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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 0-20828

DANKA BUSINESS SYSTEMS PLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:

727-622-2100 in the United States

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

NOT APPLICABLE

(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)

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  ¨

Applicable only to corporate issues:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 1, 2004: The registrant had 251,728,644 ordinary shares outstanding, including 49,519,547 represented by American Depositary Shares (“ADS”). Each ADS represents four ordinary shares.

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INDEX

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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 as the result of evolving technology; (vii) any inability by us to procure, or any inability by us to continue to gain access to and successfully distribute new products, including digital products, 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 record and process key data due to ineffective implementation of business processes and policies; (xi) any negative impact from the loss of a key vendor or customer; (xii) any negative impact from the loss of any of our senior or key management personnel; (xiii) any change in economic conditions in domestic or international markets where we operate or have material investments which may affect demand for our products or services; (xiv) any negative impact from the international scope of our operations; (xv) fluctuations in foreign currencies; (xvi) any incurrence of tax liabilities or tax payments beyond our current expectations, which could adversely affect our liquidity; (xvii) any inability to comply with the financial or other covenants in our debt instruments; (xviii) any delayed or lost sales or other impacts related to the commercial and economic disruption caused by natural disasters; (xix) 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; and (xx) other risks including those risks identified in any of our filings with the Securities and Exchange Commission, or the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our analysis only as of the date they are made. Except as required by applicable law, we undertake no obligation, and do not intend, to update these forward-looking statements to reflect events or circumstances that arise after the date they are made. Furthermore, as a matter of policy, we do not generally make any specific projections as to future earnings, nor do we endorse any projections regarding future performance, which may be made by others outside our company.

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RISK FACTORS

Business Strategy—Danka Business Systems PLC (also referred to herein as “Danka” or the “Company”) believes that in order to stay competitive and generate positive earnings and cash flow, we must successfully implement the strategies discussed elsewhere in this quarterly report.

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

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.

Profitability—Although we generated operating earnings during the three and six months ended September 30, 2004, we incurred operating losses in the past, including an operating loss for the year ended March 31, 2004 (fiscal year 2004) of $34.6 million. The operating loss for fiscal year 2004 included a $50.0 million restructuring charge and as we continue to evaluate our business and strategies, we could incur future restructuring charges which may materially and adversely affect our operations, financial position or results of operations. If we incur losses in the future, our growth potential and our ability to execute our business strategy may be limited. In addition, our ability to service our indebtedness may be impaired because we may not generate sufficient cash flow from operations to pay principal or interest when due.

Restructuring of Operations—We have implemented plans to reduce costs in order to become competitive within our industry. These cost reduction plans involve, among other things, significant headcount reductions, the exit of certain non-strategic facility locations and the consolidation of many back-office functions into more centralized locations. If we fail to successfully implement our cost restructuring plans, including the timely sublease of vacant facilities, and fail to achieve our other long-term cost reduction goals, we may not reduce costs quickly enough to become competitive within our industry. 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.

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

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 largely upon technology, performance, pricing, quality, reliability, distribution, customer service and support and lease and rental financing. In addition, our equipment suppliers continue to establish themselves as direct competitors in many of the areas in which we do business.

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. Furthermore, some of our principal competitors design and manufacture new technology, which may give them a competitive advantage over us.

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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Furthermore, there is a trend arising within the 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.

Additionally, the competitive environment creates a risk of employee retention, especially in the sales and service areas. This risk could lead to increased turnover of employees or increased compensation expense.

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 replace analog products, which have historically been a significant percentage of our machines in field (“MIF”). Digital copiers and MFPs are increasingly 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 sales and meet the demand for color products if we are to maintain and improve our operating performance and our ability to compete.

Another industry change that has been fueled by technological changes, such as the advent of e-mail and the Internet, 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 and printers that are directly linked to their networks, in order to remain competitive. Finally, the speed of technological changes has caused us in the past, and may cause us in the future, to accelerate the write down of our inventory, including, but not limited to showroom, rental and other equipment and related supplies and parts, including parts and supplies for our TechSource initiative, as a result of obsolescence. In order to remain competitive, we must quickly and effectively respond to changing technology. Otherwise, such developments of technologies in our industry may impair our business, financial condition, results of operations or competitive position.

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

If we were to breach the covenants or other restrictions in our agreements with one or more of our financing sources, including GECC, such sources might refuse to provide financing to our customers. If one or more of our financing sources were to fail to provide financing to our customers, those customers might be unable to purchase equipment from us if we were unable to arrange alternative financing arrangements on similar terms or provide financing ourselves. 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—Our Europe/Australia and Non-U.S. Americas 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. As such, we have evaluated what information system investments we should make for the countries within our Europe/Australia and Non-U.S. Americas operations. We have determined that we need to upgrade our information systems in Italy, Germany, the United Kingdom, France, Austria, the Netherlands and other countries and expect to spend between $6 million and $10 million for such upgrades. The failure to solve our management information and billing system problems in our Europe/Australia and Non-U.S. Americas operations or any disruption in our business processes when we upgrade our IT systems 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. Our facilities have reserve power generating systems to prevent the loss of product and minimize downtime in the event of shortages. 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.

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Due to the delayed investment in our information systems in Europe, we have not properly invested in world-wide disaster recovery systems. In the event that one or more of our business systems in Europe were to fail, we would be at risk of losing valuable business knowledge in the locations in Europe where the failure occurred.

Business Processes and Policies—Our past rapid expansion through acquisitions, past financial difficulties and a historical lack of focus on, and investment in, our information systems have impeded our ability to develop and implement internal controls and business processes consistently and enforce policies effectively. We have identified instances where our business processes and policies have not been properly implemented or followed in the past, which have resulted in, among other things, poor billing and credit practices, weak customer contract management, excessive and undisciplined issuances of customer credits, inaccurate customer data, inconsistent customer contract terms and conditions, inadequate document retention and inconsistent lease classification. While we believe that some of these issues that relate to the United States have been addressed with the implementation of new manual internal control procedures and the implementation of our Oracle ERP system, which is configured with better system internal controls, there is no assurance that all of these issues will be completely corrected by such changes.

Vendor Relationships—We primarily have relationships with Canon, Ricoh, Toshiba, Nexpress, Kodak 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 and for financial support in certain competitive transactions and markets which may include vendor rebates and market development funds. An 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 lack of vendor support 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.

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% of our revenue outside the United States during the first six months of fiscal year 2005. We market office imaging equipment, document solutions and related services and supplies directly to customers in 24 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:

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. Further, should we decide to downsize or exit any of these businesses, we could incur costs relating to severance and closure of facilities, 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.

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

The majority of our revenues outside the United States are denominated in either the euro or the United Kingdom pound. During the quarter ended September 30, 2004, the euro strengthened 1.5% against the United States dollar and the United Kingdom pound strengthened 1.0% against the United States dollar. This positively impacted our reported revenue and net earnings on a sequential basis.

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 United Kingdom pound. Based on the outstanding balance of our intercompany loans at September 30, 2004, a change of 1% in the exchange rate for the euro and United Kingdom pound, would cause a change in our foreign exchange gain or loss of approximately $0.3 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. If the euro weakens against the United States dollar, our operating margins and cash flow may be negatively impacted when we receive payment in euros but we pay our suppliers in United States dollars.

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

Tax Payments—We are either currently under audit or may be audited in the key 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 or our liquidity could be adversely affected based upon the size and timing of such payments.

Indebtedness—At September 30, 2004, we had consolidated long-term indebtedness, including current maturities of long-term debt and notes payable, of $244.0 million which included $64.5 million in principal amount of 10% subordinated notes due April 1, 2008 and $175.0 million in principal amount of 11% senior notes due June 15, 2010, less unamortized discount of $3.6 million. The subordinated notes accrue interest which is paid every six months on April 1 and October 1 while the senior notes have interest payable every six months on June 15 and December 15.

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

Debt and Credit Facilities—The indenture governing our senior notes and the $50 million senior secured revolving credit facility with Fleet Capital Corporation (or “Fleet Credit Facility”) contains 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) they place restrictions on the ability of our restricted subsidiaries to pay dividends, or make other payments to us; (8) engage in certain business activities; and (9) engage in mergers or consolidations. 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.

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

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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. We also maintain internal controls that are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, in order to permit the preparation of our financial statements in conformity with generally accepted accounting principles and to comply with Sections 302, 906 and 404 of the Sarbanes-Qxley Act

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within 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—We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the design and effectiveness of our internal control over financial reporting and a report by our Independent Auditors addressing these assessments. Compliance with this legislation will continue to divert management’s attention and resources and will cause us to incur significant expense.

During the course of our testing, we have identified certain matters relating to the design and operational effectiveness of our internal controls which need to be remediated, but that may not be able to be remediated in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If this were to occur, we may be unable to assert that the internal control over financial reporting are effective, or our Independent Auditors may not be able to render the required attestation concerning our assessment and the effectiveness of the internal controls over financial reporting, which could adversely impact our business.

Share Price—The market price of our ordinary shares and American Depository 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 UK GAAP:

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

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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 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.

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PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Danka Business Systems PLC

Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2004 and 2003

(In thousands, except per American Depositary Share (“ADS”) amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC

Consolidated Balance Sheets as of September 30, 2004 and March 31, 2004

(In Thousands)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2004 and 2003

(In Thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC

Consolidated Statements of Shareholders’ Equity (Deficit)

For the Six Months Ended September 30, 2004 and 2003

(In Thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC

Notes to Consolidated Financial Statements

(in thousands, except per American Depositary Share (“ADS”) amounts)

(Unaudited)

Note 1. Basis of Presentation

The accompanying financial statements of Danka Business Systems PLC (the “Company”) are unaudited as of September 30, 2004 and 2003. 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2004.

The Company’s operations have historically experienced lower revenue during the second quarter of its fiscal year, which is the three month period ended September 30. This is primarily due to increased vacation time by European and Canadian residents during July and August and lower levels of retail service revenue from U.S. governmental agencies. This has historically resulted in reduced sales activity and reduced usage of photocopiers, facsimiles and other office imaging equipment during the second quarter. 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 financial statements contained herein for the three and six months ended September 30, 2004 do not comprise statutory accounts within the meaning of Section 240 of the United Kingdom Companies Act 1985. Statutory accounts for the year ended March 31, 2004 will be delivered to the Registrar of Companies for England and Wales following our 2004 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.

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

Note 2. Interim Period Stock Compensation Disclosures

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

The following table illustrates the effect on basic and diluted net earnings (loss) available and earnings (loss) available per ADS shareholder if the Company had applied the fair value recognition provisions of SFAS 123 to employee stock benefits, including ADS shares issued under the stock option plans. For purposes of this pro-forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting periods.

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Danka Business Systems PLC

Notes to Consolidated Financial Statements

(in thousands, except per American Depositary Share (“ADS”) amounts)

(Unaudited)

Note 3. Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (the “FASB”) revised FASB Statement No. 132 (“SFAS 132”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised standard mandates additional required disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency within financial statements and requires certain disclosures to be made on a quarterly basis. The revised standard replaces existing pension disclosure requirements. Compliance with SFAS 132 was generally effective for fiscal periods beginning after December 15, 2003. However, since all of the required disclosures relate to the Company’s international plans, the implementation rules are effective for the Company’s year ending March 31, 2005 and as such, no interim period disclosures have been made in this quarterly report on Form 10-Q. The Company does not anticipate the adoption of SFAS 132 to have a material impact on its consolidated financial statements.

In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-6, “Participating Securities and the Two-Class Method under FAS 128, Earnings per Share” (“EITF 03-6”). EITF 03-6 requires the use of the two-class method in calculating basic earnings per share by issuers with participating convertible securities. Companies were required to retroactively apply EITF 03-6 to participating securities in the quarter beginning April 1, 2004. The Company adopted EITF 03-6 in the quarter beginning April 1, 2004. The adoption had no impact on its consolidated financial statements or earnings available per share presented herein.

Note 4. Restructuring Charges (Credits)

Fiscal Year 2005 Charge: In the second quarter of fiscal year 2005, the Company formulated plans to continue to reduce its selling, general and administrative costs by reducing headcount in Europe/Australia. As part of these plans, the Company recorded a $0.4 million restructuring charge in the second quarter of fiscal year 2005. The Company expects severance costs to be paid over the next two years with most of the severance costs to be paid by December 31, 2004. Cash outlays for the employee severance during the quarter ended September 30, 2004 were $0.2 million. The remaining liability of the 2005 restructuring charge, totaling $0.2 million is categorized within “Accrued expenses and other current liabilities”.

The following table summarizes the fiscal year 2005 restructuring charge:

2005 Restructuring Charge:

Fiscal Year 2004 Charge: In fiscal year 2004, the Company formulated plans to significantly reduce its selling, general and administrative costs by consolidating its back-office functions in the United States, exiting non-strategic real estate facilities and reducing headcount in the Americas and Europe/Australia. As part of these plans, the Company recorded a $50.6 million restructuring charge in fiscal year 2004 that included $26.9 million related to severance for employees and $23.7 million related to future lease obligations for facilities that were vacated by March 31, 2004. The Company expects most of the severance costs to be paid by December 31, 2004. Cash outlays for the employee severance during the six months ended September 30, 2004 were $8.8 million. Cash outlays for the remaining terms of the facility leases during the six months ending September 30, 2004 were $4.7 million. If these leases are not terminated, the Company’s payments will continue through their respective terms unless otherwise disposed of. The Company reversed $2.5 million of fiscal year 2004 severance and facility charges during the second quarter of fiscal year 2005 as a result of employee attrition in its Americas and Europe/Australia segments, a change in restructuring plans in the Europe/Australia segment partially offset by a higher estimate of facility charges in the Americas. The remaining non-cash changes of $0.3 million relate to foreign currency movements. The remaining liability of the 2004 restructuring charge is categorized within “Accrued expenses and other current liabilities” and “Deferred income taxes and other long-term liabilities.”

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Danka Business Systems PLC

Notes to Consolidated Financial Statements

(in thousands, except per American Depositary Share (“ADS”) amounts)

(Unaudited)

The following table summarizes the fiscal year 2004 restructuring charge:

2004 Restructuring Charge:

2004 Restructuring Severance Charge by Operating Segment:

2004 Restructuring Facility Charge by Operating Segment:

Fiscal Year 2002 Charge: The Company’s fiscal year 2002 restructuring charge included $4.9 million related to severance for 355 employees in the U.S., Canada and Europe. Cash outlays for the reductions during the six months ended September 30, 2004 were $0.2 million. The restructuring charge also included $6.1 million for future lease obligations on 39 facilities that were vacated by March 31, 2002. Due to a change in estimate, the Company reversed $0.5 million of fiscal year 2002 severance and facility charges during the first quarter of fiscal year 2004. The remaining liability of the 2002 restructuring charge is categorized within “Accrued expenses and other current liabilities.”

The following table summarizes the fiscal year 2002 restructuring charge:

2002 Restructuring Charge:

The remaining balance of the 2002 Restructuring Charge is for the Company’s Europe/Australia operating segment.

Note 5. Income Taxes

The Company recorded an income tax provision of $0.8 million in the first six months of fiscal year 2005 compared to a benefit of $13.8 million in the prior year period. The tax expense for the current period is attributable to European jurisdictions and an inability to recognize a tax benefit on the losses incurred in most jurisdictions. In the prior year period, the Company realized an operating loss, which generated income tax benefits, as well as reversal of $3.2 million of foreign tax accruals.

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Danka Business Systems PLC

Notes to Consolidated Financial Statements

(in thousands, except per American Depositary Share (“ADS”) amounts)

(Unaudited)

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 which give rise to the deferred tax asset become deductible. The Company’s past financial performance is a significant factor which contributes to its inability, pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”), to use projections of future taxable income in assessing the realizability of deferred tax assets. Management therefore is limited to considering the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. Due to the inability to use projections of future taxable income in making its assessment, management concluded that it is not “more likely than not” that the Company will realize the benefits of certain deferred tax assets at September 30, 2004. The Company has a valuation allowance against deferred tax assets in most jurisdictions at September 30, 2004.

Note 6. Earnings (Loss) Per Share

The effect of the Company’s 6.5% senior convertible participating shares, which represent the ADSs shown in the table below are not included in the computation of diluted earnings per share for the three and six months ended September 30, 2004 and 2003 because they are anti-dilutive as the Company incurred losses attributable to common shareholders. Stock options representing the ADSs shown in the table below are not included in the computation of diluted earnings per share for the three and six months ended September 30, 2004 and 2003 because they are anti-dilutive as the Company is in a loss position. These are presented using the treasury stock method. The total number of outstanding shares (all of which are anti-dilutive) was 7,814 and 9,997 at September 30, 2004 and 2003, respectively.

Potential ADSs issuance from: