---

UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549

# Form 10-Q

(Mark One)

[X]    
          Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
          of 1934 for the quarterly period ended            December 31, 2003 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

# IKON OFFICE SOLUTIONS,
INC.

(Exact name of
registrant as specified in its charter)

|OHIO                        
(State or other jurisdiction of          
incorporation or organization)
P.O. Box 834, Valley Forge, Pennsylvania 
(Address of principal executive offices) | 23-0334400
(I.R.S.Employer Identification No.)
19482
(Zip Code)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------

Registrants
telephone number, including area code:    (610) 296-8000Former name, former
address and former fiscal year, if changed since last report:   None

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 February 9,
2004:

Common Stock, no par value          
                
                
                
                  
          


        
                 
  

                147,472,624 shares

1

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IKON Office Solutions, Inc.INDEX

# PART I.   FINANCIAL
INFORMATION

|Item 1.               Item 2.
               Item 3.
               Item 4. | Condensed Consolidated Financial Statements
     Consolidiated Balance Sheets - December 31, 2003 (unaudited) and September 30, 2003
     Consolidated Statements of Income - Three months ended December
31, 2003 and 2002 (unaudited)
     Consolidated Statements of Cash Flows - Three months ended December 31, 2003 and 2002 (unaudited)
     Notes to Condensed Consolidated Financial Statements (unaudited)
     Management's
Discussion and Analysis of Financial Condition and Results of Operations     Quantitative and Qualitative Disclosures About Market Risk
     Controls and  Procedures
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II.   OTHER INFORMATION

|        |                                 
|------- | --------------------------------
|Item 6. | Exhibits and Reports on Form 8-K

# SIGNATURES

2

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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 constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (Litigation Reform Act).
These forward-looking statements include, but are not limited to, statements regarding the
following (and certain matters discussed in greater detail herein): plans to consummate
the proposed transaction with General Electric Capital Corporation (GE)
involving IOS Capital, LLC (IOSC); growth opportunities and increasing market
share; infrastructure and operational efficiency initiatives; earnings, revenue, cash
flow, margin, and cost-savings projections; the effect of competitive pressures on
equipment sales; developing and expanding strategic alliances and partnerships; the impact
of e-commerce and e-procurement initiatives; the implementation of e-IKON; anticipated
growth rates in the digital monochrome and color equipment and outsourcing industries; the
effect of foreign currency exchange risk; the reorganization of the Companys
business segments and the anticipated benefits of operational synergies related thereto;
and the Companys ability to finance its current operations and its growth
initiatives. Although IKON believes the expectations contained in such forward-looking
statements are reasonable, it 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 otherwise.

The
words anticipate, believe, estimate,
expect, intend, will, and similar expressions, as they
relate to the Company or the Companys management, are intended to identify
forward-looking statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those described
herein as anticipated, believed, estimated, expected or intended. The Company assumes no
obligations and does not intend to update these forward-looking statements.

In
accordance with the provisions of the Litigation Reform Act, the Company is making
investors aware that such forward-looking statements, because they relate to future
events, are by their very nature subject to many important factors which could cause
actual results to differ materially from those contained in the forward-looking
statements. These uncertainties and risks include, but are not limited to, the following
(some of which are explained in greater detail herein): conducting operations in a
competitive environment and a changing industry (which includes technical services and
products that are relatively new to the industry and to the Company); delays,
difficulties, management transitions and employment issues associated with consolidations
and/or changes in business operations, including e-IKON; existing and future vendor
relationships; risks relating to foreign currency exchange; economic, legal and political
issues associated with international operations; the Companys ability to access
capital and meet its debt service requirements (including sensitivity to fluctuations in
interest rates); and general economic conditions.

Competition.     IKON
operates in a highly competitive environment. Competition is based largely upon
technology, performance, pricing, quality, reliability, distribution, customer service and
support. A number of companies worldwide with significant financial resources compete with
IKON to provide similar products and services, such as Xerox, Pitney Bowes and Danka. 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 IKON. Some of
our competitors, such as Canon, Ricoh and HP, are also suppliers to IKON of 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 IKON is able
to charge in the future for its products and services to be less than it has 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
services offerings. These risks could lead to a loss of market share for IKON, resulting
in a negative impact on our results of operations.

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

Vendor
Relationships.IKONs access to equipment, parts and supplies
depends upon its relationships with, and its ability to purchase equipment on competitive
terms from its principal vendors, Canon, Ricoh, HP and Océ. IKON has not and does
not currently 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 IKON to
distribute their equipment and are free to change the prices and other terms at which they
sell to us. In addition, IKON competes 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 impact on IKONs ability to sell
and lease equipment as well as its ability to provide effective service and technical
support. If one of these vendors terminated or significantly curtailed its relationship
with IKON, or if one of these vendors ceased operations, IKON would be forced to expand
its relationship with other vendors, seek out new relationships with other vendors or risk
a loss in market share due to diminished product offerings and availability.

Financing
Business.     A significant portion of our profits are derived from the
financing of equipment provided to our customers. Our ability to provide such financing at
competitive rates and to realize profitable margins is highly dependent upon our costs of
borrowing. If IKON is unable to continue to have access to its funding sources on terms
that allow it to provide leases on competitive terms, IKONs business could be
adversely affected, as IKONs customers could seek to lease equipment from
competitors offering more favorable leasing terms. For the first quarter ended December
31, 2003, approximately 83% of equipment sold by IKON in the United States was financed
through IOSC, IKONs captive leasing subsidiary. IOSC accesses capital using asset
securitization transactions, including revolving asset securitization conduit
arrangements, public and private offerings of its debt securities, borrowings from
commercial lenders and loans from IKON. IOSC relies primarily on asset securitization
transactions to finance its lease receivables. There is no assurance that we will continue
to have access to our current funding sources, or that we will be able to obtain
additional funding on terms that would allow us to provide leases on competitive terms.
During 2003, Moodys Investor Services (Moodys) lowered the
Companys senior unsecured credit rating from Baa2 to Ba1 (maintaining our rating
under review for further downgrade) and Standard and Poors (S&P)
designated the Companys BBB- rating with a negative outlook. Furthermore, in
December 2003, S&P placed the Companys rating on CreditWatch for possible
downgrade as a result of the announced sale of certain assets and liabilities of IOSC. Our
access to certain credit markets is dependent upon our credit ratings. Although the
Company is currently rated investment grade by S&P, any negative changes to our credit
ratings, including any further downgrades, could reduce or foreclose our access to certain
credit markets and may require that excess cash flows under IOSCs securitization
arrangements be used to pay principal amounts outstanding under such arrangements. There
is no assurance that these credit ratings can be maintained or that the credit markets can
be readily accessed.

3

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Sale
of IOSC.     In December 2003, IKON entered into a definitive asset purchase agreement (the
Agreement) with GE to sell certain assets and liabilities of IOSC, including,
without limitation, the servicing functions, facilities, systems and processes. As a
condition to the consummation of the transactions contemplated by the Agreement, IKON and
GE will enter into a program agreement to provide for the funding of IKONs lease
originations in the United States and Canada. The transaction is subject to the execution
of other agreements and customary closing conditions. We cannot assure you that the
transactions contemplated by the Agreement will occur. In the event this transaction does
not close, or we are unable to successfully integrate our equipment distribution business
with a third party vendor finance program, which involves the integration and transition
of complex systems and processes, our liquidity, financial position and results of
operations may be adversely affected.

Liquidity.     The
Company maintains a $300,000,000 unsecured credit facility (the Credit
Facility) with a group of lenders. The Credit Facility contains affirmative and
negative covenants, including limitations on certain fundamental changes, investments and
acquisitions, mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends, intercompany loans and certain restricted payments. The
Credit Facility does not affect our ability to continue to securitize lease receivables.
The Credit Facility matures on May 24, 2005. During fiscal 2003, the Company tendered
and defeased all of IOSCs 9.75% notes due June 15, 2004 (the 2004
Notes), which removed an early maturity provision within the Credit Facility. The
Credit Facility also contains certain financial covenants, including: (i) corporate
leverage ratio; (ii) consolidated interest expense ratio; (iii) consolidated asset test
ratios; and (iv) limitations on capital expenditures. The Credit Facility contains
defaults customary for facilities of this type. In order to provide certain financial
flexibility under the corporate leverage ratio, the covenant was modified during 2003 as
follows: (i) at December 31, 2003, 3.60 to 1.00; (ii) at March 31, 2004, 3.40 to 1.00 and
(iii) at June 30, 2004 and as of the last day of each quarterly period thereafter, 3.00 to
1.00. This covenant measures a ratio of the Companys corporate non-finance
subsidiary debt to business earnings (excluding finance income and interest expense
associated with our financing operations). As of December 31, 2003, the Company did not
meet the ratio requirement under this covenant and received a waiver from its lenders. The
Company is in compliance with all other debt covenants as of December 31, 2003. Based on
the Companys communicated expectations regarding its second quarter 2004 financial results and
forecasted non-finance subsidiary debt at March 31, 2004, the Company believes it will not
be in compliance with the corporate leverage ratio covenant at March 31, 2004. Although the Company is currently renegotiating the Credit
Facility, there is
no assurance that the Company will be successful in receiving a waiver or an amendment to the covenant.
Failure to be in compliance with any material provision of the Credit Facility, including,
without limitation, the financial covenants described above, could have a material adverse
effect on our liquidity, financial position and results of operations.

On
December 11, 2003, the Company announced its intent to amend or replace the Credit
Facility in connection with the sale of IOSCs operations to GE. There can be no
assurance that the Company will successfully renegotiate the Credit Facility or, in the
event the Credit Facility is terminated, that the Company will be able to replace the
Credit Facility on an unsecured basis or on similar or improved terms and conditions.

Operational
Efficiencies.      IKONs ability to improve its profit margins is
largely dependent on the success of its initiatives to streamline its infrastructure and
drive operational efficiencies across IKON. Such initiatives, which include e-IKON and Six
Sigma, focus on strategic priorities such as process improvement, organizational
development and asset management. e-IKON is a comprehensive, multi-year initiative to
centralize operational support functions and re-design enterprise-wide processes under the
Oracle E-Business Suite. As a result of resources being reallocated
from marketplace level development to operations to accelerate productivity
in supply chain and customer care support and to ensure operational implications
of the sale of IOSC are fully addressed, the implementation of e-IKON in the remaining marketplaces and customer care
center will not occur until after 2004.
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 effectively eliminated. IKONs
ability to improve its profit margins through the implementation of these initiatives is
dependent upon certain factors that IKON cannot entirely control, including the
implementation and transition costs and expenses associated with the initiatives. Our
failure to successfully implement these initiatives, or the failure of such initiatives to
result in improved margins, could have a material adverse effect on our liquidity,
financial position and results of operations.

International
Operations.      IKON operates in eight countries outside of the United
States. Approximately 16% of our revenues are derived from our international operations,
and approximately 74% of those revenues are derived from Canada and the United Kingdom.
Political or economic instability in Canada or the United Kingdom could have a material
adverse impact on our liquidity, financial position and results of operations. IKONs
future revenues, costs of operations and profits could be affected by a number of factors
related to its 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. Unanticipated currency fluctuations in the Canadian Dollar, British
Pound or Euro vis-à-vis the U.S. Dollar could lead to lower reported consolidated
results of operations due to the translation of these currencies.

New
Product Offerings.      Our business is driven primarily by
customers needs and demands and by the products developed and manufactured by third
parties. Because IKON distributes products developed and manufactured by third parties,
IKONs business would be adversely affected if its suppliers fail to anticipate which
products or technologies will gain market acceptance or if IKON cannot sell these products
at competitive prices. IKON cannot be certain that its suppliers will permit IKON 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 new technology, those competitors may have a competitive advantage
over IKON. To successfully compete, IKON must maintain an efficient cost structure, an
effective sales and marketing team and offer additional services that distinguish IKON
from its competitors. Failure to execute these strategies successfully could result in
reduced market share for IKON or could have an adverse impact on our results of
operations.

4

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PART 1.    FINANCIAL
INFORMATION

Item 1.    Condensed
Consolidated Financial Statements

IKON Office Solutions,
Inc. Consolidated Balance Sheets

|(in thousands)                                                            | December 31,
2003  (unaudited) | September 30,
2003 |   |          
|------------------------------------------------------------------------- | ------------------------------ | ------------------ | - | ---------
|                                                                         
|Assets                                                                    |                                |                    |   |          
|Cash and cash equivalents                                                 |                                |                    | $ | 182,721  
|Restricted cash                                                           |                                |                    |   | 113,172  
|Accounts receivable, less allowances of:  December 31, 2003 - $20,772;    |                                |                   
|September 30, 2003 - $14,258                                              |                                |                    |   | 531,936  
|Finance receivables, less allowances of:  December 31, 2003 - $3,949;     |                                |                   
|September 30, 2003 - $20,467                                              |                                |                    |   | 549,843  
|Inventories                                                               |                                |                    |   | 250,270  
|Prepaid expenses and other current assets                                 |                                |                    |   | 88,928   
|Deferred taxes                                                            |                                |                    |   | 44,142   
|Assets held for sale (note 9)                                             |                                |                    |   | 2,063,892
|                                                                         
|Total current assets                                                      |                                |                    |   | 3,824,904
|                                                                         
|                                                                         
|Long-term finance receivables, less allowances of:  December 31, 2003 -   |                                |                   
|$7,335; September 30, 2003 - $38,010                                      |                                |                    |   | 1,165,998
|                                                                         
|Equipment on operating leases, net of accumulated depreciation of:        |                                |                    |   |          
|December 31, 2003 - $46,152; September 30, 2003 - $93,607                 |                                |                    |   | 18,415   
|                                                                         
|Property and equipment, net of accumulated depreciation of:               |                                |                   
|December 31, 2003 - $302,690;  September 30, 2003 - $299,178              |                                |                    |   | 168,690  
|                                                                         
|Goodwill, net                                                             |                                |                    |   | 1,283,326
|                                                                         
|Other assets                                                              |                                |                    |   | 67,372   
|                                                                         
|Total Assets                                                              |                                |                    | $ | 6,528,705
|                                                                         
|                                                                         
|Liabilities and Shareholders' Equity                                      |                                |                    |   |          
|Current portion of long-term debt, excluding finance subsidiaries         |                                |                    | $ | 67,343   
|Current portion of long-term debt of finance subsidiaries                 |                                |                    |   | 1,253,494
|Notes payable                                                             |                                |                    |   | 1,576    
|Trade accounts payable                                                    |                                |                    |   | 143,805  
|Accrued salaries, wages and commissions                                   |                                |                    |   | 75,249   
|Deferred revenues                                                         |                                |                    |   | 129,844  
|Other accrued expenses                                                    |                                |                    |   | 241,666  
|Liabilities held for sale (note 9)                                        |                                |                    |   | 363,708  
|                                                                         
|Total current liabilities                                                 |                                |                    |   | 2,276,685
|                                                                         
|                                                                         
|Long-term debt, excluding finance subsidiaries                            |                                |                    |   | 356,897  
|                                                                         
|Long-term debt of finance subsidiaries                                    |                                |                    |   | 1,403,028
|                                                                         
|Deferred taxes                                                            |                                |                    |   | 495,200  
|                                                                         
|Other long-term liabilities                                               |                                |                    |   | 295,098  
|                                                                         
|Commitments and contingencies                                             |                                |                    |   |          
|                                                                         
|Shareholders' Equity                                                      |                                |                    |   |          
|Common stock, no par value:  authorized 300,000 shares; issued:  December |                                |                   
|31, 2003-149,895 shares; September 30, 2003-149,982 shares;               |                                |                   
|outstanding:  December 31, 2003-146,793 shares; September 30, 2003-       |                                |                   
|146,368 shares                                                            |                                |                    |   | 1,015,086
|Series 12 preferred stock, no par value:  authorized 480 shares; none     |                                |                    |   |          
|issued or outstanding                                                     |                                |                    |   |          
|Unearned compensation                                                     |                                |                    |   | (2,251   
|Retained earnings                                                         |                                |                    |   | 717,779  
|Accumulated other comprehensive loss                                      |                                |                    |   | (17,533  
|Cost of common shares in treasury:  December 31, 2003-2,517 shares;       |                                |                   
|September 30, 2003-2,942 shares                                           |                                |                    |   | (11,284  
|                                                                         
|Total Shareholders' Equity                                                |                                |                    |   | 1,701,797
|                                                                         
|Total Liabilities and Shareholders' Equity                                |                                |                    | $ | 6,528,705
|                                                                         

See notes to condensed consolidated
financial statements.

5

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IKON Office Solutions,
Inc. Consolidated Statements
of Income (unaudited)

|                                         | Three Months Ended
               December 31
|---------------------------------------- | ---------------------------------------------
|                                        
|(in thousands, except per share amounts) |                                              
|                                        
|Revenues                                 |                                              
|Net sales                                | $                                            
|Services                                 |                                              
|Finance income                           |                                              
|                                        
|                                         |                                              
|                                        
|                                        
|Costs and Expenses                       |                                              
|Cost of goods sold                       |                                              
|Services costs                           |                                              
|Finance interest expense                 |                                              
|Selling and administrative               |                                              
|                                        
|                                        
|                                         |                                              
|                                        
|                                        
|Operating income                         |                                              
|Loss from early extinguishment of debt   |                                              
|Interest expense, net                    |                                              
|                                        
|Income before taxes on income            |                                              
|Taxes on income                          |                                              
|                                        
|Net income                               | $                                            
|                                        
|                                        
|                                        
|Basic earnings per common share          | $                                            
|                                        
|Diluted earnings per common share        | $                                            
|                                        
|Cash dividends per common share          | $                                            

See notes to condensed consolidated
financial statements.

6

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IKON Office Solutions,
Inc. Consolidated Statements
of Cash Flows (unaudited)

|                                                                                             | Three Months Ended
    December 31
|-------------------------------------------------------------------------------------------- | ----------------------------------
|                                                                                            
|(in thousands)                                                                               |                                   
|                                                                                            
|Cash Flows from Operating Activities                                                         |                                   
|Net income                                                                                   |                                   
|Additions (deductions) to reconcile net income to net cash                                   |                                   
|provided by operating activities:                                                            |                                   
|Depreciation                                                                                 |                                   
|Amortization                                                                                 |                                   
|Provision for losses on accounts receivable                                                  |                                   
|Provision for deferred income taxes                                                          |                                   
|Provision for lease default reserves                                                         |                                   
|Pension expense                                                                              |                                   
|Loss from early extinguishment of debt                                                       |                                   
|Changes in operating assets and liabilities                                                  |                                   
|Increase in accounts receivable                                                              |                                   
|(Increase) decrease in inventories                                                           |                                   
|Increase in prepaid expenses and other current assets                                        |                                   
|Decrease in accounts payable, deferred revenues and accrued 
                       expenses |                                   
|Decrease in accrued restructuring                                                            |                                   
|Other                                                                                        |                                   
|                                                                                            
|Net cash used in operating activities                                                        |                                   
|                                                                                            
|                                                                                            
|Cash Flows from Investing Activities                                                         |                                   
|Expenditures for property and equipment                                                      |                                   
|Expenditures for equipment on operating leases                                               |                                   
|Proceeds from sale of property and equipment                                                 |                                   
|Proceeds from sale of equipment on operating leases                                          |                                   
|Finance receivables - additions                                                              |                                   
|Finance receivables - collections                                                            |                                   
|Other                                                                                        |                                   
|                                                                                            
|Net cash used in investing activities                                                        |                                   
|                                                                                            
|                                                                                            
|Cash Flows from Financing Activities                                                         |                                   
|Proceeds from issuance of long-term debt                                                     |                                   
|Short-term repayments, net                                                                   |                                   
|Long-term debt repayments                                                                    |                                   
|Finance subsidiaries' debt - issuances                                                       |                                   
|Finance subsidiaries' debt - repayments                                                      |                                   
|Dividends paid                                                                               |                                   
|Decrease in restricted cash                                                                  |                                   
|Proceeds from option exercises and sale of treasury shares                                   |                                   
|Purchase of treasury shares and other                                                        |                                   
|                                                                                            
|Net cash used in financing activities                                                        |                                   
|                                                                                            
|Effect of exchange rate changes on cash and cash equivalents                                 |                                   
|                                                                                            
|                                                                                            
|Net decrease in cash and cash equivalents                                                    |                                   
|Cash and cash equivalents at beginning of year                                               |                                   
|                                                                                            
|Cash and cash equivalents at end of period                                                   |                                   
|                                                                                            

See notes to condensed consolidated
financial statements.

7

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IKON Office Solutions,
Inc. Notes to Condensed
Consolidated Financial Statements (in thousands, except
per share amounts) (unaudited)

Note 1:     Significant
Accounting Policies

Basis of Presentation

The accompanying unaudited condensed
consolidated financial statements of IKON Office Solutions, Inc. and subsidiaries (the
Company, we, or our) 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 (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. For further information,
refer to the consolidated financial statements and footnotes thereto included in the
Companys annual report on Form 10-K for the year ended September 30, 2003. Certain
prior year amounts have been reclassified to conform with the current year presentation.

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 footnotes. Actual results
could differ from those estimates and assumptions.

Accounting for
Stock-based Compensation

As permitted by Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, we continue to account for our stock options in accordance
with Accounting Principles Board Opinion No. 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.

If we had elected to recognize
compensation expense based on the fair value at the date of grant for awards in fiscal
years 2004 and 2003, 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 Ended December 31 |  |        
|---------------------------------------------- | ------------------------------ |  | -------
|                                               |                                |  |        
|                                               | 2003                           |  | 2002   
|                                               |                                |  |        
|Net income, as reported                        | $27,664                        |  | $32,470
|Pro forma effect of expensing stock based      |                                |  |        
|compensation plans using fair value method     | (1,644)                        |  | (1,477)
|                                               |                                |  |        
|Net income, adjusted                           | $26,020                        |  | $30,993
|                                               |                                |  |        
|Basic earnings per common share:               |                                |  |        
|As reported                                    | $0.19                          |  | $0.23  
|Pro forma effect of expensing stock based      |                                |  |        
|compensation plans using fair value method     | (0.01)                         |  | (0.01) 
|                                               |                                |  |        
|Basic earnings
per common share, as adjusted   | $0.18                          |  | $0.22  
|                                               |                                |  |        
|Diluted earnings per common share              |                                |  |        
|As reported                                    | $0.18                          |  | $0.21  
|Pro forma effect of expensing stock based      |                                |  |        
|compensation plans using fair value method     | (0.01)                         |  | (0.01) 
|                                               |                                |  |        
|Diluted
earnings per common share, as adjusted | $0.17                          |  | $0.20  
|                                               |                                |  |        

8

---

Pending Accounting Changes

In December 2003, the Financial
Accounting Standards Board (the FASB) revised FASB Statement No. 132
(SFAS 132), Employers Disclosures about Pensions and Other
Postretirement Benefits. The revised standard mandates additional required
disclosures for pensions and other postretirement benefit plans and is designed to improve
disclosure transparency within financial statements and requires certain disclosures to be
made on a quarterly basis (collectively, the Amended Disclosures). The revised
standard replaces existing pension disclosure requirements. Compliance with the Amended
Disclosures is effective for fiscal periods beginning after December 15, 2003.  Interim period disclosures will be required
to be made by the Company in the second quarter of 2004. The Company is currently
evaluating the impact of the adoption of the Amended Disclosures, but does not expect a
material impact from the adoption of the Amended Disclosures on our consolidated financial
statements.

In May 2003, the FASB issued FASB
Statement No. 150 (SFAS 150), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150 affects
three types of freestanding financial instruments that should now be classified as
liabilities: (i) mandatorily redeemable shares which are required to be redeemed at a
specified or determinable date or upon an event certain to occur; (ii) put options and
forward purchase contracts, which involves financial instruments embodying an obligation
that the issuer must or could choose to settle by issuing a variable number of its shares
or other equity instruments based solely on something other than the issuers own
equity shares; and (iii) certain obligations that can be settled with shares, the monetary
value of which is fixed, or tied to a variable (such as a market index) or varies
inversely with the value of the issuers shares. SFAS 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of entities
whose shares are mandatorily redeemable. SFAS 150 was effective for all financial
instruments entered into or modified after May 31, 2003 and otherwise was to be effective
at the beginning of the first interim period beginning after June 15, 2003. However, the
FASB issued a staff position that delayed the effective date for certain provisions of
paragraphs nine and ten as they apply to mandatorily redeemable noncontrolling interests
(the Deferred Provisions) to the first fiscal period beginning after December
15, 2003. There was no material impact on our consolidated financial statements from
the adoption of the Deferred Provisions on January 1, 2004.

In December 2003, the U.S. Securities
and Exchange Commission (the SEC) issued Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition, which supercedes SAB 101,
Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is
to rescind accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of Emerging Issues Task Force No.
00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
Deliverables. Additionally, SAB 104 rescinds the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers (the
FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue
Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While
the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
Company adopted SAB 104 immediately upon its issuance. There was no material impact from
the adoption of SAB 104 on our consolidated financial statements.

Note 2:      Goodwill

The Company has identified the
following reporting units and associated goodwill:

|                               |                                    |                                         |              |             
|------------------------------ | ---------------------------------- | --------------------------------------- | ------------ | ------------
|                               | IKON North America Copier Business | IKON North America Outsourcing Business | IKON Europe  | Total       
|                               |                                    |                                         |              |             
|                               |                                    |                                         |              |             
|Goodwill at December 31, 2003  | $    876,394                       | $     79,938                            | $    326,994 | $  1,283,326
|                               |                                    |                                         |              |             
|Goodwill at September 30, 2003 | $    864,035                       | $     79,938                            | $    314,403 | $  1,258,376

The IKON North America Copier
Business and the IKON North America Outsourcing Business reporting units comprise the IKON
North America operating segment.

Changes in the goodwill balance since
September 30, 2003 are attributable to foreign currency translation adjustments.

9

---

Note 3:      Notes Payable and
Long-term Debt

Notes payable and long-term debt
consisted of:

|                                                                          | December 31,
2003 | September 30,
2003 |   |          
|------------------------------------------------------------------------- | ----------------- | ------------------ | - | ---------
|                                                                          |                   |                    |   |          
|Outstanding debt, excluding finance subsidaries                           |                   |                    |   |          
|Bond issues                                                               |                   |                    | $ | 415,932  
|Miscellaneous notes, bonds, mortgages, and capital lease      obligations |                   |                    |   | 9,884    
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    |   | 425,816  
|Less:   Current maturities                                                |                   |                    |   | 68,919   
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    | $ | 356,897  
|Outstanding debt of finance subsidaries                                   |                   |                    |   |          
|Convertible subordinated notes                                            |                   |                    | $ | 300,000  
|Notes payable                                                             |                   |                    |   | 382,714  
|Lease-backed notes                                                        |                   |                    |   | 1,364,037
|Asset securitization conduit financing                                    |                   |                    |   | 928,856  
|Notes payable to banks                                                    |                   |                    |   | 31,497   
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    |   | 3,007,104
|Less:                                                                     |                   |                    |   |          
|Debt reclassified as liabilities held for sale (note 9)                   |                   |                    |   | 350,582  
|Current maturities                                                        |                   |                    |   | 1,253,494
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    | $ | 1,403,028
|                                                                          |                   |                    |   |          

Finance Subsidiary Debt

During the three months ended
December 31, 2003, our finance subsidiaries repaid $210,175 of debt and received $196,049
from the issuance of debt instruments.

As of December 31, 2003, IOSC, IKON
Capital, PLC and IKON Capital, Inc. had approximately $123,400, $22,130 and CN$64,563
available under their revolving asset securitization conduit financing agreements (the
Conduits). During the three months ended December 31, 2003, the Company
pledged or transferred $395,388 in financing lease receivables for $339,204 in cash in
connection with these Conduits.

During the three months ended
December 31, 2003, the Company repurchased $2,000 of IOS Capital, LLCs
(IOSC) 9.75% lease-backed notes due 2004 (the 2004 Notes) for
$2,073. As a result of this repurchase, the Company recognized a loss of $73 which is
included in loss from early extinguishment of debt in the consolidated statements of
income for the three months ended December 31, 2003.

Credit Facility

The Company has certain commitments
available to it in the form of lines of credit and standby letters of credit. As of
December 31, 2003, the Company had $161,394 available under lines of credit, including
$144,799 available under its $300,000 unsecured credit facility (the Credit
Facility), and $27,621 utilized under standby letters of credit. At December 31,
2003, the Company had no borrowings under the Credit Facility which matures on May 24,
2005. Revolving loans are available, with certain sub-limits, to IKON; IOSC; IKON Capital,
PLC, IKONs leasing subsidiary in the United Kingdom; and IKON Capital, Inc.,
IKONs leasing subsidiary in Canada. The Credit Facility also provides support for
letters of credit for the Company and its subsidiaries. The amount available under the
Credit Facility is determined by the level of certain unsecured assets and open letters of
credit of the Company and its subsidiaries. All commitments, except those under the Credit
Facility, expire within one year.

The Credit Facility contains
affirmative and negative covenants, including limitations on certain fundamental changes,
investments and acquisitions, mergers, certain transactions with affiliates, creation of
liens, asset transfers, payment of dividends, intercompany loans and certain restricted
payments. The Credit Facility does not affect our ability to continue to securitize lease
receivables. Cash dividends may be paid on common stock subject to certain limitations.
The Credit Facility also contains certain financial covenants including (i) corporate
leverage ratio; (ii) consolidated interest expense ratio; (iii) consolidated asset test
ratios; and (iv) limitations on capital expenditures. The Credit Facility contains default
provisions customary for facilities of this type. In order to provide certain additional
financial flexibility under the corporate leverage ratio, the covenant was modified during
2003 as follows: (i) at December 31, 2003, 3.60 to 1.00; (ii) at March 31, 2004, 3.40 to
1.00 and (iii) at June 30, 2004 and as of the last day of each quarterly period
thereafter, 3.00 to 1.00. This covenant measures a ratio of the Companys corporate
non-finance subsidiary debt to business earnings (excluding finance income and interest
expense associated with our financing operations).  As of December 31, 2003, the Company
did not meet the ratio requirement under this covenant and received a waiver from its lenders.
The Company is in compliance with all other debt covenants as of December 31,
2003. Failure to be in compliance with any material provision of the Credit Facility,
including, without limitation, the financial covenants described above, could have a
material adverse effect on our liquidity, financial position and results of operations.

10

---

During 2003, Moodys Investor
Services (Moodys) lowered the Companys senior unsecured credit
rating from Baa2 to Ba1 (maintaining our rating under review for further downgrade) and
Standard and Poors (S&P) designated the Companys BBB- rating
with a negative outlook. Furthermore, in December 2003, S&P placed the Companys
rating on CreditWatch for possible downgrade as a result of the announced sale of certain
assets and liabilities of IOSC (see note 9). Our access to certain credit markets is
dependent upon our credit ratings. Although the Company is currently rated investment
grade by S&P, any negative changes to our credit ratings, including any further
downgrades, could reduce or foreclose our access to certain credit markets and may require
that excess cash flows under IOSCs securitization arrangements to be used to pay
principal amounts outstanding under such arrangements. There is no assurance that these
credit ratings can be maintained or that the credit markets can be readily accessed.

Note 4:      Comprehensive
Income

Total comprehensive income is as
follows:

|                                                                 | Three Months Ended  December 31 |  |            
|---------------------------------------------------------------- | ------------------------------- |  | -----------
|                                                                 |                                 |  |            
|                                                                 | 2003                            |  | 2002       
|                                                                 |                                 |  |            
|Net income                                                       | $    27,664                     |  | $    32,470
|Foreign currency translation adjustments                         | 39,373                          |  | (209)      
|Gain on derivative financial instruments, net of tax expense of: |                                 |  |            
|$2,186 and $2,250 for the three months ended                     |                                 |  |            
|December 31, 2003 and 2002, respectively                         | 3,885                           |  | 3,375      
|                                                                 |                                 |  |            
|Total comprehensive income                                       | $    70,922                     |  | $    35,636
|                                                                 |                                 |  |            

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
loss in the consolidated balance sheets were $63,249, $(72,740) and $(8,042),
respectively, at December 31, 2003 and $23,876, $(72,740) and $(11,927), respectively, at
September 30, 2003.

11

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Note 5:      Earnings Per
Common Share

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

|                                                                                         | Three Months Ended  December 31 |  |            
|---------------------------------------------------------------------------------------- | ------------------------------- |  | -----------
|                                                                                         |                                 |  |            
|                                                                                         | 2003                            |  | 2002       
|                                                                                         |                                 |  |            
|Numerator:                                                                              
|Numerator for basic earnings per common share -                                         
|Net income                                                                               | $    27,664                     |  | $    32,470
|Effect of dilutive securities:  Interest expense                                        
|on convertible notes, net of tax                                                         | 2,354                           |  | 2,354      
|                                                                                         |                                 |  |            
|Numerator for diluted earnings per common share     - net
income plus assumed conversion | $    30,018                     |  | $    34,824
|                                                                                         |                                 |  |            
|Denominator:                                                                            
|Denominator for basic earnings per common share                                         
|- weighted average common shares                                                         | 146,503                         |  | 144,164    
|Effect of dilutive securities:                                                          
|Convertible notes                                                                        | 19,960                          |  | 19,960     
|Employee stock awards                                                                    | 328                             |  | 263        
|Employee stock options                                                                   | 2,376                           |  | 2,498      
|                                                                                         |                                 |  |            
|Dilutive potential common shares                                                         | 22,664                          |  | 22,721     
|                                                                                         |                                 |  |            
|Denominator for diluted earnings per common share -    
adjusted weighted average        | 169,167                         |  | 166,885    
|                                                                                         |                                 |  |            
|Basic earnings per common share                                                          | $      0.19                     |  | $      0.23
|                                                                                         |                                 |  |            
|Diluted earnings per common share                                                        | $      0.18                     |  | $      0.21
|                                                                                         |                                 |  |            

The Company accounts for the effect
of its 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.

Options to purchase 8,091 shares of
common stock at $9.05 per share to $46.59 per share were outstanding during the first
quarter of fiscal 2004 and options to purchase 9,206 shares of common stock at $7.50 per
share to $46.59 per share were outstanding during the first quarter of fiscal 2003, but
were not included in the computation of diluted earnings per common share because the
options prices were greater than the average market price of the common shares;
therefore, the effect would be antidilutive.

12

---

Note 6:     Segment Reporting

The table below presents segment
information for the three months ended December 31, 2003 and 2002:

|                                     |  |                    |  |             | 
|------------------------------------ |  | ------------------ |  | ----------- | 
|                                     |  | IKON North America |  | IKON Europe | 
|                                    
|Three Months Ended December 31, 2003 |  |                    |  |             | 
|Net sales                            |  | $448,996           |  | $71,540     | 
|Services                             |  | 467,060            |  | 49,872      | 
|Finance income                       |  | 92,919             |  | 6,092       | 
|Finance interest expense             |  | 33,290             |  | 1,648       | 
|Operating income (loss)              |  | 140,384            |  | 5,091       | 
|Interest expense, net                |  |                    |  |             | 
|Income before taxes on income        |  |                    |  |             | 
|                                     |  |                    |  |             | 
|Three Months Ended December 31, 2002 |  |                    |  |             | 
|Net sales                            |  | $480,629           |  | $66,546     | 
|Services                             |  | 469,567            |  | 45,737      | 
|Finance income                       |  | 89,321             |  | 5,577       | 
|Finance interest expense             |  | 37,212             |  | 1,808       | 
|Operating income (loss)              |  | 147,181            |  | 6,040       | 
|Interest expense, net                |  |                    |  |             | 
|Income before taxes on income        |  |                    |  |             | 

The Company reports information about
its 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. Under SFAS 131, our reportable
segments are IKON North America (INA) and IKON Europe (IE). The
INA and IE segments provide copiers, printers, color solutions, distributed printing,
facilities management, legal document solutions, business imaging services and other
office equipment and services, as well as customized workflow and imaging application development. These segments also include our captive
finance subsidiaries in North America and Europe, respectively.

Corporate/Operations, which is not
treated as a business segment, includes certain selling and administrative functions
including finance, supply chain, and customer service. In addition, Corporate/Operations
represent the balance sheets of certain locations that were previously reported in INA
which have been combined with the Corporate balance sheet.

Note 7:      Contingencies

The Company is involved in a number
of environmental remediation actions to investigate and clean up certain sites related to
its 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, the Company had accrued
balances, included in other long-term liabilities in the Companys consolidated
balance sheets, of $7,781 and $7,913 as of December 31, 2003 and September 30, 2003,
respectively, for its environmental liabilities, and the accrual is based on
managements best estimate of the aggregate environmental remediation 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 the Company, 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 the Companys
consolidated financial statements.

13

---

The accruals for environmental
liabilities are reflected in the consolidated balance sheets as part of other accrued
liabilities. The Company has not recorded any potential third party recoveries. The
Company is indemnified by an environmental contractor performing remedial work at a site
in Bedford Heights, OH. The contractor has agreed to indemnify the Company from cost
overruns associated with the plan of remediation. Further, the Company has cost sharing
arrangements in place with other potentially responsible parties (PRPs)
at sites located in Barkhamsted, CT and Rockford, IL. The cost-sharing agreement for the
Barkhamsted, CT 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, the Company and other PRPs agreed to reimburse Rural Refuse Disposal
District No. 2, a Connecticut Municipal Authority, for 50% of these costs. The Company
currently pays a 4.54% share of these costs. The cost-sharing arrangement for the
Rockford, IL 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, the Company pays 5.12% of these
costs.

During fiscal 2003 and 2004, the
Company did not incur any expenses for environmental capital projects, but incurred
various expenses in conjunction with its obligations under consent decrees, orders,
voluntary remediation plans, settlement agreements and other actions to comply with
environmental laws and regulations. For the three months ending December 31, 2003, and
December 31, 2002, these expenses were $132 and $149, respectively. All expenses were
charged against the related environmental accrual. The Company will continue to incur
expenses in order to comply with its obligations under consent decrees, orders, voluntary
remediation plans, settlement agreements and other actions to comply with environmental
laws and regulations.

The Company has an accrual related to
black lung and workers compensation liabilities relating to the operations of a
former subsidiary, Barnes & Tucker Company (B&T). B&T owned and
operated coalmines throughout Pennsylvania. IKON sold B&T in 1986. In connection with
the sale, IKON entered into a financing agreement with B&T whereby IKON agreed to
reimburse B&T for 95% of all costs and expenses incurred by B&T for black lung and
workers compensation liabilities, until said liabilities were extinguished. From
1986 through 2000, IKON 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 which created a black lung trust and a
workers compensation trust to handle the administration of all black lung and
workers compensation claims relating to B&T. IKON now reimburses the trusts for
95% of the costs and expenses incurred by the trusts for black lung and workers
compensation claims. As of December 31, 2003 and September 30, 2003, the Companys
accrual for black lung and workers compensation liabilities related to B&T was
$15,146 and $15,515, respectively.

The Company received notice of
possible additional taxes due related to international matters. The Company believes they will
not materially affect the consolidated financial statements of the Company.

There are other contingent
liabilities for taxes, guarantees, other 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 the Company and any related
reserves and insurance coverage, management believes that none of these other
contingencies will materially affect the consolidated financial statements of the Company.

Note 8:      Financial
Instruments

As of December 31, 2003, all of the
Companys 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 of no ineffectiveness. The Company uses interest rate swaps to fix
the interest rates on its 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 three months
ended December 31, 2003, unrealized gains totaling $3,885, after taxes, were recorded in
accumulated other comprehensive loss.

Note 9:      Assets and
Liabilities Held for Sale

The Company entered into a definitive
asset purchase agreement (the Agreement) dated December 10, 2003, by and among
IOSC and General Electric Capital Corporation (GE) pursuant to which, among
other things, GE will acquire certain assets and liabilities of IOSC including, without
limitation, the servicing functions, facilities, systems and processes. As a condition to
the consummation of the transactions contemplated by the Agreement, IKON and GE will enter
into a program agreement (the Program Agreement) under which, among other
things, GE will become the preferred lease-financing source for IKONs customers in
the United States and Canada. During the initial five-year term of the Program Agreement,
the Company will receive an origination fee on all new leases underwritten by GE and a
monthly volume fee for providing certain additional services. Except with respect to the
monthly volume fee, the term of the Program Agreement may be renewed for a subsequent
three or five-year period.

Under the terms of the Agreement, and
subject to closing adjustments, IKON will receive approximately $1.7 billion of gross
proceeds. The Company will retain approximately $1.2 billion of IOSCs net lease
receivables and the corresponding residuals, of which approximately $1.0 billion are
supported by lease-backed notes issued in our two most recent asset-backed notes
offerings. The Company will retain the Canadian leasing portfolio and assume IOSCs
$350 million 7.25% notes due 2008, $300 million 5% convertible notes due 2007, and the
remaining 9.75% notes due 2004. The retained portfolio will be serviced by GE, and most of
the retained portfolio is expected to run-off over the next twenty-four months.

14

---

At December 31, 2003, all criteria
for classification as assets held for sale as defined by SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144) had been
met. In accordance with SFAS 144, an estimate of assets and liabilities of IOSC to be sold
to GE have been reclassified from various line items within the balance sheet and
aggregated into Assets Held for Sale and Liabilities Held for Sale
pursuant to the terms of the Agreement with GE. The following represents the major classes
of assets and liabilities held for sale at December 31, 2003.   Lease defaults related to leases retained by IKON, but serviced
by GE will be the responsibility of GE (up to a predetermined limit).  Accordingly, all of IOSC's lease
default reserves will be assumed by GE.  These amounts have and will
continue to change from those amounts included in the press release announcing the Agreement and Form 10-K due to normal account activity
from September 30, 2003 to the closing date of the transaction and the results of final negotiations.

|                                                                                | Carrying Amount |  |   |          
|------------------------------------------------------------------------------- | --------------- |  | - | ---------
|                                                                                |                 |  |   |          
|Assets                                                                          |                 |  |   |          
|Cash and cash equivalents                                                       |                 |  | $ | 5,238    
|Restricted Cash                                                                 |                 |  |   | 64,749   
|Accounts receivable, net                                                        |                 |  |   | 38,377   
|Current finance receivables, less allowances of $26,257                         |                 |  |   | 654,307  
|Prepaid expenses and other current assets                                       |                 |  |   | 498      
|Long-term finance receivables, less allowances of $48,763                       |                 |  |   | 1,215,139
|Equipment of operating leases, net of accumulated depreciation       of $52,704 |                 |  |   | 85,196   
|Property and equipment, net of accumulated depreciation of $9,924               |                 |  |   | 388      
|                                                                                |                 |  |   |          
|Assets held for sale                                                            |                 |  | $ | 2,063,892
|                                                                                |                 |  |   |          
|                                                                                |                 |  |   |          
|Liabilities                                                                     |                 |  |   |          
|Current portion of long-term debt of finance subsidaries                        |                 |  | $ | 270,397  
|Trade accounts payable                                                          |                 |  |   | 1,882    
|Other accrued expenses                                                          |                 |  |   | 11,244   
|Long-term debt of finance subsidiaries                                          |                 |  |   | 80,185   
|                                                                                |                 |  |   |          
|Liabilities held for sale                                                       |                 |  | $ | 363,708  
|                                                                                |                 |  |   |          

The Agreement contains
representations, warranties, covenants, indemnifications and provisions that are customary
for a transaction of this type. The closing of the transaction is subject to the execution
of the definitive Program Agreement, other agreements and customary conditions, including
receipt of certain third party consents. This description of the transaction, including
the Agreement and the Program Agreement, is qualified in its entirety by reference to the
full text of the Agreement included with IKONs current report on Form 8-K as filed
with the U.S. Securities and Exchange Commission on December 15, 2003. The transaction is
expected to close in the second quarter of fiscal 2004.

15

---

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

All dollar and share amounts are in
thousands, except per share data.

Our preparation of this quarterly
report on Form 10-Q and other financial statements filed with the Securities and Exchange
Commission (SEC) requires us to make estimates and assumptions that affect
amounts reported in the consolidated financial statements and notes. Actual results could
differ from those estimates and assumptions.

References herein to we,
us or our refer to IKON Office Solutions, Inc. and its
subsidiaries unless the context specifically requires otherwise.

Executive Summary

IKON Office Solutions, Inc.
(IKON or the Company) integrates imaging systems and services that
help businesses manage document workflow and increase efficiency. We are the worlds
largest independent distribution channel for copier and printer technologies, offering
best-in-class systems from leading manufacturers such as Canon, Ricoh, HP and Océ
and service support through our team of 7,000 service professionals worldwide. We also
represent the industrys broadest portfolio of document management services
including: outsourcing and professional services, on-site copy and mailroom management,
fleet management, off-site digital printing solutions, and customized workflow and imaging
application development. We also provide lease-financing services to our customers through
our wholly-owned finance subsidiaries, including IOS Capital, LLC (IOSC).

We have locations worldwide,
including locations in the United States, Canada, Mexico, the United Kingdom, France,
Germany, Ireland, Denmark and the Netherlands.

Success factors critical to our
business include building solid growth initiatives to expand our market reach, developing
a highly responsive and cost efficient infrastructure, and achieving greater financial
flexibility to ensure we can return value to our shareholders and respond more
aggressively to new market opportunities.

In order to build solid growth
initiatives and expand our market reach, our long-term strategy involves enhancing our
supplier relationships, expanding our sales channels, and improving our overall business
mix. Recognizing our role as a major sales and service channel to our suppliers, we are
enhancing those relationships to target new customer and geographic opportunities, launch
new products, develop IKON exclusive offerings, and ensure that our joint execution in the
field is effective. The national account program and the metro market initiatives are two
of the Companys most important channel expansion strategies. The national account
program targets multi-million dollar long-term contracts with Fortune 1000 and large
regional companies. Our revenues from the national account program grew by over 40% compared
to 2003 and comprised approximately 5% of the Companys revenue mix compared to 3% in
2003. The metro market initiative is designed to expand the Companys presence in
major cities where we had not aggressively marketed in the past.  This initiative outpaced overall equipment growth by over two percentage points in the first quarter of 2004. In improving
our overall business mix, we are focusing on higher growth technologies like color and
high-end black & white production  two important drivers to fuel aftermarket
supplies and service revenues.  In color, we experienced a 45% increase from the same
period in the prior year as higher quality and more affordably priced products introduced
by both Canon and Ricoh throughout Fiscal 2003 continue to drive the acceptance of color
into the workplace. In expanding our mix, we recently introduced the IKON 8050 color
production device that we co-branded with Konica-Minolta. In Services, we are focusing on faster
growing markets such as outsourcing, particularly facilities management, and professional
services. Our increased focus on professional services, comprised of our technology
experts who blend workflow expertise with hardware and software solutions to improve
overall document efficiency, led to increased connectivity rates (the percentage of new
equipment sold that is connected to a network) of over 50% for the three months ended
December 31, 2003.

To develop a highly responsive and
cost efficient infrastructure, our focus is to maximize the efficiency of our organization
through a streamlined infrastructure, far-reaching information technology system, process
improvements, and effective asset management. In our effort to streamline our
infrastructure, we continue to implement our e-IKON initiative, a process and systems
redesign that integrates more than forty of the forty-five Oracle E-business modules in
the United States. Two of our three major customer care centers and 25% of our
marketplaces in the United States are currently operating under e-IKON. Current e-IKON
activity is focused on optimizing supply chain and customer care support  two areas
of the Company with the most identified opportunity in terms of productivity and potential
costs savings. As a result, e-IKON resources are currently being re-allocated from marketplace level development
to operations, to accelerate productivity in supply chain and customer care support and to ensure the operational
implications of the sale of IOSC are readily addressed.  Accordingly, our implementation of e-IKON in the remaining marketplaces and customer care center will not occur until
after 2004. We continue to place our resources into this project as it represents an area of substantial
 productivity and cost savings opportunities.  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.  We have contributed
additional resources to our Six Sigma initiative and currently have sixty-five trained
black-belts working on seventy projects of which each have qualified for a
minimum payback of $250,000 over various time periods.

Closely linked with the success
factors described above is our continued drive to achieve greater financial flexibility.
In December 2003, we announced an agreement with GE
Vendor Financial Services (GE), which will effectively transition IKON out of
the captive leasing business in the United States and Canada. This transaction, expected
to close in the second quarter of Fiscal 2004, unleashes the value of our captive leasing
organization while substantially transforming our balance sheet and future capital
requirements. This is just one step in our initiative to achieving greater financial
flexibility as we also continue to focus on lessening our restrictive covenants under our existing Credit Facility regarding share
repurchases, acquisitions, and other measures, that currently limit our options regarding
use of cash and our ability to respond to new market opportunities.

16

---

For the first quarter of 2004, we had
earnings per diluted share of $0.18 and revenues of $1.14 billion, representing a decline
of 1.8% in revenues from the same period a year ago. Sales of total copier/printer
equipment, which is reported in Net Sales, were flat for the quarter compared to the prior
year, as softness in lower-segment black & white was offset by exceptional growth in
color equipment as further discussed below. Year-to-year declines in total revenues were
attributable to technology hardware, supplies and equipment service declines, which
performed as expected for the first quarter. Refer to Results of Operations
for further discussion of our quarterly financial statements.

Results of Operations

This discussion reviews the results
of operations of the Company as reported in the consolidated statements of income. Unless
otherwise noted, references to 2004 and 2003 refer to the three months ended December 31,
2003 and 2002 respectively.

Three Months Ended December 31, 2003
                                         Compared to the Three Months Ended December 31, 2002

Revenues

|               |                |                |         | 
|-------------- | -------------- | -------------- | ------- | 
|               |                |                |         | 
|               | 2004           | 2003           | Change  | 
|               |                |                |         | 
|Net Sales      | $     520,500  | $     547,200  | (4.9) % | 
|Services       | 517,000        | 515,300        | 0.3     | 
|Finance income | 99,000         | 94,900         | 4.3     | 
|               |                |                |         | 
|               | $    1,136,500 | $    1,157,400 | (1.8) % | 
|               |                |                |         | 

The decrease in revenues of 1.8%
compared to 2003, which includes a currency benefit of 1.9% (revenues denominated in
foreign currencies impacted favorably when converted to U.S. dollars for reporting
purposes), is a result of an overall decrease in net sales, offset by increases in
services and finance income.

Net sales includes revenues from the
sale of copier/printer multi-function equipment, supplies, and technology hardware. The
decrease in net sales includes a currency benefit of 2.4%. A significant portion of this
decline is attributed to lower technology hardware sales as a result of several large
customer relationships that were not renewed for 2004.  Supplies sales declined 11.5% compared to 2003
due to lower demand for fax and lower-end
copier supplies. Sales of copier/printer equipment, which comprise over 75% of the
Companys net sales mix, were flat compared to 2003; however, revenues generated from
the sale of color devices increased by 45% compared to 2003 due to higher demand for these
products, particularly higher-end color production equipment as new products were
introduced at more affordable prices. As a percentage of copier/printer revenue, color
devices increased from approximately 13% in 2003 to approximately 19% in 2004. Offsetting
the increase in revenue from the sale of color devices were decreases from the sale of
black and white office equipment (segment 1  4 devices with page outputs less than
70 pages per minute) and black and white production equipment (segment 5 and 6 devices
with page outputs greater than 70 pages per minute) of 13% and 5%, respectively,
compared to 2003. These decreases were due to lower demand and lower average selling
prices of these products compared to the prior year due in part to the shift of sales to
color devices. However, the Company experienced growth in revenue and placements of
high-end segment 6 devices, due in part to an 11% increase in Canon imageRunner 110 and
150 placements. Black and white production and color devices, a high growth area for the
Company, represented 40% of our equipment revenues in 2004 compared to 34% in 2003.

Services consists of revenue from the
servicing of copier/printer equipment and outsourcing and other services, such as
facilities management, digital print production, legal document services, professional
services and other services, and rentals. Services increased by 0.3%, which includes a
currency benefit of 1.6%. Excluding this currency benefit, overall services decreased by
approximately 1.3% compared to 2003.  Outsourcing and other services increased by 5.8% compared to 2003.
The Company earned no profit related to the completion of a multi-year commercial imaging contract, which accounted for 4.6% of
the outsourcing and other services
revenue increase and negatively
impacted the services gross margin percentage by eighty basis points. Equipment service, which is significantly impacted by the
level and mix of copy volumes, decreased by 3.8% compared to the first quarter of 2003 (which
experienced unusually strong equipment service revenues). The price and mix of copy volumes drove this decrease as total
copy volume grew by approximately 4% compared to 2003. The Company expects the continued
growth in copy volumes to translate to equipment service revenue growth in the second half
of fiscal 2004.

17

---

Finance income is generated by
IKONs wholly-owned leasing subsidiaries. IOSC, IKONs leasing subsidiary in the
United States, accounted for approximately 89% of the Companys finance income during
2004 compared to approximately 92% during 2003. Approximately 83% of IKONs copier
and equipment revenues in the United States were financed by IOSC during 2004, compared to
approximately 78% during 2003. The increase in finance income is primarily due to growth
in the gross lease portfolio of 4.0% compared to 2003 and a currency benefit of 1.2%.

Gross Margin

|                             |        |        |  | 
|---------------------------- | ------ | ------ |  | 
|                             |        |        |  | 
|                             | 2004   | 2003   |  | 
|                             |        |        |  | 
|Gross margin, net sales      | 31.0 % | 34.2 % |  | 
|Gross margin, sales          | 39.8   | 39.8   |  | 
|Gross margin, finance income | 64.7   | 58.9   |  | 
|Gross margin, total          | 37.9   | 38.7   |  | 

Total gross margin decreased from
38.7% in 2003 to 37.9% in 2004. Approximately 50% of the decrease in gross margin on
net sales was due to less favorable product and customer mix and a more competitive
environment for copier/printer equipment that resulted in additional pricing pressures
compared to 2003. Changes in customer and product mix negatively impacted gross margin, as
new technology was introduced at more affordable prices. Color was the largest driver of
this change, as average selling price decreased by over 30% compared to the first quarter of
2003. While color pricing has declined with new technology introductions, this led to
a stronger acceptance of color in the marketplace, resulting in increased unit placements
and a 45% increase in color equipment revenues compared to the first quarter of 2003.
Compared to the fourth quarter of fiscal 2003, the gross margin on net sales increased,
indicating strengthening average equipment selling price and improved product mix. The
remaining decrease in gross margin was primarily attributable to slightly lower sales of
high-margin used equipment and lower vendor rebates and credits, partially offset by lower
inventory write-offs in 2004 compared to 2003 as a result of continued benefits realized
from the centralization of our supply chain function.

The gross margin on finance income
increased compared to 2003 due to the effect of lower average borrowing rates. The average
financing rate on our lease receivables was approximately 10.9% and 10.8% for 2004 and
2003, respectively. Additionally, our finance subsidiaries average cost of debt was
approximately 4.7% and 5.6% for 2004 and 2003, respectively.

18

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Other

|                                       |            |             |         | 
|-------------------------------------- | ---------- | ----------- | ------- | 
|                                       |            |             |         | 
|                                       | 2004       | 2003        | Change  | 
|                                       |            |             |         | 
|Selling and administrative expenses    | $  376,500 | $   383,800 | (1.9) % | 
|S&A as a % of revenue                  | 33.1  %    | 33.2 %      |         | 
|Operating income                       | 54,600     | 64,500      | (15.3)  | 
|Loss from early extinguishment of debt | 100        | 100         | 0.0     | 
|Interest expense, net                  | 10,100     | 12,200      | (17.2)  | 
|Taxes on income                        | 16,800     | 19,700      | (14.7)  | 
|Net income                             | 27,700     | 32,500      | (14.8)  | 
|Diluted earnings per common share      | 0.18       | 0.21        | (14.3)  | 

Selling and administrative expense
decreased by $7,300, or 1.9%, during 2004 compared to 2003, and decreased slightly as a
percentage of revenue. A portion of this decrease is attributable to the decline in
selling expense as a result of the decrease in revenues compared to 2003. Compensation
expenses decreased $8,400 due primarily to headcount reductions compared to 2003 as the
Company continues its efforts to consolidate and centralize certain
administrative functions. The decrease in headcount is partially offset by additional
pension expense of $3,400 and incremental increases in other benefit related costs.
Additionally, information technology related expenses, including expenses incurred related
to the Companys e-IKON implementation, decreased by $1,500. These decreases were offset
by an increase in bad debt expense of approximately $3,400 due to aging of the
Companys accounts receivable as a result, in part, of the Companys
implementation of e-IKON. Provision for lease defaults decreased by $4,100 compared to 2003
due to strengthening of the lease portfolio compared to 2003.

Our operating income decreased by
15.3% compared to the three months ended December 31, 2002, as a result of the factors
discussed above.

The decrease in interest expense was
due to 29.8% lower average outstanding non-finance subsidiary debt in 2004 compared to
2003. This decrease is partially offset by higher average interest rates during the first
quarter of 2004 due to the impact of the early extinguishment of lower interest bearing
debt during fiscal 2003.

The effective income tax rate was
37.75% during 2004 and 2003.

Diluted earnings per common share were
$0.18 for the three months ended December 31, 2003 compared to $0.21 for the three months
ended December 31, 2002.

Review of Business
Segments

IKON North America

|                         |            |            |        |   
|------------------------ | ---------- | ---------- | ------ | --
|                         |            |            |        |   
|                         | 2004       | 2003       | Change |   
|                         |            |            |        |   
|Net Sales                | $  449,000 | $  480,600 | (6.6   | )%
|Services                 | 467,100    | 469,600    | (0.5   | ) 
|Finance income           | 92,900     | 89,300     | 4.0    |   
|Finance interest expense | 33,300     | 37,200     | (10.5  | ) 
|Operating income         | 140,400    | 147,200    | (4.6   | ) 

Approximately 90% of the
Companys revenues are generated by IKON North America (INA). As a
result, many of the items discussed above regarding the Company are applicable to INA.

Approximately 45% of the net sales
decrease was due to a decline in supplies sales of $14,200, due to lower demand for fax
and lower-end copier supplies. Sales of copier/printer equipment contributed to 33% of the
net sales decline, due to lower average selling prices and less favorable product mix.
Technology hardware decreased significantly, as a result of several large
customer relationships that were not renewed for 2004. Services decreased by approximately
$2,500, due to declines in equipment services of 7.4% compared to 2003. This decrease was
partially offset by an increase in outsourcing and other services of 5.4% compared to
2003, benefiting from a one-time commercial imaging contract, which accounted for a
significant portion of this growth. Finance income increased due to growth in the lease
portfolio compared to 2003, while finance interest expense decreased due to lower average
borrowing rates compared to 2003. Operating income decreased due to lower revenues and
lower profit margins on revenues compared to 2003.

19

---

IKON Europe

|                         |           |           |        |  
|------------------------ | --------- | --------- | ------ | -
|                         |           |           |        |  
|                         | 2004      | 2003      | Change |  
|                         |           |           |        |  
|Net Sales                | $  71,500 | $  66,600 | 7.4    | %
|Services                 | 49,900    | 45,700    | 9.2    |  
|Finance income           | 6,100     | 5,600     | 8.9    |  
|Finance interest expense | 1,600     | 1,800     | (11.1  | )
|Operating income         | 5,100     | 6,000     | (15.0  | )

Net sales increased as a result of
currency benefits of approximately $7,900. Sales of copier/printer equipment remained
relatively flat compared to 2003.  Services increased as a result of
currency benefits of approximately $5,100.  Finance income increased
primarily as a result of strengthened foreign currencies. Operating income decreased
during 2004 due to an increase in cost of goods sold of approximately $7,100 and an
increase in services costs of approximately $3,100 compared to 2003. The gross profit
margin on net sales decreased from 35.2% to 29.8% from 2003 to 2004, due to lower average
selling prices and less favorable product mix.

Corporate/Operations, which is not
treated as a business segment, includes certain selling and administrative functions
including finance, supply chain, and customer service. In addition, Corporate/Operations
represents the balance sheets of certain locations that were previously reported in INA
which have been combined with the Corporate balance sheet. Operating costs in
Corporate/Operations were $90,877 and $88,751 in 2004 and 2003, respectively.

Financial Condition and
Liquidity

Cash Flows and Liquidity

|                                               |  |  |   | 2004     |   |  |  | 
|---------------------------------------------- |  |  | - | -------- | - |  |  | 
|                                               |  |  |   |          |   |  |  | 
|Cash used in operating activities              |  |  | $ | (121,700 | ) |  |  | 
|Cash used in investing activities              |  |  |   | (14,300  | ) |  |  | 
|Cash used in financing activities              |  |  |   | (40,500  | ) |  |  | 
|Effect of exchange rates                       |  |  |   | (800     | ) |  |  | 
|                                               |  |  |   |          |   |  |  | 
|Decrease in cash                               |  |  |   | (177,300 | ) |  |  | 
|Cash and cash equivalents at beginning of year |  |  |   | 360,000  |   |  |  | 
|                                               |  |  |   |          |   |  |  | 
|Cash and cash equivalents at end of period     |  |  | $ | 182,700  |   |  |  | 
|                                               |  |  |   |          |   |  |  | 

20

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Operating Cash Flows

The Company used $121,700 of cash for
operating activities during the three months ended December 31, 2003. The most significant
use of operating cash was for the payment of trade accounts payable primarily due to
higher inventory purchases compared to the fourth quarter of 2003 and the timing of terms
with some of our vendors at December 31, 2003. During the quarter, the Company made a
semi-annual interest payment and made payments for 2003 performance compensation. In
addition, the Company had lower accruals for salaries at December 31, 2003 due to the
timing of payroll payments to employees compared to September 30, 2003. The reduction in
accounts payable and accrued expenses resulted in a use of cash of $180,500. During the
first quarter of 2004, the Company used $23,100 of cash to replenish inventories that were
at historically low levels at September 30, 2003, due to improved inventory management as
a result of the Companys centralization initiatives and the fourth quarter sales
initiative. In addition, the Company used $9,100 of cash as a result of an increase in
accounts receivable compared to September 30, 2003. This increase was due primarily to the
reduction of days sales outstanding and higher than normal cash collection efforts during
the fourth quarter of 2003. These uses of cash were partially offset by net income of
$27,700 and non-cash operating expenses of $71,100 including depreciation, amortization,
provision for losses on accounts receivable and lease receivables, deferred income taxes,
pension expense and loss from early extinguishment of debt.

Investing Cash Flows

During the first quarter of 2004, the
Company used $14,300 of cash for investing activities, which included capital expenditures
for property and equipment of $4,500 and capital expenditures for equipment on operating
leases of $12,300. Capital expenditures for equipment on operating leases represent
purchases of equipment that are placed on rental with customers. Proceeds from the sale of
property and equipment during the first quarter of 2004 were $3,700.

Cash provided from investing
activities includes net cash provided by finance subsidiaries of $1,300 due to collections
exceeding additions of lease receivables.

Financing Cash Flows

During the first quarter of 2004, the
Company used $40,500 of cash for financing activities. During 2004, the Company received
proceeds of $3,000 and made repayments of $7,300 related to non-finance subsidiary debt.
As of December 31, 2003, finance subsidiaries debt decreased by $1,600 compared to
September 30, 2003. During the three months ended December 31, 2003, the Companys
finance subsidiaries repaid $210,200 of debt and received $196,000 from the issuance of
debt instruments. Repayments of finance subsidiary debt include the early extinguishment
of $2,000 par value of IOSCs 2004 Notes for $2,100. As a result of this repurchase,
the Company recognized a loss of $100, which is included in loss from early extinguishment
of debt, in the consolidated statements of income for the three months ended December 31,
2003.

The Company paid $5,900 of dividends
to shareholders, or $0.04 per common share.

Cash flows from financing activities includes
a $17,900 change in restricted cash which primarily represents the cash that has been
collected on the leases that are pledged as collateral for lease-backed notes. This cash
must be segregated within two business days into a trust account and the cash is used to
pay the principal and interest on lease-backed notes as well as any associated
administrative expenses. The level of restricted cash is impacted from one period to the
next by the volume of leases pledged as collateral on the lease-backed notes and timing of
collections on such leases. Restricted cash also includes $32,700 deposited with an escrow
agent during 2003 to defease IOSCs 2004 Notes.

Capital Structure

|                                                                          | December 31,
2003 | September 30,
2003 |   |          
|------------------------------------------------------------------------- | ----------------- | ------------------ | - | ---------
|                                                                          |                   |                    |   |          
|Outstanding debt, excluding finance subsidaries                           |                   |                    |   |          
|Bond issues                                                               |                   |                    | $ | 415,900  
|Miscellaneous notes, bonds, mortgages, and capital lease      obligations |                   |                    |   | 9,900    
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    |   | 425,800  
|Less:   Current maturities                                                |                   |                    |   | 68,900   
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    | $ | 356,900  
|Outstanding debt of finance subsidaries                                   |                   |                    |   |          
|Convertible subordinated notes                                            |                   |                    | $ | 300,000  
|Notes payable                                                             |                   |                    |   | 382,700  
|Lease-backed notes                                                        |                   |                    |   | 1,364,000
|Asset securitization conduit financing                                    |                   |                    |   | 928,900  
|Notes payable to banks                                                    |                   |                    |   | 31,500   
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    |   | 3,007,100
|Less:                                                                     |                   |                    |   |          
|Debt reclassified as liabilities held for sale (note 9)                   |                   |                    |   | 350,600  
|Current maturities                                                        |                   |                    |   | 1,253,500
|                                                                          |                   |                    |   |          
|                                                                          |                   |                    | $ | 1,403,000
|                                                                          |                   |                    |   |          

21

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Including finance subsidiaries
debt, our debt to capital ratio was 66.9% at December 31, 2003 compared to 67.8% at
September 30, 2003. Excluding finance subsidiaries debt, our debt to capital ratio
was 20.0% at December 31, 2003 compared to 20.8% at September 30, 2003 (finance
subsidiaries debt is excluded from the calculation because finance
subsidiaries lease receivables represent the primary source of repayment of finance
subsidiaries debt). This decrease is primarily due to the early extinguishment of
both finance and non-finance subsidiary debt during 2004 and 2003.

As of December 31, 2003, IOSC, IKON
Capital, PLC and IKON Capital, Inc. had approximately $123,400, $22,100 and CN$64,600
available under their Conduits.

The Company has certain commitments
available to it in the form of lines of credit and standby letters of credit. As of
December 31, 2003, the Company had $161,400 available under lines of credit, including
$144,800 available under its $300,000 unsecured credit facility (the Credit
Facility), and $27,600 utilized under standby letters of credit. At December 31,
2003, the Company had no borrowings under the Credit Facility which matures on May 24,
2005. Revolving loans are available, with certain sub-limits, to IKON; IOSC; IKON Capital,
PLC, IKONs leasing subsidiary in the United Kingdom; and IKON Capital, Inc.,
IKONs leasing subsidiary in Canada. The Credit Facility also provides support for
letters of credit for the Company and its subsidiaries. The amount available under the
Credit Facility is determined by the level of certain unsecured assets and open letters of
credit of the Company and its subsidiaries. All commitments, except those under the Credit
Facility, expire within one year.

The Company uses interest rate swaps
to fix the interest rates on its variable rate classes of lease-backed notes, which
results in a lower cost of capital than if it had issued fixed rate notes. During the
three months ended December 31, 2003, unrealized gains totaling $3,900 after taxes, were
recorded in accumulated other comprehensive loss. As of December 31, 2003, all of the
Companys 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 of no ineffectiveness.

The Credit Facility contains
affirmative and negative covenants, including limitations on certain fundamental changes,
investments and acquisitions, mergers, certain transactions with affiliates, creation of
liens, asset transfers, payment of dividends, intercompany loans and certain restricted
payments. The Credit Facility does not affect our ability to continue to securitize lease
receivables. Cash dividends may be paid on common stock subject to certain limitations.
The Credit Facility also contains certain financial covenants including (i) corporate
leverage ratio; (ii) consolidated interest expense ratio; (iii) consolidated asset test
ratios; and (iv) limitations on capital expenditures. The Credit Facility contains default
provisions customary for facilities of this type. In order to provide certain additional
financial flexibility under the corporate leverage ratio, the covenant was modified during
2003 as follows: (i) at December 31, 2003, 3.60 to 1.00; (ii) at March 31, 2004, 3.40 to
1.00 and (iii) at June 30, 2004 and as of the last day of each quarterly period
thereafter, 3.00 to 1.00. This covenant measures a ratio of the Companys corporate
non-finance subsidiary debt to business earnings (excluding finance income and interest
expense associated with our financing operations). As of December 31, 2003, the Company
did not meet the ratio requirement under this covenant and received a waiver from its
lenders. The Company is in compliance with all other debt covenants as of December 31,
2003. Based on the Companys communicated expectations regarding its second quarter 2004 financial
results and forecasted non-finance subsidiary debt at March 31, 2004, the Company believes
it will not be in compliance with the corporate leverage ratio covenant at March 31,
2004. Although the Company is currently renegotiating the Credit Facility,
there is no assurance that the Company will be successful in receiving a waiver or an amendment to the covenant. Failure to be in compliance with any material provision of the Credit
Facility, including, without limitation, the financial covenants described above, could
have a material adverse effect on our liquidity, financial position and results of
operations.

During 2003, Moodys Investor
Services (Moodys) lowered the Companys senior unsecured credit
rating from Baa2 to Ba1 (maintaining our rating under review for further downgrade) and
Standard and Poors (S&P) designated the Companys BBB- rating
with a negative outlook. Furthermore, in December 2003, S&P placed the Companys
rating on CreditWatch for possible downgrade as a result of the announced sale of certain
assets and liabilities of IOSC. Our access to certain credit markets is dependent upon our
credit ratings. Although the Company is currently rated investment grade by S&P, any
negative changes to our credit ratings, including any further downgrades, could reduce or
foreclose our access to certain credit markets and may require that excess cash flows
under IOSCs securitization arrangements be used to pay principal amounts outstanding
under such arrangements. There is no assurance that these credit ratings can be maintained
or that the credit markets can be readily accessed.

22

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Outlook

The following summarizes IKONs
significant contractual obligations and commitments as of December 31, 2003:

|                                               | Payments due by
|---------------------------------------------- | ---------------
|                                               |                
|                                               |                
|Contractual Obligations                        | Total          
|                                              
|Long-Term Debt, excluding Finance Subsidiaries | $     424,200  
|Long-Term Debt of Finance Subsidiaries         | 3,007,100      
|Notes Payable                                  | 1,600          
|Purchase Commitments                           | 1,500          
|Operating Leases                               | 440,800        
|Other Long-term Liabilities                    | 284,100        
|                                              
|Total                                          | $  4,159,300   
|                                              

Other Long-term Liabilities exclude $9,400 of
accrued contingencies due to the inability to predict the timing of payments due to the
uncertainty of their outcome.  Planned contibutions to the Company's defined benefit plans have been included in the estimated period
of payment.  All other liabilities related to pension are included in Thereafter ($97,700) 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.

Payments on long-term debt of finance
subsidiaries generally are made from collections on our finance receivables. At December
31, 2003, long-term debt of finance subsidiaries was $3,007,100 and finance receivables,
net of allowances, were $3,585,300.

Purchase commitments represent future
cash payments related to our implementation of the Oracle e-business suite. Contractual
obligations for software of $1,500 is included in fixed assets and accrued liabilities as
of December 31, 2003.

Excluding any impact resulting from
the sale of IOSC, the Company expects cash from operations for 2004 to be $325 to $350
million and capital expenditures, net of proceeds to be approximately $90 million.

At December 31, 2003, the Company had
$52,900 available for common stock repurchases under its 2001 share repurchase Board
authorization. From time to time, the Retirement Savings Plan of the Company may acquire
shares of the common stock of the Company in open market transactions or from treasury
shares held by the Company. Additionally, from time to time the Company may repurchase
available outstanding indebtedness in open market and private transactions.

On December 11, 2003, the Company
announced its intent to amend or replace its Credit Facility in connection with the sale
of IOSCs operations to GE. There can be no assurance that the Company will
successfully renegotiate the Credit Facility or, in the event the Credit Facility is
terminated, that the Company will be able to replace the Credit Facility on an unsecured
basis or on similar or improved terms and conditions. In connection with the Agreement,
the Company will retain approximately $1.2 billion of IOSCs net lease receivables
and corresponding residuals, of which approximately $1.0 billion are supported by
lease-backed notes. In addition, the Company will retain the Canadian leasing portfolio
and assume IOSCs $350 million 7.25% notes due 2008, $300 million 5% convertible
notes due 2007, and the remaining $32,700 of 9.75% notes due 2004. Cash received from the
sale of IOSC may be used by the Company to repurchase debt, repurchase outstanding shares,
increase dividends or invest in our growth initiatives.

The Company believes that its
operating cash flow together with unused bank credit facilities and other financing
arrangements will be sufficient to finance current operating requirements for fiscal 2004,
including capital expenditures, dividends and the remaining accrued costs associated with
the Companys restructuring charges.

Pending Accounting Changes

In December 2003, the Financial
Accounting Standards Board (the FASB) revised FASB Statement No. 132
(SFAS 132), Employers Disclosures about Pensions and Other
Postretirement Benefits. The revised standard mandates additional required
disclosures for pensions and other postretirement benefit plans and is designed to improve
disclosure transparency within financial statements and requires certain disclosures to be
made on a quarterly basis (collectively, the Amended Disclosures). The revised
standard replaces existing pension disclosure requirements. Compliance with the Amended
Disclosures is effective for fiscal periods beginning after December 15, 2003.   Interim period disclosures will be
required to be made by the Company in the second quarter of 2004. The Company is currently
evaluating the impact of the adoption of the Amended Disclosures, but does not expect a
material impact from the adoption of the Amended Disclosures on our consolidated financial
statements.

In May 2003, the FASB issued FASB
Statement No. 150 (SFAS 150), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150 affects
three types of freestanding financial instruments that should now be classified as
liabilities: (i) mandatorily redeemable shares which are required to be redeemed at a
specified or determinable date or upon an event certain to occur; (ii) put options and
forward purchase contracts, which involves financial instruments embodying an obligation
that the issuer must or could choose to settle by issuing a variable number of its shares
or other equity instruments based solely on something other than the issuers own
equity shares; and (iii) certain obligations that can be settled with shares, the monetary
value of which is fixed, or tied to a variable (such as a market index) or varies
inversely with the value of the issuers shares. SFAS 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of entities
whose shares are mandatorily redeemable. SFAS 150 was effective for all financial
instruments entered into or modified after May 31, 2003 and otherwise was to be effective
at the beginning of the first interim period beginning after June 15, 2003. However, the
FASB issued a staff position that delayed the effective date for certain provisions of
paragraphs nine and ten as they apply to mandatorily redeemable noncontrolling interests
(the Deferred Provisions) to the first fiscal period beginning after December
15, 2003. There was no material impact on our consolidated financial statements from
the adoption of the Deferred Provisions on January 1, 2004.

23

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In December 2003, the SEC
issued Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition, which supercedes SAB 101,
Revenue Recognition in Financial Statements. The primary purpose of SAB 104 is
to rescind accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, which was superceded as a result of the issuance of Emerging Issues Task Force No.
00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
Deliverables. Additionally, SAB 104 rescinds the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers (the
FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue
Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While
the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
Company adopted SAB 104 immediately upon its issuance. There was no material impact from
the adoption of SAB 104 on our consolidated financial statements.

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 the
Company uses 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. Finance subsidiaries long-term debt 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 the
Companys 2003 annual report on Form 10-K filed with the Securities and Exchange
Commission.

Foreign Exchange Risk.      The Company
has various non-U.S. operating locations which expose it to foreign currency exchange
risk. Foreign denominated intercompany debt borrowed in one currency and repaid in another
may be fixed via currency swap agreements. Additional disclosures regarding foreign
exchange risk are set forth in the Companys 2003 annual report on Form 10-K filed
with the Securities and Exchange Commission.

Item 4:      Controls and
Procedures

Evaluation of Disclosure Controls and
Procedures.      The Companys Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Companys disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and under the Exchange Act) as of the end of the
period covered by this quarterly report on Form 10-Q. Based on this evaluation, they have
concluded that, as of the evaluation date, the Companys disclosure controls and
procedures are effective and are reasonably designed to alert them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries) required to be included
in its reports filed or submitted under the Exchange Act.

24

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PART II.    OTHER
INFORMATION

|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------

| | a) | Exhibits                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                     
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | 2.1                                                                                                                                                                                                                                                              | Asset Purchase Agreement dated as of December 11, 2003, by and
among IKON Office Solutions, Inc., IOS Capital, LLC and General Electric Capital Corporation, as filed as Exhibit 2.1 to IKON's
for 8-K dated December 15, 2003, is incorporated herein by reference.
|
| |    | 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                                                                                                                                                                                     
|
| |    | 99.1                                                                                                                                                                                                                                                             | Waiver, dated as of December 31, 2003, to the Credit Agreement dated May 24, 2002, among
IKON and various institutional lenders, with JP Morgan Chase Bank, Toronto Branch, as Canadian Administrative Agent, and JP Morgan
Chase Bank, as Administrative Agent.    
|
| | b) | Reports on Form 8-K                                                                                                                                                                                                                                             
|
| |    | On October 27, 2003, the Company
filed a current report on Form 8-K to file, under Items 7 and 12 of the Form, information
contained in its press release dated October 27, 2003 regarding its results for the fourth
quarter of fiscal 2003.                   
|
| |    | On December 12, 2003, the Company
filed a current report on Form 8-K to file, under Items 5 and 9 of the Form, information
contained in its press release dated December 11, 2003 regarding its announced transaction
with General Electric Capital Corporation.
|
| |    | On December 15, 2003, the Company
filed a current report on Form 8-K to file, under Items 5 and 7 of the Form, information
contained in the Purchase Agreement between General Electric Capital Corporation.                                                    
|
| |    | On December 20, 2003, the Company
filed a current report on Form 8-K to file, under Items 5 and 7 of the Form, information contained in the press
release dated December 29, 2003 regarding the election of a new board member, William Meddaugh.               

25

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SIGNATURES

Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the  undersigned,  thereunto  duly  authorized.  This  report  has also been  signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.

IKON OFFICE SOLUTIONS, INC.

|Date:    February 17, 2004 | /s/ William S. Urkiel   
William S. Urkiel
Senior Vice President and
Chief Financial Officer
|-------------------------- | --------------------------------------------------------------------------------------------

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