addition, we are experiencing decreases in our click rates (per copy charge) due to
competitive pricing pressures.

Our revenue for the three months ended June 30, 2006 was negatively impacted by $1.5 million of foreign currency
movement. During the quarter, 46.9% of our total revenue was generated by our United States segment and 53.1% by our Europe/Australia segment, compared to 47.3% and 52.7%, respectively, during the three months ended June 30, 2005.

Retail equipment and related sales for the three months ended June 30, 2006 decreased by $22.0 million or 19.3% to $92.1 million compared to the prior period.
The United States decreased $10.2 million or 16.8% primarily due to continued pricing pressures and a decrease in sales headcount year over year due to a realignment of our sales force towards a more market-based approach. Our intention is to add
sales headcount in markets to strategically increase our retail equipment and related sales revenue during the remainder of the fiscal year.

Retail
equipment and related sales revenue in the Europe/Australia segment was down $11.8 million or 22.1%. This decrease was the result of continued pricing pressures as new entrants and existing providers compete for product placement and a planned
decrease in sales headcount.

Retail service revenue declined by $7.7 million or 5.8% to $124.6 million due largely to the factors discussed above. The
United States segment was down $5.8 million or 8.5%. This decrease in the United States segment was also a direct result of lower average per copy charges. In addition, these pricing pressures are inhibiting price maintenance or increases on
renewals and new contracts entered into.

Retail service revenue in the Europe/Australia segment was down $1.9 million or 3.0%. In Germany, France, the
Netherlands and the United Kingdom, we are faced with declines in per copy charges related to the transition from analog and early digital devices to more current models.

Retail supplies and rental revenue declined by $2.4 million or 10.8% to $19.9 million in the three months ended June 30, 2006 with the United States segment down $0.3 million or 3.4%. This decline was primarily
due to non-investment in rental equipment.

Retail supplies and rental revenue in the Europe/Australia segment was down $2.1 million or 15.8%. The decrease
in supplies is a result of pricing pressures on supplies, particularly in the Untied Kingdom.

Wholesale revenue remained relatively stable at $23.7
million.

Gross Profit

Our total gross profit margin
after costs of goods sold, which primarily includes inventory, service labor and overhead, management costs and depreciation of equipment, increased slightly to 33.8% in the three months ended June 30, 2006 from 33.6% in the year-ago period.
Our total gross profit decreased by $10.4 million due to decreased revenues. Of this total



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decrease, $0.5 million was due to foreign currency movements during the quarter. The gross profit margin for the United States segment increased to 37.1%
from 36.9% and the Europe/Australia segment increased to 30.9% from 30.7% in the year-ago period.

Retail equipment and related sales margins decreased to
31.4% from 31.9% in the year-ago period. Margins increased in the Europe/Australia segment due to a favorable product mix. Retail equipment and related sales margins decreased in the United States due to a higher volume of product placed with state
and local government agencies which typically generate lower margins.

Retail service margins increased to 37.1% from 36.9% in the year-ago period. In the
United States, the margins increased to 40.8% from 39.5%, and in Europe/Australia the margins decreased to 33.3% from 34.0%. Generally, the overall increase in retail service margins was a direct result of lower service costs due to the planned
decrease in sales headcount.

Retail supplies and rental margins increased to 43.1% from 39.7% in the year-ago period. In the United States, the margin
increased to 52.0% from 46.8% due to revenue recognized on rental equipment on contracts with certain governmental customers. Due to delays in executing purchase orders by those customers, depreciation on the equipment was taken in prior periods,
while the revenue was deferred.

Wholesale margins decreased to 17.5% from 18.3% in the year-ago period primarily due to increased pricing on supplies from
vendors.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) in the current year quarter decreased by $24.0 million or 23.3% from the year-ago period to $78.8 million from $102.8 million. This decline is primarily the direct result
of headcount reductions worldwide and facility closures as a result of our restructuring activities in prior years. While we have lowered SG&A costs due to reduced headcount in our sales force, this has also contributed to our declines in
revenue, predominantly our retail equipment and related sales. Foreign currency movement decreased SG&A by $0.5 million or 0.5%. As a percentage of total revenue, SG&A expenses decreased to 30.3% in the current quarter from 35.1% in the
three months ended June 30, 2005.

Restructuring Charges (Credits)

In fiscal year 2007, we formulated plans to continue to eliminate inefficiencies in our field operations and to reduce our SG&A costs by eliminating and consolidating back office functions, reducing sales and
service personnel and exiting certain facilities. As part of these plans, in the three months ended June 30, 2006, we recorded an $11.9 million restructuring charge comprised of $7.4 million relating to severance charges in the United States
and Europe/Australia due to additional cost reduction efforts and $4.5 million in facility costs primarily related to our United States and Corporate headquarters in St. Petersburg, Florida. In addition, we recorded an additional restructuring
charge of $0.5 million relating to our fiscal year 2004 and 2005 plans. During the year-ago period, we recorded a restructuring charge of $6.6 million related to severance charges for our fiscal year 2005 plan offset by a reduction of $0.4 million
relating to our fiscal year 2004 plan due to the employee attrition.

Loss on Sale of Subsidiary

During the current fiscal year quarter, we sold our interest in our wholly-owned subsidiary, Image One, resulting in a loss of $2.5 million.

Other (Income) Expense

Other income for the current fiscal year
quarter included a gain of $0.5 million relating to the sale of certain customer contracts in Europe/Australia.

Operating Earnings (Loss) from
Continuing Operations

Our operating loss from continuing operations was $5.3 million for the three months ended June 30, 2006 compared to a loss
of $9.3 million in the prior year period. The reduction in the operating loss from continuing operations is principally due to the decreases in SG&A offset by lower sales, higher restructuring charges and the loss on the sale of subsidiary as
discussed above.

Interest Expense and Interest Income

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



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##### Table of Contents

Income Taxes

We
recorded an income tax benefit of $1.1 million in the three months ended June 30, 2006 compared to a tax expense of $1.4 million in the prior year period. The tax benefit during the current year quarter resulted from the reversal of valuation
allowances previously recorded against deferred tax assets in Belgium and Spain offset by minimum taxes in certain other jurisdictions. The income tax expense in the prior period resulted from minimum taxes in certain jurisdictions and additional
accruals for tax audit contingencies.

Net Earnings (Loss) from Continuing Operations

Net loss from continuing operations was $11.9 million in the three months ended June 30, 2006 compared to a net loss from continuing operations of $18.6 million in the year-ago period. After allowing for the
dilutive effect of dividends on our participating shares, we incurred a net loss from continuing operations attributable to common shareholders of $0.27 per ADS during the current period compared to a net loss from continuing operations of $0.37 per
ADS in the year-ago period.

Exchange Rates

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



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



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

Our results of operations are affected by the relative strength of currencies in the countries where our products are sold. Approximately 53.1% and 52.7% of our revenue
in the three months ended June 30, 2006 and 2005, respectively, was generated outside the United States in our Europe/Australia segment.

In comparing
the average exchange rates between the three months ended June 30, 2006 and the year-ago period, the euro currency and the British Sterling pound weakened against the dollar by approximately 0.2% and 1.6%, respectively. The change in exchange
rates negatively impacted revenue in the quarter by approximately $1.5 million, decreased gross profit by $0.5 million and decreased SG&A by less than $0.5 million.

Our inter-company loans are subject to fluctuations in exchange rates between the United States dollar and the currencies in each of the countries in which we operate, primarily the euro and the British pound
sterling. Based on the outstanding balance of our inter-company loans at June 30, 2006, a change of 1.0% in the exchange rate for the euro and British pound sterling would cause a change in our foreign exchange result of less than $0.1 million.

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

Liquidity and Capital Resources

The following summarizes our cash
flows from continuing operations for the first three months of fiscal years 2007 and 2006 as reported in our consolidated condensed statements of cash flows in the accompanying consolidated condensed financial statements:



|                                                    |  |                             |         |   |      |   |         |  
|--------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                    |  | Three months ended June 30, |        
|                                                    |  | 2006                        |         |   | 2005 |  
|Net cash used in operating activities               |  | $                           | (14,141 | ) |      | $ | (12,645 | )
|Net cash (used in) provided by investing activities |  |                             | (3,162  | ) |      |   | 8,725   |  
|Net cash provided by (used in) financing activities |  |                             | 563     |   |      |   | (30     | )
|Effect of discontinued operations                   |  |                             |        |   |      |   | 558     |  
|Effect of exchange rates                            |  |                             | 2,737   |   |      |   | (3,093  | )
|                                                    |  |                             |         |   |      |   |         |  
|Net decrease in cash                                |  |                             | (14,003 | ) |      |   | (6,485  | )
|Cash and cash equivalents, beginning of period      |  |                             | 54,468  |   |      |   | 76,969  |  
|                                                    |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period            |  | $                           | 40,465  |   |      | $ | 70,484  |  
|                                                    |  |                             |         |   |      |   |         |  



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Cash flows

Our
generation and use of cash is cyclical within a quarter. We generate a significant portion of our cash toward the end of each quarter when we typically conclude a large percentage of our retail equipment and related sales transactions. Our use of
cash is more evenly spread over the quarter except for a much greater use of cash toward the beginning of the quarter, when we typically pay vendors for products sold toward the end of the quarter and for other services provided during the quarter.

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

Generally cash provided by operations, cash on the balance sheet and our Fleet Credit Facility continue to be our primary sources of funds
to finance operating needs and capital expenditures. Our net cash flow used in operating activities was $14.1 million and $12.6 million in the first three months of fiscal year 2007 and 2006, respectively. This slight increase in cash usage quarter
over quarter was due to working capital movements.

Because of our operating losses, the continuing cash flows used in operations, interest payments on our
debt and cash requirements for restructuring payments, liquidity was negatively impacted during the first three months of fiscal year 2007.

Our net cash
flow used in investing activities was $3.2 million for the first three months of fiscal year 2007 compared to net cash provided by investing activities of $8.7 million for the first three months of fiscal year 2006. Cash provided by investing
activities during the first three months of fiscal year 2006 resulted from cash generated by the sale of our Canadian subsidiary.

Our net cash flow
provided by financing activities was $0.6 million during the period resulting from additional borrowings on our Fleet Credit Facility of $1.0 million offset by capital lease payments of $0.4 million.

We also have restricted cash of $21.3 million due to the cash collateralization of our lines of credit with Fleet and ABN Amro and of certain letters of credit with
insurance companies. The ABN Amro letter of credit facility expired on December 31, 2005. As a result, beginning January 1, 2006, we were required to increase our cash collateralization of our letter of credit by Euro 6.8 million
(U.S. $8.9 million). Our liquidity could also be impacted if our equipment vendors were to reduce existing lines of credit for the purchase of equipment.

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

Restructuring Charges (credits)

Fiscal Year 2007 Plan:In
fiscal year 2007, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions, reducing sales and
service personnel and exiting certain facilities. These charges were accounted for under the provisions of SFAS 112 and SFAS 146.

As part of these plans,
the Company recorded an $11.9 million restructuring charge in the first three months of fiscal year 2007 consisting of $7.4 million relating to severance charges due to additional cost reduction efforts and $4.5 million in facility costs primarily
related to the Companys United States and Corporate headquarters in St. Petersburg, Florida. Cash outlays for severance and facilities during the period were $0.4 million and $0.1 million, respectively. The other non-cash changes of $0.1
million represent foreign currency adjustments.

The remaining liability of the 2007 Plan restructuring charge of $9.6 million and $1.9 million is
categorized within Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities, respectively.

The following table summarizes the fiscal year 2007 Plan restructuring charge:

2007 Plan Restructuring Charge:



|                                              |  |                         |        |              |   |      |                        |  |                          |    |  |   |       
|--------------------------------------------- |  | ----------------------- | ------ | ------------ | - | ---- | ---------------------- |  | ------------------------ | -- |  | - | ------
|                                              |  | Charge to June 30, 2006 |        | Cash Outlays |   |      | Other Non-Cash Changes |  | Reserve at June 30, 2006
|Severance                                     |  | $                       | 7,352  |              | $ | (406 | )                      |  | $                        | 89 |  | $ | 7,035 
|Future lease obligations on facility closures |  |                         | 4,537  |              |   | (90  | )                      |  |                          | 8  |  |   | 4,455 
|                                              |  |                         |        |              |   |      |                        |  |                          |    |  |   |       
|Total                                         |  | $                       | 11,889 |              | $ | (496 | )                      |  | $                        | 97 |  | $ | 11,490
|                                              |  |                         |        |              |   |      |                        |  |                          |    |  |   |       



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2007 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                         |       |              |   |      |                       |  |                          |    |  |   |      
|---------------- |  | ----------------------- | ----- | ------------ | - | ---- | --------------------- |  | ------------------------ | -- |  | - | -----
|                 |  | Charge to June 30, 2006 |       | Cash Outlays |   |      | Other Non-CashChanges |  | Reserve at June 30, 2006
|United States    |  | $                       | 1,939 |              | $ | (203 | )                     |  | $                        |   |  | $ | 1,736
|Europe/Australia |  |                         | 5,376 |              |   | (191 | )                     |  |                          | 89 |  |   | 5,274
|Other(1)         |  |                         | 37    |              |   | (12  | )                     |  |                          |   |  |   | 25   
|                 |  |                         |       |              |   |      |                       |  |                          |    |  |   |      
|Total            |  | $                       | 7,352 |              | $ | (406 | )                     |  | $                        | 89 |  | $ | 7,035
|                 |  |                         |       |              |   |      |                       |  |                          |    |  |   |      

---

|(3) | Includes corporate charges
|--- | --------------------------

2007 Plan Restructuring Facility Charge by
Operating Segment:



|                 |  |                         |       |              |   |     |                        |  |                          |   |  |   |      
|---------------- |  | ----------------------- | ----- | ------------ | - | --- | ---------------------- |  | ------------------------ | - |  | - | -----
|                 |  | Charge to June 30, 2006 |       | Cash Outlays |   |     | Other Non-Cash Changes |  | Reserve at June 30, 2006
|United States    |  | $                       | 3,979 |              | $ |    |                        |  | $                        |  |  | $ | 3,979
|Europe/Australia |  |                         | 558   |              |   | (90 | )                      |  |                          | 8 |  |   | 476  
|                 |  |                         |       |              |   |     |                        |  |                          |   |  |   |      
|Total            |  | $                       | 4,537 |              | $ | (90 | )                      |  | $                        | 8 |  | $ | 4,455
|                 |  |                         |       |              |   |     |                        |  |                          |   |  |   |      

Fiscal Year 2005 Plan:In fiscal year 2005, the Company formulated plans to continue to eliminate
inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions and exiting certain facilities. These charges were accounted for under the provisions of SFAS
112 and SFAS 146.

As part of these plans, the Company recorded a $15.2 million and $0.3 million restructuring charge related to severance and facilities,
respectively in fiscal year 2005. The severance charges were offset by a reduction of $3.3 million due to favorable severance negotiations and employee attrition. During fiscal year 2007, the Company recorded an additional charge of $10.6 million
and $1.4 million relating to severance and facilities, respectively, due to continued reduction efforts.

The Company recorded a $0.6 million restructuring
charge in fiscal year 2007 primarily relating to facility costs. Cash outlays for severance and facilities during the year were $2.3 million and $0.3 million, respectively. The other non-cash changes of $0.2 million represent foreign currency
adjustments.

The remaining liability of the 2005 Plan restructuring charge of $3.8 million and $5.2 million is categorized within Accrued expenses
and other current liabilities and Deferred income taxes and other long-term liabilities, respectively.

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

2005 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |        |   |                          |   |     |   |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | ---------------------- | ------ | - | ------------------------ | - | --- | - |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |        |   | Reserve at June 30, 2006
|Severance                                     |  | $                                         | 22,489 |                           | $ | 9,594                   |  | $ | (48          | ) |  | $                      | (2,290 | ) |                          | $ | 292 |   |  | $ | 7,548
|Future lease obligations on facility closures |  |                                           | 1,689  |                           |   | 1,117                   |  |   | 650          |   |  |                        | (250   | ) |                          |   | (48 | ) |  |   | 1,469
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |        |   |                          |   |     |   |  |   |      
|Total                                         |  | $                                         | 24,178 |                           | $ | 10,711                  |  | $ | 602          |   |  | $                      | (2,540 | ) |                          | $ | 244 |   |  | $ | 9,017
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |        |   |                          |   |     |   |  |   |      

2005 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                       |        |                          |  |   |     |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | --------------------- | ------ | ------------------------ |  | - | --- |  | - | -----
|                 |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-CashChanges |        | Reserve at June 30, 2006
|United States    |  | $                                         | 6,562  |                           | $ | 1,556                   |  | $ | 52           |   |  | $                     | (1,263 | )                        |  | $ |    |  | $ | 345  
|Europe/Australia |  |                                           | 15,927 |                           |   | 8,038                   |  |   | (100         | ) |  |                       | (1,027 | )                        |  |   | 292 |  |   | 7,203
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                       |        |                          |  |   |     |  |   |      
|Total            |  | $                                         | 22,489 |                           | $ | 9,594                   |  | $ | (48          | ) |  | $                     | (2,290 | )                        |  | $ | 292 |  | $ | 7,548
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                       |        |                          |  |   |     |  |   |      



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##### Table of Contents

2005 Plan Restructuring Facility Charge by Operating Segment:



|                 |  |                                           |       |                          |   |                         |  |              |     |  |                        |      |   |                          |   |     |   |  |   |      
|---------------- |  | ----------------------------------------- | ----- | ------------------------ | - | ----------------------- |  | ------------ | --- |  | ---------------------- | ---- | - | ------------------------ | - | --- | - |  | - | -----
|                 |  | Cumulative Expense through March 31, 2006 |       | Reserve atMarch 31, 2006 |   | Charge to June 30, 2006 |  | Cash Outlays |     |  | Other Non-Cash Changes |      |   | Reserve at June 30, 2006
|United States    |  | $                                         | 868   |                          | $ | 586                     |  | $            | 24  |  | $                      | (131 | ) |                          | $ |    |   |  | $ | 479  
|Europe/Australia |  |                                           | 821   |                          |   | 531                     |  |              | 626 |  |                        | (119 | ) |                          |   | (48 | ) |  |   | 990  
|                 |  |                                           |       |                          |   |                         |  |              |     |  |                        |      |   |                          |   |     |   |  |   |      
|Total            |  | $                                         | 1,689 |                          | $ | 1,117                   |  | $            | 650 |  | $                      | (250 | ) |                          | $ | (48 | ) |  | $ | 1,469
|                 |  |                                           |       |                          |   |                         |  |              |     |  |                        |      |   |                          |   |     |   |  |   |      

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

As part of these plans, the Company recorded a $47.3 million restructuring charge in fiscal year 2004
that included $24.1 million related to severance for employees and $23.2 million related to future lease obligations for facilities that were vacated by March 31, 2004. The fiscal year 2004 restructuring charge was partially offset by a $0.6
million reversal of prior years restructuring charges. The Company reversed $2.0 million of fiscal year 2004 Plan severance and facility charges during fiscal year 2005 as a result of employee attrition in its United States and
Europe/Australia segments, and a change in restructuring plans in Europe/Australia due to improved performance in certain markets partially offset by a higher estimate of facility charges in the United States due to its inability to sublease the
facilities. During fiscal year 2006, the Company reversed $0.3 million of severance costs due to employee attrition. In addition, the company incurred $0.9 million of facility charges as a result of broker commissions paid in the United States due
to the sublease of certain facilities.

Cash outlays for employee severance and facilities during fiscal year 2007 were $0.1 million and $0.5 million,
respectively. In addition, the Company reversed $0.1 million of facility costs during the period due to the early termination of lease agreements.

The
remaining liability of the 2004 Plan restructuring charge of $3.4 million and $2.5 million is categorized within Accrued expenses and other current liabilities and Deferred income taxes and other long-term liabilities,
respectively.

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

2004 Plan Restructuring Charge:



|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|--------------------------------------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | ---------------------- | ---- | ------------------------ |  | - | -- |  | - | -----
|                                              |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |      | Reserve at June 30, 2006
|Severance                                     |  | $                                         | 19,320 |                           | $ | 497                     |  | $ |             |   |  | $                      | (128 | )                        |  | $ | 2  |  |   | 371  
|Future lease obligations on facility closures |  |                                           | 25,985 |                           |   | 6,104                   |  |   | (140         | ) |  |                        | (459 | )                        |  |   | 11 |  |   | 5,516
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|Total                                         |  | $                                         | 45,305 |                           | $ | 6,601                   |  | $ | (140         | ) |  | $                      | (587 | )                        |  | $ | 13 |  | $ | 5,887
|                                              |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      

2004 Plan Restructuring Severance Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                         |  |              |   |  |                        |      |                          |  |   |   |  |   |    
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | ------------ | - |  | ---------------------- | ---- | ------------------------ |  | - | - |  | - | ---
|                 |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  | Cash Outlays |   |  | Other Non-Cash Changes |      | Reserve at June 30, 2006
|United States    |  | $                                         | 5,699  |                           | $ |                        |  | $            |  |  | $                      |     |                          |  | $ |  |  | $ |   
|Europe/Australia |  |                                           | 13,573 |                           |   | 497                     |  |              |  |  |                        | (128 | )                        |  |   | 2 |  |   | 371
|Other (1)        |  |                                           | 48     |                           |   |                        |  |              |  |  |                        |     |                          |  |   |  |  |   |   
|                 |  |                                           |        |                           |   |                         |  |              |   |  |                        |      |                          |  |   |   |  |   |    
|Total            |  | $                                         | 19,320 |                           | $ | 497                     |  | $            |  |  | $                      | (128 | )                        |  | $ | 2 |  | $ | 371
|                 |  |                                           |        |                           |   |                         |  |              |   |  |                        |      |                          |  |   |   |  |   |    

---

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



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##### Table of Contents

2004 Plan Restructuring Facility Charge by Operating Segment:



|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|---------------- |  | ----------------------------------------- | ------ | ------------------------- | - | ----------------------- |  | - | ------------ | - |  | ---------------------- | ---- | ------------------------ |  | - | -- |  | - | -----
|                 |  | Cumulative Expense through March 31, 2006 |        | Reserve at March 31, 2006 |   | Charge to June 30, 2006 |  |   | Cash Outlays |   |  | Other Non-Cash Changes |      | Reserve at June 30, 2006
|United States    |  | $                                         | 15,555 |                           | $ | 2,719                   |  | $ | 34           |   |  | $                      | (318 | )                        |  | $ |   |  | $ | 2,435
|Europe/Australia |  |                                           | 5,985  |                           |   | 3,385                   |  |   | (174         | ) |  |                        | (141 | )                        |  |   | 11 |  |   | 3,081
|Other (1)        |  |                                           | 4,445  |                           |   |                        |  |   |             |   |  |                        |     |                          |  |   |   |  |   |     
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      
|Total            |  | $                                         | 25,985 |                           | $ | 6,104                   |  | $ | (140         | ) |  | $                      | (459 | )                        |  | $ | 11 |  | $ | 5,516
|                 |  |                                           |        |                           |   |                         |  |   |              |   |  |                        |      |                          |  |   |    |  |   |      

---

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

Long-Term Debt

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



|                                 |  |       |         |   |                                  |   |                                  |  |   |         |  
|-------------------------------- |  | ----- | ------- | - | -------------------------------- | - | -------------------------------- |  | - | ------- | -
|                                 |  | Total |         |   | Payments due in Less Than 1 Year |   | Payments due in More Than 1 Year | 
|11% senior notes, due 2010       |  | $     | 175,000 |   |                                  | $ |                                 |  | $ | 175,000 |  
|10% subordinated notes, due 2008 |  |       | 64,520  |   |                                  |   |                                 |  |   | 64,520  |  
|Capital leases                   |  |       | 2,075   |   |                                  |   | 1,149                            |  |   | 926     |  
|Other long-term obligations      |  |       | 11,433  |   |                                  |   | 11,138                           |  |   | 295     |  
|Less unamortized discount        |  |       | (2,713  | ) |                                  |   |                                 |  |   | (2,713  | )
|                                 |  |       |         |   |                                  |   |                                  |  |   |         |  
|Total                            |  | $     | 250,315 |   |                                  | $ | 12,287                           |  | $ | 238,028 |  
|                                 |  |       |         |   |                                  |   |                                  |  |   |         |  

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

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

If, for any fiscal year commencing with the fiscal year ending March 31, 2004, there is excess cash flow, as such term is defined in the indenture governing the senior notes, in an amount in excess of $5.0 million, we will be required
to make an offer in cash to holders of the senior notes to use 50.0% of such excess cash flow to purchase their senior notes at 101.0% of the aggregate principal amount of the senior notes to be repurchased plus accrued and unpaid interest and
additional amounts, if any. As of June 30, 2006 there has not been excess cash flow.

We incurred $7.2 million in debt issuance costs relating to the
senior notes and are amortizing these costs over the term of the senior notes. The unamortized balance of these costs as of June 30, 2006 was $4.1 million. The $4.1 million discount related to the senior notes is being accreted to interest
expense using the effective interest method over the life of the related debt. The unamortized balance of the discount as of June 30, 2006 was $2.7 million.

We have a credit facility which expires on January 4, 2008, with Bank of America, who acquired Fleet Capital Corporation, (the Fleet Credit Facility) to provide a $50.0 million, senior secured revolving credit facility,
which includes a $30.0 million sub-limit for standby and documentary letters of credit. The Fleet Credit Facility will bear interest at an annual rate equal to, at our option, (a) the sum of the rate of interest publicly announced from time to
time by Bank of America as its prime or base rate of interest plus the applicable margin thereon or (b) the sum of LIBOR for interest periods at our option of one, two, three or Three Months plus the applicable margin thereon. Under the terms
of the Fleet Credit Facility, as amended, extensions of credit to the borrowers are further limited to the lesser of the commitment and the borrowing base. In addition, the Fleet Credit Facility requires us to keep $5.0 million of cash in an
operating account. As of June 30, 2006, the borrowing base for the credit facility was $36.1 million and we had $11.0 million of borrowings under the Fleet Credit Facility. The borrowing base fluctuates each month and is generally highest at
the end of the quarter.

We incurred $1.6 million in debt issuance costs relating to the Fleet Credit Facility and are amortizing these costs over the
remaining term of the credit facility. The unamortized balance of these costs as of June 30, 2006 was $0.4 million.



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##### Table of Contents

On December 31, 2003, we entered into a one year letter of credit facility with ABN. On November 2, 2004, this
agreement was amended to provide us a letter of credit facility for Euro 11.8 million (U.S. $15.1 million) and an open term credit facility of Euro 1.0 million (U.S. $1.3 million) available for general working capital purposes, including
overdrafts. The open term credit facility expired on November 15, 2005. The letter of credit facility expired on December 31, 2005. The facilities were secured by the assets of certain of our Netherlands subsidiaries and were also cash
collateralized by Euro 5.0 million (U.S. $6.4 million).

On January 1, 2006, we opened a replacement letter of credit facility with ABN AMRO in
favor of Ricoh in the amount of Euro 11.8 million (U.S. $15.1 million) that is fully cash collateralized and will expire on September 30, 2006. This agreement can be renewed. The Company is currently working with several bank to obtain
financing for this letter of credit.

Off-Balance Sheet Arrangements

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



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Contractual Obligations and Commitments

The following table summarizes our significant contractual obligations at June 30, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes
accounts payable, accrued expenses (except restructuring charges), taxes payable and deferred revenue already recorded on our balance sheet as current liabilities at June 30, 2006.



|                                      |  |                                              |         |                  |   |             |  |             |         |               |   |         |  |   |       
|------------------------------------- |  | -------------------------------------------- | ------- | ---------------- | - | ----------- |  | ----------- | ------- | ------------- | - | ------- |  | - | ------
|                                      |  | Amount of contractual obligations per period
|                                      |  | Total                                        |         | Less than 1 year |   | 1  3 years |  | 4  5 years |         | After 5 years
|Long-term debt  11.0% Notes          |  | $                                            | 175,000 |                  | $ |            |  | $           |        |               | $ | 175,000 |  | $ |      
|Long-term debt  10.0% Notes          |  |                                              | 64,520  |                  |   |            |  |             | 64,520  |               |   |        |  |   |      
|Capital lease obligations             |  |                                              | 2,075   |                  |   | 1,149       |  |             | 926     |               |   |        |  |   |      
|Other long-term obligations           |  |                                              | 11,433  |                  |   | 11,138      |  |             | 295     |               |   |        |  |   |      
|Restructuring payment obligations (1) |  |                                              | 26,394  |                  |   | 16,797      |  |             | 9,597   |               |   |        |  |   |      
|Operating lease obligations           |  |                                              | 72,207  |                  |   | 18,064      |  |             | 24,172  |               |   | 11,956  |  |   | 18,015
|Purchase obligations                  |  |                                              | 57,268  |                  |   | 56,983      |  |             | 264     |               |   | 21      |  |   |      
|Estimated pension obligations         |  |                                              | 30,407  |                  |   | 1,963       |  |             | 3,267   |               |   | 2,500   |  |   | 22,677
|                                      |  |                                              |         |                  |   |             |  |             |         |               |   |         |  |   |       
|Total contractual obligations         |  | $                                            | 439,304 |                  | $ | 106,094     |  | $           | 103,041 |               | $ | 189,477 |  | $ | 40,692
|                                      |  |                                              |         |                  |   |             |  |             |         |               |   |         |  |   |       

---

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

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

Other Financing Arrangements

Senior Convertible Participating Shares

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

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

The participating shares are currently
convertible into ordinary shares at a conversion price of $3.11 per ordinary share (equal to $12.44 per ADS), subject to adjustment in certain circumstances to avoid dilution of the interests of participating shareholders. As of June 30, 2006
the participating shares have voting rights, on an as converted basis, currently corresponding to approximately 29.4% of the total voting power of our capital stock which includes an additional 111,663 participating shares in respect of
payment-in-kind dividends.

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



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unpaid dividends from the most recent dividend payment date. If the price set out in (b) above is applicable, we are permitted to convert the
participating shares into the number of ordinary shares into which they are convertible instead of making the cash payment.

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

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

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

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

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

General Electric Capital
Corporation

We have an agreement with General Electric Capital Corporation (GECC) under which GECC agrees to provide financing to our
qualified United States customers to purchase equipment. The agreement expires March 31, 2009. In connection with this agreement, we are obligated to provide a minimum level of customer leases to GECC. The minimum level of customer leases is
equal to a specified percentage of United States retail equipment and related sales revenues. If we fail to provide a minimum level of customer leases under the agreement, we are obligated to pay penalty payments to GECC. For the three months ended
June 30, 2006 and 2005, we were not required to make any penalty payments to GECC.

Tax Payments

We have not paid substantial amounts of income tax in the prior three years because of our net operating losses in most jurisdictions. We are subject to audits by
multiple tax authorities with respect to prior years and certain of these audits are in the latter stages. Where we disagree with any of these positions adopted by the tax authorities, we may formally protest them.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in
the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for Danka beginning April 1, 2007. If there are changes
in net assets as a result of application of FIN 48, these will be accounted for as a cumulative adjustment to beginning retained earnings. The Company is currently assessing the impact of FIN 48 on its consolidated financial position and results of
operations.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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

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

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

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

On
December 31, 2003, we entered into a one year letter of credit facility with ABN AMRO. On November 2, 2004, this agreement was amended to provide us a letter of credit facility for Euro 11.8 million (U.S. $15.1 million) and an open
term credit facility of Euro 1.0 million (U.S. $1.3 million) available for general working capital purposes, including overdrafts. The open term credit facility expired on November 15, 2005. The letter of credit facility expired on
December 31, 2005. The facilities were secured by the assets of certain of our Netherlands subsidiaries and were also cash collateralized by Euro 5.0 million (U.S. $6.4 million).

On January 1, 2006, we opened a replacement letter of credit facility with ABN AMRO in favor of Ricoh in the amount of Euro 11.8 million (U.S. $15.1 million)
that is fully cash collateralized and will expire on September 30, 2006. This agreement can be renewed. The Company is currently working with several banks to obtain financing for this letter of credit.

Foreign Currency Exchange Risk

Operating in international markets
involves exposure to the possibility of volatile movements in foreign exchange rates. These exposures may impact future earnings and/or cash flows. Revenue from Europe/Australia represented approximately 53.1% of our consolidated revenue during the
first three months ended June 30, 2006. The economic impact of foreign exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors.
These changes, if material, could cause us to adjust our financing and operating strategies. Therefore, to solely isolate the effect of changes in currency does not accurately portray the effect of these other important economic factors. As foreign
exchange rates change, translation of the income statements of our international subsidiaries into U.S. dollars affects year-over-year comparability of operating results. While we may hedge specific transaction risks, we generally do not hedge
translation risks because we believe there is no long-term economic benefit in doing so.

At June 30, 2006, we had no outstanding forward contracts or
option contracts to buy or sell foreign currency. For the three month periods ended June 30, 2006 and 2005, there were no gains or losses included in our consolidated statements of operations on forward contracts and option contracts.

Assets and liabilities are matched in the local currency, which reduces the need for dollar conversion. Any foreign currency impact on translating assets
and liabilities into dollars is included as a component of shareholders equity. Our revenue results for the first three months of fiscal year 2007 were negatively impacted by a $1.5 million foreign currency movement, primarily due to the
weakening of the euro and the British pound sterling versus the United States dollar quarter over quarter.

Changes in foreign exchange rates that have the
largest impact on translating our international operating profits relate to the euro and the British pound versus the U.S. dollar. We estimate that a 1% adverse change in foreign exchange rates would have decreased our revenues by approximately $1.4
million in the first three months of fiscal 2007, assuming no changes other than the exchange rate itself. As discussed above, this quantitative measure has inherent limitations. Further, the sensitivity analysis disregards the possibility that
rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency.



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Item 4. Controls and Procedures

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

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to the Securities and Exchange Act Rule
13a-15(e) and 15d-15(e). Based upon this evaluation as of June 30, 2006, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective for the reasons more fully described below
related to the weakness in our internal control over financial reporting identified during the fiscal year 2006 internal control over financial reporting evaluation in connection with Section 404 of the Sarbanes-Oxley Act of 2002. Although
progress is being made to remediate the material weakness that was identified at March 31, 2006, additional action is still required. To address the control weakness, the Company performed other procedures to ensure the unaudited quarterly
consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated condensed financial statements included in this Quarterly Report on Form 10-Q, fairly
present, in all material respects our financial condition, results of operations and cash flows for the periods presented.

Based on our assessment,
management determined that, as of March 31, 2006, a material weakness related to the revenue and billing processes in the United States existed within our internal controls over financial reporting. Therefore management has determined that its
internal control over financial reporting was ineffective. This material weakness related to (a) controls over the recording of copies made by customers in order to calculate service revenue, (b) controls over accurate input of contract
information into our billing system in order to determine correct amounts to bill, (c) controls to timely identify and correct billing errors, including errors in sales taxes, (d) controls to determine the correct allocation for the
provisions for billing disputes and inaccuracies and bad debt expense between revenue reductions and bad debt expense and (e) controls over ensuring that all criteria necessary to recognize revenue have been met prior to recognizing revenue.
This material weakness also existed as of March 31, 2005 and was disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 (the 2005 Form 10-K).

The deficiency described above was characterized as a material weakness in accordance with the rules and regulations of the Securities and Exchange Commission, as a more
than remote possibility that a material misstatement to the Company's interim or annual financial statements could occur. However, the internal control weaknesses identified by management did not cause a material misstatement or have an adverse
impact to the Company's financial position, results of operations or control environment as of and for the three months ended June 30, 2006.

Additionally, on February 5, 2007, management concluded that the Company should restate its previously filed financial statements for fiscal years ended March 31, 2006, 2005 and 2004, and for the interim quarterly periods in
fiscal year 2007, to correct the accounting for its domestic income tax valuation allowance. The Company had previously established its valuation allowances assuming future taxable income would be generated from the turnaround of non-reversing
book/tax timing difference for goodwill. It has been determined that the valuation allowance on Deferred Tax Assets should have been increased by $1.4 million for the fiscal year ended March 31, 2006 and by $2.0 million for fiscal year 2005 and
prior. As a result of this restatement, management identified a material weakness in its controls over the accounting for its domestic income tax valuation allowance.

Planned Remediation Efforts to Address Material Weaknesses

We have begun planning and implementing changes to our
processes to improve our internal control over financial reporting, remediate the identified material weaknesses and to establish adequate disclosure controls and internal controls over financial reporting as soon as reasonably practicable. The
following are among the steps we have taken, or intend to take, to remediate the material weakness in our revenue and billing process identified as of March 31, 2006:



| |  |  | restructure order processing personnel under the leadership of the finance department in order to better control the flow of data from order entry to the final
distribution of invoices;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | review existing contract terms and verify that such terms agree with our customers understanding and the information in our accounting system;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | improve our meter reading capabilities possibly through the use of an automated technology solution;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | increase the number of large customers that receive invoice data via EDI transfer;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | take steps to systematically gather information to allow for analysis and development of targeted control improvements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | establish a cross functional team to study errors identified and design and aid in the implementation of improved controls; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide additional training and increased responsibility to account managers to better ensure that customers receive billings that are free from error or
inaccuracies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our testing and evaluation of the operating effectiveness and sustainability of the changes to our internal control over
financial reporting with respect to this material weakness will continue as the above-referenced remediation actions are still in the implementation process. As a result, we may identify additional changes that are required to remediate or improve
this material weakness.

As a result of the material weakness in our income tax controls, we have implemented a formal review to ensure the
proper accounting for our domestic income tax valuation allowance and we continue to monitor new and emerging accounting guidance and industry interpretations to assist in our application of generally accepted accounting principles. Additionally, we
recorded an increase to our valuation allowance and related income tax expense and restated our previously filed financial statements for the years ended March 31, 2006 and 2005 and the quarters ended June 30, 2006 and September 30, 2006.
Accordingly we are confident that, as of the date of this filing, we have fully remediated this material weakness in our internal controls over financial reporting.

We will provide appropriate updates regarding our general progress with the remediation efforts in future filings.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the
quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

APPROVAL OF NON-AUDIT SERVICES

The audit committee has approved Ernst & Young LLP and its affiliates to perform services
regarding certain tax issues during the three months ended June 30, 2006.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.



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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a) Exhibits.



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



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SIGNATURE

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



|                        |  |                           
|----------------------- |  | --------------------------
|                        |  | Danka Business Systems PLC
|                        |  | (Registrant)              
|                        | 
|Date: February 13, 2007 |  | /s/ Edward K. Quibell     
|                        |  | Edward K. Quibell         
|                        |  | Chief Financial Officer   



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Exhibit Index



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



57