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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the three months ended June 30, 2005



or



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from             to
            .



Commission file number 1-5964



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IKON OFFICE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|OHIO                                                           |  | 23-0334400                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|70 Valley Stream Parkway, Malvern, Pennsylvania                |  | 19355                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (610) 296-8000



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 Act).    Yes  x    No ̈



Applicable only to corporate issuers:



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of August 1, 2005:



Common Stock, no par value 139,977,635 shares



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IKON OFFICE SOLUTIONS, INC.



INDEX



PART IFINANCIAL INFORMATION



|                          |  |                                                                                                  |  |   
|------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --
|ITEM 1.                   |  | Financial Statements                                                                             |  |   
|                          |  |                                                                                                 
|                          |  | Consolidated Balance SheetsJune 30, 2005 and September 30, 2004 (unaudited)                     |  | 6 
|                          |  |                                                                                                 
|                          |  | Consolidated Statements of IncomeThree and nine months ended June 30, 2005 and 2004 (unaudited) |  | 7 
|                          |  |                                                                                                 
|                          |  | Consolidated Statements of Cash FlowsNine months ended June 30, 2005 and 2004 (unaudited)       |  | 8 
|                          |  |                                                                                                 
|                          |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                 |  | 9 
|                          |  |                                                                                                 
|ITEM 2.                   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 27
|                          |  |                                                                                                 
|ITEM 3.                   |  | Quantitative and Qualitative Disclosures About Market Risk                                       |  | 45
|                          |  |                                                                                                 
|ITEM 4.                   |  | Controls and Procedures                                                                          |  | 46
|                          | 
|PART IIOTHER INFORMATION |  |                                                                                                 
|                          |  |                                                                                                 
|ITEM 2.                   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 48
|                          |  |                                                                                                 
|ITEM 6.                   |  | Exhibits                                                                                         |  | 48
|                          | 
|SIGNATURES                |  |                                                                                                 



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FORWARD-LOOKING INFORMATION



IKON Office Solutions, Inc. (we, us, our, IKON, or the Company)
may from time to time provide information, whether verbally or in writing, including certain statements included in, or incorporated by reference in, this Form 10-Q, which constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the Litigation Reform Act). These forward-looking statements include all matters that are not historical facts, including, but not limited to, statements regarding the following: the
expected use of proceeds from our transactions with General Electric Capital Corporation (GE) and its affiliates involving the sale of certain assets and liabilities of our leasing operations in the U.S. and Canada; earnings, revenue,
cash flow, margin, and cost-savings projections; our ability to execute long-term strategic initiatives, achieve growth objectives and improve operational efficiency; our ability to repay debt; the run-off of our retained U.S. lease portfolio; the
expensing of stock options; our share repurchase activity; the completion of restructuring actions initiated in the second quarter of fiscal 2005; the effect of competitive pressures on equipment sales; conducting operations in a competitive
environment and a changing industry; developing and expanding strategic alliances and partnerships; the implementation, timing, and cost of our ongoing conversion to a common enterprise resource planning (ERP) system, which is primarily
based on the Oracle E-Business Suite (the ERP Conversion); anticipated growth rates in the digital monochrome and color equipment and outsourcing areas; the effect of foreign currency exchange risks; the reorganization of our business
segments and the anticipated benefits of operational synergies related thereto; our ability to finance our current operations and growth initiatives; our ability to remediate control deficiencies identified in our billing and trade accounts
receivable processes; our ability to have effective internal controls over financial reporting at September 30, 2005; and existing or future vendor relationships. Although we believe the expectations contained in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove correct. References herein to we, us, our, IKON, or the Company refer to IKON and its subsidiaries unless the context
specifically requires or implies otherwise.



The words
anticipate, believe, estimate, expect, intend, will, should, may, plan, could, and similar expressions, as they relate to us, our
industry, or our management, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are by their very nature, subject to certain risks, uncertainties, assumptions, and other
important factors that could cause actual results to differ materially from those contained in these forward-looking statements. These factors include, but are not limited to, the following (some of which are explained in greater detail in this Form
10-Q): our ability to successfully integrate our equipment distribution business with a third-party finance vendor program, which involves the integration and transition of complex systems and processes; operating in a competitive environment and a
changing industry, which includes technological services and products that are relatively new to the industry; delays, difficulties, management transitions, and employment issues associated with consolidations and/or changes in business operations,
including our ERP Conversion; existing and future vendor relationships; risks relating to foreign currency exchange; economic, legal, and political issues associated with international operations; our ability to access capital and meet our debt
service requirements (including sensitivity to fluctuations in interest rates); and general economic conditions. Should one or more of these risks, factors or uncertainties materialize, or should underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, or planned. We assume no obligations related to, nor do we intend to update, these forward-looking statements.



Billing and Trade Accounts Receivable. Our ability to timely issue
accurate invoices is critical to ensuring accurate recording of our revenue and trade accounts receivable. During the second quarter of fiscal 2005, we identified deficiencies in the processes and timeliness by which we issue and adjust certain
invoices (See Item 1. Financial StatementsNote 2. Restatement of Previously Issued Financial Statements) and have implemented processes designed to fairly present our financial statements. Our inability to continue to remediate
these deficiencies could result in a material adverse effect on our financial position and results of operations.



Competition. We operate in a highly competitive environment. Competition is based largely upon technology, performance, pricing, quality,
reliability, distribution, and customer support. A number of companies worldwide with significant financial resources or customer relationships compete with us to provide similar products and services, such as Xerox and Pitney Bowes. Our competitors
may be positioned to offer more favorable product and service terms to the marketplace, resulting in reduced profitability and loss of market share for us. Some of our competitors, such as Canon, Ricoh, Konica Minolta, and HP, also supply us with
the products we sell, service, and lease. In addition, we compete against smaller local independent office equipment distributors. Financial pressures faced by our competitors may cause them to engage in uneconomic pricing practices, which could
cause the prices that we are able to charge in the future for our products and services to be less than we have historically charged. Our future success is based in large part upon our ability to successfully compete in the markets we currently
serve and to expand into additional product and service offerings. Our failure to do so could lead to a loss of market share for us, resulting in a material adverse effect on our results of operations.



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Pricing. Our success is dependent upon our ability to charge adequate prices for the equipment,
parts, supplies, and services we offer. Depending on competitive market factors, future prices we can charge for the equipment, parts, supplies, and services we offer may vary from historical levels and may effect our profitability.



Third-party Finance Vendor Relationships. If we are unable to continue
to successfully integrate our equipment distribution business with a third-party finance vendor under our program agreement (the U.S. Program Agreement) with GE and our rider to the U.S. Program Agreement with GE in Canada (the
Canadian Rider, together with the U.S. Program Agreement, the Program Agreements), which involves the integration and transition of complex systems and processes, our liquidity, financial position, and results of operations
may be adversely affected. Prior to our entry into the Program Agreements, significant portions of our profits were derived from our leasing operations in the U.S. and Canada. Currently, we are entitled to receive certain fees under the Program
Agreements for future leases funded by GE. We intend to use these fees as well as the proceeds from the sale of our North American leasing operations to implement certain strategies, including, among other things, to enhance our core business of
document management solutions, reduce our debt, and repurchase shares of our common stock. Our failure to successfully implement these strategies could have a material adverse effect on our ability to implement those strategies and our liquidity,
financial position, and results of operations.



In addition,
our ability to generate ongoing revenue from the Program Agreements is dependent upon our ability to identify and secure opportunities for lease-financing transactions with our customers under the Program Agreements. Our failure to secure such
opportunities for funding by GE could result in a material adverse effect on our liquidity, financial position, and results of operations.



Vendor Relationships. Our access to equipment, parts, supplies, and services depends upon our relationships with, and our ability to purchase these
items on competitive terms from, our principal vendors, Canon, Ricoh, Konica Minolta, EFI, and HP. We do not enter into long-term supply contracts with these vendors and we have no current plans to do so in the future. These vendors are not required
to use us to distribute their equipment and are free to change the prices and other terms at which they sell to us. In addition, we compete with the direct selling efforts of some of these vendors. Significant deterioration in relationships with, or
in the financial condition of, these significant vendors could have an adverse effect on our ability to sell and lease equipment as well as our ability to provide effective service and technical support. If one of these vendors terminated or
significantly curtailed its relationship with us, or if one of these vendors ceased operations, we would be forced to expand our relationship with other vendors, seek new relationships with other vendors, or risk a loss in market share due to
diminished product offerings and availability. In addition, as we continue to seek expansion of our products and services portfolio, we are developing relationships with certain software vendors, including Captaris, EMC (Documentum) and Kofax. As
our relationships with software vendors become more integral to our development and growth, the termination or significant curtailment of these relationships may force us to seek new relationships with other software vendors, or pose a risk of loss
in market share due to diminished software offerings.



New
Product Offerings. Our business is driven primarily by customers needs and demands and by the products developed and manufactured by third parties. Because we distribute products developed and manufactured by third parties, our business
would be adversely affected if our suppliers fail to anticipate which products or technologies will gain market acceptance or if we cannot sell these products at competitive prices. We cannot be certain that our suppliers will permit us to
distribute their newly developed products or that such products will meet our customers needs and demands. Additionally, because some of our principal competitors design and manufacture their own products rather than rely on third parties to
supply them, those competitors may have a competitive advantage over us. To successfully compete, we must maintain an efficient cost structure, an effective sales and marketing team, and offer additional services that distinguish us from our
competitors. Failure to execute these strategies successfully could result in reduced market share for us or could have a material adverse effect on our liquidity, financial position, and results of operations.



Liquidity. We maintain a $200 million secured credit facility (the
Credit Facility) with a group of lenders. The Credit Facility provides the availability of revolving loans, with certain sub-limits, and provides support for letters of credit. The amount of credit available under the Credit Facility is
reduced by open letters of credit. The amount available under the Credit Facility for borrowings or additional letters of credit was $165.7 million at June 30, 2005. The Credit Facility is secured by our accounts receivable and inventory, the stock
of our first-tier domestic subsidiaries, 65% of the stock of our first-tier foreign subsidiaries, and all of our intangible assets. All security interests pledged under the Credit Facility are shared with the holders of our 7.25% notes payable due
2008.



The Credit Facility contains affirmative and negative
covenants, including limitations on certain fundamental core business changes, investments and acquisitions, mergers, certain transactions with affiliates, creations of liens, asset transfers, payments of dividends, intercompany loans, and certain
restricted payments. The Credit Facility does not, however, limit our ability to continue to securitize lease receivables. The Credit Facility matures on March 1, 2008, but is subject to certain early maturity events in November 2006, January 2007,
and April 2007 if our 5% convertible subordinated notes due 2007 (the



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Convertible Notes) have not been converted to equity or refinanced or minimum liquidity is not met as of such
dates. Minimum liquidity is defined as having sufficient cash, including any unused capacity under the Credit Facility, to repay the balance of the Convertible Notes plus an additional $100 million. The Credit Facility contains certain financial
covenants relating to: (i) corporate leverage ratios; (ii) consolidated interest coverage ratio; (iii) consolidated asset coverage ratio; (iv) consolidated net worth ratios; (v) limitations on capital expenditures; and (vi) limitations on additional
indebtedness and liens. Under the terms of the Credit Facility, share repurchases are permitted in an aggregate amount not to exceed $250 million during the period of July 28, 2004 through March 1, 2008. From July 28, 2004 through September 30,
2005, share repurchases are permitted in an aggregate amount not to exceed $150 million. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net
income, plus (b) that portion of the $150 million allowance that we did not utilize prior to October 1, 2005. As of June 30, 2005, approximately $85 million of the $150 million allowance was utilized. The Credit Facility contains default provisions
customary for facilities of this type. Failure to comply with any material provision of the Credit Facility could have a material adverse effect on our liquidity, financial position, and results of operations.



Operational Efficiencies. Our ability to improve our profit margins is
largely dependent on the success of our initiatives to streamline our infrastructure and drive operational efficiencies across the Company. Such initiatives, which include the ERP Conversion and process enhancement through Six Sigma, are focused on
strategic priorities such as process redesign and improvement, organizational development, and asset management. Six Sigma is a disciplined business methodology designed to assist companies in increasing profitability by streamlining operations,
improving quality, and eliminating possible defects in processes. Six Sigma is intended to provide specific methods to re-create a particular process, starting from the customers vantage point, so that defects in the process are eliminated and
any potential defects are prevented. Our failure to successfully implement these initiatives, or the failure of such initiatives to result in improved profit margins, could have a material adverse effect on our liquidity, financial position, and
results of operations.



International Operations. We
have international operations in Canada, Mexico, and Western Europe. Approximately 18% of our revenues for fiscal 2005 are derived from our international operations, and approximately 74% of those revenues are derived from Canada and the United
Kingdom. Our future revenues, costs of operations, and profits could be affected by a number of factors related to our international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to
country, changes in a countrys political condition, trade protection measures, licensing and other legal requirements, and local tax issues. For example, unanticipated currency fluctuations in the Canadian Dollar, British Pound, or Euro versus
the U.S. Dollar could lead to lower reported consolidated results of operations due to the translation of these currencies.



Internal Controls. Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to
effectively prevent fraud. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our brand and operating results could be harmed. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to
furnish a report by management on our internal controls over financial reporting, including managements assessment of the effectiveness of such controls as of September 30, 2005. Internal controls over financial reporting may not prevent or
detect misstatements because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with
respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal controls over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or
improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed, we could fail to meet our reporting obligations, and there could be a material adverse effect on our stock price.



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PART IFINANCIAL INFORMATION



Item 1.Financial Statements



IKON OFFICE SOLUTIONS, INC.



CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands)



|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ------------------------- | - | --------- | -
|                                                                                                                                                                                                                     |  | June 30,2005 |           |   | RestatedSeptember 30,2004 |  
|Assets                                                                                                                                                                                                               |  |              |           |   |                           |   |           |  
|Cash and cash equivalents                                                                                                                                                                                            |  | $            | 289,277   |   |                           | $ | 472,951   |  
|Restricted cash                                                                                                                                                                                                      |  |              | 23,694    |   |                           |   | 27,032    |  
|Accounts receivable, less allowances of: June 30, 2005$11,372; September 30, 2004$7,224                                                                                                                            |  |              | 668,948   |   |                           |   | 728,634   |  
|Finance receivables, less allowances of: June 30, 2005$2,922; September 30, 2004$2,514                                                                                                                             |  |              | 360,661   |   |                           |   | 457,615   |  
|Inventories                                                                                                                                                                                                          |  |              | 233,929   |   |                           |   | 233,345   |  
|Prepaid expenses and other current assets                                                                                                                                                                            |  |              | 71,995    |   |                           |   | 81,188    |  
|Deferred taxes                                                                                                                                                                                                       |  |              | 52,458    |   |                           |   | 64,481    |  
|Current assets held for sale (Note 16)                                                                                                                                                                               |  |              | 16,908    |   |                           |   |           |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Total current assets                                                                                                                                                                                                 |  |              | 1,717,870 |   |                           |   | 2,065,246 |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Long-term finance receivables, less allowances of: June 30, 2005$3,572; September 30, 2004$3,932                                                                                                                   |  |              | 514,923   |   |                           |   | 753,146   |  
|Equipment on operating leases, net of accumulated depreciation of: June 30, 2005 $78,917; September 30,
2004$76,456                                                                                                |  |              | 104,448   |   |                           |   | 78,673    |  
|Property and equipment, net of accumulated depreciation of: June 30, 2005 $311,867; September 30, 2004$321,789                                                                                                     |  |              | 149,364   |   |                           |   | 164,132   |  
|Goodwill                                                                                                                                                                                                             |  |              | 1,278,039 |   |                           |   | 1,286,564 |  
|Unsold residual value (Note 6)                                                                                                                                                                                       |  |              | 35,692    |   |                           |   | 45,548    |  
|Other assets                                                                                                                                                                                                         |  |              | 117,415   |   |                           |   | 125,104   |  
|Long-term assets held for sale (Note 16)                                                                                                                                                                             |  |              | 13,628    |   |                           |   |           |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Total Assets                                                                                                                                                                                                         |  | $            | 3,931,379 |   |                           | $ | 4,518,413 |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                                                                 |  |              |           |   |                           |   |           |  
|Current portion of corporate debt                                                                                                                                                                                    |  | $            | 3,446     |   |                           | $ | 63,023    |  
|Current portion of debt supporting finance contracts and unsold residual value                                                                                                                                       |  |              | 333,848   |   |                           |   | 439,941   |  
|Trade accounts payable                                                                                                                                                                                               |  |              | 210,373   |   |                           |   | 307,170   |  
|Accrued salaries, wages, and commissions                                                                                                                                                                             |  |              | 92,868    |   |                           |   | 124,808   |  
|Deferred revenues                                                                                                                                                                                                    |  |              | 99,110    |   |                           |   | 116,682   |  
|Taxes payable                                                                                                                                                                                                        |  |              | 61,355    |   |                           |   | 52,976    |  
|Other accrued expenses                                                                                                                                                                                               |  |              | 146,301   |   |                           |   | 170,741   |  
|Current liabilities held for sale (Note 16)                                                                                                                                                                          |  |              | 18,879    |   |                           |   |           |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Total current liabilities                                                                                                                                                                                            |  |              | 966,180   |   |                           |   | 1,275,341 |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Long-term corporate debt                                                                                                                                                                                             |  |              | 694,746   |   |                           |   | 741,857   |  
|Long-term debt supporting finance contracts and unsold residual value                                                                                                                                                |  |              | 263,507   |   |                           |   | 422,868   |  
|Deferred taxes                                                                                                                                                                                                       |  |              | 107,533   |   |                           |   | 187,091   |  
|Other long-term liabilities                                                                                                                                                                                          |  |              | 207,147   |   |                           |   | 203,538   |  
|Long-term liabilities held for sale (Note 16)                                                                                                                                                                        |  |              | 2,366     |   |                           |   |           |  
|                                                                                                                                                                                                                     |  |             
|Commitments and contingencies (Note 13)                                                                                                                                                                              |  |              |           |   |                           |   |           |  
|                                                                                                                                                                                                                     |  |             
|Shareholders Equity                                                                                                                                                                                                 |  |              |           |   |                           |   |           |  
|Common stock, no par value: authorized 300,000 shares; issued: June 30, 2005148,378 shares; September 30, 2004 149,955 shares,
shares outstanding: June 30, 2005139,959 shares; September 30, 2004142,133 shares |  |              | 1,026,243 |   |                           |   | 1,022,842 |  
|Series 12 preferred stock, no par value: authorized 480 shares; none issued or outstanding                                                                                                                           |  |              |           |   |                           |   |           |  
|Unearned compensation                                                                                                                                                                                                |  |              | (4,848    | ) |                           |   | (2,239    | )
|Retained earnings                                                                                                                                                                                                    |  |              | 748,838   |   |                           |   | 723,847   |  
|Accumulated other comprehensive income                                                                                                                                                                               |  |              | 20,604    |   |                           |   | 20,195    |  
|Cost of common shares in treasury: June 30, 20059,371 shares; September 30, 20047,196 shares                                                                                                                       |  |              | (100,937  | ) |                           |   | (76,927   | )
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Total Shareholders Equity                                                                                                                                                                                           |  |              | 1,689,900 |   |                           |   | 1,687,718 |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  
|Total Liabilities and Shareholders Equity                                                                                                                                                                           |  | $            | 3,931,379 |   |                           | $ | 4,518,413 |  
|                                                                                                                                                                                                                     |  |              |           |   |                           |   |           |  



See notes to
condensed consolidated financial statements.



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IKON OFFICE SOLUTIONS, INC.



CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share amounts)



|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|-------------------------------------------------------- |  | --------------------------- | --------- | - | -------------------------- | - | --------- | ---- |  | - | ------------ | - |  | - | --------- | -
|                                                         |  | Three Months Ended June 30, |           |   | Nine Months Ended June 30, |  
|                                                         |  | 2005                        |           |   | Restated2004               |   |           | 2005 |  |   | Restated2004 |  
|Revenues                                                 |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Net sales                                                |  | $                           | 487,211   |   |                            | $ | 513,412   |      |  | $ | 1,447,624    |   |  | $ | 1,450,201 |  
|Services                                                 |  |                             | 586,195   |   |                            |   | 587,989   |      |  |   | 1,745,035    |   |  |   | 1,739,368 |  
|Finance income                                           |  |                             | 24,899    |   |                            |   | 41,827    |      |  |   | 83,364       |   |  |   | 239,097   |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|                                                         |  |                             | 1,098,305 |   |                            |   | 1,143,228 |      |  |   | 3,276,023    |   |  |   | 3,428,666 |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Costs and Expenses                                       |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Cost of goods sold                                       |  |                             | 367,527   |   |                            |   | 366,881   |      |  |   | 1,056,532    |   |  |   | 1,032,872 |  
|Services costs                                           |  |                             | 335,200   |   |                            |   | 340,302   |      |  |   | 1,033,332    |   |  |   | 1,032,670 |  
|Finance interest expense                                 |  |                             | 6,139     |   |                            |   | 11,473    |      |  |   | 21,033       |   |  |   | 80,748    |  
|Selling and administrative                               |  |                             | 338,879   |   |                            |   | 362,577   |      |  |   | 1,030,885    |   |  |   | 1,103,540 |  
|(Gain) loss on divestiture of businesses                 |  |                             |           |   |                            |   | (698      | )    |  |   | (1,901       | ) |  |   | 11,427    |  
|Asset impairments                                        |  |                             | 27        |   |                            |   |           |      |  |   | 340          |   |  |   |           |  
|Restructuring                                            |  |                             | (406      | ) |                            |   |           |      |  |   | 10,990       |   |  |   |           |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|                                                         |  |                             | 1,047,366 |   |                            |   | 1,080,535 |      |  |   | 3,151,211    |   |  |   | 3,261,257 |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Operating income                                         |  |                             | 50,939    |   |                            |   | 62,693    |      |  |   | 124,812      |   |  |   | 167,409   |  
|Loss from early extinguishment of debt                   |  |                             |           |   |                            |   | 32,687    |      |  |   | 1,734        |   |  |   | 35,906    |  
|Interest expense, net                                    |  |                             | 11,260    |   |                            |   | 15,175    |      |  |   | 34,571       |   |  |   | 34,923    |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Income from continuing operations before taxes on income |  |                             | 39,679    |   |                            |   | 14,831    |      |  |   | 88,507       |   |  |   | 96,580    |  
|Taxes on income                                          |  |                             | 13,307    |   |                            |   | 5,629     |      |  |   | 30,715       |   |  |   | 29,175    |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Income from continuing operations                        |  |                             | 26,372    |   |                            |   | 9,202     |      |  |   | 57,792       |   |  |   | 67,405    |  
|Discontinued operations:                                 |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Operating loss                                           |  |                             | (3,210    | ) |                            |   | (1,336    | )    |  |   | (19,410      | ) |  |   | (4,917    | )
|Tax benefit                                              |  |                             | 1,268     |   |                            |   | 527       |      |  |   | 7,667        |   |  |   | 1,940     |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Net loss from discontinued operations                    |  |                             | (1,942    | ) |                            |   | (809      | )    |  |   | (11,743      | ) |  |   | (2,977    | )
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Net income                                               |  | $                           | 24,430    |   |                            | $ | 8,393     |      |  | $ | 46,049       |   |  | $ | 64,428    |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Basic earnings per common share                          |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Continuing operations                                    |  | $                           | 0.19      |   |                            | $ | 0.06      |      |  | $ | 0.41         |   |  | $ | 0.46      |  
|Discontinued operations                                  |  |                             | (0.01     | ) |                            |   | (0.01     | )    |  |   | (0.08        | ) |  |   | (0.02     | )
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Net income                                               |  | $                           | 0.17      | * |                            | $ | 0.06      | *    |  | $ | 0.33         |   |  | $ | 0.44      |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Diluted earnings per common share                        |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Continuing operations                                    |  | $                           | 0.18      |   |                            | $ | 0.06      |      |  | $ | 0.40         |   |  | $ | 0.44      |  
|Discontinued operations                                  |  |                             | (0.01     | ) |                            |   | (0.01     | )    |  |   | (0.07        | ) |  |   | (0.02     | )
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Net income                                               |  | $                           | 0.17      |   |                            | $ | 0.06      | *    |  | $ | 0.32         | * |  | $ | 0.42      |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  
|Cash dividends per common share                          |  | $                           | 0.04      |   |                            | $ | 0.04      |      |  | $ | 0.12         |   |  | $ | 0.12      |  
|                                                         |  |                             |           |   |                            |   |           |      |  |   |              |   |  |   |           |  

---

|* | The sum of the earnings per share amounts do not equal the total due to rounding.
|- | ---------------------------------------------------------------------------------



See notes to condensed consolidated financial statements.



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                         |  |                            |          |   |               |   |            |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ------------- | - | ---------- | -
|                                                                                         |  | Nine Months Ended June 30, |         
|                                                                                         |  | 2005                       |          |   | Restated 2004 |  
|Cash Flows from Operating Activities                                                     |  |                            |          |   |               |   |            |  
|Net income                                                                               |  | $                          | 46,049   |   |               | $ | 64,428     |  
|Net loss from discontinued operations                                                    |  |                            | (11,743  | ) |               |   | (2,977     | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Income from continuing operations                                                        |  |                            | 57,792   |   |               |   | 67,405     |  
|Additions (deductions) to reconcile net income to net cash used in operating activities: |  |                            |          |   |               |   |            |  
|Depreciation                                                                             |  |                            | 55,068   |   |               |   | 62,052     |  
|Amortization                                                                             |  |                            | 5,862    |   |               |   | 7,877      |  
|(Gain) loss from divestiture of businesses                                               |  |                            | (1,901   | ) |               |   | 11,427     |  
|Provision for losses on accounts receivable                                              |  |                            | 11,898   |   |               |   | 4,280      |  
|Restructuring charge                                                                     |  |                            | 10,990   |   |               |   |            |  
|Asset impairment charge                                                                  |  |                            | 340      |   |               |   |            |  
|Deferred income taxes                                                                    |  |                            | (67,535  | ) |               |   | (211,318   | )
|Provision for lease default reserves                                                     |  |                            | 2,124    |   |               |   | 32,352     |  
|Pension expense                                                                          |  |                            | 32,654   |   |               |   | 38,281     |  
|Non-cash interest expense on debt supporting unsold residual value                       |  |                            | 432      |   |               |   |            |  
|Loss from early extinguishment of debt                                                   |  |                            | 1,734    |   |               |   | 35,906     |  
|Changes in operating assets and liabilities, net of divestiture of businesses:           |  |                            |          |   |               |   |            |  
|Decrease (increase) in accounts receivable                                               |  |                            | 30,629   |   |               |   | (224,707   | )
|Increase in inventories                                                                  |  |                            | (6,621   | ) |               |   | (43,316    | )
|Increase in prepaid expenses and other current assets                                    |  |                            | (66      | ) |               |   | (14,119    | )
|Decrease in accounts payable, deferred revenues and accrued expenses                     |  |                            | (155,979 | ) |               |   | (203,526   | )
|Decrease in accrued restructuring                                                        |  |                            | (5,849   | ) |               |   | (2,984     | )
|Other                                                                                    |  |                            | 394      |   |               |   | (4,080     | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Net cash used in continuing operations                                                   |  |                            | (28,034  | ) |               |   | (444,470   | )
|Net cash used in discontinued operations                                                 |  |                            | (9,618   | ) |               |   | (5,534     | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Net cash used in operating activities                                                    |  |                            | (37,652  | ) |               |   | (450,004   | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Cash Flows from Investing Activities                                                     |  |                            |          |   |               |   |            |  
|Proceeds from the divestiture of businesses                                              |  |                            | 5,330    |   |               |   | 1,849,148  |  
|Expenditures for property and equipment                                                  |  |                            | (22,091  | ) |               |   | (24,367    | )
|Expenditures for equipment on operating leases                                           |  |                            | (36,151  | ) |               |   | (39,497    | )
|Proceeds from the sale of property and equipment                                         |  |                            | 2,308    |   |               |   | 4,983      |  
|Proceeds from the sale of equipment on operating leases                                  |  |                            | 14,165   |   |               |   | 11,911     |  
|Proceeds from the sale of finance receivables                                            |  |                            | 188,956  |   |               |   | 162,498    |  
|Finance receivablesadditions                                                            |  |                            | (277,560 | ) |               |   | (934,609   | )
|Finance receivablescollections                                                          |  |                            | 398,448  |   |               |   | 1,025,383  |  
|Other                                                                                    |  |                            | (1,266   | ) |               |   | (7,982     | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Net cash provided by continuing operations                                               |  |                            | 272,139  |   |               |   | 2,047,468  |  
|Net cash provided by (used in) discontinued operations                                   |  |                            | 1,558    |   |               |   | (776       | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Net cash provided by investing activities                                                |  |                            | 273,697  |   |               |   | 2,046,692  |  
|                                                                                         |  |                            |          |   |               |   |            |  
|Cash Flows from Financing Activities                                                     |  |                            |          |   |               |   |            |  
|Proceeds from issuance of long-term corporate debt                                       |  |                            | 1,450    |   |               |   | 606        |  
|Short-term corporate debt repayments, net                                                |  |                            | (223     | ) |               |   | (2,700     | )
|Repayment of other borrowings                                                            |  |                            | (3,465   | ) |               |   | (59,997    | )
|Long-term corporate debt repayments                                                      |  |                            | (104,924 | ) |               |   | (327,454   | )
|Debt supporting finance contractsissuances                                              |  |                            | 19,339   |   |               |   | 337,070    |  
|Debt supporting finance contractsrepayments                                             |  |                            | (289,037 | ) |               |   | (1,436,277 | )
|Dividends paid                                                                           |  |                            | (16,889  | ) |               |   | (17,679    | )
|Decrease in restricted cash                                                              |  |                            | 3,338    |   |               |   | 1,128      |  
|Proceeds from option exercises and sale of treasury shares                               |  |                            | 3,946    |   |               |   | 8,125      |  
|Purchases of treasury shares and other                                                   |  |                            | (34,240  | ) |               |   | (25,841    | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Net cash used in financing activities                                                    |  |                            | (420,705 | ) |               |   | (1,523,019 | )
|                                                                                         |  |                            |          |   |               |   |            |  
|Effect of exchange rate changes on cash and cash equivalents                             |  |                            | 1,040    |   |               |   | 5,039      |  
|                                                                                         |  |                            |          |   |               |   |            |  
|Net (decrease) increase in cash and cash equivalents                                     |  |                            | (183,620 | ) |               |   | 78,708     |  
|Cash and cash equivalents at beginning of year                                           |  |                            | 472,951  |   |               |   | 360,030    |  
|                                                                                         |  |                            |          |   |               |   |            |  
|Cash and cash equivalents at end of period                                               |  | $                          | 289,331  | * |               | $ | 438,738    |  
|                                                                                         |  |                            |          |   |               |   |            |  

---

|* | Includes $54 of cash and cash equivalents that has been reclassified to assets held for sale on the Consolidated Balance Sheet at June 30, 2005, as a result of the sale of our
French operating subsidiary in the fourth quarter of fiscal 2005 (see Note 16).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to condensed consolidated financial statements.



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



IKON Office Solutions, Inc. (IKON or the Company) delivers integrated document management solutions and systems, enabling customers to improve document workflow and increase efficiency. We are
the worlds largest independent channel for copier, printer and multifunction product (MFP) technologies, integrating best-in-class systems from leading manufacturers, such as Canon, Ricoh, Konica Minolta, EFI, and HP, and document
management software from companies such as Captaris, EMC (Documentum), Kofax, and others, to deliver tailored, high-value solutions implemented and supported by our services organization-Enterprise Services. We offer financing in North America
through a program agreement (the U.S. Program Agreement) with IKON Financial Services, a wholly owned subsidiary of General Electric Capital Corporation (GE), and a rider to the U.S. Program Agreement (the Canadian
Rider) with GE in Canada. We entered into the U.S. Program Agreement and Canadian Rider as part of the sale of certain assets and liabilities of our U.S. leasing business to GE (the U.S. Transaction) and our Canadian lease
portfolio (the Canadian Transaction, and together with the U.S. Program Agreement, the Canadian Rider and the U.S. Transaction, the Transactions), respectively. We represent one of the industrys broadest portfolios of
document management services, including professional services, a unique blend of on-site and off-site managed services, customized workflow solutions, and comprehensive support through our service force of 15,000 employees, including our team of
6,800 customer service technicians and support resources. We have approximately 450 locations throughout North America and Western Europe. References herein to we, us, or our refer to IKON and its subsidiaries
unless the context specifically requires otherwise. All dollar and share amounts are in thousands, except per share data.



Throughout these notes to the condensed consolidated financial statements, certain prior period comparisons reflect the balances and amounts on a restated
basis (see Note 2).



1. SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments considered necessary for a fair
statement, which are of a normal recurring nature, have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended September 30, 2004
filed with the U.S. Securities and Exchange Commission (SEC) on July 8, 2005.



Use of Estimates



The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated
financial statements and notes to the condensed consolidated financial statements. Actual results could differ from those estimates and assumptions.



Book Overdrafts



We had $11,384 and $92,968 of book overdrafts (outstanding checks on zero balance bank accounts which are funded from an investment account with another
financial institution upon presentation for payment) included within our accounts payable balance at June 30, 2005 and September 30, 2004, respectively. The changes in these book overdrafts are included as a component of cash flows from operations
in our consolidated statements of cash flows.



Accounting for Stock-Based
Compensation



We have stock-based employee compensation
plans. As permitted by Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation (SFAS 123), we continue to account for our stock options in accordance with APB 25,
Accounting for Stock Issued to Employees. Employee stock options are granted at or above the market price at dates of grant, which does not require us to recognize any compensation expense. In general, these options expire in ten years
(twenty years for certain non-employee director options) and vest over three years (five years for grants issued prior to December 15, 2000). The proceeds from options exercised are credited to shareholders equity. A plan for our non-employee
directors enables participants to receive their annual directors fees in the form of options to purchase shares of common stock at a discount. The discount is equivalent to the annual directors fees and is charged to expense.



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If we had elected to recognize compensation expense based on the fair value at the date of grant for
awards in the beginning of fiscal 2004, consistent with the provisions of SFAS 123, our net income and earnings per share would have been reduced to the following unaudited pro forma amounts:



|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------------ | - |  | - | ------ | -
|                                                                                                                            |  | Three Months EndedJune 30 |        |   | Nine Months EndedJune 30 |  
|                                                                                                                            |  | 2005                      |        |   | Restated2004             |   |        | 2005 |  |   | Restated2004 |  
|Net income as reported                                                                                                      |  | $                         | 24,430 |   |                          | $ | 8,393  |      |  | $ | 46,049       |   |  | $ | 64,428 |  
|Pro forma effect of expensing stock based compensation plans using fair value method not included in net income as reported |  |                           | (999   | ) |                          |   | (1,513 | )    |  |   | (3,782       | ) |  |   | (4,857 | )
|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Net income, as adjusted                                                                                                     |  | $                         | 23,431 |   |                          | $ | 6,880  |      |  | $ | 42,267       |   |  | $ | 59,571 |  
|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Basic earnings per common share:                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Net income as reported                                                                                                      |  | $                         | 0.17   |   |                          | $ | 0.06   |      |  | $ | 0.33         |   |  | $ | 0.44   |  
|Pro forma effect of expensing stock based compensation plans using fair value method not included in net income as reported |  |                           | (0.01  | ) |                          |   | (0.01  | )    |  |   | (0.02        | ) |  |   | (0.03  | )
|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Basic earnings per common share, as adjusted                                                                                |  | $                         | 0.16   |   |                          | $ | 0.05   |      |  | $ | 0.31         |   |  | $ | 0.41   |  
|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Diluted earnings per common share:                                                                                          |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Net income as reported                                                                                                      |  | $                         | 0.17   |   |                          | $ | 0.06   |      |  | $ | 0.32         |   |  | $ | 0.42   |  
|Pro forma effect of expensing stock based compensation plans using fair value method not included in net income as reported |  |                           | (0.01  | ) |                          |   | (0.01  | )    |  |   | (0.02        | ) |  |   | (0.03  | )
|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Diluted earnings per common share, as adjusted                                                                              |  | $                         | 0.16   |   |                          | $ | 0.05   |      |  | $ | 0.30         |   |  | $ | 0.39   |  
|                                                                                                                            |  |                           |        |   |                          |   |        |      |  |   |              |   |  |   |        |  



Pending Accounting Changes



In October 2004, the American Jobs Creation Act (the
AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined by the AJCA. We may elect to apply this provision to qualifying earnings repatriations in either the balance of
fiscal 2005 or in fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between $0 and $130,000. The related potential range of income tax is between $0 and $7,000.



In November 2004, the Financial Accounting Standards Board (the
FASB) issued SFAS 151, Inventory Costs, an amendment of ARB 43, Chapter 4, (SFAS 151). This statement amends previous guidance as it relates to inventory valuation to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) should be recorded as current-period charges. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. We are currently evaluating the impact that SFAS
151 will have on our financial position and result of operations.



In December 2004, the FASB issued its final standard on accounting for share-based payments, SFAS 123R (Revised 2004), Share-Based Payments (SFAS 123R). SFAS 123R requires companies to expense the fair value of
employee stock options and other similar awards, effective for interim and annual periods beginning on or after June 15, 2005. On April 15, 2005, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, which amends the
compliance dates for SFAS 123R. As a result, we are required to adopt the provisions of SFAS 123R beginning in the first quarter of fiscal 2006. When measuring the fair value of theses awards, companies can choose from two different pricing models
that appropriately reflect their specific circumstances and the economics of their transactions. Accordingly, we have not yet determined the impact on our consolidated financial statements of adopting SFAS 123R. Additional information regarding the
pro forma impact of expensing stock options is presented above.



In December 2004, the FASB issued its final standard on accounting for exchanges of non-monetary assets, SFAS 153, Exchanges of Non-monetary Assets an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 requires
that exchanges of non-monetary assets be measured based on the fair value of assets exchanged for annual periods beginning after June 15, 2005. We are currently evaluating the impact of SFAS 153, but we do not expect a material impact from the
adoption of SFAS 153 on our consolidated financial position, results of operations or cash flows.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN
47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by FIN 47 are those for which an entity has a
legal obligation to perform an asset retirement activity, even if the timing and method of settling the



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##### Table of Contents

obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also
clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating
the impact that FIN 47 will have on our financial position and result of operations.



In June 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements (SFAS 154). SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way
of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements.



2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS



During an analysis of aged trade accounts receivable conducted during fiscal
2005, and in connection with performing self-assessment and testing of our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified deficiencies in the processes and timeliness by which we issue
and adjust certain invoices. The identified deficiencies result primarily from the centralization of billing centers and the migration to a new billing platform and relate to certain of our U.S. trade accounts receivable, and do not affect
receivables arising under our Mexican operations, receivables owing from GE under our leasing relationship with GE, or receivables arising under our Legal Document Services and Business Document Services businesses. In connection with these
developments, our management executed a comprehensive review (the Review) to determine the extent of such accounts receivable and billing errors. Based on the results of the Review, our management and the Audit Committee of our Board of
Directors concluded that the errors had a cumulative effect over multiple periods and that prior period financial statements required restatement. Accordingly, we restated our consolidated financial statements at September 30, 2004 and our unaudited
consolidated financial statements for the three and nine months ended June 30, 2004 (the Restatement) for the impact of billing errors and other identified adjustments (described further below). The Restatement affected periods prior to
fiscal 2004 and the impact of the Restatement on such prior periods of $30,032 was reflected as an adjustment to retained earnings as of October 1, 2003. Set forth below are the Restatement adjustments, each of which is an error within
the meaning of Accounting Principles Board Opinion No. 20, Accounting Changes.



Allowance for Doubtful Accounts, Billing Quality and Deferred Revenues



Historically, the allowance for doubtful accounts was our best estimate of the amount of probable credit losses in our existing accounts receivable
balance based on our historical experience, and was calculated based on the aging of the accounts receivable portfolio. In addition, an allowance was established for any credit matters we were aware of with specific customers. These allowances were
recorded as a reduction of accounts receivable and changes to allowance requirements were recorded within selling and administrative expense. As a result of the Review, we determined that trade accounts receivable included billing errors that should
have been recorded as a reduction of revenue and accounts receivable in the period in which the revenue was recognized. Because of the length of time between invoice issuance and correction, allowances for receivables with unknown billing errors
were incorrectly recorded as a bad debt expense when the accounts receivable reached a certain age. As a result, previously reported revenues and previously reported bad debt expense (included within selling and administrative expense) were
misstated.



In addition, we determined that due to the
identified billing errors included within our accounts receivable, deferred revenues required restatement. Deferred revenues represent revenues to be earned in future periods that had been billed to customers. To the extent that accounts receivable
related to deferred revenues included billing errors, the deferred revenues balance was overstated.



As a result of the above, we restated:



| |  |  | revenues, accounts receivable and deferred revenues for all prior periods presented to reflect the impact of billing errors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | the allowance for doubtful accounts and bad debt expense for all prior periods presented to reflect only the impact on accounts receivable of credit losses due to the inability of
customers to pay;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | revenues and selling and administrative expense for all periods presented for the reclassification of billing error corrections which were incorrectly recorded as selling and
administrative expense rather than a reduction of revenue; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | income and deferred income taxes for the tax impact of the above items.
| | - |  | -----------------------------------------------------------------------



In addition, we determined that amounts owed by customers for services provided by us but which were not yet invoiced were improperly recorded as a
reduction of deferred revenues. As a result, we reclassified these amounts from deferred revenue to accounts receivable for all periods presented. This adjustment did not have an impact on net income or earnings per share.



Advances from GE



As a result of the U.S. Transaction, GE bills and collects certain trade
accounts receivable on our behalf. Upon billing, GE advances cash to us for the customer receivable prior to collection. Historically, we did not recognize accounts receivable from our customers and a corresponding liability to GE for these types of
transactions. In addition to the billing errors described above and as a result of the Review, we determined that an accounts receivable from our customers and a corresponding liability to GE should be recognized for cash received from GE which has
not yet been collected from the customer. Accordingly, we restated the consolidated balance sheet as of September 30, 2004 to increase accounts receivable and accounts payable to appropriately reflect amounts due from customers and amounts payable
to GE. This adjustment did not have an impact on net income or earnings per share.



Financial Statement Impact



The
following table presents the impact of the Restatement adjustments on our previously reported results as of September 30, 2004 and for the three and nine months ended June 30, 2004. During the second quarter of fiscal 2005, results from our Business
Document Services business were classified as discontinued operations. As a result, the As Previously Reported amounts for the three and nine months ended June 30, 2004, are presented on a discontinued operations basis and therefore
differ from the format presented in the filing of the Quarterly Report on Form 10-Q/A for June 30, 2004.



Statements of Income:



|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|-------------------------------------------------------- |  | -------------------------------- | --------- | - | ----------- | - | --------- | ------ |  | - | ------ | ----
|                                                         |  | Three Months Ended June 30, 2004 |          
|                                                         |  | AsPreviouslyReported             |           |   | As Restated |   |           | Change | 
|Revenues:                                                |  |                                  |           |   |             |   |           |        |  |   |        |     
|Net sales                                                |  | $                                | 514,098   |   |             | $ | 513,412   |        |  | $ | (686   | )(a)
|Services                                                 |  |                                  | 593,443   |   |             |   | 587,989   |        |  |   | (5,454 | )(b)
|Finance income                                           |  |                                  | 41,827    |   |             |   | 41,827    |        |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|                                                         |  |                                  | 1,149,368 |   |             |   | 1,143,228 |        |  |   | (6,140 | )   
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Costs and Expenses:                                      |  |                                  |           |   |             |   |           |        |  |   |        |     
|Cost of goods sold                                       |  |                                  | 366,881   |   |             |   | 366,881   |        |  |   |        |     
|Services costs                                           |  |                                  | 340,302   |   |             |   | 340,302   |        |  |   |        |     
|Finance interest expense                                 |  |                                  | 11,473    |   |             |   | 11,473    |        |  |   |        |     
|Selling and administrative                               |  |                                  | 369,134   |   |             |   | 362,577   |        |  |   | (6,557 | )(c)
|Gain on divestiture of businesses                        |  |                                  | 698       |   |             |   | 698       |        |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|                                                         |  |                                  | 1,087,092 |   |             |   | 1,080,535 |        |  |   | (6,557 | )   
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Operating income                                         |  |                                  | 62,276    |   |             |   | 62,693    |        |  |   | 417    |     
|Loss from early extinguishment of debt, net              |  |                                  | 32,687    |   |             |   | 32,687    |        |  |   |        |     
|Interest expense, net                                    |  |                                  | 15,175    |   |             |   | 15,175    |        |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Income from continuing operations before taxes on income |  |                                  | 14,414    |   |             |   | 14,831    |        |  |   | 417    |     
|Taxes on income                                          |  |                                  | 5,464     |   |             |   | 5,629     |        |  |   | 165    | (d) 
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Income from continuing operations                        |  |                                  | 8,950     |   |             |   | 9,202     |        |  |   | 252    |     
|Discontinued operations:                                 |  |                                  |           |   |             |   |           |        |  |   |        |     
|Operating loss                                           |  |                                  | (1,336    | ) |             |   | (1,336    | )      |  |   |        |     
|Tax benefit                                              |  |                                  | 527       |   |             |   | 527       |        |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Net loss from discontinued operations                    |  |                                  | (809      | ) |             |   | (809      | )      |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Net income                                               |  | $                                | 8,141     |   |             | $ | 8,393     |        |  | $ | 252    |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Basic Earnings Per Common Share                          |  |                                  |           |   |             |   |           |        |  |   |        |     
|Continuing operations                                    |  |                                  | 0.06      |   |             |   | 0.06      |        |  |   | **     |     
|Discontinued operations                                  |  |                                  | (0.01     | ) |             |   | (0.01     | )      |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Net income                                               |  | $                                | *0.06     |   |             | $ | *0.06     |        |  | $ | **     |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Diluted Earnings Per Common Share                        |  |                                  |           |   |             |   |           |        |  |   |        |     
|Continuing operations                                    |  |                                  | 0.05      |   |             |   | 0.06      |        |  |   | **     |     
|Discontinued operations                                  |  |                                  | (0.01     | ) |             |   | (0.01     | )      |  |   |        |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     
|Net income                                               |  | $                                | *0.05     |   |             | $ | *0.06     |        |  | $ | **     |     
|                                                         |  |                                  |           |   |             |   |           |        |  |   |        |     

---

|* | The sum of the earnings per share amounts do not equal the total due to rounding.
|- | ---------------------------------------------------------------------------------



|** | The Restatement adjustment had an immaterial (less than $.005) impact on earnings per common share.
|-- | ---------------------------------------------------------------------------------------------------



12



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##### Table of Contents

Statement of Income components (decreased) increased as a result of the following:



|    |  |                                                                                                                                               |  |   |        |  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|(a) |  | Net Sales                                                                                                                                     |  |   |        |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (317   | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (369   | )
|    |  |                                                                                                                                               |  |   |        |  
|    |  | Net decrease                                                                                                                                  |  | $ | (686   | )
|    |  |                                                                                                                                               |  |   |        |  
|(b) |  | Services                                                                                                                                      |  |   |        |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (4,219 | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (1,235 | )
|    |  |                                                                                                                                               |  |   |        |  
|    |  | Net decrease                                                                                                                                  |  | $ | (5,454 | )
|    |  |                                                                                                                                               |  |   |        |  
|(c) |  | Selling and Administrative Expense                                                                                                            |  |   |        |  
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  | $ | (1,604 | )
|    |  | Adjustment for the impact of overstated bad debt expense and allowance for doubtful accounts                                                  |  |   | (4,953 | )
|    |  |                                                                                                                                               |  |   |        |  
|    |  | Net decrease                                                                                                                                  |  | $ | (6,557 | )
|    |  |                                                                                                                                               |  |   |        |  
|(d) |  | Taxes on Income                                                                                                                               |  |   |        |  
|    |  | Net increase to taxes on income due to above adjustments                                                                                      |  | $ | 165    |  
|    |  |                                                                                                                                               |  |   |        |  



|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|---------------------------------------------------------- |  | ------------------------------- | --------- | - | ----------- | - | --------- | ------ |  | - | ------- | ----
|                                                           |  | Nine Months Ended June 30, 2004 |          
|                                                           |  | AsPreviouslyReported            |           |   | As Restated |   |           | Change | 
|Revenues:                                                  |  |                                 |           |   |             |   |           |        |  |   |         |     
|Net sales                                                  |  | $                               | 1,452,880 |   |             | $ | 1,450,201 |        |  | $ | (2,679  | )(a)
|Services                                                   |  |                                 | 1,754,845 |   |             |   | 1,739,368 |        |  |   | (15,477 | )(b)
|Finance income                                             |  |                                 | 239,097   |   |             |   | 239,097   |        |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|                                                           |  |                                 | 3,446,822 |   |             |   | 3,428,666 |        |  |   | (18,156 | )   
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Costs and Expenses:                                        |  |                                 |           |   |             |   |           |        |  |   |         |     
|Cost of goods sold                                         |  |                                 | 1,032,872 |   |             |   | 1,032,872 |        |  |   |         |     
|Services costs                                             |  |                                 | 1,032,670 |   |             |   | 1,032,670 |        |  |   |         |     
|Finance interest expense                                   |  |                                 | 80,748    |   |             |   | 80,748    |        |  |   |         |     
|Selling and administrative                                 |  |                                 | 1,119,136 |   |             |   | 1,103,540 |        |  |   | (15,596 | )(c)
|Loss on divestiture of businesses, net                     |  |                                 | 11,427    |   |             |   | 11,427    |        |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|                                                           |  |                                 | 3,276,853 |   |             |   | 3,261,257 |        |  |   | (15,596 | )   
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Operating income                                           |  |                                 | 169,969   |   |             |   | 167,409   |        |  |   | (2,560  | )   
|Loss from early extinguishment of debt, net                |  |                                 | 35,906    |   |             |   | 35,906    |        |  |   |         |     
|Interest expense, net                                      |  |                                 | 34,923    |   |             |   | 34,923    |        |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Income before continuing operations before taxes on income |  |                                 | 99,140    |   |             |   | 96,580    |        |  |   | (2,560  | )   
|Taxes on income                                            |  |                                 | 30,186    |   |             |   | 29,175    |        |  |   | (1,011  | )(d)
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Income from continuing operations                          |  |                                 | 68,954    |   |             |   | 67,405    |        |  |   | (1,549  | )   
|Discontinued operations:                                   |  |                                 |           |   |             |   |           |        |  |   |         |     
|Operating loss                                             |  |                                 | (4,917    | ) |             |   | (4,917    | )      |  |   |         |     
|Tax benefit                                                |  |                                 | 1,940     |   |             |   | 1,940     |        |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Net loss from discontinued operations                      |  |                                 | (2,977    | ) |             |   | (2,977    | )      |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Net income                                                 |  | $                               | 65,977    |   |             | $ | 64,428    |        |  |   | (1,549  | )   
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Basic Earnings Per Common Share                            |  |                                 |           |   |             |   |           |        |  |   |         |     
|Continuing operations                                      |  |                                 | 0.47      |   |             |   | 0.46      |        |  |   | (0.01   | )   
|Discontinued operations                                    |  |                                 | (0.02     | ) |             |   | (0.02     | )      |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Net income                                                 |  | $                               | 0.45      |   |             | $ | 0.44      |        |  |   | (0.01   | )   
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Diluted Earnings Per Common Share                          |  |                                 |           |   |             |   |           |        |  |   |         |     
|Continuing operations                                      |  |                                 | 0.45      |   |             |   | 0.44      |        |  |   | (0.01   | )   
|Discontinued operations                                    |  |                                 | (0.02     | ) |             |   | (0.02     | )      |  |   |         |     
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     
|Net income                                                 |  | $                               | 0.43      |   |             | $ | 0.42      |        |  | $ | (0.01   | )   
|                                                           |  |                                 |           |   |             |   |           |        |  |   |         |     



13



---

##### Table of Contents

Statement of Income components decreased as a result of the following:



|    |  |                                                                                                                                               |  |   |         |  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|(a) |  | Net Sales                                                                                                                                     |  |   |         |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (1,247  | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (1,432  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (2,679  | )
|    |  |                                                                                                                                               |  |   |         |  
|(b) |  | Services                                                                                                                                      |  |   |         |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (10,683 | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (4,794  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (15,477 | )
|    |  |                                                                                                                                               |  |   |         |  
|(c) |  | Selling and Administrative Expense                                                                                                            |  |   |         |  
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  | $ | (6,226  | )
|    |  | Adjustment for the impact of overstated bad debt expense and allowance for doubtful accounts                                                  |  |   | (9,370  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (15,596 | )
|    |  |                                                                                                                                               |  |   |         |  
|(d) |  | Taxes on Income                                                                                                                               |  |   |         |  
|    |  | Net decrease to taxes on income due to above adjustments                                                                                      |  | $ | (1,011  | )
|    |  |                                                                                                                                               |  |   |         |  



Balance Sheets:



|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|-------------------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ----------- | - | --------- | ------ |  | - | ------- | ----
|                                                                                       |  | September 30, 2004       |          
|                                                                                       |  | AmountPreviouslyReported |           |   | As Restated |   |           | Change | 
|ASSETS                                                                                 |  |                          |           |   |             |   |           |        |  |   |         |     
|Cash and cash equivalents                                                              |  | $                        | 472,951   |   |             | $ | 472,951   |        |  |   |         |     
|Restricted cash                                                                        |  |                          | 27,032    |   |             |   | 27,032    |        |  |   |         |     
|Accounts receivable, less allowances of $20,112 (as reported) and $7,224 (as restated) |  |                          | 772,635   |   |             |   | 728,634   |        |  | $ | (44,001 | )(a)
|Finance receivables, net                                                               |  |                          | 457,615   |   |             |   | 457,615   |        |  |   |         |     
|Inventories                                                                            |  |                          | 233,345   |   |             |   | 233,345   |        |  |   |         |     
|Prepaid expenses and other current assets                                              |  |                          | 81,188    |   |             |   | 81,188    |        |  |   |         |     
|Deferred taxes                                                                         |  |                          | 39,974    |   |             |   | 64,481    |        |  |   | 24,507  | (b) 
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Total current assets                                                                   |  |                          | 2,084,740 |   |             |   | 2,065,246 |        |  |   | (19,494 | )   
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Long-term finance receivables, net                                                     |  |                          | 753,146   |   |             |   | 753,146   |        |  |   |         |     
|Equipment on operating leases, net                                                     |  |                          | 78,673    |   |             |   | 78,673    |        |  |   |         |     
|Property and equipment, net                                                            |  |                          | 164,132   |   |             |   | 164,132   |        |  |   |         |     
|Goodwill                                                                               |  |                          | 1,286,564 |   |             |   | 1,286,564 |        |  |   |         |     
|Unsold residual value                                                                  |  |                          | 45,548    |   |             |   | 45,548    |        |  |   |         |     
|Other assets                                                                           |  |                          | 125,104   |   |             |   | 125,104   |        |  |   |         |     
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Total Assets                                                                           |  | $                        | 4,537,907 |   |             | $ | 4,518,413 |        |  | $ | (19,494 | )   
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|LIABILITIES AND SHAREHOLDERS EQUITY                                                   |  |                          |           |   |             |   |           |        |  |   |         |     
|Current portion of corporate debt                                                      |  | $                        | 62,085    |   |             | $ | 62,085    |        |  |   |         |     
|Current portion of debt supporting finance contracts and unsold residual value         |  |                          | 439,941   |   |             |   | 439,941   |        |  |   |         |     
|Notes payable                                                                          |  |                          | 938       |   |             |   | 938       |        |  |   |         |     
|Trade accounts payable                                                                 |  |                          | 285,603   |   |             |   | 307,170   |        |  | $ | 21,567  | (c) 
|Accrued salaries, wages and commissions                                                |  |                          | 124,808   |   |             |   | 124,808   |        |  |   |         |     
|Deferred revenues                                                                      |  |                          | 119,851   |   |             |   | 116,682   |        |  |   | (3,169  | )(d)
|Taxes payable                                                                          |  |                          | 52,976    |   |             |   | 52,976    |        |  |   |         |     
|Other accrued expenses                                                                 |  |                          | 170,741   |   |             |   | 170,741   |        |  |   |         |     
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Total current liabilities                                                              |  |                          | 1,256,943 |   |             |   | 1,275,341 |        |  |   | 18,398  |     
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Long-term corporate debt                                                               |  |                          | 741,857   |   |             |   | 741,857   |        |  |   |         |     
|Long-term debt supporting finance contracts and unsold residual value                  |  |                          | 422,868   |   |             |   | 422,868   |        |  |   |         |     
|Deferred taxes                                                                         |  |                          | 187,091   |   |             |   | 187,091   |        |  |   |         |     
|Other long-term liabilities                                                            |  |                          | 203,538   |   |             |   | 203,538   |        |  |   |         |     
|                                                                                       |  |                          |          
|SHAREHOLDERS EQUITY                                                                   |  |                          |           |   |             |   |           |        |  |   |         |     
|Common stock, no par value                                                             |  |                          | 1,022,842 |   |             |   | 1,022,842 |        |  |   |         |     
|Series 12 preferred stock, no par value                                                |  |                          |           |   |             |   |           |        |  |   |         |     
|Deferred compensation                                                                  |  |                          | 209       |   |             |   | 209       |        |  |   |         |     
|Unearned compensation                                                                  |  |                          | (2,448    | ) |             |   | (2,448    | )      |  |   |         |     
|Retained earnings                                                                      |  |                          | 761,739   |   |             |   | 723,847   |        |  |   | (37,892 | )(e)
|Accumulated other comprehensive income                                                 |  |                          | 20,195    |   |             |   | 20,195    |        |  |   |         |     
|Cost of common shares in treasury                                                      |  |                          | (76,927   | ) |             |   | (76,927   | )      |  |   |         |     
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Total Shareholders Equity                                                             |  |                          | 1,725,610 |   |             |   | 1,687,718 |        |  |   | (37,892 | )   
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     
|Total Liabilities and Shareholders Equity                                             |  | $                        | 4,537,907 |   |             | $ | 4,518,413 |        |  | $ | (19,494 | )   
|                                                                                       |  |                          |           |   |             |   |           |        |  |   |         |     



14



---

##### Table of Contents

Balance sheet components (decreased) increased due to the following:



|    |  |                                                                                                                        |  |   |          |  
|--- |  | ---------------------------------------------------------------------------------------------------------------------- |  | - | -------- | -
|(a) |  | Accounts Receivable, net                                                                                               |  |   |          |  
|    |  | Adjustment for the impact of billing errors                                                                            |  | $ | (105,490 | )
|    |  | Adjustment for the overstatement of the allowance for doubtful accounts                                                |  |   | 22,653   |  
|    |  | Adjustment for the accounting for advances from GE                                                                     |  |   | 21,567   |  
|    |  | Adjustment for accounts receivable incorrectly recorded as a reduction of deferred revenue                             |  |   | 17,269   |  
|    |  |                                                                                                                        |  |   |          |  
|    |  | Net decrease                                                                                                           |  | $ | (44,001  | )
|    |  |                                                                                                                        |  |   |          |  
|(b) |  | Deferred Taxes                                                                                                         |  |   |          |  
|    |  | Net increase for deferred tax impact related to the Restatement                                                        |  | $ | 24,507   |  
|    |  |                                                                                                                        |  |   |          |  
|(c) |  | Trade Accounts Payable                                                                                                 |  |   |          |  
|    |  | Adjustment for the accounting for advances from GE                                                                     |  | $ | 21,567   |  
|    |  |                                                                                                                        |  |   |          |  
|(d) |  | Deferred Revenues                                                                                                      |  |   |          |  
|    |  | Adjustment for the impact of billing errors                                                                            |  | $ | (20,438  | )
|    |  | Adjustment for accounts receivable incorrectly recorded as a reduction of deferred revenues                            |  |   | 17,269   |  
|    |  |                                                                                                                        |  |   |          |  
|    |  | Net decrease                                                                                                           |  | $ | (3,169   | )
|    |  |                                                                                                                        |  |   |          |  
|(e) |  | Retained Earnings                                                                                                      |  |   |          |  
|    |  | Net decrease to retained earnings for Restatement adjustments (net of taxes) in fiscal 2004                            |  | $ | (7,860   | )
|    |  | Net decrease to retained earnings for Restatement adjustments (net of taxes) for fiscal years prior to October 1, 2003 |  |   | (30,032  | )
|    |  |                                                                                                                        |  |   |          |  
|    |  | Net decrease                                                                                                           |  | $ | (37,892  | )
|    |  |                                                                                                                        |  |   |          |  



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##### Table of Contents

3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES



During fiscal 2005, we took several actions to reduce costs, increase productivity, and improve operating income. These
actions involved our operations in Business Document Services (BDS), Legal Document Services (LDS), our North American field organization and our corporate staff, and Mexico (see Note 4).



Business Document Services



During the second quarter of fiscal 2005, we exited BDS, which provided
off-site document management solutions, including digital print and fulfillment services. The exit of BDS was achieved by the closure or sale of 11 North American operating locations. As of June 30, 2005, all of the 11 BDS sites were closed or sold.
Proceeds received from the sale of 2 sites were not material. As a result, the results of operations and cash flows of BDS are classified as discontinued operations (see Note 5).



In connection with the exit of BDS, we recorded pre-tax restructuring and asset impairment charges of $1,559 and $37,
respectively, during the third quarter of fiscal 2005. For the nine months ended June 30, 2005, pre-tax restructuring and asset impairment charges were $8,653 and $1,331, respectively. The pre-tax components of the restructuring and asset impairment
charges for fiscal 2005 are as follows:



|                                         |  |                                  |       |   |                                |   |       
|---------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------ | - | ------
|Type of Charge                           |  | Three Months Ended June 30, 2005 |       |   | Nine Months EndedJune 30, 2005
|Restructuring Charge:                    |  |                                  |       |   |                                |   |       
|Severance                                |  | $                                | 790   |   |                                | $ | 3,635 
|Contractual commitments                  |  |                                  | 189   |   |                                |   | 2,180 
|Contract termination                     |  |                                  | 580   |   |                                |   | 2,838 
|                                         |  |                                  |       |   |                                |   |       
|Total Restructuring Charge               |  |                                  | 1,559 |   |                                |   | 8,653 
|Asset Impairment Charge for Fixed Assets |  |                                  | 37    |   |                                |   | 1,331 
|Other Non-Restructuring Items            |  |                                  | (800  | ) |                                |   | 907   
|                                         |  |                                  |       |   |                                |   |       
|Total                                    |  | $                                | 796   |   |                                | $ | 10,891
|                                         |  |                                  |       |   |                                |   |       



The severance charge
of $790 represents an additional 75 employees identified to be terminated during the three months ended June 30, 2005, for a total of 302 employees during fiscal 2005. The asset impairment charge represents fixed asset write-offs. In addition,
during fiscal 2005, we wrote-down inventories and other assets by $610 and recorded additional reserves for accounts receivable of $297, which are included in Other Non-Restructuring Items in the table above. Actual cash collections on
outstanding BDS receivables during the third quarter of fiscal 2005 exceeded initial management estimates resulting in a $904 reduction to the existing accounts receivable reserve. These charges (benefits) are included within discontinued
operations.



Legal Document Services



LDS provides off-site document management solutions for the legal industry,
including document imaging, coding and conversion services, legal graphics, and electronic discovery. During the second quarter of fiscal 2005, we closed 16 of 82 LDS sites in North America to provide both cost flexibility and savings. No additional
LDS sites were closed during the third quarter of fiscal 2005.



As a result of the closure of these sites, we recorded pre-tax restructuring and asset impairment charges of $2,306 and $229, respectively, for the nine months ended June 30, 2005. During the third quarter of fiscal 2005, we recorded a net
reduction to the restructuring charge in the amount of $46, as a result of a revision to the number of employees to be terminated offset by additional contractual commitments and contract termination charges. The pre-tax components of the
restructuring and asset impairment charges for fiscal 2005 are as follows:



|                                         |  |                                 |      |   |                                |   |      
|---------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | -----
|Type of Charge                           |  | Three Months EndedJune 30, 2005 |      |   | Nine Months EndedJune 30, 2005
|Restructuring Charge:                    |  |                                 |      |   |                                |   |      
|Severance                                |  | $                               | (141 | ) |                                | $ | 1,534
|Contractual commitments                  |  |                                 | 75   |   |                                |   | 612  
|Contract termination                     |  |                                 | 20   |   |                                |   | 160  
|                                         |  |                                 |      |   |                                |   |      
|Total Restructuring Charge               |  |                                 | (46  | ) |                                |   | 2,306
|Asset Impairment Charge for Fixed Assets |  |                                 | 27   |   |                                |   | 229  
|Other Non-Restructuring Items            |  |                                 | (142 | ) |                                |   | 177  
|                                         |  |                                 |      |   |                                |   |      
|Total                                    |  | $                               | (161 | ) |                                | $ | 2,712
|                                         |  |                                 |      |   |                                |   |      



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The restructuring charge represents severance of $1,534 for the termination of 157 employees during
fiscal 2005. The asset impairment charge of $229 represents fixed asset write-offs. In addition, we wrote-down inventories and other assets by $44 and recorded additional reserves for accounts receivable of $133, which are included in Other
Non-Restructuring Items in the table above. Revisions to the initial account receivable reserves are attributable to the reduction in other non-restructuring items during the three months ended June 30, 2005.



Field Organization and Corporate Staff Reduction



During fiscal 2005, we reorganized our field structure in North America. To
achieve this, we expanded geographic coverage under certain area vice presidents, allowing us to reduce the number of our marketplaces. By streamlining our field leadership structure and reducing other corporate staff, we believe we will be able to
save costs while maintaining our sales capabilities and services provided to customers. As a result of these actions, we recorded a pre-tax restructuring charge of $8,684 representing severance for 385 employees during the nine months ended June 30,
2005. In addition, we recorded fixed asset impairments representing fixed asset write-offs in the amount of $111 during fiscal 2005.



Summarized Restructuring Activity



The pre-tax components of the restructuring and asset impairment charges for fiscal 2005 are as follows:



|                                         |  |                                 |       |   |                                |   |       
|---------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------
|Type of Charge                           |  | Three Months EndedJune 30, 2005 |       |   | Nine Months EndedJune 30, 2005
|Restructuring Charge:                    |  |                                 |       |   |                                |   |       
|Severance                                |  | $                               | 289   |   |                                | $ | 13,853
|Contractual commitments                  |  |                                 | 264   |   |                                |   | 2,792 
|Contract termination                     |  |                                 | 600   |   |                                |   | 2,998 
|                                         |  |                                 |       |   |                                |   |       
|Total Restructuring Charge               |  |                                 | 1,153 |   |                                |   | 19,643
|Asset Impairment Charge for Fixed Assets |  |                                 | 64    |   |                                |   | 1,671 
|Other Non-Restructuring Items            |  |                                 | (941  | ) |                                |   | 1,085 
|                                         |  |                                 |       |   |                                |   |       
|Total                                    |  | $                               | 276   |   |                                | $ | 22,399
|                                         |  |                                 |       |   |                                |   |       



We calculated the
asset impairment charges in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The proceeds received for locations sold or held for sale were not sufficient to cover the fixed asset balances, as
such, those balances were written-off. Fixed assets associated with closed sites were written-off.



All restructuring costs were incurred by the IKON North America operating segment.



The following presents a reconciliation of the restructuring and asset impairment charges to the accrual balance remaining
at June 30, 2005, which is included in other accrued expenses on the consolidated balance sheet:



|                              |  |                   |        |                         |   |                            |  |                             |       |  |   |      
|----------------------------- |  | ----------------- | ------ | ----------------------- | - | -------------------------- |  | --------------------------- | ----- |  | - | -----
|                              |  | Fiscal 2005Charge |        | CashPaymentsFiscal 2005 |   | Non-cashchargesFiscal 2005 |  | Ending BalanceJune 30, 2005
|Severance                     |  | $                 | 13,853 |                         | $ | 7,959                      |  |                             |       |  | $ | 5,894
|Contractual commitments       |  |                   | 2,792  |                         |   | 767                        |  |                             |       |  |   | 2,025
|Contract termination          |  |                   | 2,998  |                         |   | 2,197                      |  |                             |       |  |   | 801  
|Asset impairments             |  |                   | 1,671  |                         |   |                            |  | $                           | 1,671 |  |   |      
|Other Non-Restructuring Items |  |                   | 1,085  |                         |   |                            |  |                             | 1,085 |  |   |      
|                              |  |                   |        |                         |   |                            |  |                             |       |  |   |      
|Total                         |  | $                 | 22,399 |                         | $ | 10,923                     |  | $                           | 2,756 |  | $ | 8,720
|                              |  |                   |        |                         |   |                            |  |                             |       |  |   |      



The projected payments
of the remaining balances, by fiscal year, are as follows:



|                        |  |             |       |             |   |             |  |        |     |       |   |     |  |   |      
|----------------------- |  | ----------- | ----- | ----------- | - | ----------- |  | ------ | --- | ----- | - | --- |  | - | -----
|Projected Payments      |  | Fiscal 2005 |       | Fiscal 2006 |   | Fiscal 2007 |  | Beyond |     | Total
|Severance               |  | $           | 4,970 |             | $ | 924         |  |        |     |       |   |     |  | $ | 5,894
|Contractual commitments |  |             | 415   |             |   | 788         |  | $      | 352 |       | $ | 470 |  |   | 2,025
|Contract termination    |  |             | 801   |             |   |             |  |        |     |       |   |     |  |   | 801  
|                        |  |             |       |             |   |             |  |        |     |       |   |     |  |   |      
|Total                   |  | $           | 6,186 |             | $ | 1,712       |  | $      | 352 |       | $ | 470 |  | $ | 8,720
|                        |  |             |       |             |   |             |  |        |     |       |   |     |  |   |      



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All contractual commitment amounts related to leases are shown net of projected sublease income.
Projected sublease income was $3,472 at June 30, 2005. To the extent that sublease income cannot be realized, additional restructuring charges will be incurred in each period in which sublease income is not received.



The employees affected by the charge were as follows:



|                                       |  |                   |  |                                 |   |  |                                                    
|-------------------------------------- |  | ----------------- |  | ------------------------------- | - |  | ---------------------------------------------------
|Headcount Reductions                   |  | EmployeesAffected |  | Fiscal 2005EmployeeTerminations |   |  | Remaining Employeesto be Terminated atJune 30, 2005
|BDS                                    |  | 302               |  | (301                            | ) |  | 1                                                  
|LDS                                    |  | 157               |  | (157                            | ) |  |                                                    
|Field organization and corporate staff |  | 425               |  | (385                            | ) |  | 40                                                 
|                                       |  |                   |  |                                 |   |  |                                                    
|Total                                  |  | 884               |  | (843                            | ) |  | 41                                                 
|                                       |  |                   |  |                                 |   |  |                                                    



The locations affected
by the charge were as follows:



|              |  |                              |  |                                     |  |                                     |   |  |                                             
|------------- |  | ---------------------------- |  | ----------------------------------- |  | ----------------------------------- | - |  | --------------------------------------------
|Site Closures |  | Initial PlannedSite Closures |  | Sites Closedor Sold atJune 30, 2005 |  | Change in Estimate of Site Closures |   |  | Remaining Sites tobe Closed at June 30, 2005
|BDS           |  | 11                           |  | 11                                  |  |                                     |   |  |                                             
|LDS           |  | 17                           |  | 16                                  |  | (1                                  | ) |  |                                             
|              |  |                              |  |                                     |  |                                     |   |  |                                             
|Total         |  | 28                           |  | 27                                  |  | (1                                  | ) |  |                                             
|              |  |                              |  |                                     |  |                                     |   |  |                                             



During the third
quarter of fiscal 2005, management determined that one of the 17 LDS sites initially approved for closing will remain in operation. As such, the locations affected by the charge were 16 as of June 30, 2005. We expect all restructuring actions to be
completed during the remainder of fiscal 2005. Remaining employees to be terminated at June 30, 2005 represents employees who received notice of termination but were not yet terminated. Severance payments to terminated employees are made in
installments. The charges for contractual commitments relate to real estate lease contracts where we have exited certain locations and are required to make payments over the remaining lease term. The charges for contract termination represent costs
incurred to immediately terminate contracts.



4. NET GAIN ON SALE OF
BUSINESSES



During the second quarter of fiscal 2005, we
received $7,217 of additional proceeds from GE as a result of the completion of the closing balance sheet audit related to the U.S. Transaction. Accordingly, we recognized a gain of $7,763 related to the additional proceeds received from GE and the
reversal of contingencies previously recorded related to the U.S. Transaction of $546. During the second quarter of fiscal 2005, we recorded a charge of $253 for a contingent purchase price adjustment related to the Canadian Transaction.



During the second quarter of fiscal 2005, we sold substantially all of our
operations in Mexico (the Mexican Sale). We incurred a loss in the second quarter of fiscal 2005 of $6,734 from the Mexican Sale resulting from the difference between the carrying amount of assets sold and proceeds received and certain
associated costs. We will continue to serve our national and multi-national customers and operate our remanufacturing facility located in Tijuana.



During the second quarter of fiscal 2005, we sold two small business units that provided technology equipment and services to customers. As a result of
these sales, we recognized a gain of $1,125.



As a result of
the above transactions, we recognized a net gain of $1,901 during the second quarter of fiscal 2005.



5. DISCONTINUED OPERATIONS



In connection with our restructuring plan discussed in Note 3, we exited BDS during fiscal 2005. The exit of this business involved the sale or closure of 11 digital print centers. Operating activities of BDS have been reported as
discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation. Summarized financial information for BDS is set forth below:



|                                      |  |                           |        |   |                          |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------- |  | ------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                      |  | Three Months EndedJune 30 |        |   | Nine Months EndedJune 30 |  
|                                      |  | 2005                      |        |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|Revenues                              |  | $                         | 491    |   |                          | $ | 13,804 |      |  | $ | 20,570  |   |  | $ | 37,147 |  
|Pretax loss                           |  |                           | (3,210 | ) |                          |   | (1,336 | )    |  |   | (19,410 | ) |  |   | (4,917 | )
|Income tax benefit                    |  |                           | 1,268  |   |                          |   | 527    |      |  |   | 7,667   |   |  |   | 1,940  |  
|Net loss from discontinued operations |  |                           | (1,942 | ) |                          |   | (809   | )    |  |   | (11,743 | ) |  |   | (2,977 | )



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The BDS pretax loss of $3,210 and $19,410 for the three and nine months ended June 30, 2005,
respectively, consisted of losses from operations of $2,414 and $8,519, respectively, and the following asset impairments, severance, contractual commitments, contract termination, and other costs (described in additional detail in Note 3):



|                                         |  |                                 |       |   |                                |   |       
|---------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------
|Type of Charge                           |  | Three Months EndedJune 30, 2005 |       |   | Nine Months EndedJune 30, 2005
|Restructuring Charge:                    |  |                                 |       |   |                                |   |       
|Severance                                |  | $                               | 790   |   |                                | $ | 3,635 
|Contractual commitments                  |  |                                 | 189   |   |                                |   | 2,180 
|Contract termination                     |  |                                 | 580   |   |                                |   | 2,838 
|                                         |  |                                 |       |   |                                |   |       
|Total Restructuring Charge               |  |                                 | 1,559 |   |                                |   | 8,653 
|Asset Impairment Charge for Fixed Assets |  |                                 | 37    |   |                                |   | 1,331 
|Other Non-Restructuring Items            |  |                                 | (800  | ) |                                |   | 907   
|                                         |  |                                 |       |   |                                |   |       
|Total                                    |  | $                               | 796   |   |                                | $ | 10,891
|                                         |  |                                 |       |   |                                |   |       



As of June 30, 2005, 9
digital print shops were closed and 2 were sold. Assets related to BDS are recorded at their estimated net realizable value.



6. NOTES PAYABLE AND LONG-TERM DEBT



Long-term corporate debt consisted of:



|                                                                     |  |              |         |                   |   |        
|-------------------------------------------------------------------- |  | ------------ | ------- | ----------------- | - | -------
|                                                                     |  | June 30,2005 |         | September 30,2004
|Bond issues                                                          |  | $            | 354,828 |                   | $ | 411,423
|Convertible subordinated notes (Convertible Notes)                 |  |              | 245,075 |                   |   | 290,000
|Notes payable                                                        |  |              | 94,835  |                   |   | 94,835 
|Miscellaneous notes, bonds, mortgages, and capital lease obligations |  |              | 3,454   |                   |   | 8,622  
|                                                                     |  |              |         |                   |   |        
|                                                                     |  |              | 698,192 |                   |   | 804,880
|Less: current maturities                                             |  |              | 3,446   |                   |   | 63,023 
|                                                                     |  |              |         |                   |   |        
|                                                                     |  | $            | 694,746 |                   | $ | 741,857
|                                                                     |  |              |         |                   |   |        



Long-term debt
supporting finance contracts and unsold residual value (Non-Corporate Debt) consisted of:



|                                       |  |              |         |                   |   |        
|-------------------------------------- |  | ------------ | ------- | ----------------- | - | -------
|                                       |  | June 30,2005 |         | September 30,2004
|Lease-backed notes                     |  | $            | 408,269 |                   | $ | 683,086
|Asset securitization conduit financing |  |              | 127,537 |                   |   | 129,668
|Notes payable to banks                 |  |              | 10,397  |                   |   | 3,868  
|Debt supporting unsold residual value  |  |              | 51,152  |                   |   | 46,187 
|                                       |  |              |         |                   |   |        
|                                       |  |              | 597,355 |                   |   | 862,809
|Less: current maturities               |  |              | 333,848 |                   |   | 439,941
|                                       |  |              |         |                   |   |        
|                                       |  | $            | 263,507 |                   | $ | 422,868
|                                       |  |              |         |                   |   |        



Excluded above is
$3,982 of our corporate debt that has been reclassified to liabilities held for sale on the Consolidated Balance Sheets as a result of the sale of our French operating subsidiary in the fourth quarter of fiscal 2005 (see Note 16).



Our 6.75% notes due 2004 were paid upon maturity in November 2004. The
balance of these notes at September 30, 2004 was $56,659.



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Debt Supporting Finance Contracts



During the nine months ended June 30, 2005, we repaid $289,037 and issued $19,339 of debt supporting finance contracts.



As of June 30, 2005, IKON Capital PLC, IKONs leasing
subsidiary in the United Kingdom, had approximately $26,080 available under its asset securitization conduit financing agreement.



Debt Supporting Unsold Residual Value



Due mainly to certain provisions within our agreements with GE and other lease syndicators, which do not allow us to recognize the sale of the residual
value on leases in which we are the original equipment lessor (primarily state and local government contracts), we must keep the present value of the residual value of those leases on our balance sheet. A corresponding amount of debt is recorded
representing the cash received from GE and the other lease syndicators for the residual value. This debt will not be repaid unless required under the applicable agreement in the event that an IKON service performance failure is determined to relieve
the lessee of its lease payment obligations. During the three year period ending September 30, 2004, total repurchases of lease receivables related to our service performance failures have amounted to approximately $504 on a cumulative basis.



In addition, we transferred lease receivables to GE for which
we have retained all of the risks of ownership. A corresponding amount of debt was recorded representing the cash received from GE for these receivables.



As of June 30, 2005, we had $36,763 of debt related to $35,692 of unsold residual value and the present value of the remaining lease receivables that
remained on our balance sheet. During fiscal 2005, we imputed interest at our average borrowing rate of 3.73% and recorded $432 of interest expense related to this debt. Upon the end of the lease term or repurchase of the lease, whichever comes
first, we will reverse the unsold residual value and related debt as the underlying leases mature and any differential will be recorded as a gain on the extinguishment of debt. As of June 30, 2005, this differential was $1,071.



In addition, we have $14,389 of debt related to equipment on operating leases
which have been funded by GE.



Credit Facility



We maintain a $200,000 secured credit facility (the Credit
Facility) with a group of lenders. The Credit Facility provides the availability of revolving loans, with certain sub-limits, and provides support for letters of credit. The amount of credit available under the Credit Facility is reduced by
open letters of credit. The amount available under the Credit Facility for borrowings or additional letters of credit was $165,658 at June 30, 2005. The Credit Facility is secured by our accounts receivable and inventory, the stock of our first-tier
domestic subsidiaries, 65% of the stock of our first-tier foreign subsidiaries, and all of our intangible assets. All security interests pledged under the Credit Facility are shared with the holders of our 7.25% notes payable due 2008.



The Credit Facility contains affirmative and negative covenants, including
limitations on certain fundamental core business changes, investments and acquisitions, mergers, certain transactions with affiliates, creations of liens, asset transfers, payments of dividends, intercompany loans, and certain restricted payments.
The Credit Facility does not, however, limit our ability to continue to securitize lease receivables. The Credit Facility matures on March 1, 2008, but is subject to certain early maturity events in November 2006, January 2007, and April 2007 if our
5% convertible subordinated notes due 2007 (the Convertible Notes) have not been converted to equity or refinanced or minimum liquidity is not met as of such dates. Minimum liquidity is defined as having sufficient cash, including any
unused capacity under the Credit Facility, to repay the balance of the Convertible Notes plus an additional $100,000. The Credit Facility contains certain financial covenants relating to: (i) our corporate leverage ratios; (ii) our consolidated
interest coverage ratio; (iii) our consolidated asset coverage ratio; (iv) our consolidated net worth ratios; (v) limitations on our capital expenditures; and (vi) limitations on additional indebtedness and liens. Under the terms of the Credit
Facility, share repurchases are permitted in an aggregate amount not to exceed $250,000 during the period of July 28, 2004 through March 1, 2008. From July 28, 2004 through September 30, 2005, share repurchases are permitted in an aggregate amount
not to exceed $150,000. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that we did
not utilize prior to October 1, 2005. As of June 30, 2005, $84,973 of the $150,000 allowance was utilized. The Credit Facility contains default provisions customary for facilities of this type.



Loss from the Early Extinguishment of Debt



During the nine months ended June 30, 2005, we repurchased $44,925 of our
Convertible Notes for $45,938. As a result of these repurchases, we recognized a loss, including the write-off of unamortized costs, of $1,734, which is included in loss from the early extinguishment of debt, in the consolidated statements of income
for the nine months ended June 30, 2005.



20



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##### Table of Contents

Letters of Credit



We have certain commitments available to us in the form of lines of credit and standby letters of credit. As of June 30, 2005, we had $171,724 available
under lines of credit, including the $165,658 available under the Credit Facility and had open standby letters of credit totaling $34,342. These letters of credit are primarily supported by the Credit Facility. All letters of credit expire within
one year.



7. SALE OF LEASE RECEIVABLES



Under the U.S. Program Agreement, the Canadian Rider, and agreements with
other syndicators, from time-to-time we may sell customer lease receivables. We do not expect to retain interests in these assets. Gains or losses on the sale of these lease receivables depend in part on the previous carrying amount of the financial
assets involved in the transfer. We estimate fair value based on the present value of future expected cash flows. As these same assumptions are used in recording the lease receivables, and sale of the lease receivables occurs shortly thereafter,
management anticipates that in most instances, book value is expected to approximate fair value.



During fiscal 2005, we sold lease receivables totaling $188,956 for cash proceeds in transactions to GE and other syndicators. In those transactions, we
will not retain any interest in the assets. No material gain or loss resulted from these transactions.



8. GOODWILL



Goodwill
associated with our reporting segments was:



|                                                                |  |                   |         |            |   |         |       |  |   |           |  
|--------------------------------------------------------------- |  | ----------------- | ------- | ---------- | - | ------- | ----- |  | - | --------- | -
|                                                                |  | IKON NorthAmerica |         | IKONEurope |   |         | Total | 
|Goodwill at September 30, 2004                                  |  | $                 | 949,138 |            | $ | 337,426 |       |  | $ | 1,286,564 |  
|Translation adjustment and transfer to net assets held for sale |  |                   | 3,747   |            |   | (12,272 | )     |  |   | (8,525    | )
|                                                                |  |                   |         |            |   |         |       |  |   |           |  
|Goodwill at June 30, 2005                                       |  | $                 | 952,885 |            | $ | 325,154 |       |  | $ | 1,278,039 |  
|                                                                |  |                   |         |            |   |         |       |  |   |           |  



Changes in the
goodwill balance since September 30, 2004 are attributable to foreign currency translation adjustments. In addition, $9,588 of European goodwill has been reclassified to assets held for sale on the consolidated balance sheets as a result of the sale
of our French operating subsidiary in the fourth quarter of fiscal 2005 (see Note 16).



As of June 30, 2005, we had no intangible assets other than goodwill except those related to our defined benefit plans.



9. SHARE REPURCHASES



In March 2004, our Board of Directors authorized the repurchase of up to $250,000 of our outstanding shares of common stock (the 2004 Plan).
From time-to-time, our Retirement Savings Plan may acquire shares of our common stock in open market transactions or from our treasury shares. During fiscal 2004, we repurchased 6,741 shares of our outstanding common stock for $77,574 under the 2004
Plan. During fiscal 2005 we repurchased 3,109 shares of our outstanding common stock for $34,098, leaving $138,328 remaining for share repurchases under the 2004 Plan. Under the terms of the Credit Facility, share repurchases are permitted up to
$150,000 until September 2005. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that
we did not utilize prior to October 1, 2005. As of June 30, 2005, $84,973 of the $150,000 allowance was utilized.



10. COMPREHENSIVE INCOME



Total comprehensive (loss) income is as follows:



|                                                                                                                                                                                                                                                  |  |                           |         |   |                          |   |         |      |  |              |        |  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | ------------ | ------ |  | - | -------
|                                                                                                                                                                                                                                                  |  | Three Months EndedJune 30 |         |   | Nine Months EndedJune 30
|                                                                                                                                                                                                                                                  |  | 2005                      |         |   | Restated2004             |   |         | 2005 |  | Restated2004
|Net income                                                                                                                                                                                                                                        |  | $                         | 24,430  |   |                          | $ | 8,393   |      |  | $            | 46,049 |  | $ | 64,428 
|Foreign currency translation adjustments                                                                                                                                                                                                          |  |                           | (31,353 | ) |                          |   | (12,281 | )    |  |              | 204    |  |   | 35,369 
|(Loss) gain on derivative financial instruments, net of tax (benefit) expense of: $(102) and $890 for the three months ended June 30, 2005 and
2004, respectively; $112 and $6,836 for the nine months ended June 30, 2005 and 2004, respectively |  |                           | (177    | ) |                          |   | 1,567   |      |  |              | 205    |  |   | 12,136 
|                                                                                                                                                                                                                                                  |  |                           |         |   |                          |   |         |      |  |              |        |  |   |        
|Total comprehensive (loss) income                                                                                                                                                                                                                 |  | $                         | (7,100  | ) |                          | $ | (2,321  | )    |  | $            | 46,458 |  | $ | 111,933
|                                                                                                                                                                                                                                                  |  |                           |         |   |                          |   |         |      |  |              |        |  |   |        



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During the second quarter of fiscal 2005, we recognized a gain of $1,041 from the realization of
accumulated translation adjustments related to the Mexican Sale.



The minimum pension liability is adjusted at each fiscal year end; therefore, there is no impact on total comprehensive income during interim periods. The balances for foreign currency translation, minimum pension liability, and derivative
financial instruments included in accumulated other comprehensive income in the consolidated balance sheets were $66,623, $(46,400), and $381, respectively, at June 30, 2005 and $66,418, $(46,400), and $177, respectively, at September 30, 2004.



11. EARNINGS PER COMMON SHARE



The following table sets forth the computation of basic and diluted earnings
per common share from continuing operations:



|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ------------------------ | - | ------- |  | ------------ | ------- |  | - | -------
|                                                                                                                  |  | Three Months EndedJune 30 |         | Nine Months EndedJune 30
|                                                                                                                  |  | 2005                      |         | Restated2004             |   | 2005    |  | Restated2004
|Numerator:                                                                                                        |  |                           |         |                          |   |         |  |              |         |  |   |        
|Income from continuing operations                                                                                 |  | $                         | 26,372  |                          | $ | 9,202   |  | $            | 57,792  |  | $ | 67,405 
|Effect of dilutive securities:                                                                                    |  |                           |         |                          |   |         |  |              |         |  |   |        
|Interest expense on Convertible Notes, net of taxes                                                               |  |                           | 1,848   |                          |   |         |  |              | 6,072   |  |   | 6,959  
|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        
|Numerator for diluted earnings per common sharenet income                                                        |  | $                         | 28,220  |                          | $ | 9,202   |  | $            | 63,864  |  | $ | 74,364 
|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        
|Denominator:                                                                                                      |  |                           |         |                          |   |         |  |              |         |  |   |        
|Weighted average common shares                                                                                    |  |                           | 139,826 |                          |   | 147,657 |  |              | 140,567 |  |   | 147,202
|Effect of dilutive securities:                                                                                    |  |                           |         |                          |   |         |  |              |         |  |   |        
|Convertible Notes                                                                                                 |  |                           | 16,306  |                          |   |         |  |              | 17,857  |  |   | 19,870 
|Employee stock options                                                                                            |  |                           | 1,439   |                          |   | 2,519   |  |              | 1,758   |  |   | 2,681  
|Employee stock awards                                                                                             |  |                           | 402     |                          |   | 355     |  |              | 382     |  |   | 341    
|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        
|Dilutive potential common shares                                                                                  |  |                           | 18,147  |                          |   | 2,874   |  |              | 19,997  |  |   | 22,892 
|Denominator for diluted earnings per common shareadjusted weighted average common shares and assumed conversions |  |                           | 157,973 |                          |   | 150,531 |  |              | 160,564 |  |   | 170,094
|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        
|Basic earnings per common share from continuing operations                                                        |  | $                         | 0.19    |                          | $ | 0.06    |  | $            | 0.41    |  | $ | 0.46   
|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        
|Diluted earnings per common share from continuing operations                                                      |  | $                         | 0.18    |                          | $ | 0.06    |  | $            | 0.40    |  | $ | 0.44   
|                                                                                                                  |  |                           |         |                          |   |         |  |              |         |  |   |        



We account for the
effect of the Convertible Notes in the diluted earnings per common share calculation using the if converted method. Under that method, the Convertible Notes are assumed to be converted to shares (weighted for the number of days
outstanding in the period) at a conversion price of $15.03 and interest expense, net of taxes, related to the Convertible Notes is added back to net income. The calculation of diluted earnings per common share for the three months ended June 30,
2004 excludes the assumed conversion of the Convertible Notes because the impact is antidilutive.



Options to purchase 7,899 shares of common stock at $9.63 to $46.59 per share were outstanding during the third quarter of fiscal 2005 and options to
purchase 3,022 shares of common stock at $11.62 to $46.59 per share were outstanding during the third quarter of fiscal 2004, but were not included in the computation of diluted earnings per share because the options exercise prices were
greater than the average market price of the common shares; therefore, the effect would be antidilutive.



Options to purchase 7,735 shares of common stock at $10.49 to $46.59 per share were outstanding during the first nine months of fiscal 2005 and options to
purchase 5,230 shares of common stock at $11.22 to $46.59 per share were outstanding during the first nine months of fiscal 2004, but were not included in the computation of diluted earnings per common share because the options exercise prices
were greater than the average market price of the common shares; therefore, the effect would be antidilutive.



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12. SEGMENT REPORTING



The table below presents segment information for the three months ended June 30, 2005 and 2004:



|                                            |  |                  |         |   |            |   |                          |  |   |         |   |  |   |         |  
|------------------------------------------- |  | ---------------- | ------- | - | ---------- | - | ------------------------ |  | - | ------- | - |  | - | ------- | -
|                                            |  | IKONNorthAmerica |         |   | IKONEurope |   | CorporateandEliminations |  |   | Total   |  
|Three Months Ended June 30, 2005            |  |                  |         |   |            |   |                          |  |   |         |   |  |   |         |  
|Net sales                                   |  | $                | 412,896 |   |            | $ | 74,315                   |  |   |         |   |  | $ | 487,211 |  
|Services                                    |  |                  | 525,259 |   |            |   | 60,936                   |  |   |         |   |  |   | 586,195 |  
|Finance income                              |  |                  | 18,044  |   |            |   | 6,855                    |  |   |         |   |  |   | 24,899  |  
|Asset impairments                           |  |                  | 27      |   |            |   |                          |  |   |         |   |  |   | 27      |  
|Restructuring                               |  |                  | (406    | ) |            |   |                          |  |   |         |   |  |   | (406    | )
|Operating income (loss)                     |  |                  | 121,073 |   |            |   | 8,058                    |  | $ | (78,192 | ) |  |   | 50,939  |  
|Interest expense, net                       |  |                  |         |   |            |   |                          |  |   | 11,260  |   |  |   | 11,260  |  
|Income before taxes                         |  |                  |         |   |            |   |                          |  |   |         |   |  |   | 39,679  |  
|                                            |  |                  |         |  
|Three Months Ended June 30, 2004 (restated) |  |                  |         |   |            |   |                          |  |   |         |   |  |   |         |  
|Net sales                                   |  | $                | 442,008 |   |            | $ | 71,404                   |  |   |         |   |  | $ | 513,412 |  
|Services                                    |  |                  | 531,261 |   |            |   | 56,728                   |  |   |         |   |  |   | 587,989 |  
|Finance income                              |  |                  | 35,369  |   |            |   | 6,458                    |  |   |         |   |  |   | 41,827  |  
|Gain from divestiture of business           |  |                  | 698     |   |            |   |                          |  |   |         |   |  |   | 698     |  
|Operating income (loss)                     |  |                  | 132,294 |   |            |   | 6,178                    |  | $ | (75,779 | ) |  |   | 62,693  |  
|Interest expense, net                       |  |                  |         |   |            |   |                          |  |   | 15,175  |   |  |   | 15,175  |  
|Income before taxes                         |  |                  |         |   |            |   |                          |  |   |         |   |  |   | 14,831  |  



The table below
presents segment information for the nine months ended June 30, 2005 and 2004:



|                                           |  |                   |           |            |   |                          |  |   |          |   |  |   |          
|------------------------------------------ |  | ----------------- | --------- | ---------- | - | ------------------------ |  | - | -------- | - |  | - | ---------
|                                           |  | IKON NorthAmerica |           | IKONEurope |   | CorporateandEliminations |  |   | Total   
|Nine Months Ended June 30, 2005            |  |                   |           |            |   |                          |  |   |          |   |  |   |          
|Net sales                                  |  | $                 | 1,221,851 |            | $ | 225,773                  |  |   |          |   |  | $ | 1,447,624
|Services                                   |  |                   | 1,561,743 |            |   | 183,292                  |  |   |          |   |  |   | 1,745,035
|Finance income                             |  |                   | 62,834    |            |   | 20,530                   |  |   |          |   |  |   | 83,364   
|Gain from divestiture of business          |  |                   | 1,901     |            |   |                          |  |   |          |   |  |   | 1,901    
|Asset impairments                          |  |                   | 340       |            |   |                          |  |   |          |   |  |   | 340      
|Restructuring                              |  |                   | 10,990    |            |   |                          |  |   |          |   |  |   | 10,990   
|Operating income (loss)                    |  |                   | 327,434   |            |   | 22,834                   |  | $ | (225,456 | ) |  |   | 124,812  
|Interest expense, net                      |  |                   |           |            |   |                          |  |   | 34,571   |   |  |   | 34,571   
|Income before taxes                        |  |                   |           |            |   |                          |  |   |          |   |  |   | 88,507   
|                                           |  |                   |           |           
|Nine Months Ended June 30, 2004 (restated) |  |                   |           |            |   |                          |  |   |          |   |  |   |          
|Net sales                                  |  | $                 | 1,239,575 |            | $ | 210,626                  |  |   |          |   |  | $ | 1,450,201
|Services                                   |  |                   | 1,570,378 |            |   | 168,990                  |  |   |          |   |  |   | 1,739,368
|Finance income                             |  |                   | 219,954   |            |   | 19,143                   |  |   |          |   |  |   | 239,097  
|Loss from divestiture of business          |  |                   | 11,427    |            |   |                          |  |   |          |   |  |   | 11,427   
|Operating income (loss)                    |  |                   | 384,204   |            |   | 17,379                   |  | $ | (234,174 | ) |  |   | 167,409  
|Interest expense, net                      |  |                   |           |            |   |                          |  |   | 34,923   |   |  |   | 34,923   
|Income before taxes                        |  |                   |           |            |   |                          |  |   |          |   |  |   | 96,580   



We report information
about our operating segments according to the management approach. The management approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. Our
reportable segments are IKON North America (INA) and IKON Europe (IE). The INA and IE segments provide copiers, printers, color solutions, and a variety of document management service capabilities through Enterprise Services.
These segments also include our captive finance subsidiaries in North America (including those now divested) and Europe, respectively.



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Corporate and Eliminations, which is not treated as a business segment, includes certain selling and
administrative functions such as finance, supply chain, and customer support.



13. CONTINGENCIES



We are involved in a number
of environmental remediation actions to investigate and clean up certain sites related to our discontinued operations in accordance with applicable federal and state laws. Uncertainties about the status of laws and regulations, technology and
information related to individual sites, including the magnitude of possible contamination, the timing and extent of required corrective actions and proportionate liabilities of other responsible parties, make it difficult to develop a meaningful
estimate of probable future remediation costs. While the actual costs of remediation at these sites may vary from managements estimate because of these uncertainties, we had accrued balances, included in other long-term liabilities in our
consolidated balance sheets, of $7,780 and $7,928 as of June 30, 2005 and September 30, 2004, respectively, for our environmental liabilities. This accrual is based on managements best estimate of the aggregate environmental exposure. The
measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, prior experience in
remediation of contaminated sites, and any studies performed for a site. As assessments and remediation progress at individual sites, these liabilities are reviewed and adjusted to reflect additional technical and legal information that becomes
available. After consideration of the defenses available to us, the accrual for such exposure, insurance coverage, and other responsible parties, management does not believe that its obligations to remediate these sites would have a material adverse
effect on our consolidated financial statements.



The accruals
for such environmental liabilities are reflected in the consolidated balance sheets as part of other accrued liabilities. We have not recorded any potential third party recoveries. We are indemnified by an environmental contractor performing
remedial work at a site in Bedford Heights, Ohio. The contractor has agreed to indemnify us from cost overruns associated with the plan of remediation. Further, we have cost-sharing arrangements in place with other potentially responsible parties at
sites located in Barkhamsted, Connecticut and Rockford, Illinois. The cost-sharing agreement for the Barkhamsted, Connecticut site relates to apportionment of expenses associated with non-time critical removal actions and operation and maintenance
work, such as capping the landfill, maintaining the landfill, fixing erosion rills and gullies, maintaining site security, maintaining vegetative growth on the landfill cap, and groundwater monitoring. Under the agreement, we and other potentially
responsible parties agreed to reimburse Rural Refuse Disposal District No. 2, a Connecticut Municipal Authority, for 50% of these costs. We currently pay a 4.54% share of these costs. The cost-sharing arrangement for the Rockford, Illinois site
relates to apportioning the costs of a Remedial Investigation/Feasibility Study and certain operation and maintenance work, such as fencing the site, removing waste liquids and sludges, capping a former surface impoundment and demolishing certain
buildings. Under this arrangement, we pay 5.12% of these costs.



During fiscal 2005 and 2004, we did not incur any costs for environmental capital projects, but incurred various costs in conjunction with our obligations under consent decrees, orders, voluntary remediation plans, settlement agreements,
and other actions to comply with environmental laws and regulations. For the nine months ended June 30, 2005 and 2004, these costs were $207 and $282, respectively. All costs were charged against the related environmental accrual. We will continue
to incur expenses in order to comply with our obligations under consent decrees, orders, voluntary remediation plans, settlement agreements, and other actions to comply with environmental laws and regulations.



We have an accrual related to black lung and workers compensation
liabilities relating to the operations of a former subsidiary, Barnes & Tucker Company (B&T). B&T owned and operated coal mines throughout Pennsylvania. We sold B&T in 1986. In connection with the sale, we entered into a
financing agreement with B&T whereby we agreed to reimburse B&T for 95% of all costs and expenses incurred by B&T for black lung and workers compensation liabilities, until such liabilities were extinguished. From 1986 through
2000, we reimbursed B&T in accordance with the terms of the financing agreement. In 2000, B&T filed for bankruptcy protection under Chapter 11. The bankruptcy court approved a plan of reorganization that created a black lung trust and a
workers compensation trust to handle the administration of all black lung and workers compensation claims relating to B&T. We now reimburse the trusts for 95% of the costs and expenses incurred by the trusts for black lung and
workers compensation claims. As of June 30, 2005 and September 30, 2004, our accrual for black lung and workers compensation liabilities related to B&T was $11,665 and $12,384, respectively, and was reflected in the consolidated
balance sheets as part of other long-term liabilities.



We
received notice of possible additional taxes due related to international matters. We believe they will not materially affect our consolidated financial statements.



We recognize certain guarantees in accordance with FASB Interpretation No. 45. Accordingly, we recognize a liability related
to guarantees for the fair value, or market value, of the obligation we assume.



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As a result of the U.S. Transaction, we agreed to indemnify GE with respect to certain liabilities that
may arise in connection with business activities that occurred prior to the completion of the U.S. Transaction or that may arise in connection with leases sold to GE under the U.S. Program Agreement. If GE were to incur a liability or have a
liability increase as a result of a successful claim, pursuant to the terms of the indemnification, we would be required to reimburse GE for the full amount of GEs damages; provided, that for certain successful claims, we would only be
required to reimburse GE for damages in excess of $20,000, but not to exceed, in the aggregate, $2,000,000. These indemnification obligations generally relate to recourse on different types of lease receivables sold to GE that could potentially
become uncollectible. In the event that all lease receivables for which we have indemnified GE become uncollectible, the maximum potential loss we could incur as a result of these indemnifications at June 30, 2005 was $232,459. Based on our analysis
of historical losses for these types of leases, we had recorded reserves totaling approximately $458 at June 30, 2005. The equipment leased to the customers related to the above indemnifications represents collateral which we would be entitled to
recover and could be remarketed by us. No specific recourse provisions exist with other parties related to assets sold under the U.S. Program Agreement.



We guarantee an industrial revenue bond in Covington, Tennessee relating to The Delfield Company (Delfield), a former subsidiary of Alco
Standard (our predecessor company). This bond matures in full on September 1, 2006. We have not accrued any liability with respect to this guarantee based on our analysis of Delfields ability and intent to make payment or refinance the bond.
In the event Delfield defaults on the bond, we would be required under the agreement to make payment to the lender. As of June 30, 2005, the maximum amount that we would be required to pay the lender is $3,150.



There are other contingent liabilities for taxes, guarantees, lawsuits, and
various other matters occurring in the ordinary course of business. On the basis of information furnished by counsel and others, and after consideration of the defenses available to us and any related reserves and insurance coverage, management
believes that none of these other contingencies will materially affect our consolidated financial statements.



14. PENSION PLANS



We
sponsor defined benefit pension plans for the majority of our employees (all U.S. employees hired on or after July 1, 2004 are not eligible to participate in the U.S. defined benefit pension plan). The benefits generally are based on years of
service and compensation. We fund at least the minimum amount required by government regulations.



The components of net periodic pension cost for the company-sponsored defined benefit pension plans are:



|                                              |  |                            |         |   |               |   |        |            |  |   |               |   |  |   |        |  
|--------------------------------------------- |  | -------------------------- | ------- | - | ------------- | - | ------ | ---------- |  | - | ------------- | - |  | - | ------ | -
|                                              |  | Three Months Ended June 30 |        
|                                              |  | 2005                       |         |   | 2004          |  
|                                              |  | U.S. Plans                 |         |   | Non-U.S.Plans |   |        | U.S. Plans |  |   | Non-U.S.Plans |  
|Service cost                                  |  | $                          | 7,255   |   |               | $ | 1,054  |            |  | $ | 7,225         |   |  | $ | 1,017  |  
|Interest cost on projected benefit obligation |  |                            | 8,349   |   |               |   | 958    |            |  |   | 7,582         |   |  |   | 789    |  
|Expected return on assets                     |  |                            | (8,237  | ) |               |   | (933   | )          |  |   | (6,009        | ) |  |   | (728   | )
|Amortization of net obligation                |  |                            |         |   |               |   | 9      |            |  |   |               |   |  |   | 9      |  
|Amortization of prior service cost            |  |                            | 142     |   |               |   | 2      |            |  |   | 142           |   |  |   | 1      |  
|Recognized net actuarial loss                 |  |                            | 2,014   |   |               |   | 161    |            |  |   | 2,507         |   |  |   | 221    |  
|                                              |  |                            |         |   |               |   |        |            |  |   |               |   |  |   |        |  
|Net periodic pension cost                     |  | $                          | 9,523   |   |               | $ | 1,251  |            |  | $ | 11,447        |   |  | $ | 1,309  |  
|                                              |  |                            |         |   |               |   |        |            |  |   |               |   |  |   |        |  
|                                              | 
|                                              |  | Nine Months Ended June 30  |        
|                                              |  | 2005                       |         |   | 2004          |  
|                                              |  | U.S. Plans                 |         |   | Non-U.S.Plans |   |        | U.S. Plans |  |   | Non-U.S.Plans |  
|Service cost                                  |  | $                          | 21,321  |   |               | $ | 3,192  |            |  | $ | 21,675        |   |  | $ | 3,065  |  
|Interest cost on projected benefit obligation |  |                            | 24,563  |   |               |   | 2,897  |            |  |   | 22,746        |   |  |   | 2,357  |  
|Expected return on assets                     |  |                            | (23,241 | ) |               |   | (2,822 | )          |  |   | (18,027       | ) |  |   | (2,173 | )
|Amortization of net obligation                |  |                            |         |   |               |   | 28     |            |  |   |               |   |  |   | 27     |  
|Amortization of prior service cost            |  |                            | 426     |   |               |   | 5      |            |  |   | 426           |   |  |   | 4      |  
|Recognized net actuarial loss                 |  |                            | 5,798   |   |               |   | 487    |            |  |   | 7,521         |   |  |   | 660    |  
|                                              |  |                            |         |   |               |   |        |            |  |   |               |   |  |   |        |  
|Net periodic pension cost                     |  | $                          | 28,867  |   |               | $ | 3,787  |            |  | $ | 34,341        |   |  | $ | 3,940  |  
|                                              |  |                            |         |   |               |   |        |            |  |   |               |   |  |   |        |  



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As of June 30, 2005, $42,604 of contributions had been made during fiscal 2005. We expect to make
additional contributions of $777 during fiscal 2005. Effective September 30, 2005, participants will no longer accrue benefits under the U.S. defined benefit plan. As a result of this action, the Company will incur a charge of approximately $2,900
during the first quarter of fiscal 2006. In addition, effective January 1, 2006, the Company will increase the employer match of the U.S. defined contribution plan for participants who were hired prior to July 1, 2004.



15. FINANCIAL INSTRUMENTS



As of June 30, 2005, all of our derivatives designated as hedges are
interest rate swaps which qualify for evaluation using the short cut method for assessing effectiveness. As such, there is an assumption that the interest rate swaps are fully effective. We use interest rate swaps to fix the interest
rates on our variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the nine months ended June 30, 2005, unrealized gains totaling $205, after taxes, were recorded in
accumulated other comprehensive income.



16. ASSETS AND LIABILITIES HELD FOR
SALE



On July 8, 2005, IKON Office Solutions (Holdings)
S.A.S. completed the divestiture of our French operating subsidiary, IKON Office Solutions S.A.S (IKON France). We will continue to support key accounts and pan-European accounts with a continued but downscaled presence in France,
similar to our strategy in Mexico. We currently expect to realize a gain during the fourth quarter of fiscal 2005 on the sale of IKON France.



At June 30, 2005, all criteria for classification of assets and liabilities as held for sale as defined by SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144) for IKON France had been met. In accordance with SFAS 144, an estimate of assets and liabilities to be sold have been reclassified from various line items within the balance
sheet and aggregated into Assets Held for Sale and Liabilities Held for Sale. The following represents the major classes of assets and liabilities held for sale at June 30, 2005. These amounts changed insignificantly due to
normal account activity from June 30, 2005 to the closing date of the transaction.



|                                            |  |                 |       
|------------------------------------------- |  | --------------- | ------
|                                            |  | Carrying Amount
|Assets                                      |  |                 |       
|Total cash                                  |  | $               | 54    
|Accounts receivable, less allowance         |  |                 | 8,404 
|Finance receivables, less allowance         |  |                 | 1,521 
|Inventories                                 |  |                 | 2,071 
|Prepaid expenses and other current assets   |  |                 | 4,858 
|Long term lease receivables, less allowance |  |                 | 2,169 
|Property and equipment, net                 |  |                 | 976   
|Goodwill                                    |  |                 | 9,588 
|Other assets                                |  |                 | 895   
|                                            |  |                 |       
|Assets held for sale                        |  | $               | 30,536
|                                            |  |                 |       
|Liabilities                                 |  |                 |       
|Current portion of long-term debt           |  | $               | 1,616 
|Trade accounts payable                      |  |                 | 7,299 
|Accrued salaries, wages and commissions     |  |                 | 6,224 
|Taxes payable                               |  |                 | 3,740 
|Long-term debt                              |  |                 | 2,366 
|                                            |  |                 |       
|Liabilities held for sale                   |  | $               | 21,245
|                                            |  |                 |       



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



The following information has been amended to reflect the restatement made to the Condensed Consolidated Condensed Financial Statements as further
discussed in Item 1. Financial StatementsNote 2. Restatement of Previously Issued Financial Statements. This information should be read in conjunction with the information contained in the Condensed Consolidated Financial
Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.



OVERVIEW



IKON Office
Solutions, Inc. (we, us, our, IKON or the Company) delivers integrated document management solutions and systems, enabling customers to improve document workflow and increase efficiency. We
are the worlds largest independent channel for copier, printer and multifunction product (MFP) technologies, integrating best-in-class systems from leading manufacturers, such as Canon, Ricoh, Konica Minolta, EFI, and HP, and
document management software from companies such as Captaris, EMC (Documentum), Kofax, and others, to deliver tailored, high-value solutions implemented and supported by our services organization-Enterprise Services. We offer financing in North
America through a program agreement (the U.S. Program Agreement) with IKON Financial Services, a wholly owned subsidiary of General Electric Capital Corporation (GE), and a rider to the U.S. Program Agreement (the
Canadian Rider) with GE in Canada. We entered into the U.S. Program Agreement and Canadian Rider as part of the sale of certain assets and liabilities of our U.S. leasing business to GE (the U.S. Transaction) and our Canadian
lease portfolio (the Canadian Transaction, and together with the U.S. Program Agreement, the Canadian Rider and the U.S. Transaction, the Transactions), respectively. We represent one of the industrys broadest
portfolios of document management services, including professional services, on-site managed services, legal document services, customized workflow solutions, and comprehensive support through our service force of 15,000 employees, including our
team of 6,800 customer service technicians and support resources. We have approximately 450 locations throughout North America and Western Europe.



For fiscal 2005, we outlined the following objectives for our business:



| |  |  | improving operational leverage;
| | - |  | -------------------------------



| |  |  | core growth; and
| | - |  | ----------------



| |  |  | related expansion.
| | - |  | ------------------



These objectives assume continued growth and profitability improvements in our ongoing revenue streams as we continue to transition out of our captive
leasing business in North America.



Operating leverage requires
that we continue to lower our overall cost-to-serve and improve both sales and administrative productivity through centralization and process and system enhancements. In particular, we focused on reducing our selling and administrative expenses to
more competitive levels, and established a fiscal 2005 target for selling and administrative expense as a percentage of revenues of one percentage point below fiscal year 2004 levels. In the third quarter of fiscal 2005, selling and administrative
expense as a percentage of revenue was 30.9% compared to 31.7% a year ago. We had a headcount decline of over 913 employees in the third quarter of fiscal 2005, of which many were directly attributable to the actions we took during the second
quarter to reduce costs and improve operational efficiency, including exiting our Business Document Services (BDS) unit, reducing the number of our Legal Document Services (LDS) sites, reorganizing our field structure in
North America through expansion of geographic coverage for certain area vice presidents, reducing other corporate staff, and selling substantially all of our operations in Mexico. In addition, during the fourth quarter of fiscal 2005, we completed
the divestiture of our French operating subsidiary, but will continue to support key accounts and pan-European customers through an ongoing presence in Paris. Finally, we made considerable progress during the third quarter to improve operational
leverage from the work performed to complete the review of our accounts receivable (see Note 2 to the condensed consolidated financial statements). By analyzing the processes used in our customer care operations, we have gained significant
operational insights that will be used to develop a strategy to improve our performance in order processing and billing administration.



Core growth has three points of focus: improvement of sales effectiveness in all market segments; gain of market share in underrepresented markets; and
the targeting of product segments in which demand is growing the fastest. A top priority for us in fiscal 2005 is our implementation of the integrated selling model (ISM), which is designed to provide sales coverage on a
lower-cost-to-serve basis through the use of professional phone-based sales representatives working with our field-based representatives. We believe this model will also improve our retention of small to medium-sized customers while at the same time
provide us with added sales capacity for higher-end selling solutions. Additionally, during the third quarter of fiscal 2005, we continued to strengthen our share of the market encompassing the Fortune 500 and large global and private companies
(through our National Account Program) as we added additional contracts to this focus area. To ensure that we capture the fastest growing product technologies, we continue to strengthen our color equipment portfolio with a diversified
mixture of products. Color equipment revenues grew 7.5% in the third quarter of fiscal 2005 compared to the same period of fiscal 2004.



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We are expanding into adjacent markets, such as Europe, and new service opportunities within Enterprise
Services that differentiate and build solidly on our core business, which involves equipment sales and the ongoing volume in services and supplies that those sales generate. In Europe, our city expansion strategy focuses on expansion into key cities
throughout Europe as we commenced operations in three additional cities, Milan, Barcelona, and Geneva, in fiscal 2005. In the third quarter of fiscal 2005, revenues in Europe increased 6% compared to the same period a year ago. Within Enterprise
Services, our on-site Managed Service business delivered strong growth, with revenue up 7% and continued growth within the existing install base. Off-site Managed Services experienced a revenue decline partially driven by our decision to close 16
unprofitable LDS locations during the second quarter of fiscal 2005.



For the third quarter of fiscal 2005, we had revenues of $1.1 billion, representing a 3.9% decline from the third quarter of fiscal 2004. This decline was due in large measure to the decrease in finance income resulting from the run-off of
the retained U.S. lease portfolio not sold to GE as part of the U.S. Transaction, lower equipment revenues in North America and lower revenues from the sale of de-emphasized technology hardware. Diluted earnings per share from continuing operations
for the third quarter of fiscal 2005 were $0.18. Refer to Results of Operations for further discussion of our quarterly financial statements.



RESULTS OF OPERATIONS



This discussion reviews the results of our operations as reported in the consolidated statements of income. All dollar and share amounts are in thousands,
except per share data. Unless otherwise noted, references to 2005 and 2004 in the section relating to the three months ended June 30 refer to the three months ended June 30, 2005 and 2004, respectively, and references to 2005 and 2004 in the section
relating to the nine months ended June 30 refer to the nine months ended June 30, 2005 and 2004, respectively.



Three Months Ended June 30, 2005

Compared to the Three Months Ended June 30,
2004



Revenues



|               |  |      |           |              |   |           |  |       |   
|-------------- |  | ---- | --------- | ------------ | - | --------- |  | ----- | --
|               |  | 2005 |           | Restated2004 |   | Change    | 
|Net sales      |  | $    | 487,211   |              | $ | 513,412   |  | (5.1  | )%
|Services       |  |      | 586,195   |              |   | 587,989   |  | (0.3  | ) 
|Finance income |  |      | 24,899    |              |   | 41,827    |  | (40.5 | ) 
|               |  |      |           |              |   |           |  |       |   
|               |  | $    | 1,098,305 |              | $ | 1,143,228 |  | (3.9  | )%
|               |  |      |           |              |   |           |  |       |   



The decrease in
revenues of 3.9%, compared to the third quarter of fiscal 2004, which includes a currency benefit of 0.8% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is a result of an
overall decrease in finance income due to the run-off of the retained U.S. lease portfolio, lower equipment revenues in North America, lower revenues from the sale of de-emphasized technology hardware and lower off-site Managed Services revenues
driven primarily by our decision to close 16 unprofitable LDS locations during the second quarter of fiscal 2005.



Net sales includes revenues from the sale of copier/printer multifunction equipment, direct supplies, and technology hardware. The decrease in net sales
was partially offset by a currency benefit of 0.9%. Equipment revenue of $452,444 decreased approximately 2.1%, or $9,890, compared to the same period in fiscal 2004 due mainly to a combination of new product introductions at lower price points and
increased competition, partially offset by continued growth from the sale of color equipment. In addition, and consistent with our city expansion strategy, European equipment revenues increased by 7.8%, or $4,591, compared to the third quarter of
fiscal 2004. Revenues generated from the sale of color devices increased by 7.5% compared to the third quarter of fiscal 2004, due to higher demand for these products, particularly higher-end color production equipment, as new products continued to
be introduced at more affordable prices. As a percentage of equipment revenue, color devices increased from approximately 20.7% in the third quarter of fiscal 2004 to approximately 22.7% in the third quarter of fiscal 2005. U.S. revenues from the
sale of segment 5 and 6 black and white production equipment (devices with page outputs greater than 70 pages per minute) decreased approximately 26.4% compared to the third quarter of fiscal 2004 due to continued pricing pressure, a shift to
lower-end products within this segment, and new alternate products available in segment 4. In addition, the third quarter of fiscal 2004 included several large customer transactions with combined placements equivalent to 35% of the normal run rate.
However, during the third quarter of fiscal 2005, we continued to experience strong performance in the high-end within segment 6 equipment sales. U.S. revenues from the sale of segment 1  4 black and white office equipment (devices with page
outputs less than 70 pages per minute, fax and other



28



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##### Table of Contents

equipment) declined approximately 1.6% compared to the third quarter of fiscal 2004. This decrease was attributable to
lower average selling prices as we offered attractive marketing bundles in the third quarter in fiscal 2005 in an effort to increase market share in the mid-market customer base. As a result, U.S. placements of these products increased approximately
4.4%. As of June 30, 2005, U.S. sales of black and white office equipment represented 55.4% of U.S. equipment revenue, compared to 53.2% at June 30, 2004. Direct supply sales of $28,357 decreased by approximately 11.3%, or $3,600, compared to the
third quarter of fiscal 2004, due to lower demand for fax and lower-end copier supplies. Revenues from the sale of de-emphasized technology hardware decreased $12,711, or 66.5% compared to the third quarter of fiscal 2004 as a result of the
continued exit from this business.



Services is comprised of
Enterprise Services and Other Services. Enterprise Services consists of Managed Services, which provides: on-site and off-site outsourcing services and other expertise; Customer Services (equipment service); and Professional Services, which focuses
on integrating hardware and software technologies that capture, manage, control, and store output for customers document lifecycles. Other Services includes rental income on operating leases; income from the sharing of gains on certain
lease-end activities with GE in the U.S.; and fees received from GE for providing preferred services for lease generation in the U.S. (the Preferred Fees). Services decreased by 0.3% including a currency benefit of approximately 0.7%.
Managed Services revenues of $165,985, which includes both on-site Managed Services and LDS, decreased $3,180, or 1.9%. Off-site Managed Services of $44,256, which is primarily comprised of LDS, a short-cycle and increasingly competitive
transactional business, declined by approximately $11,339, compared to the third quarter of fiscal 2004, due mainly to the impact of the restructuring actions we took during the second quarter of fiscal 2005 which involved the closure of 16 sites.
On-site Managed Services revenues, including facilities management, document production and mailroom operations, of $121,729 grew 7.2%, or $8,158, from the prior year, due to an increase in new contracts and continued expansion to existing
contracts. Customer Services revenues (which are significantly impacted by the amount and mix of copy volumes) increased by $631, or 0.2%, compared to the third quarter of fiscal 2004, attributable mainly to an increase in copy volumes of 2%
partially offset by a decrease in average revenue per copy. Professional Services revenues of $13,231, decreased 8.7%, or by $1,262, compared to the third quarter of fiscal 2004 due to the impact of the sale of two technology service businesses
during the second quarter of fiscal 2005. Revenue from consulting, network connectivity services, document strategy assessments and various software solutions, included within Professional Services, increased by 15% compared to the third quarter of
fiscal 2004, as a result of our continued focus on providing customers with digital technologies to reduce their costs and improve workflow. Fees received as a result of the GE relationship, including Preferred Fees of $12,688 and $12,680, for the
three months ended June 30, 2005 and 2004, respectively, and the related impact of lease-end activities, increased by $885, or 4.1%, compared to the third quarter of fiscal 2004. We expect to earn approximately $50,000 of Preferred Fees annually
until the initial term of the U.S. Program Agreement terminates on March 31, 2009. Rental revenue remained relatively consistent, increasing $232, or 1.1%, compared to the third quarter of fiscal 2004.



Finance income is generated by our leasing subsidiaries, as well as by
certain lease receivables not sold to GE as part of the U.S. Transaction. The decrease in finance income was primarily due to the continued run-off of the retained U.S. lease portfolio not sold to GE as part of the U.S. Transaction. In addition,
finance income was impacted from the sale of our Canadian lease portfolio during fiscal 2004 as part of the Canadian Transaction. Accordingly, lease receivables sold as part of the Canadian Transaction did not generate finance income for us during
the third quarter of fiscal 2005. This decrease was partially offset by a currency benefit of 0.8%. Although we will continue to receive finance income under certain leases that will be financed directly by us, including from our European leasing
operations, our total finance income will continue to decrease in future periods as a result of the Transactions. In fiscal 2005, we expect finance income to decline approximately 60% compared to fiscal 2004 as a result of the Transactions and the
continued run-off of the retained U.S. lease portfolio.



Gross Margin



|                             |  |      |   |  |              |  
|---------------------------- |  | ---- | - |  | ------------ | -
|                             |  | 2005 |   |  | Restated2004 |  
|Gross margin, net sales      |  | 24.6 | % |  | 28.5         | %
|Gross margin, services       |  | 42.8 |   |  | 42.1         |  
|Gross margin, finance income |  | 75.3 |   |  | 72.6         |  
|Gross margin, total          |  | 35.5 |   |  | 37.1         |  



The decrease in the
gross margin percentage on net sales was due to lower equipment margins resulting from competitive pricing, aggressive promotions, and a higher mix of state and local government business. Strategic pricing and promotion actions during the third
quarter of fiscal 2005 were focused on increasing market competitiveness to gain market share and increase future aftermarket revenue potential.



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The gross margin percentage on services increased compared to the three months ended June 30, 2004.
Customer Services gross margin increased due to the impact of the restructuring actions taken during the second quarter of fiscal 2005 to lower our cost structure. Off-site Managed Services margins declined compared to the third quarter of fiscal
2004 due to the impact of lower revenues. The off-site Managed Services cost structure is less variable than our other lines of business; therefore, gross margin percentages are more heavily influenced by changes in revenue. As a result of the
actions we took late in the second quarter of fiscal 2005 to reduce the variability of the cost structure of off-site Managed Services, we expect profit margin percentages for off-site Managed Services to improve during the remainder of fiscal 2005.



The gross margin percentage on finance income increased from
72.6% in the third quarter of fiscal 2004 to 75.3% in the third quarter of fiscal 2005 due to European leasing revenues becoming a larger part of the finance income mix in fiscal 2005 compared to fiscal 2004. Because European leases are funded with
a lower percentage of debt, European leases generate higher gross profit margins than our sold North American leases. In addition, there was a lower leverage ratio on the U.S. lease receivable portfolio after the U.S. Transaction during the third
quarter of fiscal 2005 compared to the third quarter of fiscal 2004. In fiscal 2005, we expect gross profit earned from finance income to decline compared to fiscal 2004 as a result of the Transactions and the continued run-off of the retained U.S.
lease portfolio.



Selling and Administrative Expenses



|                                    |  |      |         |   |              |   |         |        |  |      |   
|----------------------------------- |  | ---- | ------- | - | ------------ | - | ------- | ------ |  | ---- | --
|                                    |  | 2005 |         |   | Restated2004 |   |         | Change | 
|Selling and administrative expenses |  | $    | 338,879 |   |              | $ | 362,577 |        |  | (6.5 | )%
|S&A as a % of revenue               |  |      | 30.9    | % |              |   | 31.7    | %      |  |      |   



Selling and
administrative expense, which was unfavorably impacted by $2,366 due to foreign currency translation, decreased by $23,698 or 6.5%, during the third quarter fiscal 2005 compared to the third quarter of fiscal 2004, and decreased from 31.7% to 30.9%
as a percentage of revenue. These changes were due primarily to the following:



| |  |  | A decrease of $6,894 in selling compensation and benefits costs due primarily to average headcount reductions and a decline in revenues compared to fiscal 2004;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease in pension costs of $1,050 compared to the third quarter of fiscal 2004, due mainly to the impact of changes in actuarial assumptions compared to fiscal 2004. Pension
expense is allocated between selling and administrative expense and cost of revenues based on the number of employees related to those areas. We expect that our total fiscal 2005 pension expense will decrease compared to fiscal 2004;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $5,598 as a result of lower spending for information technology, travel, and other expenses due to discretionary spending reductions during fiscal 2005, partially
offset by higher consulting fees from our internal controls certification efforts required by the Sarbanes-Oxley Act of 2002 (SOX); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $3,037 related to a reduction of real estate facility costs due primarily to the closure of 16 LDS locations as a result of the restructuring actions taken during the
second quarter of fiscal 2005 and the closure and consolidation of other facilities during the third quarter of fiscal 2005 as we continue to rationalize our real estate needs.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the remainder of fiscal 2005, we will continue to take aggressive actions
to reduce selling and administrative expense to achieve our goal of reducing selling and administrative expense as a percentage of revenue for the 2005 fiscal year by one percentage point compared to fiscal year 2004. We expect to accomplish this
goal through a combination of headcount and real estate reductions, discretionary expense reductions, and by eliminating unprofitable business lines to streamline our selling and administrative structure. These decreases will be partially offset by
the impact of an increase in consulting and audit fees as we execute our SOX internal controls certification efforts (see Item 4. Controls and Procedures).



Other



|                                                        |  |      |        |   |              |   |        |  |        |   
|------------------------------------------------------- |  | ---- | ------ | - | ------------ | - | ------ |  | ------ | --
|                                                        |  | 2005 |        |   | Restated2004 |   | Change | 
|Gain from divestiture of businesses                     |  |      |        |   |              | $ | 698    |  | (100.0 | )%
|Asset impairments                                       |  | $    | 27     |   |              |   |        |  | 100.0  |   
|Restructuring                                           |  |      | (406   | ) |              |   |        |  | (100.0 | ) 
|Operating income                                        |  |      | 50,939 |   |              |   | 62,693 |  | (18.7  | ) 
|Loss from early extinguishment of debt                  |  |      |        |   |              |   | 32,687 |  | (100.0 | ) 
|Interest expense, net                                   |  |      | 11,260 |   |              |   | 15,175 |  | (25.8  | ) 
|Taxes on income                                         |  |      | 13,307 |   |              |   | 5,629  |  | 136.4  |   
|Net income from continuing operations                   |  |      | 26,372 |   |              |   | 9,202  |  | 186.6  |   
|Diluted earnings per common share-continuing operations |  |      | 0.18   |   |              |   | 0.06   |  | 200.0  |   



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##### Table of Contents

During the third quarter of fiscal 2004, we recognized a gain of $698 as a result of the Canadian
Transaction.



During the three months ended March 31, 2005, we
took several actions to reduce costs, increase productivity and improve operating income. These actions involved our operations in BDS, LDS, our North American field organization and corporate staff, and Mexico. See pages 38-40 for a discussion
relating to third quarter fiscal 2005 activity related to these actions.



Operating income decreased in fiscal 2005 by 18.7% compared to fiscal 2004, as a result of the factors discussed above.



During the three months ended June 30, 2004, we recorded a loss from the early extinguishment of debt of $32,687, as a result of the repurchase of various
debt instruments.



The decrease in interest expense, net was
primarily the result of the benefit from lower average outstanding balances of corporate debt during fiscal 2005 compared to fiscal 2004.



The effective income tax rate was 33.5% and 38.0% for the third quarter of fiscal 2005 and 2004, respectively. The decrease in the effective income tax
rate is due primarily to the benefit of a cumulative reduction in the projected fiscal 2005 full year effective income tax rate before discreet items from 36.8% to 35.5% due primarily to the mix of pretax income between domestic and foreign
operations. The effective income tax rate for the remainder of fiscal 2005 is expected to be 35.5%, resulting in a full year effective tax rate of 34.9%. This excludes any tax impact from the sale of our French operating subsidiary in the fourth
quarter of fiscal 2005.



Diluted earnings per common share from
continuing operations were $0.18 for the third quarter of fiscal 2005, compared to $0.06 for the third quarter of fiscal 2004. The increase in diluted earnings per share is mainly attributable to the impact of the loss from the early extinguishment
of debt during the three months ended June 30, 2004, the benefit realized from the restructuring actions initiated during the second quarter of fiscal 2005, the impact of higher Customer Services gross profit, the sale or closure of unprofitable
operations during the second quarter of fiscal 2005, and discretionary spending reductions made by the Company during fiscal 2005, partially offset by the impact of lower finance income due to the run-off of the retained U.S. lease portfolio and the
decrease in equipment margins.



Review of Business Segments



Our reportable business segments are IKON North
America (INA) and IKON Europe (IE). INA and IE provide copiers, printers, color solutions, and a variety of document management service capabilities through Enterprise Services. These segments also include our captive finance
subsidiaries in North America (including those now divested) and Europe.



IKON North America



|                                  |  |      |         |   |              |   |         |  |        |   
|--------------------------------- |  | ---- | ------- | - | ------------ | - | ------- |  | ------ | --
|                                  |  | 2005 |         |   | Restated2004 |   | Change  | 
|Net sales                         |  | $    | 412,896 |   |              | $ | 442,008 |  | (6.6   | )%
|Services                          |  |      | 525,259 |   |              |   | 531,261 |  | (1.1   | ) 
|Finance income                    |  |      | 18,044  |   |              |   | 35,369  |  | (49.0  | ) 
|Gain from divestiture of business |  |      |         |   |              |   | 698     |  | (100.0 | ) 
|Asset impairments                 |  |      | 27      |   |              |   |         |  | 100.0  |   
|Restructuring                     |  |      | (406    | ) |              |   |         |  | (100.0 | ) 
|Operating income                  |  |      | 121,073 |   |              |   | 132,294 |  | (8.5   | ) 



Approximately 87% of
our revenues are generated by INA; accordingly, many of the items discussed above regarding our consolidated results are applicable to INA.



Net sales decreased by 6.6% due to a decrease in equipment sales of 3.6%, or $14,481, compared to the same period in fiscal 2004 due primarily from
increased competition and the impact of newly introduced products positioned at lower average selling prices to obtain long term growth objectives. Revenues generated from the sale of color devices increased compared to the third quarter of fiscal
2004 due to higher demand for these products, particularly higher-end color production



31



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##### Table of Contents

equipment, as new products continued to be introduced at more affordable prices. As a percentage of equipment revenue,
sales of color devices increased during the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004. This increase was offset by a decrease in the sale of segment 5 and 6 black and white production equipment compared to the third
quarter of fiscal 2004 due to continued pricing pressure, a shift to lower-end products within this segment and new alternate products available in segment 4. Sales of segment 1  4 black and white office equipment declined slightly compared to
the third quarter of fiscal 2004. This decrease was attributable to lower average selling price of these products compared to the same period in the prior year which resulted in increased placements of these products during the third quarter of 2005
compared to the previous year quarter. Direct supply sales decreased by approximately 12.5% or $3,354 compared to the third quarter of fiscal 2004, due to lower demand for fax and lower-end equipment supplies. Revenues from the sale of de-emphasized
technology hardware decreased $11,277, or 95%, compared to fiscal 2004.



Services decreased by 1.1% due primarily to a decrease in Managed Services revenues, which includes both on-site Managed Services and LDS, of $3,086 or 2.0%, to $153,319. Off-site Managed Services of $44,256, which is primarily comprised of
LDS, a short-cycle and increasingly competitive transactional business, declined by approximately $11,339 compared to the third quarter of fiscal 2004 due mainly to the impact of the restructuring actions we took during the second quarter of fiscal
2005, which involved the closure of 16 sites in North America. On-site Managed Services revenues of $109,063 grew 8.2%, or $8,252, from the prior year due to an increase in new contracts and continued expansion from existing customers. Customer
Services revenues decreased by $2,516 or 0.8% compared to the third quarter of fiscal 2004, attributable mainly to a decrease in average revenue per copy partially offset by increased copy volumes. Partially offsetting these decreases to service
revenues was the impact of fees received as a result of the GE relationship, which increased $885 or 4.1%, including Preferred Fees of $12,688 and $12,680, for the three months ended June 30, 2005 and 2004, respectively, and related impact of the
lease-end activities.



The decrease in finance income was
primarily due to the continued run-off of the retained U.S. lease portfolio not sold to GE as part of the U.S Transaction. In addition, finance income was impacted from the Canadian Transaction.



Operating income decreased primarily as a result of the factors discussed
above.



IKON Europe



|                 |  |      |        |      |   |        |  |      |  
|---------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | -
|                 |  | 2005 |        | 2004 |   | Change | 
|Net sales        |  | $    | 74,315 |      | $ | 71,404 |  | 4.1  | %
|Services         |  |      | 60,936 |      |   | 56,728 |  | 7.4  |  
|Finance income   |  |      | 6,855  |      |   | 6,458  |  | 6.1  |  
|Operating income |  |      | 8,058  |      |   | 6,178  |  | 30.4 |  



Net sales includes a
currency benefit of approximately $2,400. Excluding the impact of currency translation, net sales increased by 1.0%, primarily driven by an increase in equipment sales compared to the prior year. Equipment sales increased by 7.8%, compared to the
third quarter of fiscal 2004 but this growth was offset by decreases in direct supplies sales and de-emphasized technology hardware revenues of 4.8% and 19.8%, respectively.



Services increased as a result of currency benefits of approximately $1,902. Excluding the impact of currency translation,
services increased by 4.1% due to an increase in Customer Services revenues of 8.7% as a result of an increase in copy volumes and the continued focus on color products across Europe.



Finance income increased primarily as a result of strengthened foreign currencies, which resulted in a benefit of $196.



Operating income increased due to stronger operational
performance and the favorable impact of currency.



Corporate and
Eliminations



Corporate and Eliminations, which is not
treated as a business segment, is comprised of certain selling and administrative functions including finance, supply chain, and customer service. INA and IE are not presented on a comparative basis because certain administrative costs of INA are
included in Corporate and Eliminations, and excluded from the presentation of results of INA, but are included in the presentation of results of IE. Operating losses in Corporate and Eliminations, were $78,192 and $75,779 in the third quarter of
fiscal 2005 and 2004, respectively.



32



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##### Table of Contents

Nine Months Ended June 30, 2005

Compared to the Nine Months Ended June 30, 2004



Revenues



|               |  |      |           |              |   |           |  |       |   
|-------------- |  | ---- | --------- | ------------ | - | --------- |  | ----- | --
|               |  | 2005 |           | Restated2004 |   | Change    | 
|Net sales      |  | $    | 1,447,624 |              | $ | 1,450,201 |  | (0.2  | )%
|Services       |  |      | 1,745,035 |              |   | 1,739,368 |  | 0.3   |   
|Finance income |  |      | 83,364    |              |   | 239,097   |  | (65.1 | ) 
|               |  |      |           |              |   |           |  |       |   
|               |  | $    | 3,276,023 |              | $ | 3,428,666 |  | (4.5  | )%
|               |  |      |           |              |   |           |  |       |   



The decrease in
revenues of 4.5%, compared to the nine months ended June 30, 2004, which includes a currency benefit of 1.0% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is a result of an
overall decrease in finance income as a result of the sale of our North American leasing business, lower sales of de-emphasized technology hardware, lower direct supply sales, and lower Managed Services and Customer Services revenues. These
decreases were partially offset by an increase in revenues as a result of benefits realized from fees received under the U.S. Program Agreement and the Canadian Rider compared to fiscal 2004.



Net sales includes revenues from the sale of copier/printer multifunction
equipment, direct supplies, and technology hardware. The decrease in net sales includes a currency benefit of 1.2%. Equipment revenue of $1,331,932, increased by approximately 2.3%, or $29,913, compared to the same period in fiscal 2004 due mainly
to the net impact of the relationship with GE, and continued growth from the sale of color equipment. Origination fees from, and sales of residual value to, GE (not recognized as revenue when we had captive finance subsidiaries in North America)
contributed $77,879 of equipment revenue during the nine months ended June 30, 2005. As a result, equipment revenue would have decreased by 3.5% compared to fiscal 2004, excluding the impact of the origination fees and sales of residual value. While
European equipment revenues increased by 12.4%, or $21,410, compared to fiscal 2004, consistent with our city expansion strategy in Europe, North American equipment sales increased slightly by 0.8% due to the impact of the relationship with GE
discussed above, offset by the impact of competitive pressures and newly introduced black and white models positioned at lower average selling prices. In addition, first quarter fiscal 2005 North American equipment revenues were impacted by changes
in sales coverage, selling processes and incentives, as we launched important long-term initiatives in Professional Services and the new integrated selling model. Revenues generated from the sale of color devices increased by 11% compared to fiscal
2004 due to higher demand for these products, particularly higher-end color production equipment, as new products continued to be introduced at more affordable prices. As a percentage of equipment revenue, color devices increased from approximately
20.6% for the nine months ended June 30, 2004 to approximately 22.3% for the same period in fiscal 2005. U.S. revenues from the sale of segment 5 and 6 black and white production equipment (devices with page outputs greater than 70 pages per minute)
decreased approximately 18.5% compared to fiscal 2004 due to continued pricing pressure, a shift to lower-end products within this segment and new alternate products available in segment 4 as placements decreased by 11.5% from the prior year. U.S.
revenues from the sale of segment 1  4 black and white office equipment (devices with page outputs less than 70 pages per minute, fax and other equipment) declined approximately 4.3% compared to fiscal 2004. This decrease was partially
attributable to the lower average selling prices, due in part, to the impact of attractive marketing bundles offered in the third quarter in fiscal 2005 in an effort to increase market share in the mid-market customer base. As of June 30, 2005, U.S.
revenues from the sale of black and white office equipment represented 55.6% of U.S. equipment revenue, compared to 55.7% at June 30, 2004. Direct supply sales of $89,042 decreased by approximately 12.0%, or $12,115, compared to fiscal 2004, due to
lower demand for fax and lower-end copier supplies. Revenues from the sale of de-emphasized technology hardware decreased $20,375, or 43.3%, compared to the third quarter of fiscal 2004 as a result of the continued exit from this business.



Services is comprised of Enterprise Services and Other
Services. Enterprise Services consists of Managed Services, which provides on-site and off-site outsourcing services and other expertise; Customer Services (equipment service); and Professional Services, which focuses on integrating hardware and
software technologies that capture, manage, control, and store output for customers document lifecycles. Other Services includes rental income on operating leases, income from the sharing of gains on certain lease-end activities with GE in the
U.S., and the Preferred Fees. Services increased by 0.3% including a currency benefit of approximately 0.9%. Managed Services revenues of $496,365, which includes both on-site Managed Services and LDS, decreased by $17,757, or 3.5%. Off-site Managed
Services, a short-cycle and increasingly competitive transactional business declined by approximately $38,400, or 22.0%, compared to the nine months ended June 30, 2004 due to pricing pressure, lower copy volumes and the impact of a large commercial
imaging contract during the first quarter of fiscal 2004 which benefited fiscal 2004 revenues by $10,119. In addition, off-site Managed Services was impacted by the restructuring actions we took during the second quarter of fiscal 2005 which
involved the closure of 16 sites. On-site Managed Services revenues including facilities management, document production and mail room operations, grew from the prior year by 5.6%, due to an increase in new contracts and continued expansion to
existing contracts. Customer Services revenues (which are significantly impacted by the amount and mix of copy volumes) decreased by $14,930, or 1.4%, compared to fiscal 2004, due to lower average revenue per copy and the impact of specific
concessions made to customers during the second quarter of fiscal 2005. These decreases were partially offset by an increase in copy volumes of 2.5%



33



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##### Table of Contents

compared to fiscal 2004. Professional Services revenues of $42,396, increased 3.8%, or $1,556, compared to fiscal 2004.
Professional Services revenue was negatively impacted by the sale of two technology service businesses during the second quarter of fiscal 2005. Revenue from consulting, network connectivity services, document strategy assessments and various
software solutions, included within Professional Services, increased by 15.8%, compared to fiscal 2004, as a result of our continued focus on providing customers with digital technologies to reduce their costs and improve workflow. A significant
contribution to the services increase was the impact of fees received as a result of the GE relationship, including Preferred Fees of $38,056 and $12,680, for the nine months ended June 30, 2005 and 2004, respectively, and the related impact of
lease-end sharing activities. As a result, the impact of the GE relationship positively impacted services revenues by $41,144, during fiscal 2005 compared to fiscal 2004. Rental revenue decreased by $7,884, or 11.9%, compared to the nine months
ended June 30, 2004, due primarily from the sale of $38,900 of rental assets to GE on March 31, 2004.



Finance income is generated by our leasing subsidiaries, as well as by certain lease receivables not sold to GE as part of the U.S. Transaction. The
decrease in finance income was due primarily to the impact of the sale of $2,027,832 of lease receivables to GE during fiscal 2004 as part of the Transactions. Accordingly, lease receivables sold as part of the Transactions did not generate finance
income for us during the nine months ended June 30, 2005. This decrease was partially offset by a currency benefit of 1.2%. Although we will continue to receive finance income under certain leases that will be financed directly by us, including from
our European leasing operations, our total finance income will continue to decrease in future periods as a result of the Transactions. In fiscal 2005, we expect finance income to decline approximately 60% compared to fiscal 2004 as a result of the
Transactions and the continued run-off of the retained U.S. lease portfolio.



Gross Margin



|                             |  |      |   |  |              |  
|---------------------------- |  | ---- | - |  | ------------ | -
|                             |  | 2005 |   |  | Restated2004 |  
|Gross margin, net sales      |  | 27.0 | % |  | 28.8         | %
|Gross margin, services       |  | 40.8 |   |  | 40.6         |  
|Gross margin, finance income |  | 74.8 |   |  | 66.2         |  
|Gross margin, total          |  | 35.6 |   |  | 37.4         |  



The decrease in the
gross margin percentage on net sales was due to lower equipment revenues, growth in lower-margin National Account Program revenues, and continued market competitiveness coupled with strategic pricing and related marketing promotions. In addition,
the net impact of origination fees and sales of equipment residual values to GE negatively impacted the net sales gross margin by approximately 8 basis points.



The gross margin percentage on services remained relatively flat compared to the nine months ended June 30, 2004. However, the services gross margin
percentage during fiscal 2004 was negatively impacted by 23 basis points from the completion of a multi-year commercial imaging contract in which no profit was earned. Off-site Managed Services margins declined compared to fiscal 2004 due to the
impact of lower revenues. The off-site Managed Services cost structure is less variable than our other lines of business; therefore, gross margin percentages are more heavily influenced by changes in revenue. As a result of the actions we took late
in the second quarter of fiscal 2005 to reduce the variability of the cost structure of off-site Managed Services, we expect profit margin percentages for off-site Managed Services to improve during the remainder of fiscal 2005. Customer Services
gross margin increased due to a lower cost structure as a result of the restructuring actions taken during the second quarter 2005, partially offset by impact of specific concessions made to customers during the second quarter of fiscal 2005. These
decreases were offset by the net impact of the GE relationship (income from the sharing of gains on certain lease-end activities with GE as well as the Preferred Fees), which positively impacted the services gross margin percentage by approximately
39 basis points.



The gross margin percentage on finance income
increased from 66.2% in fiscal 2004 to 74.8% in fiscal 2005 due to European leasing revenues becoming a larger part of the finance income mix in fiscal 2005 compared to fiscal 2004. Because European leases are funded with a lower percentage of debt,
European leases generate higher gross profit margins than our sold North American leases. In addition, there was a lower leverage ratio on the U.S. lease receivable portfolio after the U.S. Transaction during fiscal 2005 compared to fiscal 2004.
Part of this lower leverage was due to the fact that $11,700 of interest expense recorded in Interest expense, net during fiscal 2005 related to debt that was reclassified from Non-Corporate Debt to corporate debt beginning on April 1,
2004. Prior to April 1, 2004, interest costs of the Non-Corporate Debt were recorded in finance interest expense. As a result, the gross margin on finance income was positively impacted by this change in classification. In fiscal 2005, we expect
gross profit earned from finance income to decline approximately 60% compared to fiscal 2004 as a result of the Transactions and the continued run-off of the retained U.S. lease portfolio.



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##### Table of Contents

Selling and Administrative Expenses



|                                    |  |      |           |   |              |   |           |        |  |      |   
|----------------------------------- |  | ---- | --------- | - | ------------ | - | --------- | ------ |  | ---- | --
|                                    |  | 2005 |           |   | Restated2004 |   |           | Change | 
|Selling and administrative expenses |  | $    | 1,030,885 |   |              | $ | 1,103,540 |        |  | (6.6 | )%
|S&A as a % of revenue               |  |      | 31.5      | % |              |   | 32.2      | %      |  |      |   



Selling and
administrative expense, which was unfavorably impacted by $8,846 due to foreign currency translation compared to fiscal 2004, decreased by $72,655, or 6.6%, during the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004,
and decreased from 32.2% to 31.5% as a percentage of revenue.



The net impact of the Transactions of $45,684 was a significant factor in the decrease of selling and administrative expense compared to fiscal 2004. Approximately $22,485 of this decrease was due to no lease default expense being required
for either retained or sold IOS Capital, LLC, our former leasing subsidiary in the U.S. (IOSC), lease receivables during the nine months ended June 30, 2005. Under the terms of the U.S. Program Agreement, GE assumed substantially all
risks related to lease defaults for both the retained and sold lease receivables of IOSC. The remaining decrease in selling and administrative expense attributable to the Transactions was due to the transfer of over 300 employees to GE. In addition,
during the first quarter of fiscal 2005 we received a refund from GE of approximately $3,400 related to administrative fees paid to GE for servicing our retained U.S. lease portfolio during fiscal 2004. Partially offsetting these decreases were
increases in corporate costs to support the Transactions, including headcount and certain infrastructure enhancements.



Other changes in selling and administrative expenses impacting the Company were:



| |  |  | A decrease in pension costs of $2,982 compared to the nine months ended June 30, 2004, due mainly to the impact of changes in actuarial assumptions compared to fiscal 2004. Pension
expense is allocated between selling and administrative expense and cost of revenues based on the number of employees related to those areas. We expect that our total fiscal 2005 pension expense will continue to decrease compared to fiscal 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $4,916 in selling compensation and benefits costs due primarily to average headcount reductions and a decline in revenues compared to fiscal 2004;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease in spending for information technology, travel, and other expenses of approximately $8,483 compared to fiscal 2004 as a result of discretionary spending reductions during
fiscal 2005, partially offset by higher consulting fees from our SOX internal controls certification efforts; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $4,791 related to a reduction of real estate facility costs due primarily to the closure of 16 LDS locations as a result of the restructuring actions taken during the
second quarter of fiscal 2005 and the closure and consolidation of other facilities during fiscal 2005 as we continue to rationalize our real estate needs. This was partially offset by an increase in costs incurred to terminate seven real estate
leases during the second quarter of fiscal 2005, representing both lease termination payments made to lessors as well as future lease payments for locations in which we ceased using the facility.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the remainder of fiscal 2005, we will continue to take aggressive actions
to reduce selling and administrative expense to achieve our goal of reducing selling and administrative expense as a percentage of revenue for the 2005 fiscal year by one percentage point compared to fiscal year 2004. We expect to accomplish this
goal through a combination of headcount reductions, real estate consolidations, discretionary expense reductions, and the elimination of unprofitable business lines to streamline our selling and administrative structure. These decreases will be
partially offset by the impact of an increase in consulting and audit fees as we execute our SOX internal controls certification efforts (see Item 4. Controls and Procedures).



Other



|                                                        |  |      |         |   |              |   |         |  |        |   
|------------------------------------------------------- |  | ---- | ------- | - | ------------ | - | ------- |  | ------ | --
|                                                        |  | 2005 |         |   | Restated2004 |   | Change  | 
|(Gain) loss from divestiture of businesses              |  | $    | (1,901  | ) |              | $ | 11,427  |  | (116.6 | )%
|Asset impairments                                       |  |      | 340     |   |              |   |         |  | 100.0  |   
|Restructuring                                           |  |      | 10,990  |   |              |   |         |  | 100.0  |   
|Operating income                                        |  |      | 124,812 |   |              |   | 167,409 |  | (25.4  | ) 
|Loss from early extinguishment of debt, net             |  |      | 1,734   |   |              |   | 35,906  |  | (95.2  | ) 
|Interest expense, net                                   |  |      | 34,571  |   |              |   | 34,923  |  | (1.0   | ) 
|Taxes on income                                         |  |      | 30,715  |   |              |   | 29,175  |  | 5.3    |   
|Net income from continuing operations                   |  |      | 57,792  |   |              |   | 67,405  |  | (14.3  | ) 
|Diluted earnings per common share-continuing operations |  |      | 0.40    |   |              |   | 0.44    |  | (9.1   | ) 



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##### Table of Contents

During fiscal 2005, we recognized a net gain of $1,901 as a result of the completion of the closing
balance sheet audit related to the U.S. Transaction, the sale of substantially all of our operations in Mexico, and the sale of two small business units that provided technology equipment and services to customers. During fiscal 2004, we recognized
a net loss of $11,427 as a result of the Transactions.



During
the nine months ended June 30, 2005, we took several actions to reduce costs, increase productivity and improve operating income. These actions involved our operations in BDS, LDS, our North American field organization and our corporate staff, and
Mexico. See pages 38-40 for additional information.



Operating
income decreased in fiscal 2005 by 25.4% compared to fiscal 2004, as a result of the factors discussed above.



During the nine months ended June 30, 2005, we repurchased $44,925 of the Convertible Notes for $45,938. As a result of these repurchases, we recognized a
loss, including the write-off of unamortized costs, of $1,734 which is included in loss from the early extinguishment of debt in the consolidated statements of income for the nine months ended June 30, 2005. During the nine months ended June 30,
2004, we recorded a loss from the early extinguishment of debt of $35,906, as a result of the repurchase of various debt instruments.



Interest expense decreased due to lower average outstanding debt balance during fiscal 2005 compared to the same period during fiscal 2004. This decrease
was partially offset by the assumption of the Additional Corporate Debt as part of the U.S. Transaction. Interest on this debt, which was reported in Finance interest expense prior to April 1, 2004, is now reported as Interest
expense, net. This change resulted in approximately $11,701 of additional interest expense being recorded in Interest expense, net for the nine months ended June 30, 2005 compared to the same period in fiscal 2004.



The effective income tax rate was 34.7% and 30.2% for the nine months ended
June 30, 2005 and 2004, respectively. The increase in the effective income tax rate is due primarily to certain non-recurring items that reduced the tax rate in fiscal 2004. These items were the reversal of valuation allowances on state net
operating loss carryovers of $4,720 as a result of the tax gain generated by the U.S. Transaction during fiscal 2004 and the reversal of valuation allowances on our Canadian net operating loss carryovers of $2,603 as a result of improved financial
performance achieved by our Canadian operations. In addition, the tax benefit relating to the sale of our Mexican operations during the second quarter of fiscal 2005 was reduced due to capital loss limitations. Partially offsetting the increase in
income tax expense is the deferral of depreciation expense for tax purposes in Ireland as a result of tax planning strategies. In particular, we have previously expensed depreciable asset purchases in accordance with Irish tax law provisions. We are
currently taxed at 10% of income; however, effective January 1, 2006, we will be taxed at 12.5% of income. During the first quarter of fiscal 2005, we determined that we would not deduct depreciable asset purchases in fiscal 2004 and fiscal 2005. As
a result, we will receive a tax benefit of 12.5% rather than 10% from the depreciation of these assets. The nine months of fiscal 2005 results reflect the benefit of the change in tax planning with respect to depreciable assets in fiscal 2004 of
$1,345. The fiscal 2005 expected benefit of $822 has been considered in the determination of the expected effective tax rate for fiscal 2005. The effective income tax rate for the remainder of fiscal 2005 is expected to be 35.5%, resulting in a full
year effective tax rate of 34.9%. This excludes any tax impact from the sale of our French operating subsidiary.



Diluted earnings per common share from continuing operations were $0.40 for the nine months ended June 30, 2005, compared to $0.44 for the nine months
ended June 30, 2004. This decline was attributable mainly to the impact of lower finance income due to the run-off of the retained U.S. lease portfolio and the impact of the Transactions, the decrease in equipment gross margins, the impact of lower
Customer Services and Managed Services revenues, partially offset by the effect of the fiscal 2005 restructuring activities, the sale or closure of unprofitable operations and our cost reduction efforts during fiscal 2005.



Review of Business Segments



Our reportable business segments are IKON North America (INA)
and IKON Europe (IE). INA and IE provide copiers, printers, color solutions, and a variety of document management service capabilities through Enterprise Services. These segments also include our captive finance subsidiaries in North
America (including those now divested) and Europe.



36



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##### Table of Contents

IKON North America



|                                           |  |      |           |   |              |   |           |  |        |   
|------------------------------------------ |  | ---- | --------- | - | ------------ | - | --------- |  | ------ | --
|                                           |  | 2005 |           |   | Restated2004 |   | Change    | 
|Net sales                                  |  | $    | 1,221,851 |   |              | $ | 1,239,575 |  | (1.4   | )%
|Services                                   |  |      | 1,561,743 |   |              |   | 1,570,378 |  | (0.5   | ) 
|Finance income                             |  |      | 62,834    |   |              |   | 219,954   |  | (71.4  | ) 
|(Gain) loss from divestiture of businesses |  |      | (1,901    | ) |              |   | 11,427    |  | (116.6 | ) 
|Asset impairments                          |  |      | 340       |   |              |   |           |  | 100.0  |   
|Restructuring                              |  |      | 10,990    |   |              |   |           |  | 100.0  |   
|Operating income                           |  |      | 327,434   |   |              |   | 384,204   |  | (14.8  | ) 



Approximately 87% of
our revenues are generated by INA; accordingly, many of the items discussed above regarding our consolidated results are applicable to INA.



Net sales decreased by 1.4% due primarily as a result of a decline in de-emphasized technology hardware and decreases in direct supply sales which were
offset by an increase in equipment sales due primarily to the net impact of the relationship with GE and continued growth from the sale of color equipment. Origination fees and sales of residual value to GE (not recognized as revenue when we had
captive finance subsidiaries in North America) contributed $77,879 of equipment revenue growth during fiscal 2005. As a result, equipment revenue would have decreased approximately 5.6% excluding the impact of the origination fees and sales of
residual value. This decline was due to competitive pressures and the impact of the newly introduced black and white models positioned at lower average selling prices. Revenues generated from the sale of color devices increased compared to fiscal
2004 due to higher demand for these products, particularly higher-end color production equipment, as new products continued to be introduced at more affordable prices. These increases were offset by a decrease in the sale of segment 5 and 6 black
and white production equipment compared to fiscal 2004 due to continued pricing pressure, a shift to lower-end products within this segment and new alternate products available in segment 4. Sales of segment 1  4 black and white office
equipment also declined compared to fiscal 2004. This decrease was partially attributable to lower average selling prices, due in part to the impact of attractive marketing bundles offered during the third quarter of fiscal 2005. Direct supply sales
decreased by approximately 13.1% compared to fiscal 2004, due to lower demand for fax and lower-end equipment supplies. Revenues from the sale of de-emphasized technology hardware decreased approximately 61% compared to fiscal 2004.



Services decreased by 0.5% due primarily to a decrease in Customer Services
revenues, Managed Services revenues, and rental revenues, partially offset by increases in Professional Services revenues and leasing fees. Managed Services revenues, which includes both on-site Managed Services and LDS, decreased by $17,897, or
3.8%, to $456,749 compared to fiscal 2004. Off-site Managed Services, a short-cycle and increasingly competitive transactional business declined by approximately $38,400 compared to the nine months ended June 30, 2004 due to pricing pressure, lower
copy volumes and the impact of a large commercial imaging contract during the first quarter of fiscal 2004 which benefited the first quarter of fiscal 2004 revenues by $10,119. In addition, off-site Managed Services was impacted by the restructuring
actions we took during the second quarter of fiscal 2005, which involved the closure of 16 sites. On-site Managed Services revenues of $320,880 grew 6.8% or $20,503, from the prior year due to an increase in new contracts and continued expansion on
existing contracts. Customer Services revenues decreased by $25,340, or 2.6%, compared to fiscal 2004, attributable mainly to a decrease in average revenue per copy and the impact of specific concessions made to customers during the second quarter
of fiscal 2005. Rental revenue decreased by $8,101, or 13.1%, due primarily to the sale of $38,900 of rental assets to GE on March 31, 2004. Professional Services revenue grew by $1,566, or 3.8%, however was negatively impacted by the sale of two
technology service businesses during the second quarter of fiscal 2005. Revenue from consulting, network connectivity services, document strategy assessments and various software solutions, included within Professional Services, increased by 15.8%,
compared to fiscal 2004, as a result of our continued focus on providing customers with digital technologies to reduce their costs and improve workflow. A significant contribution to the services increase was the impact of fees received as a result
of the GE relationship, partially offset by the impact of lease-end sharing activities. As a result, services revenues were positively impacted by $41,444, during fiscal 2005 compared to fiscal 2004.



Finance income and finance interest expense decreased as a result of the
Transactions. Accordingly, lease receivables sold as part of the Transactions did not generate finance income for us during fiscal 2005.



37



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##### Table of Contents

IKON Europe



|                 |  |      |         |      |   |         |  |      |  
|---------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | -
|                 |  | 2005 |         | 2004 |   | Change  | 
|Net sales        |  | $    | 225,773 |      | $ | 210,626 |  | 7.2  | %
|Services         |  |      | 183,292 |      |   | 168,990 |  | 8.5  |  
|Finance income   |  |      | 20,530  |      |   | 19,143  |  | 7.2  |  
|Operating income |  |      | 22,834  |      |   | 17,379  |  | 31.4 |  



Net sales includes a
currency benefit of approximately $11,833. Excluding the impact of currency translation, net sales increased by 1.6%. In addition and consistent with our city expansion strategy, European equipment sales increased by 12.4% compared to fiscal 2004 as
a result of the success of our Pan European and global account initiatives and successful starts of our two new European offices. The increases in equipment sales were partially offset by decreases in direct supplies sales and technology hardware
revenues of 5.6% and 24.1%, respectively.



Services increased
as a result of currency benefits of approximately $9,065. Excluding the impact of currency translation, services increased by 3.1% due to an increase in customer services revenues of 9.8% as a result of an increase in copy volumes across Europe.



Finance income increased primarily as a result of strengthened
foreign currencies, which resulted in a currency benefit of $971.



Operating income in fiscal 2005 increased due to stronger operational performance and the favorable impact of currency.



Corporate and Eliminations



Corporate and Eliminations, which is not treated as a business segment, is comprised of certain selling and administrative functions including finance,
supply chain, and customer service. INA and IE are not presented on a comparative basis because certain administrative costs of INA are included in Corporate and Eliminations, and excluded from the presentation of results of INA, but are included in
the presentation of results of IE. Operating losses in Corporate and Eliminations, were $225,456 and $234,174 in fiscal 2005 and fiscal 2004, respectively.



Restructuring and Asset Impairment Charges



During fiscal 2005, we took several actions to reduce costs, increase productivity, and improve operating income. These actions involved our operations in
BDS, LDS, our North American field organization and our corporate staff, and Mexico (see Note 4).



Business Document Services



During the second quarter of fiscal 2005, we exited BDS, which provided off-site document management solutions, including digital print and fulfillment services. The exit of BDS was achieved by the closure or sale of 11 North American
operating locations. As of June 30, 2005, all of the 11 BDS sites were closed or sold. Proceeds received from the sale of 2 sites were not material. As a result, the results of operations and cash flows of BDS are classified as discontinued
operations (see Note 5).



In connection with the exit of BDS,
we recorded pre-tax restructuring and asset impairment charges of $1,559 and $37, respectively, during the third quarter of fiscal 2005. For the nine months ended June 30, 2005, pre-tax restructuring and asset impairment charges were $8,653 and
$1,331, respectively. The pre-tax components of the restructuring and asset impairment charges for fiscal 2005 are as follows:



|                                         |  |                                  |       |   |                                 |   |       
|---------------------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | - | ------
|Type of Charge                           |  | Three Months Ended June 30, 2005 |       |   | Nine Months Ended June 30, 2005
|Restructuring Charge:                    |  |                                  |       |   |                                 |   |       
|Severance                                |  | $                                | 790   |   |                                 | $ | 3,635 
|Contractual commitments                  |  |                                  | 189   |   |                                 |   | 2,180 
|Contract termination                     |  |                                  | 580   |   |                                 |   | 2,838 
|                                         |  |                                  |       |   |                                 |   |       
|Total Restructuring Charge               |  |                                  | 1,559 |   |                                 |   | 8,653 
|Asset Impairment Charge for Fixed Assets |  |                                  | 37    |   |                                 |   | 1,331 
|Other Non-Restructuring Items            |  |                                  | (800  | ) |                                 |   | 907   
|                                         |  |                                  |       |   |                                 |   |       
|Total                                    |  | $                                | 796   |   |                                 | $ | 10,891
|                                         |  |                                  |       |   |                                 |   |       



38



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##### Table of Contents

The severance charge of $790 represents an additional 75 employees identified to be terminated during the
three months ended June 30, 2005, for a total of 302 employees during fiscal 2005. The asset impairment charge represents fixed asset write-offs. In addition, during fiscal 2005, we wrote-down inventories and other assets by $610 and recorded
additional reserves for accounts receivable of $297, which are included in Other Non-Restructuring Items in the table above. Actual cash collections on outstanding BDS receivables during the third quarter of fiscal 2005 exceeded initial
management estimates resulting in a $904 reduction to the existing accounts receivable reserve. These charges (benefits) are included within discontinued operations.



Legal Document Services



LDS provides off-site document management solutions for the legal industry, including document imaging, coding and conversion services, legal graphics,
and electronic discovery. During the second quarter of fiscal 2005, we closed 16 of 82 LDS sites in North America to provide both cost flexibility and savings. No additional LDS sites were closed during the third quarter of fiscal 2005.



As a result of the closure of these sites, we recorded pre-tax
restructuring and asset impairment charges of $2,306 and $229, respectively, for the nine months ended June 30, 2005. During the third quarter of fiscal 2005, we recorded a net reduction to the restructuring charge in the amount of $46, as a result
of a revision to the number of employees to be terminated offset by additional contractual commitments and contract termination charges. The pre-tax components of the restructuring and asset impairment charges for fiscal 2005 are as follows:



|                                         |  |                                 |      |   |                                |   |      
|---------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | -----
|Type of Charge                           |  | Three Months EndedJune 30, 2005 |      |   | Nine Months EndedJune 30, 2005
|Restructuring Charge:                    |  |                                 |      |   |                                |   |      
|Severance                                |  | $                               | (141 | ) |                                | $ | 1,534
|Contractual commitments                  |  |                                 | 75   |   |                                |   | 612  
|Contract termination                     |  |                                 | 20   |   |                                |   | 160  
|                                         |  |                                 |      |   |                                |   |      
|Total Restructuring Charge               |  |                                 | (46  | ) |                                |   | 2,306
|Asset Impairment Charge for Fixed Assets |  |                                 | 27   |   |                                |   | 229  
|Other Non-Restructuring Items            |  |                                 | (142 | ) |                                |   | 177  
|                                         |  |                                 |      |   |                                |   |      
|Total                                    |  | $                               | (161 | ) |                                | $ | 2,712
|                                         |  |                                 |      |   |                                |   |      



The restructuring
charge represents severance of $1,534 for the termination of 157 employees during fiscal 2005. The asset impairment charge of $229 represents fixed asset write-offs. In addition, we wrote-down inventories and other assets by $44 and recorded
additional reserves for accounts receivable of $133, which are included in Other Non-Restructuring Items in the table above. Revisions to the initial account receivable reserves attributed to the reduction in other non-restructuring
items during the three months ended June 30, 2005.



Field Organization and
Corporate Staff Reduction



During fiscal 2005, we
reorganized our field structure in North America. To achieve this, we expanded geographic coverage under certain area vice presidents, allowing us to reduce the number of our marketplaces. By streamlining our field leadership structure and reducing
other corporate staff, we believe we will be able to save costs while maintaining our sales capabilities and services provided to customers. As a result of these actions, we recorded a pre-tax restructuring charge of $8,684 representing severance
for 385 employees during the nine months ended June 30, 2005. In addition, we recorded fixed asset impairments representing fixed asset write-offs in the amount of $111 during fiscal 2005.



Summarized Restructuring Activity



The pre-tax components of the restructuring and asset impairment charges for
fiscal 2005 are as follows:



|                                         |  |                                 |       |   |                                |   |       
|---------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------
|Type of Charge                           |  | Three Months EndedJune 30, 2005 |       |   | Nine Months EndedJune 30, 2005
|Restructuring Charge:                    |  |                                 |       |   |                                |   |       
|Severance                                |  | $                               | 289   |   |                                | $ | 13,853
|Contractual commitments                  |  |                                 | 264   |   |                                |   | 2,792 
|Contract termination                     |  |                                 | 600   |   |                                |   | 2,998 
|                                         |  |                                 |       |   |                                |   |       
|Total Restructuring Charge               |  |                                 | 1,153 |   |                                |   | 19,643
|Asset Impairment Charge for Fixed Assets |  |                                 | 64    |   |                                |   | 1,671 
|Other Non-Restructuring Items            |  |                                 | (941  | ) |                                |   | 1,085 
|                                         |  |                                 |       |   |                                |   |       
|Total                                    |  | $                               | 276   |   |                                | $ | 22,399
|                                         |  |                                 |       |   |                                |   |       



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We calculated the asset impairment charges in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The proceeds received for locations sold or held for sale were not sufficient to cover the fixed asset balances, as such, those balances were written-off. Fixed assets associated with closed sites
were written-off.



All restructuring costs were incurred by the
IKON North America operating segment.



The following presents a
reconciliation of the restructuring and asset impairment charges to the accrual balance remaining at June 30, 2005, which is included in other accrued expenses on the consolidated balance sheet:



|                              |  |                   |        |                         |   |                            |  |                             |       |  |   |      
|----------------------------- |  | ----------------- | ------ | ----------------------- | - | -------------------------- |  | --------------------------- | ----- |  | - | -----
|                              |  | Fiscal 2005Charge |        | CashPaymentsFiscal 2005 |   | Non-cashchargesFiscal 2005 |  | Ending BalanceJune 30, 2005
|Severance                     |  | $                 | 13,853 |                         | $ | 7,959                      |  |                             |       |  | $ | 5,894
|Contractual commitments       |  |                   | 2,792  |                         |   | 767                        |  |                             |       |  |   | 2,025
|Contract termination          |  |                   | 2,998  |                         |   | 2,197                      |  |                             |       |  |   | 801  
|Asset impairments             |  |                   | 1,671  |                         |   |                            |  | $                           | 1,671 |  |   |      
|Other Non-Restructuring Items |  |                   | 1,085  |                         |   |                            |  |                             | 1,085 |  |   |      
|                              |  |                   |        |                         |   |                            |  |                             |       |  |   |      
|Total                         |  | $                 | 22,399 |                         | $ | 10,923                     |  | $                           | 2,756 |  | $ | 8,720
|                              |  |                   |        |                         |   |                            |  |                             |       |  |   |      



The projected payments
of the remaining balances, by fiscal year, are as follows:



|                        |  |             |       |             |   |             |  |        |     |       |   |     |  |   |      
|----------------------- |  | ----------- | ----- | ----------- | - | ----------- |  | ------ | --- | ----- | - | --- |  | - | -----
|Projected Payments      |  | Fiscal 2005 |       | Fiscal 2006 |   | Fiscal 2007 |  | Beyond |     | Total
|Severance               |  | $           | 4,970 |             | $ | 924         |  |        |     |       |   |     |  | $ | 5,894
|Contractual commitments |  |             | 415   |             |   | 788         |  | $      | 352 |       | $ | 470 |  |   | 2,025
|Contract termination    |  |             | 801   |             |   |             |  |        |     |       |   |     |  |   | 801  
|                        |  |             |       |             |   |             |  |        |     |       |   |     |  |   |      
|Total                   |  | $           | 6,186 |             | $ | 1,712       |  | $      | 352 |       | $ | 470 |  | $ | 8,720
|                        |  |             |       |             |   |             |  |        |     |       |   |     |  |   |      



All contractual
commitment amounts related to leases are shown net of projected sublease income. Projected sublease income was $3,472 at June 30, 2005. To the extent that sublease income cannot be realized, additional restructuring charges will be incurred in each
period in which sublease income is not received.



The employees
affected by the charge were as follows:



|                                       |  |                   |  |                                 |   |  |                                                     
|-------------------------------------- |  | ----------------- |  | ------------------------------- | - |  | ----------------------------------------------------
|Headcount Reductions                   |  | EmployeesAffected |  | Fiscal 2005EmployeeTerminations |   |  | Remaining Employeesto be Terminated at June 30, 2005
|BDS                                    |  | 302               |  | (301                            | ) |  | 1                                                   
|LDS                                    |  | 157               |  | (157                            | ) |  |                                                     
|Field organization and corporate staff |  | 425               |  | (385                            | ) |  | 40                                                  
|                                       |  |                   |  |                                 |   |  |                                                     
|Total                                  |  | 884               |  | (843                            | ) |  | 41                                                  
|                                       |  |                   |  |                                 |   |  |                                                     



The locations affected
by the charge were as follows:



|              |  |                              |  |                                     |  |                                   |   |  |                                             
|------------- |  | ---------------------------- |  | ----------------------------------- |  | --------------------------------- | - |  | --------------------------------------------
|Site Closures |  | Initial PlannedSite Closures |  | Sites Closedor Sold atJune 30, 2005 |  | Change inEstimate ofSite Closures |   |  | Remaining Sites tobe Closed at June 30, 2005
|BDS           |  | 11                           |  | 11                                  |  |                                   |   |  |                                             
|LDS           |  | 17                           |  | 16                                  |  | (1                                | ) |  |                                             
|              |  |                              |  |                                     |  |                                   |   |  |                                             
|Total         |  | 28                           |  | 27                                  |  | (1                                | ) |  |                                             
|              |  |                              |  |                                     |  |                                   |   |  |                                             



During the third
quarter of fiscal 2005, management determined that one of the 17 LDS sites initially approved for closing will remain in operation. As such, the locations affected by the charge were 16 as of June 30, 2005. We expect all restructuring actions to be
completed during the remainder of fiscal 2005. Remaining employees to be terminated at June 30, 2005 represents employees who received notice of termination but were not yet terminated. Severance payments to terminated employees are made in
installments. The charges for contractual commitments relate to real estate lease contracts where we have exited certain locations and are required to make payments over the remaining lease term. The charges for contract termination represent costs
incurred to immediately terminate contracts.



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Financial Condition and Liquidity



Cash Flows and Liquidity



The following summarizes cash flows for the nine months ended June 30, 2005 as reported in our consolidated statements of cash flows:



|                                                   |  |      |          |  
|-------------------------------------------------- |  | ---- | -------- | -
|                                                   |  | 2005 |         
|Cash used in operating activities                  |  | $    | (37,652  | )
|Cash provided by investing activities              |  |      | 273,697  |  
|Cash used in financing activities                  |  |      | (420,705 | )
|Effect of exchange rates                           |  |      | 1,040    |  
|                                                   |  |      |          |  
|Decrease in cash                                   |  |      | (183,620 | )
|Cash and cash equivalents at beginning of the year |  |      | 472,951  |  
|                                                   |  |      |          |  
|Cash and cash equivalents at end of period         |  | $    | 289,331  |  
|                                                   |  |      |          |  



Operating Cash Flows



We used $37,652 of cash for operating activities during
fiscal 2005, which includes a use of cash of $9,618 from discontinued operations related to our exit from BDS in the second quarter of fiscal 2005. A decrease in accounts receivable positively impacted cash flow from operations by $30,629 as a
result primarily of lower receivables from GE from the improvement in funding timing compared to fiscal 2004. Amounts due from GE decreased from $215,740 at September 30, 2004 to $184,183 at June 30, 2005. Net income from continuing operations was
$57,792, which excludes the loss from discontinued operations of $11,743, for the nine months ended June 30, 2005. Non-cash operating expenses were $51,666, which includes depreciation, amortization, gain on the divesture of businesses, provision
for losses on accounts and lease receivables, asset impairment charges, restructuring charges, deferred income taxes, pension expense, loss from the early extinguishment of debt, and non-cash interest expense on debt supporting unsold residual
value. Increased inventory levels compared to September 30, 2004, resulted in a cash use in operations of $6,621 during fiscal 2005 due to a large inventory purchase during June 2005. However, inventory turns increased to 10.7 at June 30, 2005 from
9.6 at September 30, 2004. Our most significant use of cash was a decrease in accounts payable, deferred revenues, and accrued expenses of $155,979 from September 30, 2004, due mainly to a decrease in accounts payable as a result of less favorable
terms with some of our vendors compared to September 30, 2004. Accrued salaries, wages and commissions decreased as a result of the timing of the payroll cycle and the payment of fiscal 2004 performance compensation during fiscal 2005. In addition,
during fiscal 2005 we made net federal tax payments of $47,109. In addition, during fiscal 2005, we made contributions to the U.S. defined benefit plan of $42,604. During fiscal 2005, we made $5,849 of payments related to our 2005 restructuring
actions.



Investing Cash Flows



During the nine months ended June 30, 2005, we generated $273,697 of cash
from investing activities, mainly attributable to the sale and collection of $188,956 and $398,448, respectively, of our finance receivables partially offset by $277,560 of finance receivable additions during fiscal 2005. As a result of the
Transactions, collections received from our U.S. retained lease portfolio will continue to significantly outpace finance receivable additions. During the nine months ended June 30, 2005, we had capital expenditures for property and equipment of
$22,091 and capital expenditures for equipment on operating leases of $36,151. Capital expenditures for equipment on operating leases represent purchases of equipment that are placed on rental with our customers. Proceeds from the sale of property
and equipment during fiscal 2005 were $2,308. Proceeds from the sale of equipment on operating leases during fiscal 2005 were $14,165. During fiscal 2005, we received $5,330 of proceeds from the sale of businesses, primarily in the form of
additional proceeds from GE as a result of the completion of the closing balance sheet audit related to the U.S. Transaction. In addition, we sold substantially all of our operations in Mexico and sold two small subsidiaries that provided technology
equipment and services to customers.



Financing Cash Flows



During the nine months ended June 30, 2005, we used $420,705 of cash for
financing activities. As discussed in further detail below under Debt Structure, during fiscal 2005 we used $397,649 for debt payments. These payments include the maturity of $56,659 of the 6.75% notes due 2004 (the November 2004
Notes) that were paid in November 2004, $289,037 of lease related debt, and $44,925 of our Convertible Notes which we repurchased for $45,938. During fiscal 2005,



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$19,339 of lease related debt was issued by our European leasing subsidiaries. In March 2004, the Board of Directors
authorized the repurchase of up to $250,000 of our outstanding shares of common stock (the 2004 Plan), superseding the fiscal 2000 share repurchase authorization. During the nine months ended June 30, 2005, we repurchased 3.1 million
shares of our outstanding common stock for $34,240 (including related fees paid), leaving $138,328 remaining for share repurchases under the 2004 Plan.



During the nine months ended June 30, 2005, we paid $16,889 of dividends, representing $0.12 per common share to shareholders of record.



Debt Structure



Long-term corporate debt consisted of:



|                                                                     |  |              |         |                   |   |        
|-------------------------------------------------------------------- |  | ------------ | ------- | ----------------- | - | -------
|                                                                     |  | June 30,2005 |         | September 30,2004
|Bond issues                                                          |  | $            | 354,828 |                   | $ | 411,423
|Convertible subordinated notes                                       |  |              | 245,075 |                   |   | 290,000
|Notes payable                                                        |  |              | 94,835  |                   |   | 94,835 
|Miscellaneous notes, bonds, mortgages, and capital lease obligations |  |              | 3,454   |                   |   | 8,622  
|                                                                     |  |              |         |                   |   |        
|                                                                     |  |              | 698,192 |                   |   | 804,880
|Less: current maturities                                             |  |              | 3,446   |                   |   | 63,023 
|                                                                     |  |              |         |                   |   |        
|                                                                     |  | $            | 694,746 |                   | $ | 741,857
|                                                                     |  |              |         |                   |   |        



Long-term debt
supporting finance contracts and unsold residual value (Non-Corporate Debt) consisted of:



|                                       |  |              |         |                   |   |        
|-------------------------------------- |  | ------------ | ------- | ----------------- | - | -------
|                                       |  | June 30,2005 |         | September 30,2004
|Lease-backed notes                     |  | $            | 408,269 |                   | $ | 683,086
|Asset securitization conduit financing |  |              | 127,537 |                   |   | 129,668
|Notes payable to banks                 |  |              | 10,397  |                   |   | 3,868  
|Debt supporting unsold residual value  |  |              | 51,152  |                   |   | 46,187 
|                                       |  |              |         |                   |   |        
|                                       |  |              | 597,355 |                   |   | 862,809
|Less: current maturities               |  |              | 333,848 |                   |   | 439,941
|                                       |  |              |         |                   |   |        
|                                       |  | $            | 263,507 |                   | $ | 422,868
|                                       |  |              |         |                   |   |        



Excluded from above is
$3,982 of our corporate debt that has been reclassified to liabilities held for sale on the Consolidated Balance Sheets as a result of the sale of our French operating subsidiary during the fourth quarter of fiscal 2005 (see Note 16 to the Condensed
Consolidated Financial Statements (Unaudited)).



Our 6.75%
notes due 2004 were paid upon maturity in November 2004. The balance of these notes at September 30, 2004 was $56,659.



Debt Supporting Finance Contracts



During the nine months ended June 30, 2005, we repaid $289,037 and issued $19,339 of debt supporting finance contracts.



As of June 30, 2005, IKON Capital PLC, IKONs leasing subsidiary in the
United Kingdom, had approximately $26,080 available under its asset securitization conduit financing agreement.



Debt Supporting Unsold Residual Value



Due mainly to certain provisions within our agreements with GE and other lease syndicators, which do not allow us to recognize the sale of the residual
value on leases in which we are the original equipment lessor (primarily state and local government contracts), we must keep the present value of the residual value of those leases on our balance sheet. A corresponding amount of debt is recorded
representing the cash received from GE and the other lease syndicators for the residual value. This debt will not be repaid unless required under the applicable agreement in the event that an IKON service performance failure is determined to relieve
the lessee of its lease payment obligations. During the three year period ending September 30, 2004, total repurchases of lease receivables related to our service performance failures have amounted to approximately $504 on a cumulative basis.



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In addition, we transferred lease receivables to GE for which we have retained all of the risks of
ownership. A corresponding amount of debt was recorded representing the cash received from GE for these receivables.



As of June 30, 2005, we had $36,763 of debt related to $35,692 of unsold residual value and the present value of the remaining lease receivables that
remained on our balance sheet. During fiscal 2005, we imputed interest at our average borrowing rate of 3.73% and recorded $432 of interest expense related to this debt. Upon the end of the lease term or repurchase of the lease, whichever comes
first, we will reverse the unsold residual value and related debt as the underlying leases mature and any differential will be recorded as a gain on the extinguishment of debt. As of June 30, 2005, this differential was $1,071.



In addition, we have $14,389 of debt related to equipment on operating leases
which have been funded by GE.



Credit Facility



We maintain a $200,000 secured credit facility (the Credit
Facility) with a group of lenders. The Credit Facility provides the availability of revolving loans, with certain sub-limits, and provides support for letters of credit. The amount of credit available under the Credit Facility is reduced by
open letters of credit. The amount available under the Credit Facility for borrowings or additional letters of credit was $165,658 at June 30, 2005. The Credit Facility is secured by our accounts receivable and inventory, the stock of our first-tier
domestic subsidiaries, 65% of the stock of our first-tier foreign subsidiaries, and all of our intangible assets. All security interests pledged under the Credit Facility are shared with the holders of our 7.25% notes payable due 2008.



The Credit Facility contains affirmative and negative covenants, including
limitations on certain fundamental core business changes, investments and acquisitions, mergers, certain transactions with affiliates, creations of liens, asset transfers, payments of dividends, intercompany loans, and certain restricted payments.
The Credit Facility does not, however, limit our ability to continue to securitize lease receivables. The Credit Facility matures on March 1, 2008, but is subject to certain early maturity events in November 2006, January 2007, and April 2007 if our
Convertible Notes have not been converted to equity or refinanced or minimum liquidity is not met as of such dates. Minimum liquidity is defined as having sufficient cash, including any unused capacity under the Credit Facility, to repay the balance
of the Convertible Notes plus an additional $100,000. The Credit Facility contains certain financial covenants relating to: (i) our corporate leverage ratios; (ii) our consolidated interest coverage ratio; (iii) our consolidated asset coverage
ratio; (iv) our consolidated net worth ratios; (v) limitations on our capital expenditures; and (vi) limitations on additional indebtedness and liens. Under the terms of the Credit Facility, share repurchases are permitted in an aggregate amount not
to exceed $250,000 during the period of July 28, 2004 through March 1, 2008. From July 28, 2004 through September 30, 2005, share repurchases are permitted in an aggregate amount not to exceed $150,000. Beginning on October 1, 2005, we are permitted
to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that we did not utilize prior to October 1, 2005. As of June 30, 2005, $84,973 of
the $150,000 allowance was utilized. Additionally, the Credit Facility contains default provisions customary for facilities of this type.



Letters of Credit



We have certain commitments available to us in the form of lines of credit and standby letters of credit. As of June 30, 2005, we had $171,724 available
under lines of credit, including the $165,658 available under the Credit Facility and had open standby letters of credit totaling $34,342. These letters of credit are primarily supported by the Credit Facility. All letters of credit expire within
one year.



Credit Ratings



As of June 30, 2005, the credit ratings on our senior unsecured debt were
designated Ba2 by Moodys Investor Services and BB by Standard and Poors. During the third quarter of fiscal 2005, Moodys Investor Services and Standard and Poors moved the Companys credit ratings from stable outlook to
negative outlook.



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Liquidity Outlook



The following summarizes our significant contractual obligations and commitments as of June 30, 2005:



|                            |  |       |                 |              |           |         |           |   |            |  |   |         |  |   |        
|--------------------------- |  | ----- | --------------- | ------------ | --------- | ------- | --------- | - | ---------- |  | - | ------- |  | - | -------
|                            |  | Total |                 | Payments due
|Contractual Obligations     |  |       | Less Than 1Year |              | 1-3 Years |         | 3-5 Years |   | Thereafter
|Corporate debt              |  | $     | 1,272,456       |              | $         | 50,731  |           | $ | 418,500    |  | $ | 53,196  |  | $ | 750,029
|Non-Corporate debt          |  |       | 565,326         |              |           | 344,069 |           |   | 220,506    |  |   | 751     |  |   |        
|Purchase commitments        |  |       | 699             |              |           | 699     |           |   |            |  |   |         |  |   |        
|Other long-term liabilities |  |       | 178,859         |              |           | 3,840   |           |   | 54,174     |  |   | 49,759  |  |   | 71,086 
|Operating leases            |  |       | 351,559         |              |           | 98,912  |           |   | 131,626    |  |   | 62,030  |  |   | 58,991 
|                            |  |       |                 |              |           |         |           |   |            |  |   |         |  |   |        
|Total                       |  | $     | 2,368,899       |              | $         | 498,251 |           | $ | 824,806    |  | $ | 165,736 |  | $ | 880,106
|                            |  |       |                 |              |           |         |           |   |            |  |   |         |  |   |        



Non-Corporate Debt
excludes the maturity of debt supporting unsold residual value of $36,763. This debt will not be repaid unless required under the applicable agreement in the event that an IKON service performance failure is determined to relieve the lessee of its
lease payment obligations. During the three year period ending September 30, 2004, total repurchases of lease receivables related to our service performance have amounted to approximately $504 on a cumulative basis. In addition, Non-Corporate Debt
excludes $14,389 of debt related to equipment on operating leases which have been funded by GE. Maturities of debt include estimated interest payments. Maturities of lease-backed notes are based on the contractual maturities of leases. Payments on
Non-Corporate Debt are generally made from collections of our finance receivables. At June 30, 2005, Non-Corporate Debt (excluding debt supporting unsold residual value) was $546,203 and finance receivables, net of allowances, were $875,584.



In addition, corporate debt payments include $4,194 of
principal and interest payments on corporate debt reclassified to assets held for sale on the consolidated balance sheets as a result of the sale of our French operating subsidiary in the fourth quarter of fiscal 2005.



Other long-term liabilities exclude $28,288 of accrued contingencies due
primarily to the inability to predict the timing of payments. Planned contributions to our defined benefit plans have been included in the estimated period of payment. All other liabilities related to pension are included in Thereafter
($35,273), as required payments are based on actuarial data that has not yet been determined. Payment requirements may change significantly based on the outcome or changes of various actuarial assumptions.



Purchase commitments represent future cash payments related to an agreement
with an outside consultant to be rendered prior to June 30, 2005.



We may repurchase available outstanding indebtedness in open market and private transactions. Additionally, from time-to-time, our Retirement Savings Plan may acquire shares of our common stock in open market transactions or from our
treasury shares. During fiscal 2004, we repurchased 6,741 shares of our outstanding common stock for $77,574 under the 2004 Plan. During fiscal 2005, we repurchased 3,109 shares of our outstanding common stock for $34,098, leaving $138,328 remaining
for share repurchases under the 2004 Plan. Under the terms of the Credit Facility, share repurchases are permitted up to $150,000 until September 2005. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an
aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that we did not utilize prior to October 1, 2005. As of June 30, 2005, $84,973 of the $150,000 allowance was utilized.



For fiscal 2005, we expect to generate (use) $25,000 to $(25,000) in cash
from operations. These expected results are primarily due to the payment of tax obligations related to the retained U.S. leasing portfolio which we will continue to pay over the next several years as the underlying leases run-off. We expect to make
tax payments of approximately $90,000 to $100,000 during fiscal 2005. We expect net lease receivable collections, reported under Cash from Investing Activities, to more than offset the future tax liabilities during the transition period,
as well as the obligations for the underlying debt supporting the lease receivables. Capital expenditures, net of proceeds from the sale of fixed assets, are expected to be approximately $75,000 for fiscal 2005.



We believe that our operating cash flow together with our current cash
position and other financing arrangements will be sufficient to finance current operating requirements for fiscal 2005, including capital expenditures, and payment of dividends.



PENDING ACCOUNTING CHANGES



In October 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign
earnings that are repatriated, as defined by the AJCA. We may elect to apply this provision to qualifying earnings repatriations in either the balance of fiscal 2005 or in fiscal 2006. The range of possible amounts that we are considering for
repatriation under this provision is between $0 and $130,000. The related potential range of income tax is between $0 and $7,000.



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In November 2004, the Financial Accounting Standards Board (the FASB) issued SFAS 151,
Inventory Costs, an amendment of ARB 43, Chapter 4, (SFAS 151). This statement amends previous guidance as it relates to inventory valuation to clarify that abnormal amounts of idle facility expense, freight, handling costs
and wasted material (spoilage) should be recorded as current-period charges. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. We are currently evaluating the impact that SFAS 151 will have on our financial
position and result of operations.



In December 2004, the FASB
issued its final standard on accounting for share-based payments, SFAS 123R (Revised 2004), Share-Based Payments (SFAS 123R). SFAS 123R requires companies to expense the fair value of employee stock options and other similar
awards, effective for interim and annual periods beginning on or after June 15, 2005. On April 15, 2005, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, which amends the compliance dates for SFAS 123R. As a
result, we are required to adopt the provisions of SFAS 123R beginning in the first quarter of fiscal 2006. When measuring the fair value of theses awards, companies can choose from two different pricing models that appropriately reflect their
specific circumstances and the economics of their transactions. Accordingly, we have not yet determined the impact on our consolidated financial statements of adopting SFAS 123R. Additional information regarding the pro forma impact of expensing
stock options is presented above.



In December 2004, the FASB
issued its final standard on accounting for exchanges of non-monetary assets, SFAS 153, Exchanges of Non-monetary Assets an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 requires that exchanges of non-monetary assets
be measured based on the fair value of assets exchanged for annual periods beginning after June 15, 2005. We are currently evaluating the impact of SFAS 153, but we do not expect a material impact from the adoption of SFAS 153 on our consolidated
financial position, results of operations or cash flows.



In
March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation
if the fair value of the obligation can be reasonably estimated. Asset retirement obligations covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity, even if the timing and method of settling
the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.
FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating the impact that FIN 47 will have on our financial position and result of operations.



In June 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (SFAS 154). SFAS 154 changes the requirements for the accounting for, and
reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires
retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements.



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. We have no cash flow
exposure due to interest rate changes for long-term debt obligations as we use interest rate swaps to fix the interest rates on our variable rate classes of lease-backed notes and other debt obligations. We primarily enter into debt obligations to
support general corporate purposes, including capital expenditures, working capital needs and acquisitions. Debt supporting finance contracts is used primarily to fund the lease receivables portfolio. The carrying amounts for cash and cash
equivalents, accounts receivable, and notes payable reported in the consolidated balance sheets approximate fair value. Additional disclosures regarding interest rate risk are set forth in our 2004 Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission (the SEC) on July 8, 2005.



Foreign Exchange Risk. We have various non-U.S. operating locations which expose us to foreign currency exchange risk. Foreign denominated intercompany debt borrowed in one currency and repaid in another may be
fixed via currency swap agreements.



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Item 4.Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of June 30, 2005 pursuant to SEC Rule 13a-15(b) under the Exchange Act. Disclosure controls and procedures include controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act is properly recorded, processed, summarized and reported within the time periods required by the SECs rules and forms. Management necessarily applied its
judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding managements control objectives. Management does not expect that its disclosure controls and
procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives. Based on that
evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that because of the material weakness in internal controls described below as of the evaluation date, our disclosure controls and procedures
were not effective, to give reasonable assurance that information we must disclose in reports filed with the SEC is properly recorded, processed, and summarized, and then reported within the time periods specified in the rules and forms of the SEC.



Internal Controls Over Financial Reporting



We are currently documenting, and evaluating the design effectiveness of and
testing the internal controls of our significant processes over financial reporting, as required by Section 404 of the SarbanesOxley Act (SOX 404), in order to allow our management to report on our internal controls over financial
reporting. The evaluation and testing requires significant costs and management time. We restated our financial results as of September 30, 2004 and 2003, and for the three years ended September 30, 2004 and the first quarter of fiscal 2005 as
reported in Amendment No. 1 to the Annual Report on Form 10-K/A filed with the SEC on July 8, 2005 (the 2004 10-K/A), and Amendment No. 1 to the Quarterly Report on Form 10-Q/A filed with the SEC on July 8, 2005 (the Q1 2005
10-Q/A), respectively. For a discussion of the individual restatement adjustments, see Item 1. Financial StatementsNote 2. Restatement of Previously Issued Financial Statements (the Restatement Footnote) as well
as the 2004 10-K/A and Q1 2005 10-Q/A for the three months ended December 31, 2004.



During the quarter ended June 30, 2005, General Electric Capital Corporation (GE) acted as servicer for the portion of the U.S. lease asset portfolio retained by IKON under the U.S. Transaction and
provided periodic reporting with respect to both the serviced and originated lease portfolios. Both the U.S. Program Agreement and the Canadian Rider contain audit right provisions that require, upon our request, GEs external auditors to
perform certain audit procedures and issue annual and quarterly reports to us relating to GEs servicing of such portfolios (Servicing Controls), including a Type II Statement on Auditing Standards (SAS) 70 Report
relating to the Servicing Controls. The audit rights and Type II SAS 70 Report are designed to inform us of any identified weakness relating to the Servicing Controls and to provide us with an opportunity to review and understand such findings in
advance of our fiscal year reporting requirements. We believe that such audit rights and the Type II SAS 70 Report are reasonably designed to confirm that the objectives of the Servicing Controls are met.



As reported in our 2004 10-K/A and Q1 2005 10-Q/A, and as described in the
Restatement Footnote, in the second quarter of fiscal 2005 our management identified a deficiency in our internal controls that existed in the second quarter of fiscal 2005 and for several prior periods relating to the processes and timeliness by
which we issue and adjust certain invoices. In connection with these developments, we concluded that certain trade accounts receivable were overstated due to billing errors (the Billing Matter). The Billing Matter does not affect
receivables arising from Mexican operations, receivables owing from GE under our leasing relationship with GE, or receivables arising under our Legal Document Services and Business Document Services businesses.



Our management discussed the Billing Matter with our Audit Committee and
Registered Independent Public Accounting Firm and advised them that management believes it constitutes a material weakness in our internal controls over financial reporting. As a result, we have implemented processes designed to fairly present our
financial statements including:



| |  |  | applying an error rate to the appropriate U.S. accounts receivable;
| | - |  | -------------------------------------------------------------------



| |  |  | reclassifying billing errors from selling and administrative expense to a reduction of revenue;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | properly stating bad debt expense and related allowance for doubtful accounts;
| | - |  | ------------------------------------------------------------------------------



| |  |  | correcting treatment of advances we receive from GE for customer receivables as an accounts payable; and
| | - |  | --------------------------------------------------------------------------------------------------------



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| |  |  | recording the impact of billing errors on deferred revenues.
| | - |  | ------------------------------------------------------------



We have a complex billing process that is performed in several locations using multiple billing platforms. The process requires the proper initiation of a
customer master record and contract to ensure consistent billing of monthly charges. Additionally, our collection of accurate meter readings from equipment is critical in order to ensure the generation of a proper bill to our customers. We are
undertaking several efforts to remediate our billing errors, including:



| |  |  | realigning responsibilities to ensure direct accountability for all customer billing;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | synchronizing service contract initialization and termination with equipment installation and removal;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | creating a quality assurance function to audit contract set-up and termination;
| | - |  | -------------------------------------------------------------------------------



| |  |  | improving our meter reading collection process and reducing reliance on meter estimates; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | standardizing our issue resolution process across IKON.
| | - |  | -------------------------------------------------------



We can give no assurances that these remediation efforts will be adequate to fully remediate the Billing Matter, or that the efforts will be completed on
or prior to September 30, 2005. Currently, management does not expect that the remediation will be completed on or prior to September 30, 2005. If the Billing Matter is not remedied on or prior to September 30, 2005, it would constitute a
material weakness as defined by the Public Company Accounting Oversight Board and we would disclose it as such in Managements Report on Internal Controls Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the
fiscal year ending September 30, 2005.



We have also identified
certain deficiencies in general controls over our information systems, including segregation of duties and access to data and applications by program developers. We are in the process of designing and implementing improvements that we believe will
adequately mitigate these deficiencies, and we expect that such improvements will be implemented in sufficient time to ensure their operating effectiveness as of September 30, 2005.



In addition to the matters described above, we have identified other deficiencies that we have remediated or are in the
process of implementing remediation plans. We are continuing to document, review and evaluate the design effectiveness of the internal controls over financial reporting and are executing our testing plan of such controls and procedures as required
under SOX 404. Consequently, we may identify additional areas where disclosure and corrective measures are advisable or required. We have assigned the highest priority to the short- and long-term correction of the internal controls deficiencies that
have been identified and are taking the steps necessary to strengthen our internal controls and to address their deficiencies.



Other than the internal controls issues and corresponding corrective actions discussed above, our Chief Executive Officer and Chief Financial Officer have
each confirmed that there have been no changes in internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.



In light of
the Billing Matter, we performed additional analysis and other post-closing procedures to ensure our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, we
believe that the unaudited condensed consolidated financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.



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PART IIOTHER INFORMATION



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds



During the quarter ended June 30, 2005, we did not purchase any of our common stock.



Item 6.Exhibits



a)  Exhibits



|     |  |                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
|     | 
|32.1 |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350                               
|     | 
|32.2 |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350                               



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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. This report has also been signed by the undersigned in
his capacity as the Principal Financial Officer of the Registrant.



|                            |  |                                                                                                  
|--------------------------- |  | -------------------------------------------------------------------------------------------------
|IKON OFFICE SOLUTIONS, INC.
|                           
|Date: August 4, 2005       
|                            | 
|By:                         |  | /s/ ROBERT F. WOODS                                                                              
|                            |  | (Robert F. Woods) Senior Vice President and Chief Financial Officer (Principal Financial
Officer)



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