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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the three months ended March 31, 2005 or
|- | ------------------------------------------------------------------------------------------------------------------------------------



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from
                 to                 .
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



Commission file number 1-5964



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IKON OFFICE SOLUTIONS, INC.

(Exact name of registrant as specified in its
charter)



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



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



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Securities registered pursuant to Section 12(b) of the Act:



|                                                                  |  |                                          
|----------------------------------------------------------------- |  | -----------------------------------------
|Title of each class                                               |  | Name of each exchange on which registered
|Common Stock, no par value (with Preferred Share Purchase Rights) |  | New York Stock Exchange                  



Securities
registered pursuant to Section 12(g) of the Act: None



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the 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 July 5, 2005:



Common Stock, no
par value    139,958,984 shares



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IKON OFFICE SOLUTIONS, INC.



INDEX



PART IFINANCIAL INFORMATION



|        |  |                                                                                                  |  |   
|------- |  | ------------------------------------------------------------------------------------------------ |  | --
|ITEM 1. |  | Financial Statements                                                                             |  |   
|        |  |                                                                                                 
|        |  | Consolidated Balance SheetsMarch 31, 2005 and September 30, 2004 (unaudited)                    |  | 5 
|        |  |                                                                                                 
|        |  | Consolidated Statements of IncomeThree and six months ended March 31, 2005 and 2004 (unaudited) |  | 6 
|        |  |                                                                                                 
|        |  | Consolidated Statements of Cash FlowsSix months ended March 31, 2005 and 2004 (unaudited)       |  | 7 
|        |  |                                                                                                 
|        |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                 |  | 8 
|        |  |                                                                                                 
|ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 31
|        |  |                                                                                                 
|ITEM 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                       |  | 53
|        |  |                                                                                                 
|ITEM 4. |  | Controls and Procedures                                                                          |  | 53
|        |  |                                                                                                 
|        |  | PART IIOTHER INFORMATION                                                                        |  |   
|        |  |                                                                                                 
|ITEM 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 56
|        |  |                                                                                                 
|ITEM 4. |  | Submission of Matters to a Vote of Security Holders                                              |  | 56
|        |  |                                                                                                 
|ITEM 6. |  | Exhibits                                                                                         |  | 57
|        |  |                                                                                                 
|        |  | SIGNATURES                                                                                       |  |   



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FORWARD-LOOKING INFORMATION



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



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



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



Competition. We operate in a highly
competitive environment. Competition is based largely upon technology, performance, pricing, quality, reliability, distribution, and customer support. A number of companies



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



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



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



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



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



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



Liquidity. We maintain a $200 million secured credit facility (the Credit Facility) with a group of lenders. The Credit Facility
provides the availability of revolving loans, with certain sub-limits, and provides support for letters of credit. The amount of credit available under the Credit Facility is reduced by open letters of credit. The amount available under the Credit
Facility for borrowings or additional letters of credit was $165.6 million at March 31, 2005. The Credit Facility is secured by our accounts receivable and inventory, the stock of our first-tier domestic subsidiaries, 65% of the stock of our
first-tier foreign subsidiaries, and all of our intangible assets. All security interests pledged under the Credit Facility are shared with the holders of our 7.25% notes payable due 2008.



The Credit Facility contains affirmative and negative covenants, including
limitations on certain fundamental core business changes, investments and acquisitions, mergers, certain transactions with affiliates, creations of liens, asset transfers, payments of dividends, intercompany loans, and certain restricted payments.
The Credit Facility does not, however, limit our ability to continue to securitize lease receivables. The Credit Facility matures on March 1, 2008, but is subject to certain early maturity events in November 2006, January 2007, and April 2007 if our
5% convertible subordinated notes due 2007 (the Convertible Notes) have not been converted to equity or refinanced or minimum liquidity is not met as of such dates. Minimum liquidity is defined as having sufficient cash, including any
unused capacity under the Credit Facility, to repay the balance of the Convertible Notes plus an additional $100 million. The Credit Facility contains certain financial covenants relating to: (i) corporate leverage ratios; (ii) consolidated interest
coverage ratio; (iii) consolidated asset coverage ratio; (iv) consolidated net worth ratios; (v) limitations on capital expenditures; and (vi) limitations on additional indebtedness and liens. Under the terms of the Credit Facility, share
repurchases are permitted in an aggregate amount not to exceed $250 million during the period of July 28, 2004 through March 1, 2008. From July 28, 2004 through September 30, 2005, share repurchases are permitted in an aggregate amount not to exceed
$150 million. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150 million allowance that we did not
utilize prior to October 1, 2005. As of March 31, 2005, approximately $85.0 million of the $150 million allowance was utilized. The Credit Facility contains default provisions customary for facilities of this type. Failure to comply with any
material provision of the Credit Facility could have a material adverse effect on our liquidity, financial position, and results of operations. During the third quarter of fiscal 2005, we entered into a consent (the Consent) to our
Credit Facility to provide us with an extension to the deadline by which we must deliver to the lenders certain items required under the Credit Facility, including our financial statements for the second quarter of fiscal year 2005, in order to
allow us to complete the review of our billing controls and reserve practices for our trade accounts receivable (see Item 1. Financial StatementsNote 2. Restatement of Previously Issued Financial Statements).



Operational Efficiencies. Our ability to improve our profit margins is
largely dependent on the success of our initiatives to streamline our infrastructure and drive operational efficiencies across our company. Such initiatives, which include consolidation and process redesign, the ERP Conversion, and process
enhancement through Six Sigma, are focused on strategic priorities such as process redesign and improvement, organizational development, and asset management. Six Sigma is a disciplined business methodology designed to assist



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companies in increasing profitability by streamlining operations, improving quality, and eliminating possible defects in processes. Six Sigma is intended to
provide specific methods to re-create a particular process, starting from the customers vantage point, so that defects in the process are eliminated and any potential defects are prevented. Our failure to successfully implement these
initiatives, or the failure of such initiatives to result in improved profit margins, could have a material adverse effect on our liquidity, financial position, and results of operations.



International Operations. We have international operations in Canada, Mexico, and Western Europe. Approximately 17%
of our revenues are derived from our international operations, and approximately 75% of those revenues are derived from Canada and the United Kingdom. Our future revenues, costs of operations, and profits could be affected by a number of factors
related to our international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a countrys political condition, trade protection measures, licensing and other
legal requirements, and local tax issues. For example, unanticipated currency fluctuations in the Canadian Dollar, British Pound, or Euro versus the U.S. Dollar could lead to lower reported consolidated results of operations due to the translation
of these currencies.



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



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PART IFINANCIAL INFORMATION



Item 1.Financial Statements



IKON OFFICE SOLUTIONS, INC.



CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands)



|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ------------------------- | - | --------- | -
|                                                                                                                                                                                                                      |  | March 31,2005 |           |   | RestatedSeptember 30,2004 |  
|Assets                                                                                                                                                                                                                |  |               |           |  
|Cash and cash equivalents                                                                                                                                                                                             |  | $             | 333,286   |   |                           | $ | 472,951   |  
|Restricted cash                                                                                                                                                                                                       |  |               | 24,054    |   |                           |   | 27,032    |  
|Accounts receivable, less allowances of: March 31, 2005$6,914; September 30, 2004$7,224                                                                                                                             |  |               | 674,521   |   |                           |   | 728,634   |  
|Finance receivables, less allowances of: March 31, 2005$3,131; September 30, 2004$2,514                                                                                                                             |  |               | 413,500   |   |                           |   | 457,615   |  
|Inventories                                                                                                                                                                                                           |  |               | 216,542   |   |                           |   | 233,345   |  
|Prepaid expenses and other current assets                                                                                                                                                                             |  |               | 56,478    |   |                           |   | 81,188    |  
|Deferred taxes                                                                                                                                                                                                        |  |               | 71,522    |   |                           |   | 64,481    |  
|Assets held for sale (Note 16)                                                                                                                                                                                        |  |               | 30,332    |   |                           |   |           |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Total current assets                                                                                                                                                                                                  |  |               | 1,820,235 |   |                           |   | 2,065,246 |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Long-term finance receivables, less allowances of: March 31, 2005$3,826; September 30, 2004$3,932                                                                                                                   |  |               | 582,346   |   |                           |   | 753,146   |  
|Equipment on operating leases, net of accumulated depreciation of: March 31, 2005 $77,444; September 30,
2004$76,456                                                                                                |  |               | 106,657   |   |                           |   | 78,673    |  
|Property and equipment, net of accumulated depreciation of: March 31, 2005 $327,814; September 30, 2004$321,789                                                                                                     |  |               | 153,724   |   |                           |   | 164,132   |  
|Goodwill                                                                                                                                                                                                              |  |               | 1,296,903 |   |                           |   | 1,286,564 |  
|Unsold residual value (Note 6)                                                                                                                                                                                        |  |               | 39,101    |   |                           |   | 45,548    |  
|Other assets                                                                                                                                                                                                          |  |               | 119,665   |   |                           |   | 125,104   |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Total Assets                                                                                                                                                                                                          |  | $             | 4,118,631 |   |                           | $ | 4,518,413 |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Liabilities and Shareholders Equity                                                                                                                                                                                  |  |               |           |   |                           |   |           |  
|Current portion of corporate debt                                                                                                                                                                                     |  | $             | 4,018     |   |                           | $ | 63,023    |  
|Current portion of debt supporting finance contracts and unsold residual value                                                                                                                                        |  |               | 372,925   |   |                           |   | 439,941   |  
|Trade accounts payable                                                                                                                                                                                                |  |               | 204,574   |   |                           |   | 307,170   |  
|Accrued salaries, wages, and commissions                                                                                                                                                                              |  |               | 95,738    |   |                           |   | 124,808   |  
|Deferred revenues                                                                                                                                                                                                     |  |               | 106,493   |   |                           |   | 116,682   |  
|Taxes payable                                                                                                                                                                                                         |  |               | 65,329    |   |                           |   | 52,976    |  
|Other accrued expenses                                                                                                                                                                                                |  |               | 169,162   |   |                           |   | 170,741   |  
|Liabilities held for sale (Note 16)                                                                                                                                                                                   |  |               | 25,953    |   |                           |   |           |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Total current liabilities                                                                                                                                                                                             |  |               | 1,044,192 |   |                           |   | 1,275,341 |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Long-term corporate debt                                                                                                                                                                                              |  |               | 694,727   |   |                           |   | 741,857   |  
|Long-term debt supporting finance contracts and unsold residual value                                                                                                                                                 |  |               | 323,192   |   |                           |   | 422,868   |  
|Deferred taxes                                                                                                                                                                                                        |  |               | 129,150   |   |                           |   | 187,091   |  
|Other long-term liabilities                                                                                                                                                                                           |  |               | 228,034   |   |                           |   | 203,538   |  
|Commitments and contingencies (Note 13)                                                                                                                                                                               |  |               |           |   |                           |   |           |  
|Shareholders Equity                                                                                                                                                                                                  |  |               |           |   |                           |   |           |  
|Common stock, no par value: authorized 300,000 shares issued: March 31, 2005150,228 shares; September 30, 2004 149,955
shares, shares outstanding: March 31, 2005139,687 shares; September 30, 2004142,133 shares |  |               | 1,026,122 |   |                           |   | 1,022,842 |  
|Series 12 preferred stock, no par value: authorized 480 shares; none issued or outstanding                                                                                                                            |  |               |           |   |                           |   |           |  
|Unearned compensation                                                                                                                                                                                                 |  |               | (5,395    | ) |                           |   | (2,239    | )
|Retained earnings                                                                                                                                                                                                     |  |               | 730,343   |   |                           |   | 723,847   |  
|Accumulated other comprehensive income                                                                                                                                                                                |  |               | 52,134    |   |                           |   | 20,195    |  
|Cost of common shares in treasury: March 31, 20059,643 shares; September 30, 20047,196 shares                                                                                                                       |  |               | (103,868  | ) |                           |   | (76,927   | )
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Total Shareholders Equity                                                                                                                                                                                            |  |               | 1,699,336 |   |                           |   | 1,687,718 |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  
|Total Liabilities and Shareholders Equity                                                                                                                                                                            |  | $             | 4,118,631 |   |                           | $ | 4,518,413 |  
|                                                                                                                                                                                                                      |  |               |           |   |                           |   |           |  



See notes to
condensed consolidated financial statements.



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IKON OFFICE SOLUTIONS, INC.



CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share amounts)



|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|-------------------------------------------------------- |  | --------------------------- | --------- | - | ------------------------- | - | --------- | ---- |  | - | ------------ | - |  | - | --------- | -
|                                                         |  | Three Months EndedMarch 31, |           |   | Six Months EndedMarch 31, |  
|                                                         |  | 2005                        |           |   | Restated2004              |   |           | 2005 |  |   | Restated2004 |  
|Revenues                                                 |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Net sales                                                |  | $                           | 495,716   |   |                           | $ | 485,985   |      |  | $ | 960,413      |   |  | $ | 936,789   |  
|Services                                                 |  |                             | 568,898   |   |                           |   | 576,883   |      |  |   | 1,158,840    |   |  |   | 1,151,379 |  
|Finance income                                           |  |                             | 27,659    |   |                           |   | 98,259    |      |  |   | 58,465       |   |  |   | 197,270   |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|                                                         |  |                             | 1,092,273 |   |                           |   | 1,161,127 |      |  |   | 2,177,718    |   |  |   | 2,285,438 |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Costs and Expenses                                       |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Cost of goods sold                                       |  |                             | 358,236   |   |                           |   | 347,743   |      |  |   | 689,005      |   |  |   | 665,991   |  
|Services costs                                           |  |                             | 344,818   |   |                           |   | 348,958   |      |  |   | 698,132      |   |  |   | 692,368   |  
|Finance interest expense                                 |  |                             | 7,006     |   |                           |   | 34,336    |      |  |   | 14,894       |   |  |   | 69,275    |  
|Selling and administrative                               |  |                             | 345,469   |   |                           |   | 371,320   |      |  |   | 692,006      |   |  |   | 740,963   |  
|(Gain) loss on divestiture of businesses                 |  |                             | (1,901    | ) |                           |   | 12,125    |      |  |   | (1,901       | ) |  |   | 12,125    |  
|Asset impairments                                        |  |                             | 313       |   |                           |   |           |      |  |   | 313          |   |  |   |           |  
|Restructuring                                            |  |                             | 11,396    |   |                           |   |           |      |  |   | 11,396       |   |  |   |           |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|                                                         |  |                             | 1,065,337 |   |                           |   | 1,114,482 |      |  |   | 2,103,845    |   |  |   | 2,180,722 |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Operating income                                         |  |                             | 26,936    |   |                           |   | 46,645    |      |  |   | 73,873       |   |  |   | 104,716   |  
|Loss from early extinguishment of debt                   |  |                             | 1,734     |   |                           |   | 3,146     |      |  |   | 1,734        |   |  |   | 3,219     |  
|Interest expense, net                                    |  |                             | 10,507    |   |                           |   | 9,662     |      |  |   | 23,311       |   |  |   | 19,748    |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Income from continuing operations before taxes on income |  |                             | 14,695    |   |                           |   | 33,837    |      |  |   | 48,828       |   |  |   | 81,749    |  
|Taxes on income                                          |  |                             | 5,640     |   |                           |   | 5,399     |      |  |   | 17,408       |   |  |   | 23,546    |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Income from continuing operations                        |  |                             | 9,055     |   |                           |   | 28,438    |      |  |   | 31,420       |   |  |   | 58,203    |  
|Discontinued operations:                                 |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Operating loss                                           |  |                             | (14,339   | ) |                           |   | (1,949    | )    |  |   | (16,200      | ) |  |   | (3,581    | )
|Tax benefit                                              |  |                             | 5,664     |   |                           |   | 769       |      |  |   | 6,399        |   |  |   | 1,413     |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Net loss from discontinued operations                    |  |                             | (8,675    | ) |                           |   | (1,180    | )    |  |   | (9,801       | ) |  |   | (2,168    | )
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Net income                                               |  | $                           | 380       |   |                           | $ | 27,258    |      |  | $ | 21,619       |   |  | $ | 56,035    |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Basic earnings per common share                          |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Continuing operations                                    |  | $                           | 0.06      |   |                           | $ | 0.19      |      |  | $ | 0.22         |   |  | $ | 0.40      |  
|Discontinued operations                                  |  |                             | (0.06     | ) |                           |   | (0.01     | )    |  |   | (0.07        | ) |  |   | (0.01     | )
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Net income                                               |  | $                           | 0.00      |   |                           | $ | 0.18      |      |  | $ | 0.15         |   |  | $ | 0.39      |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Diluted earnings per common share                        |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Continuing operations                                    |  | $                           | 0.06      |   |                           | $ | 0.18      |      |  | $ | 0.22         |   |  | $ | 0.37      |  
|Discontinued operations                                  |  |                             | (0.06     | ) |                           |   | (0.01     | )    |  |   | (0.07        | ) |  |   | (0.01     | )
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Net income                                               |  | $                           | 0.00      |   |                           | $ | 0.17      |      |  | $ | 0.15         |   |  | $ | 0.36      |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  
|Cash dividends per common share                          |  | $                           | 0.04      |   |                           | $ | 0.04      |      |  | $ | 0.08         |   |  | $ | 0.08      |  
|                                                         |  |                             |           |   |                           |   |           |      |  |   |              |   |  |   |           |  



See notes to
condensed consolidated financial statements.



6



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                             |  |                            |          |   |              |   |            |  
|-------------------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ------------ | - | ---------- | -
|                                                                                             |  | Six Months Ended March 31, |         
|                                                                                             |  | 2005                       |          |   | Restated2004 |  
|Cash Flows from Operating Activities                                                         |  |                            |          |   |              |   |            |  
|Net income                                                                                   |  | $                          | 21,619   |   |              | $ | 56,035     |  
|Loss from discontinued operations                                                            |  |                            | (9,801   | ) |              |   | (2,168     | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Income from continuing operations                                                            |  |                            | 31,420   |   |              |   | 58,203     |  
|Additions (deductions) to reconcile net income to net cash provided by operating activities: |  |                            |          |   |              |   |            |  
|Depreciation                                                                                 |  |                            | 37,405   |   |              |   | 41,455     |  
|Amortization                                                                                 |  |                            | 3,556    |   |              |   | 6,600      |  
|(Gain) loss from divestiture of businesses                                                   |  |                            | (1,901   | ) |              |   | 12,125     |  
|Provision for losses on accounts receivable                                                  |  |                            | 6,931    |   |              |   | 8,750      |  
|Restructuring charge                                                                         |  |                            | 11,396   |   |              |   |            |  
|Asset impairment charge                                                                      |  |                            | 313      |   |              |   |            |  
|Deferred income taxes                                                                        |  |                            | (64,982  | ) |              |   | 40,487     |  
|Provision for lease default reserves                                                         |  |                            | 988      |   |              |   | 27,896     |  
|Pension expense                                                                              |  |                            | 21,880   |   |              |   | 27,598     |  
|Non-cash interest expense on debt supporting unsold residual value                           |  |                            | 225      |   |              |   |            |  
|Loss from early extinguishment of debt                                                       |  |                            | 1,734    |   |              |   | 3,219      |  
|Changes in operating assets and liabilities, net of divestiture of businesses:               |  |                            |          |   |              |   |            |  
|Decrease (increase) in accounts receivable                                                   |  |                            | 37,822   |   |              |   | (3,324     | )
|Decrease (increase) in inventories                                                           |  |                            | 12,377   |   |              |   | (13,884    | )
|Decrease in prepaid expenses and other current assets                                        |  |                            | 17,324   |   |              |   | 1,065      |  
|Decrease in accounts payable, deferred revenues and accrued expenses                         |  |                            | (109,656 | ) |              |   | (149,964   | )
|Decrease in accrued restructuring                                                            |  |                            | (905     | ) |              |   |            |  
|Other                                                                                        |  |                            | 503      |   |              |   | (1,205     | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Net cash provided by continuing operations                                                   |  |                            | 6,430    |   |              |   | 59,021     |  
|Net cash used in discontinued operations                                                     |  |                            | (2,928   | ) |              |   | (2,321     | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Net cash provided by operating activities                                                    |  |                            | 3,502    |   |              |   | 56,700     |  
|                                                                                             |  |                            |          |   |              |   |            |  
|Cash Flows from Investing Activities                                                         |  |                            |          |   |              |   |            |  
|Proceeds from the divestiture of businesses                                                  |  |                            | 5,330    |   |              |   | 1,504,786  |  
|Expenditures for property and equipment                                                      |  |                            | (14,387  | ) |              |   | (11,488    | )
|Expenditures for equipment on operating leases                                               |  |                            | (25,038  | ) |              |   | (23,852    | )
|Proceeds from the sale of property and equipment                                             |  |                            | 2,306    |   |              |   | 2,315      |  
|Proceeds from the sale of equipment on operating leases                                      |  |                            | 5,627    |   |              |   | 5,429      |  
|Proceeds from the sale of finance receivables                                                |  |                            | 139,392  |   |              |   |            |  
|Finance receivablesadditions                                                                |  |                            | (195,189 | ) |              |   | (891,793   | )
|Finance receivablescollections                                                              |  |                            | 266,079  |   |              |   | 851,882    |  
|Other                                                                                        |  |                            | (2,863   | ) |              |   | (4,190     | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Net cash provided by continuing operations                                                   |  |                            | 181,257  |   |              |   | 1,433,089  |  
|Net cash provided by (used in) discontinued operations                                       |  |                            | 88       |   |              |   | (485       | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Net cash provided by investing activities                                                    |  |                            | 181,345  |   |              |   | 1,432,604  |  
|                                                                                             |  |                            |          |   |              |   |            |  
|Cash Flows from Financing Activities                                                         |  |                            |          |   |              |   |            |  
|Proceeds from issuance of long-term corporate debt                                           |  |                            | 886      |   |              |   | 523        |  
|Short-term corporate debt repayments, net                                                    |  |                            | (182     | ) |              |   | (2,726     | )
|Repayment of other borrowings                                                                |  |                            | (3,439   | ) |              |   | (35,214    | )
|Long-term corporate debt repayments                                                          |  |                            | (104,031 | ) |              |   | (7,320     | )
|Debt supporting finance contractsissuances                                                  |  |                            | 16,965   |   |              |   | 317,925    |  
|Debt supporting finance contractsrepayments                                                 |  |                            | (199,727 | ) |              |   | (1,238,209 | )
|Dividends paid                                                                               |  |                            | (11,298  | ) |              |   | (11,764    | )
|Decrease (increase) in restricted cash                                                       |  |                            | 2,978    |   |              |   | (26,290    | )
|Proceeds from option exercises and sale of treasury shares                                   |  |                            | 2,743    |   |              |   | 5,043      |  
|Purchase of treasury shares and other                                                        |  |                            | (34,240  | ) |              |   | (296       | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Net cash used in financing activities                                                        |  |                            | (329,345 | ) |              |   | (998,328   | )
|                                                                                             |  |                            |          |   |              |   |            |  
|Effect of exchange rate changes on cash and cash equivalents                                 |  |                            | 4,833    |   |              |   | 2,308      |  
|                                                                                             |  |                            |          |   |              |   |            |  
|Net (decrease) increase in cash and cash equivalents                                         |  |                            | (139,665 | ) |              |   | 493,284    |  
|Cash and cash equivalents at beginning of year                                               |  |                            | 472,951  |   |              |   | 360,030    |  
|                                                                                             |  |                            |          |   |              |   |            |  
|Cash and cash equivalents at end of period                                                   |  | $                          | 333,286  |   |              | $ | 853,314    |  
|                                                                                             |  |                            |          |   |              |   |            |  



See notes to
condensed consolidated financial statements.



7



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



IKON Office Solutions, Inc. (IKON or the Company) delivers integrated document management solutions and systems, enabling customers to improve document workflow and increase efficiency. We are
the worlds largest independent channel for copier, printer and multifunction product (MFP) technologies, integrating best-in-class systems from leading manufacturers, such as Canon, Ricoh, Konica Minolta, EFI, and HP, and document
management software from companies such as Captaris, EMC (Documentum), Kofax, and others, to deliver tailored, high-value solutions implemented and supported by our services organization-Enterprise Services. We offer financing in North America
through a program agreement (the U.S. Program Agreement) with IKON Financial Services, a wholly owned subsidiary of General Electric Capital Corporation (GE), and a rider to the U.S. Program Agreement (the Canadian
Rider) with GE in Canada. We entered into the U.S. Program Agreement and Canadian Rider as part of the sale of certain assets and liabilities of our U.S. leasing business to GE (the U.S. Transaction) and our Canadian lease
portfolio (the Canadian Transaction, and together with the U.S. Program Agreement, the Canadian Rider and the U.S. Transaction, the Transactions), respectively. We represent one of the industrys broadest portfolios of
document management services, including professional services, a unique blend of on-site and off-site managed services, customized workflow solutions, and comprehensive support through our service force of 15,600 employees, including our team of
7,000 customer service technicians and support resources worldwide. We have approximately 450 locations throughout North America and Western Europe. References herein to we, us, or our refer to IKON and its
subsidiaries unless the context specifically requires otherwise. All dollar and share amounts are in thousands, except per share data.



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



1. SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



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



Use of Estimates



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



Book Overdrafts



We had $14,834 and $92,968 of book overdrafts
(outstanding checks on zero balance bank accounts which are funded from an investment account with another financial institution upon presentation for payment) included within our accounts payable balance at March 31, 2005 and September 30, 2004,
respectively. The changes in these book overdrafts are included as a component of cash flows from operations in our consolidated statements of cash flows.



8



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Accounting for Stock-Based Compensation



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



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



|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------------ | - |  | - | ------ | -
|                                                                                                                            |  | Three Months EndedMarch 31 |        |   | Six Months EndedMarch 31 |  
|                                                                                                                            |  | 2005                       |        |   | Restated2004             |   |        | 2005 |  |   | Restated2004 |  
|Net income as reported                                                                                                      |  | $                          | 380    |   |                          | $ | 27,258 |      |  | $ | 21,619       |   |  | $ | 56,035 |  
|Pro forma effect of expensing stock based compensation plans using fair value method not included in net income as reported |  |                            | (1,306 | ) |                          |   | (1,710 | )    |  |   | (2,782       | ) |  |   | (3,344 | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Net (loss) income, as adjusted                                                                                              |  | $                          | (926   | ) |                          | $ | 25,548 |      |  | $ | 18,837       |   |  | $ | 52,691 |  
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Net income as reported                                                                                                      |  | $                          | 0.00   |   |                          | $ | 0.18   |      |  | $ | 0.15         |   |  | $ | 0.39   |  
|Pro forma effect of expensing stock based compensation plans using fair value method not included in net income as reported |  |                            | (0.01  | ) |                          |   | (0.01  | )    |  |   | (0.02        | ) |  |   | (0.02  | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Basic (loss) earnings per common share, as adjusted                                                                         |  | $                          | (0.01  | ) |                          | $ | 0.17   |      |  | $ | 0.13         |   |  | $ | 0.37   |  
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Diluted earnings per common share:                                                                                          |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Net income as reported                                                                                                      |  | $                          | 0.00   |   |                          | $ | 0.17   |      |  | $ | 0.15         |   |  | $ | 0.36   |  
|Pro forma effect of expensing stock based compensation plans using fair value method not included in net income as reported |  |                            | (0.01  | ) |                          |   | (0.01  | )    |  |   | (0.02        | ) |  |   | (0.02  | )
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  
|Diluted (loss) earnings per common share, as adjusted                                                                       |  | $                          | (0.01  | ) |                          | $ | 0.16   |      |  | $ | 0.13         |   |  | $ | 0.34   |  
|                                                                                                                            |  |                            |        |   |                          |   |        |      |  |   |              |   |  |   |        |  



Pending Accounting Changes



In October 2004, the American Jobs Creation Act (the
AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined by the AJCA. We may elect to apply this provision to qualifying earnings repatriations in either the balance of
fiscal 2005 or in fiscal 2006. We have begun an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provides additional clarifying
language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible
amounts that we are considering for repatriation under this provision is between $0 and $130,000. The related potential range of income tax is between $0 and $7,000.



9



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



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



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



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



2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS



During an analysis of aged trade accounts receivable conducted during fiscal 2005, and in connection with performing self-assessment and testing of our
internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified deficiencies in the processes and timeliness by which we issue and adjust certain invoices. The identified deficiencies result primarily
from the centralization of billing centers and the migration to a new billing platform and relate to certain of our U.S. trade accounts receivable, and do not affect receivables arising under our Mexican operations, receivables owing from GE under
our leasing relationship with GE, or receivables arising under our Legal Document Service and Business Document Service businesses. In connection with these developments, the Companys management executed a comprehensive review (the
Review) to determine the extent of such accounts receivable and billing errors. Based on the results of the Review, the Companys management and the Audit Committee of the Companys Board of Directors concluded that the errors
had a cumulative effect over multiple periods and that prior period financial statements required restatement. Accordingly, we have restated our consolidated balance sheet at September 30, 2004 and consolidated statements of income (unaudited) and
cash flows (unaudited) for the three and six months ended March 31, 2004 (the Restatement) for the impact of billing errors and other identified adjustments (described further below) as a result of the Review. The Restatement affected
periods prior to fiscal 2004 and the impact of the Restatement on such prior periods of $30,032 was reflected as an adjustment to retained earnings as of October 1, 2003. Set forth below are the Restatement adjustments, each of which is an
error within the meaning of Accounting Principles Board Opinion No. 20, Accounting Changes.



10



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Allowance for Doubtful Accounts, Billing Quality and Deferred Revenues



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



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



As a result of the above, we have restated:



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



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



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



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



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



Advances from GE



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



11



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Financial Statement Impact



The following table presents the impact of the Restatement adjustments on our previously reported results as of September
30, 2004 and for the three and six months ended March 31, 2004. During the second quarter of fiscal 2005, results from our Business Document Services business were classified as discontinued operations. As a result, the restated income statements
for the three and six months ended March 31, 2004, have been presented on a discontinued operations basis and accordingly differ from the format presented in the filing of the Quarterly Report on Form 10-Q for March 31, 2004.



Statements of Income:



|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|-------------------------------------------------------- |  | --------------------------------- | --------- | - | ----------- | - | --------- | ------ |  | - | ------- | ----
|                                                         |  | Three Months Ended March 31, 2004 |          
|                                                         |  | AsPreviouslyReported              |           |   | As Restated |   |           | Change | 
|Revenues:                                                |  |                                   |           |   |             |   |           |        |  |   |         |     
|Net sales                                                |  | $                                 | 487,084   |   |             | $ | 485,985   |        |  | $ | (1,099  | )(a)
|Services                                                 |  |                                   | 587,558   |   |             |   | 576,883   |        |  |   | (10,675 | )(b)
|Finance income                                           |  |                                   | 98,259    |   |             |   | 98,259    |        |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|                                                         |  |                                   | 1,172,901 |   |             |   | 1,161,127 |        |  |   | (11,774 | )   
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Costs and Expenses:                                      |  |                                   |           |   |             |   |           |        |  |   |         |     
|Cost of goods sold                                       |  |                                   | 347,743   |   |             |   | 347,743   |        |  |   |         |     
|Services costs                                           |  |                                   | 348,958   |   |             |   | 348,958   |        |  |   |         |     
|Finance interest expense                                 |  |                                   | 34,336    |   |             |   | 34,336    |        |  |   |         |     
|Selling and administrative                               |  |                                   | 378,276   |   |             |   | 371,320   |        |  |   | (6,956  | )(c)
|Loss on divestiture of businesses                        |  |                                   | 12,125    |   |             |   | 12,125    |        |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|                                                         |  |                                   | 1,121,438 |   |             |   | 1,114,482 |        |  |   | (6,956  | )   
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Operating income                                         |  |                                   | 51,463    |   |             |   | 46,645    |        |  |   | (4,818  | )   
|Loss from early extinguishment of debt, net              |  |                                   | 3,146     |   |             |   | 3,146     |        |  |   |         |     
|Interest expense, net                                    |  |                                   | 9,662     |   |             |   | 9,662     |        |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Income from continuing operations before taxes on income |  |                                   | 38,655    |   |             |   | 33,837    |        |  |   | (4,818  | )   
|Taxes on income                                          |  |                                   | 7,302     |   |             |   | 5,399     |        |  |   | (1,903  | )(d)
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Income from continuing operations                        |  |                                   | 31,353    |   |             |   | 28,438    |        |  |   | (2,915  | )   
|Discontinued operations:                                 |  |                                   |           |   |             |   |           |        |  |   |         |     
|Operating loss                                           |  |                                   | (1,949    | ) |             |   | (1,949    | )      |  |   |         |     
|Tax benefit                                              |  |                                   | 769       |   |             |   | 769       |        |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Net loss from discontinued operations                    |  |                                   | (1,180    | ) |             |   | (1,180    | )      |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Net income                                               |  | $                                 | 30,173    |   |             | $ | 27,258    |        |  | $ | (2,915  | )   
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Basic Earnings Per Common Share                          |  |                                   |           |   |             |   |           |        |  |   |         |     
|Continuing operations                                    |  |                                   | 0.20      |   |             |   | 0.19      |        |  |   | (0.01   | )   
|Discontinued operations                                  |  |                                   | (0.01     | ) |             |   | (0.01     | )      |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Net income                                               |  | $                                 | 0.19      |   |             | $ | 0.18      |        |  | $ | (0.01   | )   
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Diluted Earnings Per Common Share                        |  |                                   |           |   |             |   |           |        |  |   |         |     
|Continuing operations                                    |  |                                   | 0.19      |   |             |   | 0.18      |        |  |   | (0.01   | )   
|Discontinued operations                                  |  |                                   | (0.01     | ) |             |   | (0.01     | )      |  |   |         |     
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     
|Net income                                               |  | $                                 | 0.18      |   |             | $ | 0.17      |        |  | $ | (0.01   | )   
|                                                         |  |                                   |           |   |             |   |           |        |  |   |         |     



12



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



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



|    |  |                                                                                                                                               |  |   |         |  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|(a) |  | Net Sales                                                                                                                                     |  |   |         |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (282    | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (817    | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (1,099  | )
|    |  |                                                                                                                                               |  |   |         |  
|(b) |  | Services                                                                                                                                      |  |   |         |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (7,940  | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (2,735  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (10,675 | )
|    |  |                                                                                                                                               |  |   |         |  
|(c) |  | Selling and Administrative Expense                                                                                                            |  |   |         |  
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  | $ | (3,552  | )
|    |  | Adjustment for the impact of overstated bad debt expense and allowance for doubtful accounts                                                  |  |   | (3,404  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (6,956  | )
|    |  |                                                                                                                                               |  |   |         |  
|(d) |  | Taxes on Income                                                                                                                               |  |   |         |  
|    |  | Net decrease to taxes on income due to above adjustments                                                                                      |  | $ | (1,903  | )
|    |  |                                                                                                                                               |  |   |         |  



13



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|---------------------------------------------------------- |  | ------------------------------- | --------- | - | ---------- | - | --------- | ------ |  | - | ------- | ----
|                                                           |  | Six Months Ended March 31, 2004 |          
|                                                           |  | AsPreviouslyReported            |           |   | AsRestated |   |           | Change | 
|Revenues:                                                  |  |                                 |           |   |            |   |           |        |  |   |         |     
|Net sales                                                  |  | $                               | 938,782   |   |            | $ | 936,789   |        |  | $ | (1,993  | )(a)
|Services                                                   |  |                                 | 1,161,402 |   |            |   | 1,151,379 |        |  |   | (10,023 | )(b)
|Finance income                                             |  |                                 | 197,270   |   |            |   | 197,270   |        |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|                                                           |  |                                 | 2,297,454 |   |            |   | 2,285,438 |        |  |   | (12,016 | )   
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Costs and Expenses:                                        |  |                                 |           |   |            |   |           |        |  |   |         |     
|Cost of goods sold                                         |  |                                 | 665,991   |   |            |   | 665,991   |        |  |   |         |     
|Services costs                                             |  |                                 | 692,368   |   |            |   | 692,368   |        |  |   |         |     
|Finance interest expense                                   |  |                                 | 69,275    |   |            |   | 69,275    |        |  |   |         |     
|Selling and administrative                                 |  |                                 | 750,002   |   |            |   | 740,963   |        |  |   | (9,039  | )(c)
|Loss on divestiture of businesses, net                     |  |                                 | 12,125    |   |            |   | 12,125    |        |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|                                                           |  |                                 | 2,189,761 |   |            |   | 2,180,722 |        |  |   | (9,039  | )   
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Operating income                                           |  |                                 | 107,693   |   |            |   | 104,716   |        |  |   | (2,977  | )   
|Loss from early extinguishment of debt, net                |  |                                 | 3,219     |   |            |   | 3,219     |        |  |   |         |     
|Interest expense, net                                      |  |                                 | 19,748    |   |            |   | 19,748    |        |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Income before continuing operations before taxes on income |  |                                 | 84,726    |   |            |   | 81,749    |        |  |   | (2,977  | )   
|Taxes on income                                            |  |                                 | 24,722    |   |            |   | 23,546    |        |  |   | (1,176  | )(d)
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Income from continuing operations                          |  |                                 | 60,004    |   |            |   | 58,203    |        |  |   | (1,801  | )   
|Discontinued operations:                                   |  |                                 |           |   |            |   |           |        |  |   |         |     
|Operating loss                                             |  |                                 | (3,581    | ) |            |   | (3,581    | )      |  |   |         |     
|Tax benefit                                                |  |                                 | 1,413     |   |            |   | 1,413     |        |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Net loss from discontinued operations                      |  |                                 | (2,168    | ) |            |   | (2,168    | )      |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Net income                                                 |  | $                               | 57,836    |   |            | $ | 56,035    |        |  |   | (1,801  | )   
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Basic Earnings Per Common Share                            |  |                                 |           |   |            |   |           |        |  |   |         |     
|Continuing operations                                      |  |                                 | 0.40      |   |            |   | 0.40      |        |  |   |         |     
|Discontinued operations                                    |  |                                 | (0.01     | ) |            |   | (0.01     | )      |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Net income                                                 |  | $                               | 0.39      |   |            | $ | 0.39      |        |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Diluted Earnings Per Common Share                          |  |                                 |           |   |            |   |           |        |  |   |         |     
|Continuing operations                                      |  |                                 | 0.38      |   |            |   | 0.37      |        |  |   | (0.01   | )   
|Discontinued operations                                    |  |                                 | (0.01     | ) |            |   | (0.01     | )      |  |   |         |     
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     
|Net income                                                 |  | $                               | 0.37      |   |            | $ | 0.36      |        |  | $ | (0.01   | )   
|                                                           |  |                                 |           |   |            |   |           |        |  |   |         |     



14



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



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



|    |  |                                                                                                                                               |  |   |         |  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|(a) |  | Net Sales                                                                                                                                     |  |   |         |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (930    | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (1,063  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (1,993  | )
|    |  |                                                                                                                                               |  |   |         |  
|(b) |  | Services                                                                                                                                      |  |   |         |  
|    |  | Adjustment for the impact of billing errors                                                                                                   |  | $ | (6,464  | )
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  |   | (3,559  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (10,023 | )
|    |  |                                                                                                                                               |  |   |         |  
|(c) |  | Selling and Administrative Expense                                                                                                            |  |   |         |  
|    |  | Adjustment for the impact of billing errors incorrectly recorded within selling and administrative expense rather than a reduction of
revenue |  | $ | (4,622  | )
|    |  | Adjustment for the impact of overstated bad debt expense and allowance for doubtful accounts                                                  |  |   | (4,417  | )
|    |  |                                                                                                                                               |  |   |         |  
|    |  | Net decrease                                                                                                                                  |  | $ | (9,039  | )
|    |  |                                                                                                                                               |  |   |         |  
|(d) |  | Taxes on Income                                                                                                                               |  |   |         |  
|    |  | Net increase to taxes on income due to above adjustments                                                                                      |  | $ | (1,176  | )
|    |  |                                                                                                                                               |  |   |         |  



15



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Balance Sheets:



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



16



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



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



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



3. RESTRUCTURING AND ASSET
IMPAIRMENT CHARGES



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



Business Document Services



During the second
quarter of fiscal 2005, we exited BDS, which provided off-site document management solutions, including digital print and fulfillment services. This exit was achieved by the closure or sale of 12 North American operating locations. As of March 31,
2005, all but 2 of the 12 BDS sites were closed or sold. Proceeds received from the sale of 2 sites were not material. The remaining 2 BDS sites are classified as held for sale. As a result of this exit, the results of operations and cash flows of
BDS are classified as discontinued operations (see Note 5).



As
a result of the exit of BDS, we recorded a pre-tax restructuring and asset impairment charge of $7,094 and $1,294, respectively, during the second quarter of fiscal 2005. The restructuring charge represents severance of $2,845 for the termination of
227 employees, $1,991 of contractual commitments, and $2,258 of contract termination costs. The asset impairment charge represents fixed asset write-offs. In addition, we wrote-down inventories and other assets by $506 and recorded additional
reserves for accounts receivable of $1,201, which are included in Other Non-Restructuring Items in the table below. These charges are included within discontinued operations.



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



If we are unable to successfully sell the remaining 2 BDS locations, we will incur additional charges
related to severance, contractual commitments, and contract terminations during fiscal 2005.



Legal Document Services



LDS provides off-site document management solutions for the legal industry, including document imaging, coding and conversion services, legal graphics, and electronic discovery. During the second quarter of fiscal 2005, we closed 16 of 82
LDS sites in North America to provide both cost flexibility and savings. We will close one additional site during the third quarter of fiscal 2005. As a result of the closure of these sites, we recorded a pre-tax restructuring and asset impairment
charge of $2,352 and $313, respectively, during the second quarter of fiscal 2005. The restructuring charge represents severance of $1,675 for the termination of 208 employees, $537 of contractual commitments and $140 of contract termination costs.
The asset impairment charge represents fixed asset write-offs. In addition, we wrote down inventories by $52 and recorded additional reserves for accounts receivable of $267, which are included in Other Non-Restructuring Items in the
table below.



Field Organization and Corporate Staff Reduction



During the second quarter of fiscal 2005, we reorganized
our field structure in North America to serve our customers in a more cost-effective manner, while maximizing sales potential. To achieve this, we expanded geographic coverage under certain area vice presidents, allowing us to reduce the number of
our marketplaces. By streamlining our field leadership structure and reducing other corporate staff, we believe we will be able to save costs while maintaining our sales capabilities and services provided to customers. As a result of these actions,
we recorded a pre-tax restructuring charge of $9,044 representing severance for 395 employees.



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



|                                         |  |                    |       
|---------------------------------------- |  | ------------------ | ------
|Type of Charge                           |  | Fiscal 2005 Charge
|Restructuring Charge:                    |  |                    |       
|Severance                                |  | $                  | 13,564
|Contractual commitments                  |  |                    | 2,528 
|Contract termination                     |  |                    | 2,398 
|                                         |  |                    |       
|Total Restructuring Charge               |  |                    | 18,490
|Asset Impairment Charge for Fixed Assets |  |                    | 1,607 
|Other Non-Restructuring Items            |  |                    | 2,026 
|                                         |  |                    |       
|Total                                    |  | $                  | 22,123
|                                         |  |                    |       



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



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



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



The following presents a reconciliation of the restructuring charge to the balance remaining at March
31, 2005, which is included in other accrued expenses on the consolidated balance sheet:



|                        |  |        |        |                    |   |                      |  |   |       
|----------------------- |  | ------ | ------ | ------------------ | - | -------------------- |  | - | ------
|                        |  | Charge |        | PaymentsFiscal2005 |   | BalanceMarch 31,2005
|Severance               |  | $      | 13,564 |                    | $ | 1,128                |  | $ | 12,436
|Contractual commitments |  |        | 2,528  |                    |   | 136                  |  |   | 2,392 
|Contract termination    |  |        | 2,398  |                    |   | 229                  |  |   | 2,169 
|                        |  |        |        |                    |   |                      |  |   |       
|Total                   |  | $      | 18,490 |                    | $ | 1,493                |  | $ | 16,997
|                        |  |        |        |                    |   |                      |  |   |       



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



|                        |  |      |        |      |   |       |  |        |     |       |   |     |  |   |       
|----------------------- |  | ---- | ------ | ---- | - | ----- |  | ------ | --- | ----- | - | --- |  | - | ------
|Projected Payments      |  | 2005 |        | 2006 |   | 2007  |  | Beyond |     | Total
|Severance               |  | $    | 11,096 |      | $ | 1,340 |  |        |     |       |   |     |  | $ | 12,436
|Contractual commitments |  |      | 753    |      |   | 787   |  | $      | 352 |       | $ | 500 |  |   | 2,392 
|Contract termination    |  |      | 2,169  |      |   |       |  |        |     |       |   |     |  |   | 2,169 
|                        |  |      |        |      |   |       |  |        |     |       |   |     |  |   |       
|Total                   |  | $    | 14,018 |      | $ | 2,127 |  | $      | 352 |       | $ | 500 |  | $ | 16,997
|                        |  |      |        |      |   |       |  |        |     |       |   |     |  |   |       



All contractual
commitment amounts related to leases are shown net of projected sublease income. Projected sublease income was $3,082 at March 31, 2005. To the extent that sublease income cannot be realized, additional restructuring charges will be incurred in each
period in which sublease income is not received.



The employees
affected by the charge were as follows:



|                                       |  |                   |  |                                 |   |  |                                                     
|-------------------------------------- |  | ----------------- |  | ------------------------------- | - |  | ----------------------------------------------------
|Headcount Reductions                   |  | EmployeesAffected |  | Fiscal 2005EmployeeTerminations |   |  | Remaining Employeesto be Terminatedat March 31, 2005
|BDS                                    |  | 227               |  | (126                            | ) |  | 101                                                 
|LDS                                    |  | 208               |  | (122                            | ) |  | 86                                                  
|Field organization and corporate staff |  | 395               |  | (159                            | ) |  | 236                                                 
|                                       |  |                   |  |                                 |   |  |                                                     
|Total                                  |  | 830               |  | (407                            | ) |  | 423                                                 
|                                       |  |                   |  |                                 |   |  |                                                     



The locations affected
by the charge were as follows:



|              |  |                |  |              |  |                                             
|------------- |  | -------------- |  | ------------ |  | --------------------------------------------
|Site Closures |  | Sites Affected |  | Sites Closed |  | Remaining Sites tobe Closed at March 31,2005
|BDS           |  | 12             |  | 10           |  | 2                                           
|LDS           |  | 17             |  | 16           |  | 1                                           
|              |  |                |  |              |  |                                             
|Total         |  | 29             |  | 26           |  | 3                                           
|              |  |                |  |              |  |                                             



We expect all
restructuring actions to be completed during fiscal 2005. Remaining employees to be terminated at March 31, 2005 represents employees who received notice of termination but were not yet terminated. Severance payments to terminated employees are made
in installments. The charges for contractual commitments relate to real estate lease contracts where we have exited certain locations and are required to make payments over the remaining lease term. The charges for contract termination represent
costs incurred to immediately terminate contracts.



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



4. NET GAIN ON SALE OF BUSINESSES



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



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



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



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



5. DISCONTINUED OPERATIONS



In connection with our restructuring plan discussed in
Note 3, we exited from BDS during fiscal 2005. The exit of this business involved the sale or closure of 12 digital print centers. These sales and closures were evaluated for severance and lease liabilities, asset impairments, including goodwill, in
accordance with our accounting policies. Operating activities of BDS have been reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation. Summarized financial
information for BDS is set forth below:



|                                      |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                      |  | Three Months EndedMarch 31 |         |   | Six Months EndedMarch 31 |  
|                                      |  | 2005                       |         |   | 2004                     |   |        | 2005 |  |   | 2004    |  
|Revenues                              |  | $                          | 8,555   |   |                          | $ | 11,416 |      |  | $ | 20,079  |   |  | $ | 23,343 |  
|Pretax loss                           |  |                            | (14,339 | ) |                          |   | (1,949 | )    |  |   | (16,200 | ) |  |   | (3,581 | )
|Income tax benefit                    |  |                            | 5,664   |   |                          |   | 769    |      |  |   | 6,399   |   |  |   | 1,413  |  
|Net loss from discontinued operations |  |                            | (8,675  | ) |                          |   | (1,180 | )    |  |   | (9,801  | ) |  |   | (2,168 | )



The BDS pretax loss of
$14,339 and $16,200 for the three and six months ended March 31, 2005, respectively, consisted of losses from operations of $4,244 and $6,105, respectively, and the following asset impairments, severance, contractual commitments, contract
termination, and other costs (described in additional detail in Note 3):



|                                         |  |                    |       
|---------------------------------------- |  | ------------------ | ------
|Type of Charge                           |  | Fiscal 2005 Charge
|Restructuring Charge:                    |  |                    |       
|Severance                                |  | $                  | 2,845 
|Contractual commitments                  |  |                    | 1,991 
|Contract termination                     |  |                    | 2,258 
|                                         |  |                    |       
|Total Restructuring Charge               |  |                    | 7,094 
|Asset Impairment Charge for Fixed Assets |  |                    | 1,294 
|Other Non-Restructuring Items            |  |                    | 1,707 
|                                         |  |                    |       
|Total                                    |  | $                  | 10,095
|                                         |  |                    |       



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



As of March 31, 2005, 8 digital print shops were closed, 2 were sold, and 2 were being actively
marketed for sale. Assets related to BDS are recorded at their estimated net realizable value. Assets related to digital print shops that are being marketed for sale are reported as Assets Held for Sale in our Consolidated Balance Sheet as of March
31, 2005 (see Note 16).



6. NOTES PAYABLE AND LONG-TERM DEBT



Long-term corporate debt consisted of:



|                                                                     |  |               |         |                   |   |        
|-------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                                     |  | March 31,2005 |         | September 30,2004
|Bond issues                                                          |  | $             | 354,806 |                   | $ | 411,423
|Convertible subordinated notes                                       |  |               | 245,075 |                   |   | 290,000
|Notes payable                                                        |  |               | 94,835  |                   |   | 94,835 
|Miscellaneous notes, bonds, mortgages, and capital lease obligations |  |               | 9,768   |                   |   | 8,622  
|                                                                     |  |               |         |                   |   |        
|                                                                     |  |               | 704,484 |                   |   | 804,880
|Less: current maturities                                             |  |               | 5,539   |                   |   | 63,023 
|                                                                     |  |               |         |                   |   |        
|                                                                     |  | $             | 698,945 |                   | $ | 741,857
|                                                                     |  |               |         |                   |   |        



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



|                                       |  |               |         |                   |   |        
|-------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                       |  | March 31,2005 |         | September 30,2004
|Lease-backed notes                     |  | $             | 495,345 |                   | $ | 683,086
|Asset securitization conduit financing |  |               | 135,571 |                   |   | 129,668
|Notes payable to banks                 |  |               | 8,812   |                   |   | 3,868  
|Debt supporting unsold residual value  |  |               | 56,389  |                   |   | 46,187 
|                                       |  |               |         |                   |   |        
|                                       |  |               | 696,117 |                   |   | 862,809
|Less: current maturities               |  |               | 372,925 |                   |   | 439,941
|                                       |  |               |         |                   |   |        
|                                       |  | $             | 323,192 |                   | $ | 422,868
|                                       |  |               |         |                   |   |        



Included above is
$4,218 of our corporate debt that has been reclassified to liabilities held for sale on the Consolidated Balance Sheets as a result of the proposed sale of our French subsidiary (see Note 16).



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



During the six months ended March 31, 2005, we repaid $187,741 of lease-backed notes.



Asset Securitization Conduit Financing Agreements



As of March 31, 2005, IKON Capital PLC, IKONs leasing subsidiary in the United Kingdom, had approximately $27,309 available under its asset securitization conduit financing agreement (the Conduit).
During the six months ended March 31, 2005, IKON Capital PLC repaid and borrowed $5,190 and $2,825, respectively, in connection with the Conduit. During the third quarter of fiscal 2005, we received a waiver to our Conduit to provide us with an
extension to the deadline by which we must deliver to the lender certain items required under the Conduit, including our financial statements for the second quarter of fiscal year 2005, in order to allow us to complete the review of our billing
controls and reserve practices for our trade accounts receivable (see Note 2).



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



Debt Supporting Unsold Residual Value



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



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



As of March 31, 2005, we had $39,966 of debt related to $39,101 of unsold residual value and the present value of the remaining lease receivables that
remained on our balance sheet. During fiscal 2005, we imputed interest at our average borrowing rate of 3.73% and recorded $225 of interest expense related to this debt. Upon the end of the lease term or repurchase of the lease, whichever comes
first, we will reverse the unsold residual value and related debt as the underlying leases mature and any differential will be recorded as a gain on the extinguishment of debt. As of March 31, 2005, this differential was $865.



In addition, we have $16,423 of debt related to equipment on operating leases
which have been funded by GE.



Credit Facility



We maintain a $200,000 secured credit facility (the Credit
Facility) with a group of lenders. The Credit Facility provides the availability of revolving loans, with certain sub-limits, and provides support for letters of credit. The amount of credit available under the Credit Facility is reduced by
open letters of credit. The amount available under the Credit Facility for borrowings or additional letters of credit was $165,579 at March 31, 2005. The Credit Facility is secured by our accounts receivable and inventory, the stock of our
first-tier domestic subsidiaries, 65% of the stock of our first-tier foreign subsidiaries, and all of our intangible assets. All security interests pledged under the Credit Facility are shared with the holders of our 7.25% notes payable due 2008.



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



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that we did not utilize prior to October 1, 2005. As of
March 31, 2005, $84,973 of the $150,000 allowance was utilized. The Credit Facility contains default provisions customary for facilities of this type. During the third quarter of fiscal 2005, we entered into a consent (the Consent) to
our Credit Facility to provide us with an extension to the deadline by which we must deliver to the lenders certain items required under the Credit Facility, including our financial statements for the second quarter of fiscal year 2005, in order to
allow us to complete the review of our billing controls and reserve practices for our trade accounts receivable (see Note 2).



Loss from the Early Extinguishment of Debt



During the six months ended March 31, 2005, we repurchased $44,925 of our Convertible Notes for $45,938. As a result of these repurchases, we recognized a
loss, including the write-off of unamortized costs, of $1,734, which is included in loss from the early extinguishment of debt, in the consolidated statements of income for the six months ended March 31, 2005.



Letters of Credit



We have certain commitments available to us in the form of lines of credit and standby letters of credit. As of March 31,
2005, we had $175,929 available under lines of credit, including the $165,579 available under the Credit Facility and had open standby letters of credit totaling $34,421. These letters of credit are primarily supported by the Credit Facility. All
letters of credit expire within one year.



7. SALE OF LEASE RECEIVABLES



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



During fiscal 2005, we sold lease receivables totaling $139,392 for cash proceeds in transactions to GE and other syndicators. In those transactions, we
will not retain any interest in the assets. No material gain or loss resulted from these transactions.



8. GOODWILL



Goodwill
associated with our reporting segments was:



|                               |  |                   |         |            |   |         |  |   |          
|------------------------------ |  | ----------------- | ------- | ---------- | - | ------- |  | - | ---------
|                               |  | IKON NorthAmerica |         | IKONEurope |   | Total  
|Goodwill at September 30, 2004 |  | $                 | 949,138 |            | $ | 337,426 |  | $ | 1,286,564
|Translation adjustment         |  |                   | 5,014   |            |   | 5,325   |  |   | 10,339   
|                               |  |                   |         |            |   |         |  |   |          
|Goodwill at March 31, 2005     |  | $                 | 954,152 |            | $ | 342,751 |  | $ | 1,296,903
|                               |  |                   |         |            |   |         |  |   |          



Changes in the
goodwill balance since September 30, 2004 are attributable to foreign currency translation adjustments. In addition, $9,827 of goodwill has been reclassified to assets held for sale on the consolidated balance sheets as a result of the proposed sale
of our French subsidiary (see Note 16).



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



As of March 31, 2005, we had no intangible assets other than goodwill except those related to our
defined benefit plans.



9. SHARE REPURCHASES



In March 2004, our Board of Directors authorized the repurchase of up to
$250,000 of our outstanding shares of common stock (the 2004 Plan). From time-to-time, our Retirement Savings Plan may acquire shares of our common stock in open market transactions or from our treasury shares. During fiscal 2004, we
repurchased 6,741 shares of our outstanding common stock for $77,574 under the 2004 Plan. During the first half of fiscal 2005, we repurchased 3,109 shares of our outstanding common stock for $34,098, leaving $138,328 remaining for share repurchases
under the 2004 Plan. Under the terms of the Credit Facility, share repurchases are permitted up to $150,000 until September 2005. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount
not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that we did not utilize prior to October 1, 2005. As of March 31, 2005, $84,973 of the $150,000 allowance was utilized.



10. COMPREHENSIVE INCOME



Total comprehensive income is as follows:



|                                                                                                                                                                                                                                 |  |                            |         |                          |              |   |        |  |              |        |  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ------------------------ | ------------ | - | ------ |  | ------------ | ------ |  | - | -------
|                                                                                                                                                                                                                                 |  | Three Months EndedMarch 31 |         | Six Months EndedMarch 31
|                                                                                                                                                                                                                                 |  | 2005                       |         |                          | Restated2004 |   | 2005   |  | Restated2004
|Net income                                                                                                                                                                                                                       |  | $                          | 380     |                          |              | $ | 27,258 |  | $            | 21,619 |  | $ | 56,035 
|Foreign currency translation adjustments                                                                                                                                                                                         |  |                            | (17,670 | )                        |              |   | 8,817  |  |              | 31,557 |  |   | 48,190 
|Gain on derivative financial instruments, net of tax expense of: $45 and $3,760 for the three months ended March 31, 2005 and 2004,
respectively; $214 and $5,945 for the six months ended March 31, 2005 and 2004, respectively |  |                            | 117     |                          |              |   | 6,684  |  |              | 382    |  |   | 10,569 
|                                                                                                                                                                                                                                 |  |                            |         |                          |              |   |        |  |              |        |  |   |        
|Total comprehensive (loss) income                                                                                                                                                                                                |  | $                          | (17,173 | )                        |              | $ | 42,759 |  | $            | 53,558 |  | $ | 114,794
|                                                                                                                                                                                                                                 |  |                            |         |                          |              |   |        |  |              |        |  |   |        



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



The minimum pension liability is adjusted at each fiscal year end; therefore, there is no impact on total comprehensive income during interim periods. The
balances for foreign currency translation, minimum pension liability, and derivative financial instruments included in accumulated other comprehensive income in the consolidated balance sheets were $97,975, $(46,400) and $559, respectively, at March
31, 2005 and $66,418, $(46,400) and $177, respectively, at September 30, 2004.



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



11. EARNINGS PER COMMON SHARE



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



|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ------------------------ | - | ------- |  | ------------ | ------- |  | - | -------
|                                                                                                                  |  | Three Months EndedMarch 31 |         | Six Months EndedMarch 31
|                                                                                                                  |  | 2005                       |         | Restated2004             |   | 2005    |  | Restated2004
|Numerator:                                                                                                        |  |                            |         |                          |   |         |  |              |         |  |   |        
|Income from continuing operations                                                                                 |  | $                          | 9,055   |                          | $ | 28,438  |  | $            | 31,420  |  | $ | 58,203 
|Effect of dilutive securities:                                                                                    |  |                            |         |                          |   |         |  |              |         |  |   |        
|Interest expense on Convertible Notes, net of taxes                                                               |  |                            |         |                          |   | 2,328   |  |              |         |  |   | 4,681  
|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        
|Numerator for diluted earnings per common sharenet income                                                        |  | $                          | 9,055   |                          | $ | 30,766  |  | $            | 31,420  |  | $ | 62,884 
|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        
|Denominator:                                                                                                      |  |                            |         |                          |   |         |  |              |         |  |   |        
|Weighted average common shares                                                                                    |  |                            | 140,404 |                          |   | 147,453 |  |              | 140,945 |  |   | 146,975
|Effect of dilutive securities:                                                                                    |  |                            |         |                          |   |         |  |              |         |  |   |        
|Convertible Notes                                                                                                 |  |                            |         |                          |   | 19,960  |  |              |         |  |   | 19,960 
|Employee stock options                                                                                            |  |                            | 323     |                          |   | 341     |  |              | 374     |  |   | 334    
|Employee stock awards                                                                                             |  |                            | 1,778   |                          |   | 3,147   |  |              | 1,916   |  |   | 2,762  
|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        
|Dilutive potential common shares                                                                                  |  |                            | 2,101   |                          |   | 23,448  |  |              | 2,290   |  |   | 23,056 
|Denominator for diluted earnings per common shareadjusted weighted average common shares and assumed conversions |  |                            | 142,505 |                          |   | 170,901 |  |              | 143,235 |  |   | 170,031
|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        
|Basic earnings per common share from continuing operations                                                        |  | $                          | 0.06    |                          | $ | 0.19    |  | $            | 0.22    |  | $ | 0.40   
|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        
|Diluted earnings per common share from continuing operations                                                      |  | $                          | 0.06    |                          | $ | 0.18    |  | $            | 0.22    |  | $ | 0.37   
|                                                                                                                  |  |                            |         |                          |   |         |  |              |         |  |   |        



We account for the
effect of the Convertible Notes in the diluted earnings per common share calculation using the if converted method. Under that method, the Convertible Notes are assumed to be converted to shares (weighted for the number of days
outstanding in the period) at a conversion price of $15.03 and interest expense, net of taxes, related to the Convertible Notes is added back to net income. The calculation of diluted earnings per common share for fiscal 2005 excludes the assumed
conversion of the Convertible Notes because the impact is antidilutive.



Options to purchase 6,117 shares of common stock at $10.99 to $46.59 per share were outstanding during the second quarter of fiscal 2005 and options to purchase 2,917 shares of common stock at $12.23 to $46.59 per share were outstanding
during the second quarter of fiscal 2004, but were not included in the computation of diluted earnings per share because the options exercise prices were greater than the average market price of the common shares; therefore, the effect would
be antidilutive.



Options to purchase 7,951 shares of common
stock at $10.60 to $46.59 per share were outstanding during the first six months of fiscal 2005 and options to purchase 7,388 shares of common stock at $10.67 to $46.59 per share were outstanding during the first six months of fiscal 2004, but were
not included in the computation of diluted earnings per common share because the options exercise prices were greater than the average market price of the common shares; therefore, the effect would be antidilutive.



25



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##### Table of Contents

IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



12. SEGMENT REPORTING



The table below presents segment information for the three months ended March 31, 2005 and 2004:



|                                             |  |                  |         |   |            |   |                          |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ---------------- | ------- | - | ---------- | - | ------------------------ |  | - | ------- | - |  | - | ------- | -
|                                             |  | IKONNorthAmerica |         |   | IKONEurope |   | CorporateandEliminations |  |   | Total   |  
|Three Months Ended March 31, 2005            |  |                  |         |   |            |   |                          |  |   |         |   |  |   |         |  
|Net sales                                    |  | $                | 420,671 |   |            | $ | 75,045                   |  |   |         |   |  | $ | 495,716 |  
|Services                                     |  |                  | 507,673 |   |            |   | 61,225                   |  |   |         |   |  |   | 568,898 |  
|Finance income                               |  |                  | 20,739  |   |            |   | 6,920                    |  |   |         |   |  |   | 27,659  |  
|Finance interest expense                     |  |                  | 5,293   |   |            |   | 1,713                    |  |   |         |   |  |   | 7,006   |  
|Gain from divestiture of business            |  |                  | (1,901  | ) |            |   |                          |  |   |         |   |  |   | (1,901  | )
|Asset impairments                            |  |                  | 313     |   |            |   |                          |  |   |         |   |  |   | 313     |  
|Restructuring                                |  |                  | 11,396  |   |            |   |                          |  |   |         |   |  |   | 11,396  |  
|Operating income (loss)                      |  |                  | 90,516  |   |            |   | 7,861                    |  | $ | (71,441 | ) |  |   | 26,936  |  
|Interest expense, net                        |  |                  |         |   |            |   |                          |  |   | 10,507  |   |  |   | 10,507  |  
|Income before taxes                          |  |                  |         |   |            |   |                          |  |   |         |   |  |   | 14,695  |  
|                                             |  |                  |         |  
|Three Months Ended March 31, 2004 (restated) |  |                  |         |   |            |   |                          |  |   |         |   |  |   |         |  
|Net sales                                    |  | $                | 413,711 |   |            | $ | 72,274                   |  |   |         |   |  | $ | 485,985 |  
|Services                                     |  |                  | 519,086 |   |            |   | 57,797                   |  |   |         |   |  |   | 576,883 |  
|Finance income                               |  |                  | 91,666  |   |            |   | 6,593                    |  |   |         |   |  |   | 98,259  |  
|Finance interest expense                     |  |                  | 32,762  |   |            |   | 1,574                    |  |   |         |   |  |   | 34,336  |  
|Loss from divestiture of business            |  |                  | 12,125  |   |            |   |                          |  |   |         |   |  |   | 12,125  |  
|Operating income (loss)                      |  |                  | 124,718 |   |            |   | 6,109                    |  | $ | (84,182 | ) |  |   | 46,645  |  
|Interest expense, net                        |  |                  |         |   |            |   |                          |  |   | 9,662   |   |  |   | 9,662   |  
|Income before taxes                          |  |                  |         |   |            |   |                          |  |   |         |   |  |   | 33,837  |  



The table below
presents segment information for the six months ended March 31, 2005 and 2004:



|                                           |  |                   |           |   |            |   |                          |  |   |          |   |  |   |           |  
|------------------------------------------ |  | ----------------- | --------- | - | ---------- | - | ------------------------ |  | - | -------- | - |  | - | --------- | -
|                                           |  | IKON NorthAmerica |           |   | IKONEurope |   | CorporateandEliminations |  |   | Total    |  
|Six Months Ended March 31, 2005            |  |                   |           |   |            |   |                          |  |   |          |   |  |   |           |  
|Net sales                                  |  | $                 | 808,955   |   |            | $ | 151,458                  |  |   |          |   |  | $ | 960,413   |  
|Services                                   |  |                   | 1,036,484 |   |            |   | 122,356                  |  |   |          |   |  |   | 1,158,840 |  
|Finance income                             |  |                   | 44,790    |   |            |   | 13,675                   |  |   |          |   |  |   | 58,465    |  
|Finance interest expense                   |  |                   | 11,451    |   |            |   | 3,443                    |  |   |          |   |  |   | 14,894    |  
|Gain from divestiture of business          |  |                   | (1,901    | ) |            |   |                          |  |   |          |   |  |   | (1,901    | )
|Asset impairments                          |  |                   | 313       |   |            |   |                          |  |   |          |   |  |   | 313       |  
|Restructuring                              |  |                   | 11,396    |   |            |   |                          |  |   |          |   |  |   | 11,396    |  
|Operating income (loss)                    |  |                   | 206,361   |   |            |   | 14,776                   |  | $ | (147,264 | ) |  |   | 73,873    |  
|Interest expense, net                      |  |                   |           |   |            |   |                          |  |   | 23,311   |   |  |   | 23,311    |  
|Income before taxes                        |  |                   |           |   |            |   |                          |  |   |          |   |  |   | 48,828    |  
|                                           |  |                   |           |  
|Six Months Ended March 31, 2004 (restated) |  |                   |           |   |            |   |                          |  |   |          |   |  |   |           |  
|Net sales                                  |  | $                 | 797,567   |   |            | $ | 139,222                  |  |   |          |   |  | $ | 936,789   |  
|Services                                   |  |                   | 1,039,117 |   |            |   | 112,262                  |  |   |          |   |  |   | 1,151,379 |  
|Finance income                             |  |                   | 184,585   |   |            |   | 12,685                   |  |   |          |   |  |   | 197,270   |  
|Finance interest expense                   |  |                   | 66,053    |   |            |   | 3,222                    |  |   |          |   |  |   | 69,275    |  
|Loss from divestiture of business          |  |                   | 12,125    |   |            |   |                          |  |   |          |   |  |   | 12,125    |  
|Operating income (loss)                    |  |                   | 251,910   |   |            |   | 11,201                   |  | $ | (158,395 | ) |  |   | 104,716   |  
|Interest expense, net                      |  |                   |           |   |            |   |                          |  |   | 19,748   |   |  |   | 19,748    |  
|Income before taxes                        |  |                   |           |   |            |   |                          |  |   |          |   |  |   | 81,749    |  



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



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



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



13. CONTINGENCIES



We are involved in a number of environmental remediation actions to investigate and clean up certain sites related to our discontinued operations in
accordance with applicable federal and state laws. Uncertainties about the status of laws and regulations, technology and information related to individual sites, including the magnitude of possible contamination, the timing and extent of required
corrective actions and proportionate liabilities of other responsible parties, make it difficult to develop a meaningful estimate of probable future remediation costs. While the actual costs of remediation at these sites may vary from
managements estimate because of these uncertainties, we had accrued balances, included in other long-term liabilities in our consolidated balance sheets, of $7,824 and $7,928 as of March 31, 2005 and September 30, 2004, respectively, for our
environmental liabilities, and the accrual is based on managements best estimate of the aggregate environmental exposure. The measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each
individual site and considers factors such as existing technology, presently enacted laws and regulations, prior experience in remediation of contaminated sites, and any studies performed for a site. As assessments and remediation progress at
individual sites, these liabilities are reviewed and adjusted to reflect additional technical and legal information that becomes available. After consideration of the defenses available to us, the accrual for such exposure, insurance coverage, and
other responsible parties, management does not believe that its obligations to remediate these sites would have a material adverse effect on our consolidated financial statements.



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



During fiscal 2005 and 2004, we did not incur any costs for environmental
capital projects, but incurred various costs in conjunction with our obligations under consent decrees, orders, voluntary remediation plans, settlement agreements, and other actions to comply with environmental laws and regulations. For the six
months



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



ended March 31, 2005 and March 31, 2004, these costs were $164 and $216, respectively. All costs were charged against the related environmental accrual. We
will continue to incur expenses in order to comply with our obligations under consent decrees, orders, voluntary remediation plans, settlement agreements, and other actions to comply with environmental laws and regulations.



We have an accrual related to black lung and workers compensation
liabilities relating to the operations of a former subsidiary, Barnes & Tucker Company (B&T). B&T owned and operated coalmines throughout Pennsylvania. We sold B&T in 1986. In connection with the sale, we entered into a
financing agreement with B&T whereby we agreed to reimburse B&T for 95% of all costs and expenses incurred by B&T for black lung and workers compensation liabilities, until such liabilities were extinguished. From 1986 through
2000, we reimbursed B&T in accordance with the terms of the financing agreement. In 2000, B&T filed for bankruptcy protection under Chapter 11. The bankruptcy court approved a plan of reorganization that created a black lung trust and a
workers compensation trust to handle the administration of all black lung and workers compensation claims relating to B&T. We now reimburse the trusts for 95% of the costs and expenses incurred by the trusts for black lung and
workers compensation claims. As of March 31, 2005 and September 30, 2004, our accrual for black lung and workers compensation liabilities related to B&T was $11,755 and $12,384, respectively, and was reflected in the consolidated
balance sheets as part of other long-term liabilities.



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



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



As a result of the U.S. Transaction, we agreed to indemnify GE with respect to certain liabilities that may arise in connection with business activities that occurred prior to the completion of the U.S. Transaction or
that may arise in connection with leases sold to GE under the U.S. Program Agreement. If GE were to incur a liability or have a liability increase as a result of a successful claim, pursuant to the terms of the indemnification, we would be required
to reimburse GE for the full amount of GEs damages; provided, that for certain successful claims, we would only be required to reimburse GE for damages in excess of $20,000, but not to exceed, in the aggregate, $2,000,000. These
indemnification obligations generally relate to recourse on different types of lease receivables sold to GE that could potentially become uncollectible. In the event that all lease receivables for which we have indemnified GE become uncollectible,
the maximum potential loss we could incur as a result of these indemnifications at March 31, 2005 was $254,642. Based on our analysis of historical losses for these types of leases, we had recorded reserves totaling approximately $460 at March 31,
2005. The equipment leased to the customers related to the above indemnifications represents collateral which we would be entitled to recover and could be remarketed by us. No specific recourse provisions exist with other parties related to assets
sold under the U.S. Program Agreement.



We guarantee an
industrial revenue bond in Covington, Tennessee relating to The Delfield Company (Delfield), a former subsidiary of Alco Standard (our predecessor company). This bond matures in full on September 1, 2006. We have not accrued any
liability with respect to this guarantee based on our analysis of Delfields ability and intent to make payment or refinance the bond. In the event Delfield defaults on the bond, we would be required under the agreement to make payment to the
lender. As of March 31, 2005, the maximum amount that we would be required to pay the lender is $3,150.



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



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



14. PENSION PLANS



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



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



|                                              |  |                             |        |   |               |   |       |           |  |   |               |   |  |   |       |  
|--------------------------------------------- |  | --------------------------- | ------ | - | ------------- | - | ----- | --------- |  | - | ------------- | - |  | - | ----- | -
|                                              |  | Three Months Ended March 31 |       
|                                              |  | 2005                        |        |   | 2004          |  
|                                              |  | U.S.Plans                   |        |   | Non-U.S.Plans |   |       | U.S.Plans |  |   | Non-U.S.Plans |  
|Service cost                                  |  | $                           | 7,033  |   |               | $ | 1,071 |           |  | $ | 7,714         |   |  | $ | 1,037 |  
|Interest cost on projected benefit obligation |  |                             | 8,107  |   |               |   | 974   |           |  |   | 7,666         |   |  |   | 803   |  
|Expected return on assets                     |  |                             | (7,502 | ) |               |   | (949  | )         |  |   | (5,666        | ) |  |   | (741  | )
|Amortization of net obligation                |  |                             |        |   |               |   | 9     |           |  |   |               |   |  |   | 9     |  
|Amortization of prior service cost            |  |                             | 142    |   |               |   | 2     |           |  |   | 142           |   |  |   | 1     |  
|Recognized net actuarial loss                 |  |                             | 1,892  |   |               |   | 164   |           |  |   | 2,628         |   |  |   | 226   |  
|                                              |  |                             |        |   |               |   |       |           |  |   |               |   |  |   |       |  
|Net periodic pension cost                     |  | $                           | 9,672  |   |               | $ | 1,271 |           |  | $ | 12,484        |   |  | $ | 1,335 |  
|                                              |  |                             |        |   |               |   |       |           |  |   |               |   |  |   |       |  



|                                              |  |                           |         |   |               |   |        |            |  |   |               |   |  |   |        |  
|--------------------------------------------- |  | ------------------------- | ------- | - | ------------- | - | ------ | ---------- |  | - | ------------- | - |  | - | ------ | -
|                                              |  | Six Months Ended March 31 |        
|                                              |  | 2005                      |         |   | 2004          |  
|                                              |  | U.S. Plans                |         |   | Non-U.S.Plans |   |        | U.S. Plans |  |   | Non-U.S.Plans |  
|Service cost                                  |  | $                         | 14,066  |   |               | $ | 2,138  |            |  | $ | 15,428        |   |  | $ | 2,048  |  
|Interest cost on projected benefit obligation |  |                           | 16,214  |   |               |   | 1,940  |            |  |   | 15,332        |   |  |   | 1,569  |  
|Expected return on assets                     |  |                           | (15,004 | ) |               |   | (1,889 | )          |  |   | (11,332       | ) |  |   | (1,445 | )
|Amortization of net obligation                |  |                           |         |   |               |   | 19     |            |  |   |               |   |  |   | 17     |  
|Amortization of prior service cost            |  |                           | 284     |   |               |   | 3      |            |  |   | 284           |   |  |   | 3      |  
|Recognized net actuarial loss                 |  |                           | 3,784   |   |               |   | 325    |            |  |   | 5,256         |   |  |   | 438    |  
|                                              |  |                           |         |   |               |   |        |            |  |   |               |   |  |   |        |  
|Net periodic pension cost                     |  | $                         | 19,344  |   |               | $ | 2,536  |            |  | $ | 24,968        |   |  | $ | 2,630  |  
|                                              |  |                           |         |   |               |   |        |            |  |   |               |   |  |   |        |  



As of March 31, 2005,
$9,942 of contributions had been made. During the third quarter of fiscal 2005, we made a contribution to our U.S. defined benefit pension plan of $31,200. We do not expect to make additional contributions during fiscal 2005.



15. FINANCIAL INSTRUMENTS



As of March 31, 2005, all of our derivatives designated as hedges are
interest rate swaps which qualify for evaluation using the short cut method for assessing effectiveness. As such, there is an assumption that the interest rate swaps are fully effective. We use interest rate swaps to fix the interest
rates on our variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the six months ended March 31, 2005, unrealized gains totaling $382, after taxes, were recorded in
accumulated other comprehensive income.



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IKON OFFICE SOLUTIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)



16. ASSETS AND LIABILITIES HELD FOR SALE



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



At March 31, 2005, all
criteria for classification of assets and liabilities as held for sale as defined by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) for IKON France had been met. In accordance with
SFAS 144, an estimate of assets and liabilities to be sold have been reclassified from various line items within the balance sheet and aggregated into Assets Held for Sale and Liabilities Held for Sale. The following
represents the major classes of assets and liabilities held for sale at March 31, 2005. These amounts will continue to change due to normal account activity from March 31, 2005 and the closing date of the transactions, and the results of final
negotiations.



|                                          |  |                 |       
|----------------------------------------- |  | --------------- | ------
|                                          |  | Carrying Amount
|Assets                                    |  |                 |       
|Accounts receivable, less allowance       |  | $               | 7,289 
|Finance receivables, less allowance       |  |                 | 3,602 
|Inventories                               |  |                 | 2,745 
|Prepaid expenses and other current assets |  |                 | 4,521 
|Equipment on operating leases, net        |  |                 | 150   
|Property and equipment, net               |  |                 | 1,088 
|Goodwill                                  |  |                 | 9,828 
|Other assets                              |  |                 | 1,109 
|                                          |  |                 |       
|Assets held for sale                      |  | $               | 30,332
|                                          |  |                 |       
|Liabilities                               |  |                 |       
|Trade accounts payable                    |  | $               | 9,770 
|Accrued salaries, wages and commissions   |  |                 | 7,697 
|Taxes payable                             |  |                 | 4,268 
|Long-term debt                            |  |                 | 4,218 
|                                          |  |                 |       
|Liabilities held for sale                 |  | $               | 25,953
|                                          |  |                 |       



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



OVERVIEW



IKON Office Solutions, Inc. (IKON or the Company) delivers integrated document management solutions and systems, enabling
customers to improve document workflow and increase efficiency. We are the worlds largest independent channel for copier, printer and multifunction product (MFP) technologies, integrating best-in-class systems from leading
manufacturers, such as Canon, Ricoh, Konica Minolta, EFI, and HP, and document management software from companies such as Captaris, EMC (Documentum), Kofax, and others, to deliver tailored, high-value solutions implemented and supported by our
services organization-Enterprise Services. We offer financing in North America through a program agreement (the U.S. Program Agreement) with IKON Financial Services, a wholly owned subsidiary of General Electric Capital Corporation
(GE), and a rider to the U.S. Program Agreement (the Canadian Rider) with GE in Canada. We entered into the U.S. Program Agreement and Canadian Rider as part of the sale of certain assets and liabilities of our U.S. leasing
business to GE (the U.S. Transaction) and our Canadian lease portfolio (the Canadian Transaction, and together with the U.S. Program Agreement, the Canadian Rider and the U.S. Transaction, the Transactions),
respectively. We represent one of the industrys broadest portfolios of document management services, including professional services, on-site managed services, legal document services, customized workflow solutions, and comprehensive support
through our service force of 15,600 employees, including our team of 7,000 customer service technicians and support resources worldwide. We have approximately 450 locations throughout North America and Western Europe.



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



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



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



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



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



Operating leverage requires
that we continue to lower our overall cost-to-serve and improve both sales and administrative productivity through centralization and process and system enhancements. In particular, we are focused on reducing our selling and administrative expenses
to more competitive levels, and have established a fiscal 2005 target for selling and administrative expense as a percentage of revenues of one percentage point below fiscal year 2004 levels. In the second quarter of fiscal 2005, selling and
administrative expense as a percentage of revenue was 31.6% compared to 32.0% a year ago. We had a headcount decline of over 1,700 employees in the second quarter of fiscal 2005, of which many were directly attributed to the actions we took during
the quarter to reduce costs and improve operational efficiency, including exiting our Business Document Services (BDS) unit, reducing the number of our Legal Document Services (LDS) sites, reorganizing our field structure in
North America through expansion of geographic coverage for certain area vice presidents and reducing other corporate staff, and selling substantially all of our operations in Mexico. In addition, on May 23, 2005, we announced our entry into a
definitive Share Sale Agreement with NRG France S.A.S. for the sale of our French subsidiary, IKON Office Solutions S.A.S. The completion of the divestiture occurred in the fourth quarter of fiscal year 2005. We expect to continue to support key
accounts and pan-European accounts with a continued but downscaled presence in France, similar to our new model in Mexico. Finally, we have taken several measures during the second quarter to improve our billing process, which is critical in
attaining our operational leverage objective.



Core growth has
three points of focus: improvement of sales effectiveness in all market segments; gain of market share in underrepresented markets; and the targeting of product segments in which demand is growing the fastest. A top priority for us in fiscal 2005 is
our implementation of the integrated selling model (ISM), which



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is designed to provide sales coverage on a lower-cost-to-serve basis through the use of professional phone-based sales representatives working in concert
with our field-based representatives. We believe this model will also improve our retention of small to medium-sized customers while at the same time providing us with added sales capacity for higher-end selling solutions. By the end of the second
quarter of fiscal 2005, we completed the launch of the ISM across North America and now have 276 trained account executives in place to support the model. Also during the second quarter of fiscal 2005, we continued to strengthen our share of the
market encompassing Fortune 500 and large global and private companies (through our National Account Program) as we added 13 new contracts to this focus area. To ensure that we capture the fastest growing product technologies, we
continue to strengthen our color equipment portfolio with a diversified mixture of products. Color equipment revenues grew 8% in the second quarter of fiscal 2005 compared to the same period of fiscal 2004, as sales for production color equipment
reached an all-time high in March.



We are expanding into
adjacent markets, such as Europe, and new service opportunities within Enterprise Services that differentiate and build solidly on our core business, which involves equipment sales and the ongoing volume in services and supplies that those sales
generate. In Europe, our City Strategy focuses on expansion into key cities throughout Europe as we commenced operations in three additional cities, Milan, Barcelona, and Geneva in fiscal 2005. In the second quarter of fiscal 2005, revenues in
Europe increased 5% compared to the same period a year ago. Within Enterprise Services, Professional Services is a key growth opportunity for us. In the second quarter of fiscal 2005, we experienced an increase in Professional Services revenues of
7%, compared to the second quarter of fiscal 2004, as our Professional Services team delivered four times as many document strategy assessments as in fiscal 2004, leading the way for our customers to implement new workflow solutions and fleet
management strategies to improve their productivity and return on investment.



For the second quarter of fiscal 2005, we had revenues of $1.1 billion, representing a 5.9% decline from the second quarter of fiscal 2004. This decline was due in large measure to lower Customer Services revenues,
lower Managed Services revenues and our transition out of the North American leasing operations in fiscal 2004 and the decrease in high-margin revenues previously recognized from that business. Diluted earnings per share from continuing operations
for the second quarter of fiscal 2005 were $0.06. Refer to Results of Operations for further discussion of our quarterly financial statements.



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RESULTS OF OPERATIONS



This discussion reviews the results of our operations as reported in the consolidated statements of income. All dollar and
share amounts are in thousands, except per share data. Unless otherwise noted, references to 2005 and 2004 in the section relating to the three months ended March 31, 2005 refer to the three months ended March 31, 2005 and 2004, respectively, and
references to 2005 and 2004 in the section relating to the six months ended March 31, 2005 refer to the six months ended March 31, 2005 and 2004, respectively. Read the following together with the Notes to Condensed Consolidated Financial Statements
including Note 2. Restatement of Previously Issued Financial Statements.



Three Months Ended March 31, 2005

Compared to the Three Months Ended March 31, 2004



Revenues



|               |  |      |           |              |   |           |  |       |   
|-------------- |  | ---- | --------- | ------------ | - | --------- |  | ----- | --
|               |  | 2005 |           | Restated2004 |   | Change    | 
|Net sales      |  | $    | 495,716   |              | $ | 485,985   |  | 2.0   | % 
|Services       |  |      | 568,898   |              |   | 576,883   |  | (1.4  | ) 
|Finance income |  |      | 27,659    |              |   | 98,259    |  | (71.9 | ) 
|               |  |      |           |              |   |           |  |       |   
|               |  | $    | 1,092,273 |              | $ | 1,161,127 |  | (5.9  | )%
|               |  |      |           |              |   |           |  |       |   



The decrease in
revenues of 5.9%, compared to the second quarter of fiscal 2004, which includes a currency benefit of 0.8% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is a result of an
overall decrease in finance income as a result of the sale of our North American leasing business, lower equipment revenues in North America, and lower Customer Service revenues. These decreases were partially offset by an increase in net sales and
services as a result of benefits realized from fees received under the U.S. Program Agreement and the Canadian Rider.



Net sales includes revenues from the sale of copier/printer multifunction equipment, direct supplies, and technology hardware. The increase in net sales
includes a currency benefit of 0.9%. Equipment revenue of $457,745 increased by approximately 5.1%, or $22,300, compared to the same period in fiscal 2004 due mainly to the net impact of the relationship with GE, continued growth from the sale of
color equipment, and strong equipment sales in Europe. Origination fees from, and sales of residual value to, GE (not recognized as revenue when we had captive finance subsidiaries in North America) contributed $38,090 of equipment revenue during
the second quarter of fiscal 2005. As a result, equipment revenue would have decreased by approximately 3.4% excluding the impact of the origination fees and sales of residual value. Consistent with our City Expansion strategy, European equipment
revenues increased by 12.4%, or by $7,471, compared to the second quarter of fiscal 2004, while North American equipment sales declined due to continued competitive pressure, and the impact of newly introduced black and white models positioned at
lower average selling prices. Revenues generated from the sale of color devices increased by 8% compared to the second quarter of fiscal 2004, due to higher demand for these products, particularly higher-end color production equipment, as new
products continued to be introduced at more affordable prices. As a percentage of equipment revenue, color devices increased from approximately 21% in the second quarter of fiscal 2004 to approximately 23% in the second quarter of fiscal 2005.
Revenues from the sale of segment 5 and 6 black and white production equipment (devices with page outputs greater than 70 pages per minute) decreased approximately 10% compared to the second quarter of fiscal 2004 due to continued pricing pressure,
a shift to lower-end products within this segment, and new alternate products available in segment 4. However, during the second quarter of fiscal 2005, we continued to experience strong performance in the high-end of segment 6 equipment sales.
Sales of segment 1  4 black and white office equipment (devices with page outputs less than 70 pages per minute, fax and other equipment) declined approximately 5% compared to the second quarter of fiscal 2004. This decrease was attributable
to



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lower demand for these products compared to the same period in the prior year, due in part to the shift of sales focus to color devices and lower average
selling prices for these products. As of March 31, 2005, sales of black and white office equipment represented 58% of equipment revenue, compared to 59% at March 31, 2004. Direct supply sales of $30,230 decreased by approximately 14.4%, or $5,099,
compared to the second quarter of fiscal 2004, due to lower demand for fax and lower-end copier supplies.



Services is comprised of Enterprise Services and Other Services. Enterprise Services consists of Managed Services, which provides: on-site and off-site
outsourcing services and other expertise; Customer Services (equipment service); and Professional Services, which focuses on integrating hardware and software technologies that capture, manage, control, and store output for customers document
lifecycles. Other Services includes rental income on operating leases; income from the sharing of gains on certain lease-end activities with GE in the U.S.; and fees received from GE for providing preferred services for lease generation in the U.S.
(the Preferred Fees). Services decreased by 1.4% including a currency benefit of approximately $3,854. Excluding the impact of currency translation, services decreased by approximately 2.1%. Managed Services revenues of $162,270, which
includes both on-site Managed Services and Legal Document Services, decreased by $4,216, or 2.5%. Off-site Managed Services of $44,452, which is primarily comprised of our Legal Document Services unit, a short-cycle and increasingly competitive
transactional business, declined by approximately $10,034, compared to the second quarter of fiscal 2004, due mainly to the impact of the restructuring actions we took during the second quarter of fiscal 2005 which involved the closure of 17 sites.
On-site Managed Services revenues of $117,818 grew 5.2%, or by $5,818, from the prior year, due to an increase in new contracts and an improved retention rate. Customer Services revenues (which are significantly impacted by the amount and mix of
copy volumes) decreased by $20,071, or 5.6%, compared to the second quarter of fiscal 2004, attributable mainly to a decrease in average revenue per copy, the impact of specific concessions made to customers during the second quarter of fiscal 2005,
partially offset by an increase in copy volume of approximately 1%. Professional Services increased 7.1%, or by $1,510, compared to the second quarter of fiscal 2004 as a result of our continued focus on providing customers with digital technologies
to reduce their costs and improve workflow. We believe that our new solutions portfolio, expanded sales coverage, and incentives built into our commission structure will continue to fuel growth into this important area during the remainder of fiscal
2005. A significant impact to services revenue was the impact of fees received as a result of the GE relationship, including Preferred Fees of $12,691 during the second quarter of fiscal 2005, partially offset by the impact of lease-end activities
of approximately $7,269. We expect to earn approximately $50,000 of Preferred Fees annually until the initial term of the U.S. Program Agreement terminates on March 31, 2009. Rental revenue decreased by $4,944, or 21.0%, compared to the second
quarter of fiscal 2004, due primarily from the sale of $38,900 of rental assets to GE on March 31, 2004.



Finance income is generated by our leasing subsidiaries, as well as by certain lease receivables not sold to GE as part of the U.S. Transaction. The
decrease in finance income was due primarily to the impact of the sale of $2,027,832 of lease receivables to GE during fiscal 2004 as part of the Transactions. Accordingly, lease receivables sold as part of the Transactions did not generate finance
income for us during the second quarter of fiscal 2005. This decrease was partially offset by a currency benefit of 0.7%. Although we will continue to receive finance income under certain leases that will be financed directly by us, our total
finance income will continue to decrease in future periods as a result of the Transactions. In fiscal 2005, we expect finance income to decline approximately 60% compared to fiscal 2004 as a result of the Transactions and the continued run-off of
the retained U.S. lease portfolio.



Gross Margin



|                             |  |      |   |  |              |  
|---------------------------- |  | ---- | - |  | ------------ | -
|                             |  | 2005 |   |  | Restated2004 |  
|Gross margin, net sales      |  | 27.7 | % |  | 28.4         | %
|Gross margin, services       |  | 39.4 |   |  | 39.5         |  
|Gross margin, finance income |  | 74.7 |   |  | 65.1         |  
|Gross margin, total          |  | 35.0 |   |  | 37.0         |  



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The decrease in the gross margin percentage on net sales was due to a less favorable mix of equipment,
growth in lower-margin National Account Program revenues, and continued market competitiveness. In addition, the net impact of origination fees and sales of equipment residual values to GE negatively impacted the net sales gross margin by
approximately 17 basis points.



The gross margin percentage on
services remained relatively constant when comparing the three months ended March 31, 2005 to the three months ended March 31, 2004. Off-site Managed Services margins declined compared to the second quarter of fiscal 2004 due to the impact of lower
revenues. The off-site Managed Services cost structure is less variable than our other lines of business; therefore, gross margin percentages are more heavily influenced by changes in revenue. As a result of the actions we took late in the second
quarter of fiscal 2005 to reduce the variability of the cost structure of off-site Managed Services, we expect profit margin percentages for off-site Managed Services to improve during the remainder of fiscal 2005. Professional Services margins
declined as a result of our increase in staffing in advance of our expected increase in demand. Customer Services gross margin increased due to the impact of mix, partially offset by the impact of specific concessions made to customers during the
second quarter of fiscal 2005. These decreases were offset by the net impact of the GE relationship (income from the sharing of gains on certain lease-end activities with GE as well as the Preferred Fees), which positively impacted the services
gross margin percentage by approximately 68 basis points.



The
gross margin percentage on finance income increased from 65.1% in the second quarter of fiscal 2004 to 74.7% in the second quarter of fiscal 2005 due to European leasing revenues becoming a larger part of the finance income mix in fiscal 2005
compared to fiscal 2004. Because European leases are leveraged with a lower amount of debt, European leases generate higher profit margins than our sold North American leases. In addition, there was a lower leverage ratio on the U.S. lease
receivable portfolio after the U.S. Transaction during the second quarter of fiscal 2005 compared to the second quarter of fiscal 2004. Part of this lower leverage was due to the fact that $5,721 of interest expense recorded in Interest
expense, net during fiscal 2005 related to debt that was reclassified from debt supporting finance contracts and unsold residual value (Non-Corporate Debt) to corporate debt beginning on April 1, 2004. Prior to April 1, 2004,
interest costs of the Non-Corporate Debt were recorded in finance interest expense. As a result, the gross margin on finance income was positively impacted by this change in classification. In fiscal 2005, we expect finance income to decline
approximately 60% compared to fiscal 2004 as a result of the Transactions and the continued run-off of the retained U.S. lease portfolio. By September 30, 2005, we believe that approximately 83% of the gross profit we estimated would be generated by
the retained U.S. lease portfolio as of the consummation of the U.S. Transaction will have been earned.



Selling and Administrative Expenses



|                                    |  |      |         |   |              |   |         |        |  |      |   
|----------------------------------- |  | ---- | ------- | - | ------------ | - | ------- | ------ |  | ---- | --
|                                    |  | 2005 |         |   | Restated2004 |   |         | Change | 
|Selling and administrative expenses |  | $    | 345,469 |   |              | $ | 371,320 |        |  | (7.0 | )%
|S&A as a % of revenue               |  |      | 31.6    | % |              |   | 32.0    | %      |  |      |   



Selling and
administrative expense, which was unfavorably impacted by $2,288 due to foreign currency translation, decreased by $25,851 or 7.0%, during the second quarter fiscal 2005 compared to the second quarter of fiscal 2004, and decreased from 32.0% to
31.6% as a percentage of revenue.



The net impact of
the Transactions of $18,485 was a significant factor of the decrease in selling and administrative expense compared to fiscal 2004. Approximately $11,190 of this decrease was due to no lease default expense being required for either retained or sold
lease receivables of IOS Capital LLC, our former leasing subsidiary in the U.S. (IOSC), during the second quarter of fiscal 2005. Under the terms of the U.S. Program Agreement, GE assumed substantially all risks related to lease defaults
for both the retained and sold lease receivables of IOSC. The remaining decrease in selling and administrative expense attributable to the Transactions was due to the transfer of over 300 employees to GE. Partially offsetting these decreases were
increases in corporate costs to support the Transactions, including headcount and certain infrastructure enhancements.



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



| |  |  | A decrease of $6,150 in selling compensation and benefits costs due primarily to average headcount reductions and a decline in revenues compared to fiscal 2004;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease in pension costs of $1,524 compared to the second quarter of fiscal 2004, due mainly to the impact of changes in actuarial assumptions compared to fiscal 2004. Pension
expense is allocated between selling and administrative expense and cost of revenues based on the number of employees related to those areas. We expect that our total fiscal 2005 pension expense will decrease compared to fiscal 2004;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $4,216 as a result of lower spending for information technology, travel, and other expenses due to discretionary spending reductions during fiscal 2005, partially
offset by higher consulting fees from our Sarbanes-Oxley internal control certification efforts; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $2,168 related to cost incurred to terminate seven real estate leases during the second quarter of fiscal 2005. These costs represent both lease termination payments
made to lessors as well as future lease payments for locations in which we ceased using the facility.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Other



|                                                        |  |      |        |   |              |   |        |        |  |        |   
|------------------------------------------------------- |  | ---- | ------ | - | ------------ | - | ------ | ------ |  | ------ | --
|                                                        |  | 2005 |        |   | Restated2004 |   |        | Change | 
|(Gain) loss from divestiture of businesses              |  | $    | (1,901 | ) |              | $ | 12,125 |        |  | (115.7 | )%
|Asset impairments                                       |  |      | 313    |   |              |   |        |        |  | 100.0  |   
|Restructuring                                           |  |      | 11,396 |   |              |   |        |        |  | 100.0  |   
|Operating income                                        |  |      | 26,936 |   |              |   | 46,645 |        |  | (42.3  | ) 
|Loss from early extinguishment of debt                  |  |      | 1,734  |   |              |   | 3,146  |        |  | (44.9  | ) 
|Interest expense, net                                   |  |      | 10,507 |   |              |   | 9,662  |        |  | 8.7    |   
|Taxes on income                                         |  |      | 5,640  |   |              |   | 5,399  |        |  | 4.5    |   
|Net income from continuing operations                   |  |      | 9,055  |   |              |   | 28,438 |        |  | (68.2  | ) 
|Diluted earnings per common share-continuing operations |  |      | 0.06   |   |              |   | 0.19   |        |  | (68.4  | ) 
|Net loss from discontinued operations                   |  |      | (8,675 | ) |              |   | (1,180 | )      |  | 635.2  |   
|Diluted loss per common share-discontinued operations   |  |      | (0.06  | ) |              |   | (0.01  | )      |  | 500.0  |   



During the second
quarter of fiscal 2005, we recognized a net gain of $1,901 as a result of the completion of the closing balance sheet audit related to the U.S. Transaction, the sale of substantially all of our operations in Mexico, and the sale of two small
business units that provided technology equipment and services to customers. During the second quarter of fiscal 2004, we recognized a loss of $12,125 as a result of the U.S. Transaction.



During the three months ended March 31, 2005, we took several actions to reduce costs, increase productivity and improve
operating income. These actions involved our operations in BDS, LDS, our North American field organization and corporate staff, and Mexico. See pages 45-48 for a discussion relating to asset impairments and restructuring actions that we took during
the second quarter of fiscal 2005.



Operating income decreased
in fiscal 2005 by 42.3% compared to fiscal 2004, as a result of the factors discussed above.



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During the three months ended March 31, 2005, we repurchased $44,925 of our 5% convertible subordinated
notes due 2007 (the Convertible Notes) for $45,938. As a result of these repurchases, we recognized a loss, including the write-off of unamortized costs, of $1,734 which is included in loss from the early extinguishment of debt in the
consolidated statements of income for the three months ended March 31, 2005. During the three months ended March 31, 2004, we recorded a loss from the early extinguishment of debt of $3,146, as a result of the repurchase of various debt instruments.



The increase in interest expense, net was primarily due to our
assumption of IOSCs public debt (the 2004 Notes, the Convertible Notes, and the 7.25% notes payable due 2008 (the 2008 Notes); collectively, the Additional Corporate Debt) as part of the U.S. Transaction. Interest on
this debt, which was reported in Finance interest expense prior to April 1, 2004, is now reported as Interest expense, net. This change resulted in approximately $5,721 of additional interest expense being recorded in
Interest expense, net compared to fiscal 2004. We expect to continue to experience a modest increase in Interest expense, net, as the Additional Corporate Debt will be included on this income statement line for the entire
2005 fiscal year, partially offset by the benefit of lower average outstanding balances of other debt during fiscal 2005.



The effective income tax rate was 38.38% and 15.96% for the second quarter of fiscal 2005 and 2004, respectively. The increase in the effective income tax
rate is due primarily to the impact of certain non-recurring items that reduced the rate in fiscal 2004. These items were the reversal of valuation allowances on state net operating loss carryovers of $4,720 as a result of the tax gain generated by
the U.S. Transaction during fiscal 2004 and the reversal of valuation allowances on our Canadian net operating loss carryovers of $2,603 as a result of improved financial performance achieved by our Canadian operations. In addition, the tax benefit
relating to the sale of our Mexican operations during the second quarter of fiscal 2005 was reduced due to capital loss limitations. The effective income tax rate for the remainder of fiscal 2005 is expected to be 36.75%, resulting in a full year
effective tax rate of 36.27%. This excludes any tax impact from the sale of our French operations.



Diluted earnings per common share from continuing operations were $0.06 for the second quarter of fiscal 2005, compared to $0.18 for the second quarter of
fiscal 2004. The decline in diluted earnings per share is mainly attributable to the impact of the asset impairments and restructuring activities during fiscal 2005, the impact of lower finance income, the impact of lower Customer Services revenues,
partially offset by the effect of lower outstanding shares and other operational changes compared to the second quarter of fiscal 2004.



Diluted losses per share from discontinued operations increased primarily as a result of the actions related to restructuring and asset impairments as
discussed on pages 45-48.



Review of Business Segments



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



IKON North America



|                                         |  |      |         |   |              |   |         |  |        |  
|---------------------------------------- |  | ---- | ------- | - | ------------ | - | ------- |  | ------ | -
|                                         |  | 2005 |         |   | Restated2004 |   | Change  | 
|Net sales                                |  | $    | 420,671 |   |              | $ | 413,711 |  | 1.7    | %
|Services                                 |  |      | 507,673 |   |              |   | 519,086 |  | (2.2   | )
|Finance income                           |  |      | 20,739  |   |              |   | 91,666  |  | (77.4  | )
|Finance interest expense                 |  |      | 5,293   |   |              |   | 32,762  |  | (83.8  | )
|(Gain) loss from divestiture of business |  |      | (1,901  | ) |              |   | 12,125  |  | (115.7 | )
|Asset impairments                        |  |      | 313     |   |              |   |         |  | 100.0  |  
|Restructuring                            |  |      | 11,396  |   |              |   |         |  | 100.0  |  
|Operating income                         |  |      | 90,516  |   |              |   | 124,718 |  | (27.4  | )



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



Net
sales increased by 1.7% due to an increase in equipment sales of 4.1%, or $15,315, compared to the same period in fiscal 2004 due mainly to the net impact of the relationship with GE and continued growth from the sale of color equipment. Origination
fees and sales of residual value to GE (not recognized as revenue when we had captive finance subsidiaries in North America) contributed $38,090 of equipment revenue during the second quarter of fiscal 2005. As a result, equipment revenue would have
decreased approximately 5.6% excluding the impact of the origination fees and sales of residual value. This decline was due to continued competitive pressure and the impact of newly introduced black and white models positioned at lower average
selling prices. Revenues generated from the sale of color devices increased compared to the second quarter of fiscal 2004 due to higher demand for these products, particularly higher-end color production equipment, as new products continued to be
introduced at more affordable prices. As a percentage of equipment revenue, sales of color devices increased during the second quarter of fiscal 2005 compared to the second quarter of fiscal 2004. These increases were offset by a decrease in the
sale of segment 5 and 6 black and white production equipment compared to the second quarter of fiscal 2004 due to continued pricing pressure, a shift to lower-end products within this segment and new alternate products available in segment 4.
However, during the second quarter of fiscal 2005, we continued to experience strong performance in the high-end of segment 6 equipment sales. Sales of segment 1  4 black and white office equipment declined compared to the second quarter of
fiscal 2004. This decrease was attributable to lower demand for these products compared to the same period in the prior year, due in part, to the shift of sales focus to color devices and lower average selling prices for these products. Direct
supply sales decreased by approximately 15.2% or $4,543 compared to the second quarter of fiscal 2004, due to lower demand for fax and lower-end equipment supplies.



Services decreased by 2.2% due primarily to a decrease in Managed Services revenues, which includes both on-site Managed
Services and Legal Document Services, of $3,952 or 2.6%, to $148,917. Off-site Managed Services of $44,452, which is primarily comprised of our Legal Document Services unit, a short-cycle and increasingly competitive transactional business, declined
by approximately $10,034 compared to the second quarter of fiscal 2004 due mainly to the impact of the restructuring actions we took during the second quarter of fiscal 2005 which involved the closure of 17 sites in North America. On-site Managed
Services revenues of $104,465 grew 6.2% or $6,082, from the prior year due to an increase in new contracts and an improved retention rate. Customer Services revenues decreased by $22,537 or 7.0% compared to the second quarter of fiscal 2004,
attributable mainly to a decrease in average revenue per copy and the impact of specific concessions made to customers during the second quarter of fiscal 2005. Rental revenue decreased by $4,935, or 22.3%, due primarily to the sale of $38,900 of
rental assets to GE on March 31, 2004. Off-setting these decreases to service revenues was the impact of fees received as a result of the GE relationship, including Preferred Fees of $12,961 during the second quarter of fiscal 2005 partially offset
by the impact of lease-end activities of approximately $7,269.



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



Operating income decreased primarily due to a decline in
finance income, lower equipment revenues and a decline in off-site Managed Services revenues compared to the second quarter of fiscal 2004, partially offset by the impact of the reclassification of the Additional Corporate Debt of $5,721.



IKON Europe



|                         |  |      |        |      |   |        |  |      |  
|------------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | -
|                         |  | 2005 |        | 2004 |   | Change | 
|Net sales                |  | $    | 75,045 |      | $ | 72,274 |  | 3.8  | %
|Services                 |  |      | 61,225 |      |   | 57,797 |  | 5.9  |  
|Finance income           |  |      | 6,920  |      |   | 6,593  |  | 5.0  |  
|Finance interest expense |  |      | 1,713  |      |   | 1,574  |  | 8.8  |  
|Operating income         |  |      | 7,861  |      |   | 6,109  |  | 28.7 |  



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Net sales include a currency benefit of approximately $2,271. Excluding the impact of currency
translation, net sales were flat compared to 2004. Equipment sales increased by 12.2%, compared to the second quarter of fiscal 2004 but was offset by decreases in direct supplies sales and de-emphasized technology hardware revenues of 10.1% and
42.6%, respectively. Services increased as a result of currency benefits of approximately $1,993. Excluding the impact of currency translation, services increased by 2.5% due to an increase in customer services revenues of 6.8% as a result of an
increase in copy volumes across Europe. Finance income increased primarily as a result of strengthened foreign currencies, which resulted in a benefit of $200. Operating income in the second quarter of fiscal 2005 increased due to the operational
performance discussed above and the favorable impact of currency.



Corporate
and Eliminations



Corporate and Eliminations, which is not
treated as a business segment, is comprised of certain selling and administrative functions including finance, supply chain, and customer service. INA and IE are not presented on a comparative basis because certain administrative costs of INA are
included in Corporate and Eliminations, and excluded from the presentation of results of INA, but are included in the presentation of results of IE. Operating losses in Corporate and Eliminations, were $71,441 and $84,182 in the second quarter of
fiscal 2005 and the second quarter of fiscal 2004, respectively.



Six Months Ended March 31, 2005

Compared to the Six Months Ended March 31, 2004



Revenues



|               |  |      |           |              |   |           |  |       |   
|-------------- |  | ---- | --------- | ------------ | - | --------- |  | ----- | --
|               |  | 2005 |           | Restated2004 |   | Change    | 
|Net sales      |  | $    | 960,413   |              | $ | 936,789   |  | 2.5   | % 
|Services       |  |      | 1,158,840 |              |   | 1,151,379 |  | 0.6   |   
|Finance income |  |      | 58,465    |              |   | 197,270   |  | (70.4 | ) 
|               |  |      |           |              |   |           |  |       |   
|               |  | $    | 2,177,718 |              | $ | 2,285,438 |  | (4.7  | )%
|               |  |      |           |              |   |           |  |       |   



The decrease in
revenues of 4.7%, compared to the six months ended March 31, 2004, which includes a currency benefit of 1.1% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is a result of an
overall decrease in finance income as a result of the sale of our North American leasing business, lower equipment revenues in North America, lower Managed Services revenue and lower Customer Services revenue. These decreases were partially offset
by an increase in net sales and services as a result of benefits realized from fees received under the U.S. Program Agreement and the Canadian Rider.



Net sales includes revenues from the sale of copier/printer multifunction equipment, direct supplies, and technology hardware. The increase in net sales
includes a currency benefit of 1.4%. Equipment revenue of $879,488, increased by approximately 4.7%, or $39,803, compared to the same period in fiscal 2004 due mainly to the net impact of the relationship with GE and continued growth from the sale
of color equipment. Origination fees from, and sales of residual value to, GE (not recognized as revenue when we had captive finance subsidiaries in North America) contributed $76,363 of equipment revenue during the six months ended March 31, 2005.
As a result, equipment revenue would have remained consistent with fiscal 2004 revenues, excluding the impact of the origination fees and sales of residual value. While European equipment revenues increased by 14.9%, or by $17,522, compared to
fiscal 2004, inline with our City Expansion strategy in Europe, North American equipment sales declined due to competitive pressures and the impact of the newly introduced black and white models positioned at lower average selling prices. In
addition, first quarter fiscal 2005 North American equipment revenues were impacted by changes in sales coverage, selling processes and incentives, as we



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launched important long-term initiatives in Professional Services and the new integrated selling model. Revenues generated from the sale of color devices
increased by 13% compared to fiscal 2004 due to higher demand for these products, particularly higher-end color production equipment, as new products continued to be introduced at more affordable prices. As a percentage of equipment revenue, color
devices increased from approximately 20% from the six months ended March 31, 2004 to approximately 23% in the same period in fiscal 2005. Revenues from the sale of segment 5 and 6 black and white production equipment (devices with page outputs
greater than 70 pages per minute) decreased approximately 14% compared to fiscal 2004 due to continued pricing pressure, a shift to lower-end products within this segment and new alternate products available in segment 4. However, during fiscal
2005, we experienced strong performance in the high-end of segment 6 equipment sales. Sales of segment 1  4 black and white office equipment (devices with page outputs less than 70 pages per minute, fax and other equipment) declined
approximately 5% compared to fiscal 2004. This decrease was attributable to lower demand for these products compared to the same period in the prior year, due in part to the shift of sales focus to color devices and lower average selling prices for
these products. As of March 31, 2005, sales of black and white office equipment represented 56% of equipment revenue, compared to 57% at March 31, 2004. Direct supply sales of $60,685 decreased by approximately 12%, or $8,515, compared to fiscal
2004, due to lower demand for fax and lower-end copier supplies.



Services is comprised of Enterprise Services and Other Services. Enterprise Services consists of Managed Services, which provides on-site and off-site outsourcing services and other expertise; Customer Services (equipment service); and
Professional Services, which focuses on integrating hardware and software technologies that capture, manage, control, and store output for customers document lifecycles. Other Services includes rental income on operating leases, income from
the sharing of gains on certain lease-end activities with GE in the U.S., and fees received from GE for providing preferred services for lease generation in the U.S. (the Preferred Fees). Services increased by 0.7% including a currency
benefit of approximately $10,997. Excluding the impact of currency translation, services decreased by approximately 0.3%. Managed Services revenues of $330,380, which includes both on-site Managed Services and Legal Document Services, decreased by
$14,576, or 4.2%. Off-site Managed Services, a short-cycle and increasingly competitive transactional business declined by approximately $27,060 compared to the six months ended March 31, 2004 due to pricing pressure, lower copy volumes and the
impact of a large commercial imaging contract during the first quarter of fiscal 2004 which benefited the first quarter of fiscal 2004 revenues by $10,119. On-site Managed Services revenues grew from the prior year, due to an increase in new
contracts and an improved retention rate. Customer Services revenues (which are significantly impacted by the amount and mix of copy volumes) decreased by $15,561, or 2.2%, compared to fiscal 2004, due to lower average revenue per copy and the
impact of specific concessions made to customers during the second quarter of fiscal 2005. Professional Services increased 10.7%, or by $2,818, compared to the six months ended March 31, 2004 as a result of continued focus on providing customers
with digital technologies to reduce their costs and improve workflow. We believe that our new solutions portfolio, expanded sales coverage, and incentives built into our commission structure will continue to fuel growth into this important area
during the remainder of fiscal 2005. A significant contribution to the services increase was the impact of fees received as a result of the GE relationship, including Preferred Fees of $25,368 during the six months ended March 31, 2005, partially
offset by the impact of lease-end activities of approximately $14,513. We expect to earn approximately $50,000 of Preferred Fees annually until the initial term of the U.S. Program Agreement terminates on March 31, 2009. Rental revenue decreased by
$8,114, or 17.7%, compared to the six months ended March 31, 2004, due primarily from the sale of $38,900 of rental assets to GE on March 31, 2004.



Finance income is generated by our leasing subsidiaries, as well as by certain lease receivables not sold to GE as part of the U.S. Transaction. The
decrease in finance income was due primarily to the impact of the sale of $2,027,832 of lease receivables to GE during fiscal 2004 as part of the Transactions. Accordingly, lease receivables sold as part of the Transactions did not generate finance
income for us during the six months ended March 31, 2005. This decrease was partially offset by a currency benefit of 1.3%. Although we will continue to receive finance income under certain leases that will be financed directly by us, our total
finance income will



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continue to decrease in future periods as a result of the Transactions. In fiscal 2005, we expect finance income to decline approximately 60% compared to
fiscal 2004 as a result of the Transactions and the continued run-off of the retained U.S. lease portfolio.



Gross Margin



|                             |  |      |   |  |              |  
|---------------------------- |  | ---- | - |  | ------------ | -
|                             |  | 2005 |   |  | Restated2004 |  
|Gross margin, net sales      |  | 28.3 | % |  | 28.9         | %
|Gross margin, services       |  | 39.8 |   |  | 39.9         |  
|Gross margin, finance income |  | 74.5 |   |  | 64.9         |  
|Gross margin, total          |  | 35.6 |   |  | 37.5         |  



The decrease in the
gross margin percentage on net sales was due to a less favorable mix of equipment revenues, growth in lower-margin National Account Program revenues, and continued market competitiveness. In addition, the net impact of origination fees and sales of
equipment residual values to GE negatively impacted the net sales gross margin by approximately 23 basis points.



The gross margin percentage on services remained relatively flat compared to the six months ended March 31, 2004. However, the services gross margin
percentage during fiscal 2004 was negatively impacted by 35 basis points from the completion of a multi-year commercial imaging contract in which no profit was earned. Off-site Managed Services margins declined compared to fiscal 2004 due to the
impact of lower revenues. The off-site Managed Services cost structure is less variable than our other lines of business; therefore, gross margin percentages are more heavily influenced by changes in revenue. As a result of the actions we took late
in the second quarter of fiscal 2005 to reduce the variability and of the cost structure of off-site Managed Services, we expect profit margin percentages for off-site Managed Services to improve during the remainder of fiscal 2005. Professional
Services margins declined as a result of our increase in staffing in advance of our expected increase in demand. Customer Services gross margin increased due to the impact of mix, partially offset by impact of specific concessions made to customers
during the second quarter of fiscal 2005. These decreases were offset by the net impact of the GE relationship (income from the sharing of gains on certain lease-end activities with GE as well as the Preferred Fees), which positively impacted the
services gross margin percentage by approximately 15 basis points.



The gross margin percentage on finance income increased from 64.9% in the second quarter of fiscal 2004 to 74.5% in the second quarter of fiscal 2005 due to European leasing revenues becoming a larger part of the finance income mix in
fiscal 2005 compared to fiscal 2004. Because European leases are leveraged with a lower amount of debt, European leases generate higher profit margins than our sold North American leases. In addition, there was a lower leverage ratio on the U.S.
lease receivable portfolio after the U.S. Transaction during fiscal 2005 compared to fiscal 2004. Part of this lower leverage was due to the fact that $11,700 of interest expense recorded in Interest expense, net during fiscal 2005
related to debt that was reclassified from Non-Corporate Debt to corporate debt beginning on April 1, 2004. Prior to April 1, 2004, interest costs of the Non-Corporate Debt were recorded in finance interest expense. As a result, the gross margin on
finance income was positively impacted by this change in classification. In fiscal 2005, we expect finance income to decline approximately 60% compared to fiscal 2004 as a result of the Transactions and the continued run-off of the retained U.S.
lease portfolio. By September 30, 2005, we believe that approximately 83% of the gross profit we estimated would be generated by the retained U.S. lease portfolio as of the consummation of the U.S. Transaction will have been earned.



Selling and Administrative Expenses



|                                    |  |      |         |   |              |   |         |        |  |      |   
|----------------------------------- |  | ---- | ------- | - | ------------ | - | ------- | ------ |  | ---- | --
|                                    |  | 2005 |         |   | Restated2004 |   |         | Change | 
|Selling and administrative expenses |  | $    | 692,006 |   |              | $ | 740,963 |        |  | (6.6 | )%
|S&A as a % of revenue               |  |      | 31.8    | % |              |   | 32.4    | %      |  |      |   



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Selling and administrative expense, which was unfavorably impacted by $6,480 due to foreign currency
translation compared to the prior year, decreased by $48,957, or 6.6%, during the six months ended March 31, 2005 compared to the six months ended March 31, 2004, and decreased from 32.4% to 31.8% as a percentage of revenue.



The net impact of the Transactions of $40,971 was a significant factor of the
decrease in selling and administrative expense compared to fiscal 2004. Approximately $22,485 of this decrease was due to no lease default expense being required for either retained or sold IOSC lease receivables during the six months ended March
31, 2005. Under the terms of the U.S. Program Agreement, GE assumed substantially all risks related to lease defaults for both the retained and sold lease receivables of IOSC. The remaining decrease in selling and administrative expense attributable
to the Transactions was due to the transfer of over 300 employees to GE. In addition, during the first quarter of fiscal 2005 we received a refund from GE of approximately $3,400 related to administrative fees paid to GE for servicing our retained
U.S. lease portfolio during fiscal 2004. Partially offsetting these decreases were increases in corporate costs to support the Transactions, including headcount and certain infrastructure enhancements.



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



| |  |  | A decrease in pension costs of $3,031 compared to the six months ended March 31, 2004, due mainly to the impact of changes in actuarial assumptions compared to fiscal 2004. Pension
expense is allocated between selling and administrative expense and cost of revenues based on the number of employees related to those areas. We expect that our total fiscal 2005 pension expense will continue to decrease compared to fiscal 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease in spending for information technology, travel, and other expenses of approximately $6,973 compared to fiscal 2004 as a result of discretionary spending reductions during
fiscal 2005; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $2,168 related to costs incurred to terminate seven real estate leases during the second quarter of fiscal 2005. These costs represent both lease termination payments
made to lessors as well as future lease payments for locations in which we ceased using the facility.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Other



|                                                        |  |      |        |   |              |   |         |        |  |        |   
|------------------------------------------------------- |  | ---- | ------ | - | ------------ | - | ------- | ------ |  | ------ | --
|                                                        |  | 2005 |        |   | Restated2004 |   |         | Change | 
|(Gain) loss from divestiture of businesses              |  | $    | (1,901 | ) |              | $ | 12,125  |        |  | (115.7 | )%
|Asset impairments                                       |  |      | 313    |   |              |   |         |        |  | 100.0  |   
|Restructuring                                           |  |      | 11,396 |   |              |   |         |        |  | 100.0  |   
|Operating income                                        |  |      | 73,873 |   |              |   | 104,716 |        |  | (29.5  | ) 
|Loss from early extinguishment of debt                  |  |      | 1,734  |   |              |   | 3,219   |        |  | (46.1  | ) 
|Interest expense, net                                   |  |      | 23,311 |   |              |   | 19,748  |        |  | 18.0   |   
|Taxes on income                                         |  |      | 17,408 |   |              |   | 23,546  |        |  | (26.1  | ) 
|Net income from continuing operations                   |  |      | 31,420 |   |              |   | 58,203  |        |  | (46.0  | ) 
|Diluted earnings per common share-continuing operations |  |      | 0.22   |   |              |   | 0.37    |        |  | (40.5  | ) 
|Net loss from discontinued operations                   |  |      | (9,801 | ) |              |   | (2,168  | )      |  | 352.1  |   
|Diluted loss per common share-discontinued operations   |  |      | (0.07  | ) |              |   | (0.01   | )      |  | 600.0  |   



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During fiscal 2005, we recognized a net gain of $1,901 as a result of the completion of the closing
balance sheet audit related to the U.S. Transaction, the sale of substantially all of our operations in Mexico, and the sale of two small business units that provided technology equipment and services to customers. During fiscal 2004, we recognized
a loss of $12,125 as a result of the U.S. Transaction.



During
the six months ended March 31, 2005, we took several actions to reduce costs, increase productivity and improve operating income. These actions involved our operations in Business Document Services (BDS), Legal Document Services
(LDS), our North American field organization and our corporate staff, and Mexico. See pages 45-48 for a discussion relating to asset impairments and restructuring actions that we took during fiscal 2005.



Operating income decreased in fiscal 2005 by 29.5% compared to fiscal 2004,
as a result of the factors discussed above.



During the six
months ended March 31, 2005, we repurchased $44,925 of the Convertible Notes for $45,938. As a result of these repurchases, we recognized a loss, including the write-off of unamortized costs, of $1,734 which is included in loss from the early
extinguishment of debt in the consolidated statements of income for the six months ended March 31, 2005. During the six months ended March 31, 2004, we recorded a loss from the early extinguishment of debt of $3,219, as a result of the repurchase of
various debt instruments.



The increase in interest expense,
net was primarily due to our assumption of the Additional Corporate Debt as part of the U.S. Transaction. Interest on this debt, which was reported in Finance interest expense prior to April 1, 2004, is now reported as Interest
expense, net. This change resulted in approximately $11,701 of additional interest expense being recorded in Interest expense, net for the six months ended March 31, 2005 compared to the same period in fiscal 2004. We expect to
continue to experience a modest increase in Interest expense, net, as the Additional Corporate Debt will be included on this income statement line for the entire 2005 fiscal year, partially offset by the benefit of lower average
outstanding balances of other debt during fiscal 2005.



The
effective income tax rate was 35.65% and 28.80% for the six months ended March 31, 2005 and 2004, respectively. The increase in the effective income tax rate is due primarily to certain non-recurring items that reduced the tax rate in fiscal 2004.
These items were the reversal of valuation allowances on state net operating loss carryovers of $4,720 as a result of the tax gain generated by the U.S. Transaction during fiscal 2004 and the reversal of valuation allowances on our Canadian net
operating loss carryovers of $2,603 as a result of improved financial performance achieved by our Canadian operations. In addition, the tax benefit relating to the sale of our Mexican operations during the second quarter of fiscal 2005 was reduced
due to capital loss limitations. Partially offsetting the increase in income tax expense is the deferral of depreciation expense for tax purposes in Ireland as a result of tax planning strategies. In particular, we have previously expensed
depreciable asset purchases in accordance with Irish tax law provisions. We are currently taxed at 10% of income; however, effective January 1, 2006, we will be taxed at 12.5% of income. During the first quarter of fiscal 2005, we determined that we
would not deduct depreciable asset purchases in fiscal 2004 and fiscal 2005. As a result, we will receive a tax benefit of 12.5% rather than 10% from the depreciation of these assets. The six months of fiscal 2005 results reflect the benefit of the
change in tax planning with respect to depreciable assets in fiscal 2004 of $1,345. The fiscal 2005 expected benefit of $822 has been considered in the determination of the expected effective tax rate for fiscal 2005. The effective income tax rate
for the remainder of fiscal 2005 is expected to be 36.75%, resulting in a full year effective tax rate of 36.27%. This excludes any tax impact from the sale of our French operations.



Diluted earnings per common share from continuing operations were $0.22 for the first half of fiscal 2005, compared to $0.37
for the first half of fiscal 2004. The decline in diluted earnings per share is mainly attributable to the impact of the asset impairments and restructuring activities during fiscal 2005, lower profit generated by Legal Document Services, the impact
of lower equipment sales, the impact of lower Customer Services revenues and the impact of lower finance income, partially offset by the impact of a non-recurring tax adjustment, the effect of lower outstanding shares and other operational changes
compared to the first half of fiscal 2004.



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Diluted losses per share from discontinued operations increased by 600% primarily due to the actions
related to restructuring and asset impairments as discussed on pages 45-48.



Review of Business Segments



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



IKON North America



|                                           |  |      |           |   |              |   |           |  |        |  
|------------------------------------------ |  | ---- | --------- | - | ------------ | - | --------- |  | ------ | -
|                                           |  | 2005 |           |   | Restated2004 |   | Change    | 
|Net sales                                  |  | $    | 808,955   |   |              | $ | 797,567   |  | 1.4    | %
|Services                                   |  |      | 1,036,484 |   |              |   | 1,039,117 |  | (0.3   | )
|Finance income                             |  |      | 44,790    |   |              |   | 184,585   |  | (75.7  | )
|Finance interest expense                   |  |      | 11,451    |   |              |   | 66,053    |  | (82.7  | )
|(Gain) loss from divestiture of businesses |  |      | (1,901    | ) |              |   | 12,125    |  | (115.7 | )
|Asset impairments                          |  |      | 313       |   |              |   |           |  | 100.0  |  
|Restructuring                              |  |      | 11,396    |   |              |   |           |  | 100.0  |  
|Operating income                           |  |      | 206,361   |   |              |   | 251,910   |  | (18.1  | )



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



Net sales increased by 1.4% due to an increase in equipment sales of 3.2% as a primary result of the net impact of the relationship with GE and continued
growth from the sale of color equipment. Origination fees and sales of residual value to GE (not recognized as revenue when we had captive finance subsidiaries in North America) contributed to $76,373 of equipment revenue during fiscal 2005. As a
result, equipment revenue would have decreased approximately 6.8% excluding the impact of the origination fees and sales of residual value. This decline was due to competitive pressure and lower sales productivity as a result of several long-term
strategic priorities launched during the first quarter of fiscal 2005 which impacted first quarter 2005 revenues. Revenues generated from the sale of color devices increased compared to fiscal 2004 due to higher demand for these products,
particularly higher-end color production equipment, as new products continued to be introduced at more affordable prices. These increases were offset by a decrease in the sale of segment 5 and 6 black and white production equipment compared to
fiscal 2004 due to continued pricing pressure, a shift to lower-end products within this segment and new alternate products available in segment 4. However, during fiscal 2005, we experienced strong performance in the high-end of segment 6 equipment
sales. Sales of segment 1  4 black and white office equipment declined compared to the first half of fiscal 2004. This decrease was attributable to lower demand for these products compared to the same period in the prior year, due in part, to
the shift of sales focus to color devices and lower average selling prices for these products. Direct supply sales decreased by approximately 13.4% compared to fiscal 2004, due to lower demand for fax and lower-end equipment supplies.



Services decreased by 0.3% due primarily to a decrease in Managed Services
revenues, which includes both on-site Managed Services and Legal Document Services, of $14,810, or 4.7%, to $303,429. Off-site Managed Services, a short-cycle and increasingly competitive transactional business declined by approximately $27,060
compared to the six months ended March 31, 2004 due to pricing pressure, lower copy volumes and the impact of a large commercial imaging contract during the first quarter of fiscal 2004 which benefited the first quarter of fiscal 2004 revenues by
$10,119. On-site Managed Services revenues of $211,816 grew 6.1% or $12,250, from the prior year due to an increase in new contracts and an improved retention rate. Customer Services revenues decreased by $22,824 or 3.6% compared to fiscal 2004,
attributable mainly to a decrease in average revenue



44



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per copy and the impact of specific concessions made to customers during the second quarter of fiscal 2005. Rental revenue decreased by $8,076, or 18.8%, due
primarily to the sale of $38,900 of rental assets to GE on March 31, 2004. Off-setting these decreases to Service revenues was the impact of fees received as a result of the GE relationship, including Preferred Fees of $25,368 during fiscal 2005
partially offset by the impact of lease-end activities of approximately $14,513. Additionally, Professional Services grew by $2,818, or 10.7%, compared to fiscal 2004 as a result of continued focus on providing customers with digital technologies to
reduce their costs and improve workflow.



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



Operating income decreased primarily due to a decline in finance income,
lower equipment revenues, lower Customer Services revenues, and a decline in off-site Managed Services revenues compared to fiscal 2004, partially offset by the impact of the reclassification of the Additional Corporate Debt of $11,700.



IKON Europe



|                         |  |      |         |      |   |         |  |      |  
|------------------------ |  | ---- | ------- | ---- | - | ------- |  | ---- | -
|                         |  | 2005 |         | 2004 |   | Change  | 
|Net sales                |  | $    | 151,458 |      | $ | 139,222 |  | 8.8  | %
|Services                 |  |      | 122,356 |      |   | 112,262 |  | 9.0  |  
|Finance income           |  |      | 13,675  |      |   | 12,685  |  | 7.8  |  
|Finance interest expense |  |      | 3,443   |      |   | 3,222   |  | 6.9  |  
|Operating income         |  |      | 14,776  |      |   | 11,201  |  | 31.9 |  



Net sales includes a
currency benefit of approximately $9,434. Excluding the impact of currency translation, net sales increased by 2.0% primarily driven by an increase in equipment sales of 14.8%, compared to fiscal 2004, due to several new contracts during the first
half of fiscal 2005 as a result of our ongoing emphasis on national and global accounts. The increases in equipment sales were partially offset by decreases in direct supplies sales and technology hardware revenues of 6.0% and 26.1%, respectively.
Services increased as a result of currency benefits of approximately $7,162. Excluding the impact of currency translation, services increased by 2.6% due to an increase in customer services revenues of 10.4% as a result of an increase in copy
volumes across Europe. Finance income increased primarily as a result of strengthened foreign currencies, which resulted in a benefit of $774. Operating income in fiscal 2005 increased due to the operational performance discussed above and the
favorable impact of currency.



Corporate and Eliminations



Corporate and Eliminations, which is not treated as a business segment, is
comprised of certain selling and administrative functions including finance, supply chain, and customer service. INA and IE are not presented on a comparative basis because certain administrative costs of INA are included in Corporate and
Eliminations, and excluded from the presentation of results of INA, but are included in the presentation of results of IE. Operating losses in Corporate and Eliminations, were $147,264 and $158,395 in fiscal 2005 and fiscal 2004, respectively.



Restructuring and Asset Impairment Charges



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



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Business Document Services



During the second quarter of fiscal 2005, we exited BDS, which provided off-site document management solutions, including
digital print and fulfillment services. This exit was achieved by the closure or sale of 12 North American operating locations. As of March 31, 2005, all but 2 of the 12 BDS sites were closed or sold. Proceeds received from the sale of 2 sites were
not material. The remaining 2 BDS sites are classified as held for sale. As a result of this exit, the results of operations and cash flows of BDS are classified as discontinued operations (see Note 5 to the Condensed Consolidated Financial
Statements (Unaudited)).



As a result of the exit of BDS, we
recorded a pre-tax restructuring and asset impairment charge of $7,094 and $1,294, respectively, during the second quarter of fiscal 2005. The restructuring charge represents severance of $2,845 for the termination of 227 employees, $1,991 of
contractual commitments, and $2,258 of contract termination costs. The asset impairment charge represents fixed asset write-offs. In addition, we wrote-down inventories and other assets by $506 and recorded additional reserves for accounts
receivable of $1,201, which are included in Other Non-Restructuring Items in the table below. These charges are included within discontinued operations.



If we are unable to successfully sell the remaining 2 BDS locations, we will incur additional charges related to severance,
contractual commitments, and contract terminations during fiscal 2005.



Legal Document Services



LDS provides off-site
document management solutions for the legal industry, including document imaging, coding and conversion services, legal graphics, and electronic discovery. During the second quarter of fiscal 2005, we closed 16 of 82 LDS sites in North America to
provide both cost flexibility and savings. We will close one additional site during the third quarter of fiscal 2005. As a result of the closure of these sites, we recorded a pre-tax restructuring and asset impairment charge of $2,352 and $313,
respectively, during the second quarter of fiscal 2005. The restructuring charge represents severance of $1,675 for the termination of 208 employees, $537 of contractual commitments and $140 of contract termination costs. The asset impairment charge
represents fixed asset write-offs. In addition, we wrote down inventories by $52 and recorded additional reserves for accounts receivable of $267, which are included in Other Non-Restructuring Items in the table below.



Field Organization and Corporate Staff Reduction



During the second quarter of fiscal 2005, we reorganized our field structure
in North America to serve our customers in a more cost-effective manner, while maximizing sales potential. To achieve this, we expanded geographic coverage under certain area vice presidents, allowing us to reduce the number of our marketplaces. By
streamlining our field leadership structure and reducing other corporate staff, we believe we will be able to save costs while maintaining our sales capabilities and services provided to customers. As a result of these actions, we recorded a pre-tax
restructuring charge of $9,044 representing severance for 395 employees.



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



|                                         |  |                    |       
|---------------------------------------- |  | ------------------ | ------
|Type of Charge                           |  | Fiscal 2005 Charge
|Restructuring Charge:                    |  |                    |       
|Severance                                |  | $                  | 13,564
|Contractual commitments                  |  |                    | 2,528 
|Contract termination                     |  |                    | 2,398 
|                                         |  |                    |       
|Total Restructuring Charge               |  |                    | 18,490
|Asset Impairment Charge for Fixed Assets |  |                    | 1,607 
|Other Non-Restructuring Items            |  |                    | 2,026 
|                                         |  |                    |       
|Total                                    |  | $                  | 22,123
|                                         |  |                    |       



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



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



The following presents a
reconciliation of the restructuring charge to the balance remaining at March 31, 2005, which is included in other accrued expenses on the consolidated balance sheet:



|                        |  |        |        |                    |   |                      |  |   |       
|----------------------- |  | ------ | ------ | ------------------ | - | -------------------- |  | - | ------
|                        |  | Charge |        | PaymentsFiscal2005 |   | BalanceMarch 31,2005
|Severance               |  | $      | 13,564 |                    | $ | 1,128                |  | $ | 12,436
|Contractual commitments |  |        | 2,528  |                    |   | 136                  |  |   | 2,392 
|Contract termination    |  |        | 2,398  |                    |   | 229                  |  |   | 2,169 
|                        |  |        |        |                    |   |                      |  |   |       
|Total                   |  | $      | 18,490 |                    | $ | 1,493                |  | $ | 16,997
|                        |  |        |        |                    |   |                      |  |   |       



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



|                        |  |      |        |      |   |       |  |        |     |       |   |     |  |   |       
|----------------------- |  | ---- | ------ | ---- | - | ----- |  | ------ | --- | ----- | - | --- |  | - | ------
|Projected Payments      |  | 2005 |        | 2006 |   | 2007  |  | Beyond |     | Total
|Severance               |  | $    | 11,096 |      | $ | 1,340 |  |        |     |       |   |     |  | $ | 12,436
|Contractual commitments |  |      | 753    |      |   | 787   |  | $      | 352 |       | $ | 500 |  |   | 2,392 
|Contract termination    |  |      | 2,169  |      |   |       |  |        |     |       |   |     |  |   | 2,169 
|                        |  |      |        |      |   |       |  |        |     |       |   |     |  |   |       
|Total                   |  | $    | 14,018 |      | $ | 2,127 |  | $      | 352 |       | $ | 500 |  | $ | 16,997
|                        |  |      |        |      |   |       |  |        |     |       |   |     |  |   |       



All contractual
commitment amounts related to leases are shown net of projected sublease income. Projected sublease income was $3,082 at March 31, 2005. To the extent that sublease income cannot be realized, additional restructuring charges will be incurred in each
period in which sublease income is not received.



The employees
affected by the charge were as follows:



|                                       |  |                   |  |                                 |   |  |                                                    
|-------------------------------------- |  | ----------------- |  | ------------------------------- | - |  | ---------------------------------------------------
|Headcount Reductions                   |  | EmployeesAffected |  | Fiscal 2005EmployeeTerminations |   |  | RemainingEmployees to beTerminated atMarch 31, 2005
|BDS                                    |  | 227               |  | (126                            | ) |  | 101                                                
|LDS                                    |  | 208               |  | (122                            | ) |  | 86                                                 
|Field organization and corporate staff |  | 395               |  | (159                            | ) |  | 236                                                
|                                       |  |                   |  |                                 |   |  |                                                    
|Total                                  |  | 830               |  | (407                            | ) |  | 423                                                
|                                       |  |                   |  |                                 |   |  |                                                    



The locations affected
by the charge were as follows:



|              |  |               |  |              |  |                                             
|------------- |  | ------------- |  | ------------ |  | --------------------------------------------
|Site Closures |  | SitesAffected |  | Sites Closed |  | Remaining Sitesto be Closed atMarch 31, 2005
|BDS           |  | 12            |  | 10           |  | 2                                           
|LDS           |  | 17            |  | 16           |  | 1                                           
|              |  |               |  |              |  |                                             
|Total         |  | 29            |  | 26           |  | 3                                           
|              |  |               |  |              |  |                                             



We expect all
restructuring actions to be completed during fiscal 2005. Remaining employees to be terminated at March 31, 2005 represents employees who received notice of termination but were not yet terminated. Severance payments to terminated employees are made
in installments. The charges for contractual



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commitments relate to real estate lease contracts where we have exited certain locations and are required to make payments over the remaining lease term. The
charges for contract termination represent costs incurred to immediately terminate contracts.



Financial Condition and Liquidity



Cash Flows and Liquidity



The following
summarizes cash flows for the six months ended March 31, 2005 as reported in our consolidated statements of cash flows:



|                                                   |  |      |          |  
|-------------------------------------------------- |  | ---- | -------- | -
|                                                   |  | 2005 |         
|Cash provided by operating activities              |  | $    | 3,502    |  
|Cash provided by investing activities              |  |      | 181,345  |  
|Cash used in financing activities                  |  |      | (329,345 | )
|Effect of exchange rates                           |  |      | 4,833    |  
|                                                   |  |      |          |  
|Decrease in cash                                   |  |      | (139,665 | )
|Cash and cash equivalents at beginning of the year |  |      | 472,951  |  
|                                                   |  |      |          |  
|Cash and cash equivalents at end of period         |  | $    | 333,286  |  
|                                                   |  |      |          |  



Operating Cash Flows



We generated $3,502 of cash for operating activities
during fiscal 2005 which includes a use of cash of $2,928 from discontinued operations related to our exit from Business Document Services in the second quarter of fiscal 2005. A decrease in accounts receivable positively impacted cash flow from
operations by $37,822 due primarily as a result of lower receivables from GE as a result of improvement in funding timing compared to fiscal 2004. Net income from continuing operations was $31,420, which excludes the loss from discontinued
operations of $9,801, for the six months ended March 31, 2005, and non-cash operating expenses were $17,545, which includes depreciation, amortization, gain on the divesture of businesses, provision for losses on accounts and lease receivables,
asset impairment charges, restructuring charges, deferred income taxes, pension expense, loss from the early extinguishment of debt, and non-cash interest expense on debt supporting unsold residual value. Reductions of inventory levels compared to
September 30, 2004, benefited cash from operations by $12,377 during fiscal 2005 due to improved efforts by our supply chain function to improve inventory turns. These efforts resulted in an improvement in inventory turns to 9.7 at March 31, 2005
from 9.6 at September 30, 2004. A decrease in prepaid expenses and other current assets of $17,324 benefited cash from operations during fiscal 2005, due mainly to the receipt of a tax refund during the first quarter of fiscal 2005. Our most
significant use of cash was a decrease in accounts payable, deferred revenues, and accrued expenses of $109,656 from September 30, 2004, due mainly to a decrease in accounts payable of $102,596, as a result of less favorable terms with some of our
vendors compared to September 30, 2004. Accrued salaries, wages and commissions decreased as a result of the timing of the payroll cycle and the payment of fiscal 2004 performance compensation during fiscal 2005. In addition, during fiscal 2005 we
made federal tax payments of $65,000.



Investing Cash Flows



During the six months ended March 31, 2005, we generated $181,345 of cash
from investing activities, mainly attributable to the sale and collection of $139,392 and $266,079, respectively, of our finance receivables partially offset by $195,189 of finance receivable additions during fiscal 2005. As a result of the
Transactions, collections received from our U.S. retained lease portfolio will continue to significantly outpace finance receivable additions. During the six months ended March 31, 2005, we had capital expenditures for property and equipment of
$14,387 and capital expenditures for equipment on operating leases of $25,038. Capital expenditures for equipment on operating leases represent purchases of equipment that are placed on rental with our customers. Proceeds from the sale of property
and equipment during fiscal 2005 were $2,306. Proceeds from



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the sale of equipment on operating leases during fiscal 2005 were $5,627. During fiscal 2005, we received $5,330 of proceeds from the sale of businesses,
primarily in the form of additional proceeds from GE as a result of the completion of the closing balance sheet audit related to the U.S. Transaction. In addition, we sold substantially all of our operations in Mexico and sold two small subsidiaries
that provided technology equipment and services to customers.



Financing
Cash Flows



During the six months ended March 31, 2005, we
used $329,345 of cash for financing activities. As discussed in further detail below under Debt Structure during fiscal 2005 we used $307,379 for debt payments. These payments include the maturity of $56,659 of the 6.75% notes due 2004
(the November 2004 Notes) that were paid in November 2004, $199,727 of lease related debt, and $44,925 of our Convertible Notes which we repurchased for $45,938. During fiscal 2005, we issued $16,965 of lease related debt from our
European leasing subsidiaries. In March 2004, the Board of Directors authorized the repurchase of up to $250,000 of our outstanding shares of common stock (the 2004 Plan), superceding the fiscal 2000 share repurchase authorization.
During the six months ended March 31, 2005, we repurchased 3.1 million shares of our outstanding common stock for $34,240 (including related fees paid), leaving $138,328 remaining for share repurchases under the 2004 Plan. During the remainder of
fiscal 2005, we plan to continue our share repurchases.



During
the six months ended March 31, 2005, we paid $11,298 of dividends, representing $0.04 per common share to shareholders of record.



Debt Structure



Long-term corporate debt consisted of:



|                                                                     |  |               |         |                   |   |        
|-------------------------------------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                                                     |  | March 31,2005 |         | September 30,2004
|Bond issues                                                          |  | $             | 354,806 |                   | $ | 411,423
|Convertible subordinated notes                                       |  |               | 245,075 |                   |   | 290,000
|Notes payable                                                        |  |               | 94,835  |                   |   | 94,835 
|Miscellaneous notes, bonds, mortgages, and capital lease obligations |  |               | 9,768   |                   |   | 8,622  
|                                                                     |  |               |         |                   |   |        
|                                                                     |  |               | 704,484 |                   |   | 804,880
|Less: current maturities                                             |  |               | 5,539   |                   |   | 63,023 
|                                                                     |  |               |         |                   |   |        
|                                                                     |  | $             | 698,945 |                   | $ | 741,857
|                                                                     |  |               |         |                   |   |        



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



|                                       |  |               |         |                   |   |        
|-------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                       |  | March 31,2005 |         | September 30,2004
|Lease-backed notes                     |  | $             | 495,345 |                   | $ | 683,086
|Asset securitization conduit financing |  |               | 135,571 |                   |   | 129,668
|Notes payable to banks                 |  |               | 8,812   |                   |   | 3,868  
|Debt supporting unsold residual value  |  |               | 56,389  |                   |   | 46,187 
|                                       |  |               |         |                   |   |        
|                                       |  |               | 696,117 |                   |   | 862,809
|Less: current maturities               |  |               | 372,925 |                   |   | 439,941
|                                       |  |               |         |                   |   |        
|                                       |  | $             | 323,192 |                   | $ | 422,868
|                                       |  |               |         |                   |   |        



Included above is
$4,218 of our corporate debt that has been reclassified to liabilities held for sale on the Consolidated Balance Sheets as a result of the proposed sale of our French subsidiary (see Note 16 to the Condensed Consolidated Financial Statements
(Unaudited)).



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



During the six months ended
March 31, 2005, we repaid $187,741 of lease-backed notes.



Asset
Securitization Conduit Financing Agreements



As of March
31, 2005, IKON Capital PLC, IKONs leasing subsidiary in the United Kingdom, had approximately $27,309 available under its asset securitization conduit financing agreement (the Conduit). During the six months ended March 31, 2005,
IKON Capital PLC repaid and borrowed $5,190 and $2,825, respectively, in connection with the Conduit. During the third quarter of fiscal 2005, we received a waiver to our Conduit to provide us with an extension to the deadline by which we must
deliver to the lender certain items required under the Conduit, including our financial statements for the second quarter of fiscal year 2005, in order to allow us to complete the review of our billing controls and reserve practices for our trade
accounts receivable (See Note 2 to the Condensed Consolidated Financial Statements).



Debt Supporting Unsold Residual Value



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



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



As of March 31, 2005, we had $39,966 of debt related to $39,101 of unsold residual value and the present value of the remaining lease receivables that remained on our balance sheet. During fiscal 2005, we imputed interest at our average
borrowing rate of 3.73% and recorded $225 of interest expense related to this debt. Upon the end of the lease term or repurchase of the lease, whichever comes first, we will reverse the unsold residual value and related debt as the underlying leases
mature and any differential will be recorded as a gain on the extinguishment of debt. As of March 31, 2005, this differential was $865.



In addition, we have $16,423 of debt related to equipment on operating leases which have been funded by GE.



Credit Facility



We maintain a $200,000 secured credit facility (the Credit Facility) with a group of lenders. The Credit
Facility provides the availability of revolving loans, with certain sub-limits, and provides support for letters of credit. The amount of credit available under the Credit Facility is reduced by open letters of credit. The amount available under the
Credit Facility for borrowings or additional letters of credit was $165,579 at March 31, 2005. The Credit Facility is secured by our accounts receivable and inventory, the stock of our first-tier domestic subsidiaries, 65% of the stock of our
first-tier foreign subsidiaries, and all of our intangible assets. All security interests pledged under the Credit Facility are shared with the holders of our 7.25% notes payable due 2008.



The Credit Facility contains affirmative and negative covenants, including
limitations on certain fundamental core business changes, investments and acquisitions, mergers, certain transactions with affiliates, creations of liens, asset transfers, payments of dividends, intercompany loans, and certain restricted payments.



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The Credit Facility does not, however, limit our ability to continue to securitize lease receivables. The Credit Facility matures on March 1, 2008, but is
subject to certain early maturity events in November 2006, January 2007, and April 2007 if our Convertible Notes have not been converted to equity or refinanced or minimum liquidity is not met as of such dates. Minimum liquidity is defined as having
sufficient cash, including any unused capacity under the Credit Facility, to repay the balance of the Convertible Notes plus an additional $100,000. The Credit Facility contains certain financial covenants relating to: (i) our corporate leverage
ratios; (ii) our consolidated interest coverage ratio; (iii) our consolidated asset coverage ratio; (iv) our consolidated net worth ratios; (v) limitations on our capital expenditures; and (vi) limitations on additional indebtedness and liens. Under
the terms of the Credit Facility, share repurchases are permitted in an aggregate amount not to exceed $250,000 during the period of July 28, 2004 through March 1, 2008. From July 28, 2004 through September 30, 2005, share repurchases are permitted
in an aggregate amount not to exceed $150,000. Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000
allowance that we did not utilize prior to October 1, 2005. As of March 31, 2005, $84,973 of the $150,000 allowance was utilized. Additionally, the Credit Facility contains default provisions customary for facilities of this type. During the third
quarter of fiscal 2005, we entered into a consent (the Consent) to our Credit Facility to provide us with an extension to the deadline by which we must deliver to the lenders certain items required under the Credit Facility, including
our financial statements for the second quarter of fiscal year 2005, in order to allow us to complete the review of our billing controls and reserve practices for our trade accounts receivable (see Note 2 to the Condensed Consolidated Financial
Statements).



Letters of Credit



We have certain commitments available to us in the form of lines of credit
and standby letters of credit. As of March 31, 2005, we had $175,929 available under lines of credit, including the $165,579 available under the Credit Facility and had open standby letters of credit totaling $34,421. These letters of credit are
primarily supported by the Credit Facility. All letters of credit expire within one year.



Credit Ratings



As of
March 31, 2005, the credit ratings on our senior unsecured debt were designated Ba2 by Moodys Investor Services and BB by Standard and Poors. During the third quarter of fiscal 2005, Moodys Investor Services and Standard and
Poors moved the Companys credit ratings from stable outlook to negative outlook.



Liquidity Outlook



The
following summarizes our significant contractual obligations and commitments as of March 31, 2005:



|                            |  |       |           |                 |   |           |  |           |         |            |   |         |  |   |        
|--------------------------- |  | ----- | --------- | --------------- | - | --------- |  | --------- | ------- | ---------- | - | ------- |  | - | -------
|                            |  |       |           | Payments due   
|Contractual Obligations     |  | Total |           | Less Than 1Year |   | 1-3 Years |  | 3-5 Years |         | Thereafter
|Corporate debt              |  | $     | 1,267,460 |                 | $ | 51,224    |  | $         | 329,886 |            | $ | 145,118 |  | $ | 741,232
|Non-Corporate Debt          |  |       | 663,280   |                 |   | 385,102   |  |           | 278,178 |            |   |         |  |   |        
|Purchase commitments        |  |       | 699       |                 |   | 699       |  |           |         |            |   |         |  |   |        
|Other long-term liabilities |  |       | 196,775   |                 |   | 7,155     |  |           | 55,002  |            |   | 50,554  |  |   | 84,064 
|Operating leases            |  |       | 360,915   |                 |   | 102,146   |  |           | 134,327 |            |   | 61,167  |  |   | 63,275 
|                            |  |       |           |                 |   |           |  |           |         |            |   |         |  |   |        
|Total                       |  | $     | 2,489,129 |                 | $ | 546,326   |  | $         | 797,393 |            | $ | 256,839 |  | $ | 888,571
|                            |  |       |           |                 |   |           |  |           |         |            |   |         |  |   |        



Non-Corporate Debt
excludes the maturity of debt supporting unsold residual value of $56,389. This debt will not be repaid unless required under the applicable agreement in the event that an IKON service performance failure is determined to relieve the lessee of its
lease payment obligations. Over the last three years, total repurchases of lease receivables related to our service performance have amounted to approximately $504 on a



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cumulative basis. Maturities of debt include estimated interest payments. Maturities of lease-backed notes are based on the contractual maturities of leases.
Payments on Non-Corporate Debt are generally made from collections of our finance receivables. At March 31, 2005, Non-Corporate Debt (excluding debt supporting unsold residual value) was $639,728 and finance receivables, net of allowances, were
$995,846.



Other long-term liabilities exclude $31,259 of
accrued contingencies due to the inability to predict the timing of payments due to the uncertainty of their outcome. Planned contributions to our defined benefit plans have been included in the estimated period of payment. All other liabilities
related to pension are included in Thereafter ($46,536), as required payments are based on actuarial data that has not yet been determined. Payment requirements may change significantly based on the outcome or changes of various
actuarial assumptions.



Purchase commitments represent future
cash payments related to an agreement with an outside consultant to be rendered prior to March 31, 2005.



We may repurchase available outstanding indebtedness in open market and private transactions. Additionally, from time-to-time, our Retirement Savings Plan
may acquire shares of our common stock in open market transactions or from our treasury shares. During fiscal 2004, we repurchased 6,741 shares of our outstanding common stock for $77,574 under the 2004 Plan. During the first half of fiscal 2005, we
repurchased 3,109 shares of our outstanding common stock for $34,098, leaving $138,328 remaining for share repurchases under the 2004 Plan. Under the terms of the Credit Facility, share repurchases are permitted up to $150,000 until September 2005.
Beginning on October 1, 2005, we are permitted to repurchase (a) shares and pay dividends in an aggregate annual amount not to exceed 50% of our annual net income, plus (b) that portion of the $150,000 allowance that we did not utilize prior to
October 1, 2005. As of March 31, 2005, $84,973 of the $150,000 allowance was utilized.



For fiscal 2005, we expect to generate (use) $25,000 to $(25,000) in cash from operations. These expected results are primarily due to the payment of tax obligations related to the retained U.S. leasing portfolio in
which we will continue to pay over the next several years as the underlying leases run-off. We expect to make tax payments of approximately $150,000 to $170,000 during fiscal 2005. We expect net lease receivable collections, reported under
Cash from Investing Activities, to more than offset the future tax liabilities during the transition period, as well as the obligations for the underlying debt supporting the lease receivables. Capital expenditures, net of proceeds from
the sale of fixed assets, are expected to be approximately $90,000 for fiscal 2005.



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



PENDING ACCOUNTING CHANGES



In October 2004, the American Jobs Creation Act (the
AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings that are repatriated, as defined by the AJCA. We may elect to apply this provision to qualifying earnings repatriations in either the balance of
fiscal 2005 or in fiscal 2006. We have begun an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provides additional clarifying
language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible
amounts that we are considering for repatriation under this provision is between $0 and $130,000. The related potential range of income tax is between $0 and $7,000.



In December 2004, the Financial Accounting Standards Board (the FASB) issued its final standard on accounting
for share-based payments, SFAS 123R (Revised 2004), Share-Based Payments (SFAS 123R).



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SFAS 123R requires companies to expense the fair value of employee stock options and other similar awards, effective interim and annual periods beginning on
or after June 15, 2005. On April 15, 2005, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, which amends the compliance dates for SFAS 123R. As a result, we are required to adopt the provisions of SFAS 123R
beginning in the first quarter of fiscal 2006. When measuring the fair value of these awards, companies can choose from two different pricing models that appropriately reflect their specific circumstances and the economics of their transactions.
Accordingly, we have not yet determined the impact on our consolidated financial statements of adopting SFAS 123R. Additional information regarding the pro forma impact of expensing stock options is presented in Note 1 to the Notes to Condensed
Consolidated Financial Statements (Unaudited).



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



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



Item 3.Quantitative and Qualitative Disclosures About Market Risk.



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



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



Item 4.Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act of
1934, as amended (the Exchange Act) as of March 31, 2005 pursuant to SEC Rule 13a-15(b) under the Exchange Act. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is properly recorded, processed, summarized and reported within the time periods required by



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the SECs rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by
their nature, can provide only reasonable assurance regarding managements control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well
it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has
concluded that because of the material weakness in internal controls described below as of the evaluation date, our disclosure controls and procedures were not effective, to give reasonable assurance that information we must disclose in reports
filed with the SEC is properly recorded, processed, and summarized, and then reported within the time periods specified in the rules and forms of the SEC.



Internal Controls Over Financial Reporting



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



During the quarter ended March 31, 2005, General
Electric Capital Corporation (GE) acted as servicer for the portion of the U.S. lease asset portfolio retained by IKON under the U.S. Transaction and provided periodic reporting with respect to both the serviced and originated lease
portfolios. Both the U.S. Program Agreement and the Canadian Rider contain audit right provisions that require, upon our request, GEs external auditors to perform certain audit procedures and issue annual and quarterly reports to us relating
to GEs servicing of such portfolios (Servicing Controls), including a Type II Statement on Auditing Standards (SAS) 70 Report relating to the Servicing Controls. The audit rights and Type II SAS 70 Report are designed
to inform us of any identified weakness relating to the Servicing Controls and to provide us with an opportunity to review and understand such findings in advance of our fiscal year reporting requirements. We believe that such audit rights and the
Type II SAS 70 Report are reasonably designed to confirm that the objectives of the Servicing Controls are met.



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



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



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



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



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



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



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



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



| |  |  | redesigning and simplifying our billing process;
| | - |  | ------------------------------------------------



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



| |  |  | standardizing training for contract set up and execution.
| | - |  | ---------------------------------------------------------



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



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



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



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



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



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PART IIOTHER INFORMATION



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



The following table provides information relating to our purchases of our common stock during the quarter ended March 31, 2005:



|                                     |  |                                    |  |                            |       |                                                                     |           |                                                                                |   |            
|------------------------------------ |  | ---------------------------------- |  | -------------------------- | ----- | ------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------ | - | -----------
|Period                               |  | Total Numberof SharesPurchased (1) |  | AveragePrice Paidper Share |       | Total Number of SharesPurchased as Part of PubliclyAnnouncedProgram |           | ApproximateDollar Value of Shares thatMay Yet BePurchased Underthe Program (2)
|January 1, 2005  January 31, 2005   |  |                                    |  |                            |       |                                                                     |           |                                                                                | $ | 150,629,112
|February 1, 2005  February 28, 2005 |  |                                    |  |                            |       |                                                                     |           |                                                                                |   | 150,629,112
|March 1, 2005  March 31, 2005       |  | 1,152,200                          |  | $                          | 10.68 |                                                                     | 1,152,200 |                                                                                |   | 138,328,447
|                                     |  |                                    |  |                            |       |                                                                     |           |                                                                                |   |            
|                                     |  | 1,152,200                          |  | $                          | 10.68 |                                                                     | 1,152,200 |                                                                                | $ | 138,328,447
|                                     |  |                                    |  |                            |       |                                                                     |           |                                                                                |   |            

---

|(1) | As of March 31, 2005, we repurchased a total of 9,849,700 shares of our common stock pursuant to the repurchase program (the Program) that we publicly announced in our
quarterly report on Form 10-Q filed with the SEC on May 14, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our Board of Directors authorized us to repurchase up to $250,000,000 of our outstanding common stock under the Program. The Program will remain in effect until the $250,000,000
repurchase limit is reached; however, our Board of Directors may discontinue the Program at any time. As of March 31, 2005, we had utilized $111,671,553 under the Program (see pages 50 and 51 for information concerning our share repurchase activity
and how it relates to our Credit Facility).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



On February 23, 2005, we held our annual meeting of shareholders at which time the eleven directors were elected to hold office until their successors are
duly elected and qualified. Proxies were solicited for the annual meeting pursuant to Regulation 14A of the Exchange Act. The results of the election are set forth in the table below.



|                       |  |             |  |                          
|---------------------- |  | ----------- |  | -------------------------
|Director               |  | Votes for   |  | VotesWithheld/Abstentions
|Judith M. Bell         |  | 126,448,783 |  | 3,586,855                
|                       |  |            
|Philip E. Cushing      |  | 126,441,037 |  | 3,594,601                
|                       |  |            
|Matthew J. Espe        |  | 125,509,003 |  | 4,526,635                
|                       |  |            
|Thomas R. Gibson       |  | 126,436,045 |  | 3,599,593                
|                       |  |            
|Richard A. Jalkut      |  | 126,125,479 |  | 3,910,159                
|                       |  |            
|Arthur R. Johnson      |  | 126,469,310 |  | 3,566,328                
|                       |  |            
|Kurt M. Landgraf       |  | 125,848,704 |  | 4,186,934                
|                       |  |            
|Gerald Luterman        |  | 126,142,939 |  | 3,892,699                
|                       |  |            
|William E. McCracken   |  | 126,466,496 |  | 3,569,142                
|                       |  |            
|William L. Meddaugh    |  | 126,050,076 |  | 3,985,562                
|                       |  |            
|Anthony P. Terracciano |  | 126,179,773 |  | 3,855,865                



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Item 6.Exhibits



a) Exhibits



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



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. This report has also been signed by the undersigned in his capacity as the chief accounting officer of the Registrant.



|                            |  |                                                                                                  
|--------------------------- |  | -------------------------------------------------------------------------------------------------
|IKON OFFICE SOLUTIONS, INC.
|                           
|Date: July 8, 2005         
|                            | 
|By:                         |  | /s/    ROBERT F. WOODS                                                                           
|                            |  | (Robert F. Woods) Senior Vice President and Chief Financial Officer (Principal Financial
Officer)



58