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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

[X]     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended
           March 31, 2004 or

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

Commission file number 1-5964

IKON OFFICE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

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

Former name, former address and former fiscal year, if changed since last report:   None

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

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

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 12, 2004:

Common Stock, no par value                                                                                                                            148,025,002 shares

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IKON Office Solutions, Inc.

INDEX

PART I.   FINANCIAL INFORMATION

PART II.   OTHER INFORMATION

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 constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Litigation Reform Act”). These forward-looking statements include, but are not limited to, statements regarding the following (and certain other matters discussed in greater detail herein): the expected impact of the transaction with General Electric Capital Corporation (“GE”) involving the sale of certain assets and liabilities of IOS Capital, LLC (“IOSC”) and the execution of the related Program Agreement; the expected consummation and impact of the sale of certain assets of the leasing operations (the "Canadian Leasing Business") of IKON Office Solutions, Inc., a Canadian subsidiary of the Company ("IKON Canada"), to Heller Financial Canada, an affiliate of GE ("Heller"); the expected proceeds from these transactions; the use of proceeds from these transactions; plans to enter into a revolving credit facility; core business growth opportunities and increasing market share; infrastructure and operational efficiency initiatives; earnings, revenue, cash flow, margin, and cost-savings projections; the effect of competitive pressures on equipment sales; developing and expanding strategic alliances and partnerships; the impact of e-commerce and e-procurement initiatives; the implementation of e-IKON; anticipated growth rates in the digital monochrome and color equipment and outsourcing industries; the effect of foreign currency exchange risk; the reorganization of the Company’s business segments and the anticipated benefits of operational synergies related thereto; and the Company’s ability to finance its current operations and its growth initiatives. Although IKON believes the expectations contained in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove correct. References herein to “we,” “us,” “our,” “IKON,” or the “Company” refer to IKON and its subsidiaries unless the context specifically requires otherwise.

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

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

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

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

                 Vendor Relationships.     IKON’s access to equipment, parts, supplies and services depends upon its relationships with, and its ability to purchase these items on competitive terms from, its principal vendors, Canon, Ricoh, Konica-Minolta, HP, and Océ. IKON has not and does not currently enter into long-term supply contracts with these vendors, and we have no current plans to do so in the future. These vendors are not required to use IKON to distribute their equipment and are free to change the prices and other terms at which they sell to us. In addition, IKON competes with the direct selling efforts of some of these vendors. Significant deterioration in relationships with, or in the financial condition of, these significant vendors could have an adverse impact on IKON’s ability to sell and lease equipment as well as its ability to provide effective service and technical support. If one of these vendors terminated or significantly curtailed its relationship with IKON, or if one of these vendors ceased operations, IKON would be forced to expand its relationship with other vendors, seek out new relationships with other vendors, or risk a loss in market share due to diminished product offerings and availability.

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                 Sale of U.S. Leasing Operations.      In December 2003, IKON entered into a definitive asset purchase agreement (the "U.S. Agreement") with GE to sell certain assets and liabilities of IKON, solely in its capacity as successor to IOSC, including, without limitation, servicing functions, facilities, systems and processes. The sale of such assets and liabilities pursuant to the U.S. Agreement was effective as of March 31, 2004, on which date IKON and GE executed a Program Agreement (the "Program Agreement", and, together with the U.S. Agreement, the "Transaction") to provide for the funding of IKON's lease originations in the United States. In the event that we are unable to successfully integrate our equipment distribution business with a third party vendor finance program, which involves the integration and transition of complex systems and processes, our liquidity, financial position and results of operations may be adversely affected. In addition, a significant portion of our profits were derived from IOSC's leasing operations. We are entitled to receive certain origination fees under the Program Agreement in respect of future leases funded by GE, and we currently intend to use the proceeds from the Transaction to, among other things, enhance our core business of document management solutions, reduce our debt and purchase shares of our common stock. However, the ability to attain accretion as a result of the Transaction will depend upon our ability to successfully implement these strategies and the price, timing and quantity of debt reductions and share repurchase activity, as well as other factors that are beyond our control. Our failure to successfully implement these strategies, or the failure of these strategies to result in improved profitability, could have a material adverse effect on our liquidity, financial position and results of operations. The Transaction was consummated on March 31, 2004 and, therefore, the financial statements included in this report, and all previously reported financial statements, are not indicative of our future financial performance. In connection with the Transaction, GE agreed to act as servicer for the portion of the U.S. lease asset portfolio retained by IKON and to provide periodic reporting and audit rights with respect to both the serviced and originated portfolios.

                 Sale of Canadian Leasing Business. On March 31, 2004, IKON Canada executed an Asset Purchase Agreement (the “Canadian Agreement”) with Heller pursuant to which, among other things, Heller will acquire the Company's Canadian Leasing Business and become IKON's preferred lease financing source in Canada. The sale of the Canadian Leasing Business is subject to regulatory approvals and other customary conditions. The consummation of the Canadian Agreement is also subject to the execution of a Canadian Program Agreement, which IKON expects will contain terms and conditions similar to those set forth in the U.S. Program Agreement. We cannot assure you that the transactions contemplated by the Canadian Agreement will occur.

                 Liquidity.      As of March 31, 2004, the Company terminated its $300,000,000 unsecured credit facility. Although the Company is currently negotiating a new credit facility, there can be no assurance as to the amount of any new credit facility or whether the new credit facility will be on an unsecured basis and otherwise on similar or improved terms and conditions relative to the prior credit facility. Furthermore, there can be no assurance that a new credit facility will actually be obtained.

                 As of March 31, 2004, the credit ratings on the Company's senior unsecured debt were designated Ba1 with negative outlook by Moody's Investor Services and BB with stable outlook by Standard and Poor's. On April 27, 2004, Moody's Investor Services lowered the Company's senior unsecured debt rating to Ba2 with a stable outlook. Our access to certain credit markets is dependent upon our credit ratings. Our current credit ratings, and any further downgrades, could reduce or foreclose our access to certain credit markets. There is no assurance that these credit ratings can be maintained or improved or that the credit markets can be readily accessed.

                 Operational Efficiencies.      IKON’s ability to improve its profit margins is largely dependent on the success of its initiatives to streamline its infrastructure and drive operational efficiencies across IKON. Such initiatives, which include e-IKON and Six Sigma, focus on strategic priorities such as process improvement, organizational development and asset management. e-IKON is a comprehensive, multi-year initiative to centralize operational support functions and re-design enterprise-wide processes under the Oracle E-Business Suite. As a result of resources being reallocated from marketplace level development to operations to accelerate productivity in supply chain and customer care support and to ensure that operational implications of the Transaction are fully addressed, the implementation of e-IKON in the remaining marketplaces and customer care centers will not occur until after 2004. Six Sigma is a disciplined business methodology designed to assist companies in increasing profitability by streamlining operations, improving quality and eliminating possible defects in processes. Six Sigma is intended to provide specific methods to re-create a particular process - starting from the customer’s vantage point - so that defects in the process are effectively eliminated. IKON’s ability to improve its profit margins through the implementation of these initiatives is dependent upon certain factors that IKON cannot entirely control, including the implementation and transition costs and expenses associated with the initiatives. Our failure to successfully implement these initiatives, or the failure of such initiatives to result in improved margins, could have a material adverse effect on our liquidity, financial position and results of operations.

                International Operations.      IKON operates in eight countries outside of the United States. Approximately 16% of our revenues are derived from our international operations, and approximately 74% of those revenues are derived from Canada and the United Kingdom. Political or economic instability in Canada or the United Kingdom could have a material adverse impact on our liquidity, financial position and results of operations. IKON’s future revenues, costs of operations and profits could be affected by a number of factors related to its international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements and local tax issues. Unanticipated currency fluctuations in the Canadian Dollar, British Pound or Euro vis-à-vis the U.S. Dollar could lead to lower reported consolidated results of operations due to the translation of these currencies.

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

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PART 1.    FINANCIAL INFORMATION

Item 1:    Financial Statements

IKON Office Solutions, Inc.
Consolidated Balance Sheets

See notes to condensed consolidated financial statements.

5

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

See notes to condensed consolidated financial statements.

6

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

See notes to condensed consolidated financial statements.

7

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

Note 1:     Significant Accounting Policies

Basis of Presentation

      The accompanying unaudited condensed consolidated financial statements of IKON Office Solutions, Inc. and its subsidiaries (the “Company,” “IKON,” “we,” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2003. Certain prior year amounts have been reclassified to conform with the current year presentation.

Use of Estimates

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

Accounting for Stock-based Compensation

      As permitted by Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” we continue to account for our stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Employee stock options are granted at or above the market price at dates of grant which does not require us to recognize any compensation expense. In general, these options expire in ten years (twenty years for certain non-employee director options) and vest over three years (five years for grants issued prior to December 15, 2000). The proceeds from options exercised are credited to shareholders’ equity. A plan for our non-employee directors enables participants to receive their annual directors’ fees in the form of options to purchase shares of common stock at a discount. The discount is equivalent to the annual directors’ fees and is charged to expense.

      If we had elected to recognize compensation expense based on the fair value at the date of grant for awards in fiscal years 2004 and 2003, consistent with the provisions of SFAS 123, our net income and earnings per share would have been reduced to the following unaudited pro forma amounts:

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Pending Accounting Changes

      In December 2003, the Financial Accounting Standards Board (the “FASB”) revised FASB Statement No. 132 (“SFAS 132”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised standard mandates additional required disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency within financial statements and requires certain disclosures to be made on a quarterly basis (collectively, the “Amended Disclosures”). The revised standard replaces existing pension disclosure requirements. Compliance with the Amended Disclosures was effective for fiscal periods beginning after December 15, 2003. Interim period disclosures have been made in this quarterly report on Form 10-Q. The adoption of the Amended Disclosures did not have a material impact on our consolidated financial statements.

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

      In January 2004, the FASB released FASB Staff Position No. FAS 106-1 ("FSP 106-1") discussing FASB Statement No. 106 ("FAS 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions." FAS 106 requires a company to consider current changes in applicable laws when measuring its postretirement benefit costs and accumulated postretirement benefit obligation. However, because (1) uncertainties may exist for plan sponsors surrounding the effect of the provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") and (2) certain accounting issues raised by the Act are not addressed by FAS 106, FSP 106-1 allows plan sponsors to elect a one-time deferral of the accounting for the Act. If deferral is elected, the deferral must remain in effect until the earlier of (a) the issuance of guidance by the FASB or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. Further, even if an entity elects deferral, certain disclosure requirements are still required. The Company is currently evaluating the impact of FSP 106-1, but does not expect a material impact from the adoption of FSP 106-1 on our consolidated financial statements.

Note 2:      Divestiture of U.S. Leasing Operations

      On December 10, 2003, the Company entered into an Asset Purchase Agreement, as amended by the First Amendment dated March 31, 2004, (the "U.S. Agreement"), with General Electric Capital Corporation ("GE") pursuant to which, among other things, IKON agreed to sell to GE certain assets and liabilities of IKON, solely in its capacity as successor to IOS Capital, LLC ("IOSC"), including servicing functions, facilities, systems and processes. The sale of such assets and liabilities pursuant to the U.S. Agreement was effective as of March 31, 2004. In addition, IKON and GE executed a Program Agreement (the "Program Agreement," and together with the U.S. Agreement, the "Transaction") on March 31, 2004. During the initial five-year term of the Program Agreement, IKON will receive an origination fee on all new leases underwritten by GE. In addition, IKON will receive a fee (the "Other Fees") from GE in consideration of GE being IKON's preferred lease financing source in the U.S. The term of the Program Agreement may be renewed by IKON for a subsequent three or five-year period during which period IKON will be entitled to origination fees but not the Other Fees.

      On March 31, 2004, the Company received from GE, $1,504,786 of initial proceeds from the Transaction, subject to final closing adjustments, including, without limitation, the impact on proceeds from changes in the sold lease portfolio and related debt balances of IOSC occurring between September 30, 2003 and March 31, 2004. The Company has estimated additional proceeds from GE of approximately $177,483, which is recorded as "Receivable from Divestiture of Business" in the unaudited consolidated balance sheet at March 31, 2004. The Company anticipates that the remaining net cash proceeds will be used to retire debt, repurchase outstanding shares or invest in the Company's growth initiatives.

      Immediately following the closing, GE repaid, on the Company's behalf, $796,070 of outstanding balances under the Company's U.S. asset securitization conduit financing agreements (the "Conduits") from the proceeds of the Transaction. The proceeds from the Transaction and the repayment of the U.S. Conduits have been presented as if the Company made the repayment of the U.S. Conduits directly to the lenders in the Company's consolidated statement of cash flows for the six months ended March 31, 2004.

      The Company incurred a loss of $12,125 from the divestiture of the U.S. leasing business resulting from the difference between the carrying amount of assets sold and proceeds received and certain costs associated with the Transaction.

      The Transaction qualifies as a sale of a business under the applicable accounting literature, however, due to the significant continuing involvement by the Company under the Program Agreement, the sale does not qualify as a discontinued operation.

      Under the Program Agreement, GE assumes substantially all risks related to lease defaults for both retained and sold lease receivables of IOSC.

Note 3:      Taxes on Income

      The Company recorded a tax benefit of $4,720 during 2004, associated with the reversal of valuation allowances as a result of the tax gain generated by the Transaction described in note 2 which will allow for utilization of the state net operating loss carryovers during fiscal 2004 and 2005.

      In addition, the Company recorded a tax benefit of $2,603 during 2004, associated with the reversal of valuation allowances as a result of improved financial performance achieved by the Company's Canadian operations which will allow for utilization of the Canadian net operating loss carryovers prior to expiration dates in future periods.

      Approximately $286,280 of taxes previously deferred were reclassified as currently payable on the Company's consolidated balance sheet at March 31, 2004, as a result of the Transaction.

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Note 4:      Goodwill

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

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

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

Note 5:      Notes Payable and Long-term Debt

      Notes payable and long-term debt consisted of:

      * The convertible subordinated notes and notes payable presented at September 30, 2003 have been reclassified from debt supporting finance contracts to corporate debt at March 31, 2004.

Debt Supporting Finance Contracts

      During the six months ended March 31, 2004, the Company repaid $1,238,209 of debt supporting finance contracts and received $317,925 from the issuance of related debt instruments.

      As of March 31, 2004, IKON Capital, PLC, IKON's leasing subsidiary in the United Kingdom, and IKON Capital, Inc., IKON's leasing subsidiary in Canada, had approximately $9,800 and CN$84,000 available under their revolving asset securitization conduit financing agreements (the "Conduits"). During the six months ended March 31, 2004, the Company pledged or transferred $175,251 in financing lease receivables for $150,101 in cash in connection with these Conduits.

      Immediately following the closing of the Transaction, GE repaid, on the Company's behalf, $796,070 of outstanding balances under the Company's U.S. Conduits from the proceeds of the Transaction. The Company terminated the U.S. Conduits on March 31, 2004. During the six months ended March 31, 2004, the Company pledged or transferred $361,952 in financing lease receivables for $306,134 in cash in connection with the U.S. Conduits.

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Credit Facility

      The Company terminated its $300,000 unsecured credit facility (the "Credit Facility") on March 31, 2004. The Company intends to replace the Credit Facility in the future with an arrangement with terms more appropriate for the Company's new capital structure.

Loss on Early Extinguishment of Debt

      During the six months ended March 31, 2004, the Company repurchased the following notes payable:

      As a result of these repurchases and the termination of the U.S. Conduits and Credit Facility discussed above, the Company recognized a loss, including the write-off of unamortized costs, of $3,219, which is included in loss from early extinguishment of debt, in the consolidated statements of income for the six months ended March 31, 2004.

Letters of Credit

      The Company has certain commitments available to it in the form of standby letters of credit. As of March 31, 2004, the Company had $27,621 utilized under standby letters of credit. These letters of credit were supported by the Credit Facility prior to its termination. In March 2004, the Company deposited $27,729 into an escrow account as collateral for outstanding letters of credit until a new credit facility is established. The cash collateral is recorded in restricted cash in the Company's balance sheet as of March 31, 2004.

Credit Ratings

      As of March 31, 2004, the credit ratings on the Company's senior unsecured debt were designated Ba1 with negative outlook by Moody's Investor Services and BB with stable outlook by Standard and Poor's. On April 27, 2004, Moody's Investor Services lowered the Company's senior unsecured debt rating to Ba2 with a stable outlook.

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Note 6:      Share Repurchases

      In March 2004, the Company's Board of Directors authorized the repurchase of up to $250 million of the Company's outstanding shares of common stock, superceding the fiscal 2000 share repurchase authorization.

Note 7:      Comprehensive Income

      Total comprehensive income is as follows:

      The minimum pension liability is adjusted at each fiscal year end; therefore, there is no impact on total comprehensive income during interim periods. The balances for foreign currency translation, minimum pension liability and derivative financial instruments included in accumulated other comprehensive loss in the consolidated balance sheets were $72,066, $(72,740) and $(1,358), respectively, at March 31, 2004 and $23,876, $(72,740) and $(11,927), respectively, at September 30, 2003.

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Note 8:      Earnings Per Common Share

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

      The Company accounts for the effect of its convertible notes in the diluted earnings per common share calculation using the “if converted” method. Under that method, the convertible notes are assumed to be converted to shares (weighted for the number of days outstanding in the period) at a conversion price of $15.03, and interest expense, net of taxes, related to the convertible notes is added back to net income.

      Options to purchase 2,917 shares of common stock at $12.23 to $46.59 per share were outstanding during the second quarter of fiscal 2004 and options to purchase 8,867 shares of common stock at $7.50 to $46.59 per share were outstanding during the second quarter of fiscal 2003, but were not included in the computation of diluted earnings per common share because the options’ prices were greater than the average market price of the common shares; therefore, the effect would be antidilutive.

      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 and options to purchase 8,867 shares of common stock at $7.50 to $46.59 per share were outstanding during the first six months of fiscal 2003, but were not included in the computation of diluted earnings per common share because the options’ prices were greater than the average market price of the common shares; therefore, the effect would be antidilutive.

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Note 9:      Segment Reporting

      The table below presents segment information for the three months ended March 31, 2004 and 2003:

      The table below presents segment information for the six months ended March 31, 2004 and 2003:

      The Company reports information about its operating segments according to the “management approach.” The management approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. Under SFAS 131, our reportable segments are IKON North America (“INA”) and IKON Europe (“IE”). The INA and IE segments provide copiers, printers, color solutions, distributed printing, facilities management, legal document solutions, business imaging services and other office equipment and services, as well as customized workflow and imaging application development. These segments also include our captive finance subsidiaries in North America (including those now divested) and Europe, respectively.

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

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Note 10:      Contingencies

Environmental Matters

      The Company is involved in a number of environmental remediation actions to investigate and clean up certain sites related to its discontinued operations in accordance with applicable federal and state laws. Uncertainties about the status of laws and regulations, technology and information related to individual sites, including the magnitude of possible contamination, the timing and extent of required corrective actions and proportionate liabilities of other responsible parties, make it difficult to develop a meaningful estimate of probable future remediation costs. While the actual costs of remediation at these sites may vary from management’s estimate because of these uncertainties, the Company had accrued balances, included in other long-term liabilities in the Company’s consolidated balance sheets, of $7,696 and $7,913 as of March 31, 2004 and September 30, 2003, respectively, for its environmental liabilities, and the accrual is based on management’s best estimate of the aggregate environmental remediation exposure. The measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, prior experience in remediation of contaminated sites and any studies performed for a site. As assessments and remediation progress at individual sites, these liabilities are reviewed and adjusted to reflect additional technical and legal information that becomes available. After consideration of the defenses available to the Company, the accrual for such exposure, insurance coverage and other responsible parties, management does not believe that its obligations to remediate these sites would have a material adverse effect on the Company’s consolidated financial statements.

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

      During fiscal 2003 and 2004, the Company did not incur any expenses for environmental capital projects, but incurred various expenses in conjunction with its obligations under consent decrees, orders, voluntary remediation plans, settlement agreements and other actions to comply with environmental laws and regulations. For the six months ending March 31, 2004, and March 31, 2003, these expenses were $216 and $228, respectively. All expenses were charged against the related environmental accrual. The Company will continue to incur expenses in order to comply with its obligations under consent decrees, orders, voluntary remediation plans, settlement agreements and other actions to comply with environmental laws and regulations.

Black Lung & Worker's Compensation Matters

      The Company has an accrual related to black lung and worker’s compensation liabilities relating to the operations of a former subsidiary, Barnes & Tucker Company (“B&T”). B&T owned and operated coalmines throughout Pennsylvania. IKON sold B&T in 1986. In connection with the sale, IKON entered into a financing agreement with B&T whereby IKON agreed to reimburse B&T for 95% of all costs and expenses incurred by B&T for black lung and worker’s compensation liabilities, until said liabilities were extinguished. From 1986 through 2000, IKON reimbursed B&T in accordance with the terms of the financing agreement. In 2000, B&T filed for bankruptcy protection under Chapter 11. The bankruptcy court approved a plan of reorganization which created a black lung trust and a worker’s compensation trust to handle the administration of all black lung and worker’s compensation claims relating to B&T. IKON now reimburses the trusts for 95% of the costs and expenses incurred by the trusts for black lung and worker’s compensation claims. As of March 31, 2004 and September 30, 2003, the Company’s accrual for black lung and worker’s compensation liabilities related to B&T was $14,275 and $15,515, respectively.

Tax Matters

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

Guarantees

      As a result of the Transaction, the Company has 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 Transaction. 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, the Company would be required to reimburse GE. These indemnifications generally relate to recourse on different types of lease receivables sold to GE that could potentially become uncollectable. In the event that all lease receivables for which the Company has indemnified GE become uncollectable, the maximum potential loss the Company could incur as a result of these indemnifications at March 31, 2004 was $258,598. Based on the Company's analysis of historical losses for these types of leases, the Company has recorded reserves of approximately $664 at March 31, 2004. The equipment leased to the customers related to the above indemnifications, represents collateral in which the Company would be entitled to recover and could be remarketed by IKON. No specific recourse provisions exist with other parties.

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

Note 11:      Financial Instruments

      As of March 31, 2004, all of the Company’s derivatives designated as hedges are interest rate swaps which qualify for evaluation using the “short cut” method for assessing effectiveness. As such, there is an assumption of no ineffectiveness. The Company uses interest rate swaps to fix the interest rates on its variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the six months ended March 31, 2004, unrealized gains totaling $10,569, after taxes, were recorded in accumulated other comprehensive loss.

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Note 12:      Pension

      The Company sponsors defined benefit pension plans for the majority of its employees. The benefits generally are based on years of service and compensation. The Company funds at least the minimum amount required by government regulations.

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

      The Company expected to contribute $15,900 to the plans during the year ended September 30, 2004. As of March 31, 2004, $700 of contributions had been made. In April 2004, the Company contributed $82,600 to the Company's plans, including a special contribution of $75,000. The Company expects to contribute an additional $7,600 to the plans during the remainder of fiscal 2004.

Note 13:      Assets Held for Sale

      On March 31, 2004, IKON Office Solutions, Inc., a Canadian subsidiary of the Company ("IKON Canada"), executed an Asset Purchase Agreement (the "Canadian Agreement") with Heller Financial Canada, an affiliate of GE ("Heller"), pursuant to which, among other things, Heller will acquire certain assets relating to the leasing operations of IKON Canada (the "Canadian Leasing Business") and become IKON's preferred lease financing source in Canada. Expected proceeds from the transaction are $176,888, which represents the carrying amount of the Canadian Leasing Business at March 31, 2004. This amount will change due to normal lease activity occurring from March 31, 2004 to the closing date of the transaction and the result of final negotiations.

      At March 31, 2004, all criteria for classification as assets held for sale as defined by SFAS No. 144, ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets" had been met. In accordance with SFAS 144, an estimate of assets to be sold to Heller have been reclassified from various line items within the balance sheet and aggregated into "Assets Held for Sale."

      The Canadian Agreement contains representations, warranties, covenants, indemnifications and provisions that are customary for a transaction of this type. The closing is subject to regulatory approvals and other customary conditions and is subject to the execution of a Canadian Program Agreement, which the Company expects will contain terms similar to those set forth in the U.S. Program Agreement. The transactions contemplated by the Canadian Agreement are expected to close in the third quarter of fiscal 2004. This description of the transactions is qualified in its entirety by reference to the full text of the Canadian Agreement included with IKON's current report on Form 8-K as filed with the U.S. Securities and Exchange Commission on April 6, 2004 as exhibit 2.2.

Note 14:      Subsequent Event

      In April 2004, the Company completed its tender for $250,165 of aggregate principal of its outstanding $345 million 7.25% notes due 2008. As a result of the completion of the tender, the Company expects to incur a pretax loss on early extinguishment of debt of approximately $32 million, including $5 million related to the write-off of unamoritized costs, in the third quarter of fiscal 2004.

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

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

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

      References herein to "IKON", the "Company", “we”, “us”, or “our” refer to IKON Office Solutions, Inc. and its subsidiaries unless the context specifically requires otherwise.

Executive Summary

      IKON integrates imaging systems and services that help businesses manage document workflow and increase efficiency. We are the world's largest independent distribution channel for copier and printer technologies, offering best-in-class systems from leading manufacturers such as Canon, Ricoh, Konica-Minolta, HP and Océ and service support through our team of 7,000 service professionals worldwide. We also represent the industry's broadest portfolio of document management services including: outsourcing and professional services, on-site copy and mailroom management, fleet management, off-site digital printing solutions, and customized workflow and imaging application development. We have approximately 600 locations worldwide, including locations in the United States, Canada, Mexico, the United Kingdom, France, Germany, Ireland, Denmark and the Netherlands.

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

      In order to build solid growth initiatives and expand our market reach, our long-term strategy involves enhancing our supplier relationships, expanding our sales channels, and improving our overall business mix. Recognizing our role as a major sales and service channel to our suppliers, we are enhancing those relationships to target new customer and geographic opportunities, launch new products, develop IKON exclusive offerings, and ensure that our execution in the field is effective. The national account program and the metro market initiatives are two of the Company's most important market expansion strategies. The national account program targets multi-million dollar long-term contracts with Fortune 1000 and large regional companies. Our revenues from the national account program grew by over 100% compared to the first half of 2003, with several significant new customer wins made during Fiscal 2004. The metro market initiative is designed to expand the Company's presence in major cities where we had not aggressively marketed in the past. In improving our overall business mix, we are focusing on higher growth technologies like color and high-end black & white production - two important drivers to fuel aftermarket supplies and service revenues. In color, we experienced a 62% increase from the first half of Fiscal 2003 as higher quality and more affordably priced products introduced by both Canon and Ricoh throughout Fiscal 2003 continue to drive the acceptance of color into the workplace. Our strong product mix from industry leaders including Canon, Ricoh, and the IKON CPP 8050 we co-branded with Konica-Minolta, continue to see increased placements in both color and high-end black & white equipment. In Services, we are focusing on faster growing markets such as outsourcing, particularly facilities management, and professional services. Our increased focus on professional services, comprised of our technology experts who blend workflow expertise with hardware and software solutions to improve overall document efficiency, led to increased connectivity rates (the percentage of new equipment sold that is connected to a network) of nearly 50% for Fiscal 2004.

      To develop a highly responsive and cost efficient infrastructure, our focus is to maximize the efficiency of our organization through a streamlined infrastructure, comprehensive information technology system, process improvements, and effective asset management. In our effort to streamline our infrastructure, we continue to implement our e-IKON initiative, a process and systems software solution that integrates more than forty of the forty-five Oracle E-Business modules in the United States. Current e-IKON activity is focused on optimizing supply chain and customer care support - two areas of the Company with the most identified opportunity in terms of productivity and potential costs savings. As a result of our efforts, our supply chain delivered significantly improved inventory turns of 10.4 for the quarter compared to 9.9 at September 30, 2003. We will continue to place our resources into e-IKON as it represents an area of substantial productivity and cost savings opportunities. Six-Sigma is a disciplined business methodology designed to assist companies in increasing profitability by streamlining operations, improving quality and eliminating possible defects in processes. We are seeing some of the first benefits from our initial Six-Sigma projects that are reaching conclusion and we now have eighty trained "black-belts" in the program all targeting measurable financial and process benefits for the Company.

      Closely linked with the success factors described above is our continued drive to achieve greater financial flexibility. During the quarter, we announced the completion of our transaction with General Electric Capital Corporation ("GE") in which the Company sold to GE certain assets and liabilities of IKON, solely in its capacity as successor to IOS Capital, LLC ("IOSC"). The Company and GE executed a Program Agreement with an initial term of five years, during which time the Company will receive fees on all new leases underwritten by GE. The sale of certain of IOSC's assets and liabilities to GE, together with the transactions contemplated by the Program Agreement, are referred to in this report as the "Transaction." In addition, we executed an Asset Purchase Agreement ("the Canadian Agreement") between IKON Canada and Heller Financial Canada, an affiliate of GE ("Heller"), pursuant to which, among other things, Heller will acquire certain assets relating the leasing operations of IKON Canada ( the "Canadian Leasing Business") and become IKON's preferred lease financing source in Canada. These transactions effectively transition us out of the captive leasing business in the United States and Canada, simplify our capital structure, and give us a substantial amount of cash to redeploy in growth initiatives, and share and debt repurchases. For example, our total debt to capital ratio for the quarter declined to 56.3% from 67.7% compared to the second quarter of Fiscal 2003. In addition, we recently tendered $250 million of our 7.25% notes due 2008 which will further reduce our debt to capital ratio.

      For the quarter, the Company had revenues of $1.18 billion, representing a slight increase in revenues from the second quarter of Fiscal 2003, with foreign currency translation providing 2.2% of the benefit. Diluted earnings per share was $0.19, which included a pre-tax loss of $12.1 million from the sale of the Company's U.S. leasing operations; a pretax loss of $3.1 million on the early extinguishment of debt and a tax benefit of $4.7 million associated with the utilization of net operating loss carryovers as a result of the tax gain recognized on the sale of the U.S. leasing operations. Refer to "Results of Operations" for further discussion of our quarterly financial statements.

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Outlook

      As a result of the Transaction, beginning with the third quarter of fiscal 2004, finance income will decline as leases in the retained U.S. lease asset portfolio expire. Fees and profit sharing opportunities resulting from the new alliance with GE, to be reflected in Net Sales and Services, may only partially replace historically reported finance income. We intend to use the proceeds of the Transaction to, among other things, enhance our core business of document management solutions, reduce our debt and purchase shares of our common stock.

Results of Operations

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

Three Months Ended March 31, 2004
Compared to the Three Months Ended March 31, 2003

Revenues

      The increase in revenues of 0.4% compared to 2003, which includes a currency benefit of 2.2% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is a result of an overall decrease in net sales, offset by increases in services and finance income.

      Net sales includes revenues from the sale of copier/printer multi-function equipment, direct supplies, and technology hardware. The decrease in net sales includes a currency benefit of 2.9%. Sales of technology hardware declined by $4,900 compared to the second quarter of 2003 as several large customer relationships were not renewed by the Company for 2004 as we continue to de-emphasize this business. Direct supply sales of $49,200 remained relatively flat compared to the prior year. Equipment revenue, which comprised over 87% of the Company's net sales mix during the second quarter of 2004, decreased 1%, or $4,400, compared to 2003. Revenues generated from the sale of color devices increased by 62% compared to 2003 due to higher demand for these products, particularly higher-end color production equipment, as new products were introduced at more affordable prices. As a percentage of equipment revenue, color devices increased from approximately 12% in 2003 to approximately 20% in 2004. The Company also experienced growth in black & white production equipment (segment 5 - 6 devices with page outputs greater than 70 pages per minute) of approximately 4%, due in part, to an increase of approximately 20% in Canon imageRUNNER 110/150 placements. Sales of black & white production and color devices, a high growth area for the Company, represented 35% of the Company's equipment revenues in 2004 compared to 27% in 2003. These increases were offset by decreases from the sale of black & white office equipment (segment 1 - 4 devices with page outputs less than 70 pages per minute) of approximately 9%, compared to 2003. This decrease was due to lower demand for these products compared to the prior year, due in part, to the shift of sales to color devices. As a percentage of equipment revenue, sales of black & white office equipment (including miscellaneous equipment) represented 65% in 2004 compared to 73% in 2003.

       Services consists of revenue from the servicing of copier/printer equipment and outsourcing and other services, such as facilities management, digital print production, legal document services, professional services and other services, and rentals. Services increased by 2.3%, which includes a currency benefit of 1.7%. Outsourcing and other services increased by $4,000, or 1.8%, compared to 2003. Equipment service, which is significantly impacted by the level and mix of copy volumes, increased by $8,900, or 2.6%, compared to the second quarter of 2003, as the Company began to realize the benefit of a more favorable mix of color and production technologies and benefits from strategic investments that enhance the potential for aftermarket revenues. Total copy volume grew by approximately 5% compared to 2003.

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      Finance income is generated by IKON's wholly-owned leasing subsidiaries. IOSC, IKON's former leasing subsidiary in the United States, accounted for 88% of the Company's finance income during 2004, compared to 89% during 2003. Approximately 84% of IKON's copier and equipment revenues in the United States were financed by IOSC during 2004, compared to approximately 78% during 2003. The increase in finance income is primarily due to growth in the gross lease portfolio of 4.6% compared to 2003 (prior to the Transaction on March 31, 2004) and a currency benefit of 1.5%. These increases were partially offset by a decrease in the Company's average financing rate charged on our lease receivables compared to 2003. Although we will receive finance income under certain leases that will be financed directly by the Company, our total finance income will decrease in future periods as a result of the Transaction.

Gross Margin

      Total gross margin decreased from 38.0% in 2003 to 37.6% in 2004. Over 50% of the decrease in gross margin on net sales was due to less favorable product and customer mix and a more competitive environment for copier/printer equipment that resulted in additional pricing pressures compared to 2003. Changes in customer and product mix negatively impacted gross margin, as new technology was introduced at more affordable prices. Color was the largest driver of this change, as average selling price decreased by over 12% compared to the second quarter of 2003. While color pricing has declined with new technology introductions, lower pricing led to a stronger acceptance of color in the marketplace, resulting in increased unit placements and a 62% increase in color equipment revenues compared to the second quarter of 2003. The remaining decrease in gross margin was primarily attributable to lower sales of high-margin used equipment and write-offs related to our continued centralization efforts.

      The gross margin on services increased slightly compared to 2003 due mainly to continued productivity and operational improvements.

      The gross margin on finance income increased compared to 2003 due to the effect of lower average borrowing rates, partially offset by a decrease in the Company's average financing rate charged on our lease receivables. The average financing rate on our lease receivables was approximately 10.7% and 11.1% for 2004 and 2003, respectively. Additionally, our average cost of debt supporting finance contracts was approximately 4.7% and 5.3% for 2004 and 2003, respectively.

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Other

      Selling and administrative expense increased by $5,300, or 1.4%, during 2004 compared to 2003, and increased slightly as a percentage of revenue. A significant portion of this increase is attributable to the unfavorable impact of changes in foreign currency rates of $6,300 compared to the prior year, additional pension expense of $4,400 and incremental increases in other benefit related costs compared to 2003. Partially offsetting these increases was a decrease in the provision for lease defaults of $4,700 due to the strengthening of the lease portfolio compared to 2003.

      The Company incurred a loss of $12,100 from the divestiture of the U.S. leasing business resulting from the difference between the carrying amount of assets sold and proceeds received and certain costs associated with the Transaction.

      Our operating income decreased by 29.1% compared to the three months ended March 31, 2003, as a result of the factors discussed above.

      During the three months ended March 31, 2004, the Company recorded a loss from early extinguishment of debt of $3,100, as a result of the repurchases of debt and other financing related actions discussed below under "Debt Structure." During 2003, the Company recorded a gain from the early extinguishment of debt of $1,300, as a result of the repurchase of various debt instruments.

      The decrease in interest expense was due to lower average outstanding debt balances in 2004 compared to 2003. This decrease is partially offset by higher weighted average interest rates during the second quarter of 2004 compared to the second quarter of 2003.

      The effective income tax rate was 17.80% and 37.75% for 2004 and 2003, respectively. This decrease was due to the reversal of valuation allowances on state net operating loss carryovers of $4,700 as a result of the tax gain generated by the Transaction in 2004. In addition, during 2004, the Company reversed valuation allowances on the Company's Canadian net operating loss carryovers of $2,600 as a result of improved financial performance achieved by the Company's Canadian operations.

      Diluted earnings per common share were $0.19 for the three months ended March 31, 2004 compared to $0.23 for the three months ended March 31, 2003.

Review of Business Segments

IKON North America

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

      Approximately 66% of the net sales decrease was due to a decline in copier/printer equipment sales of 3.5%, or $13,600, due to lower average selling prices and less favorable product mix. Technology hardware decreased by $5,100 as a result of several large customer relationships that were not renewed for 2004 by the Company. Services increased by approximately 1.7%, or $8,900. Equipment services increased by 1.9%, or $5,900, compared to 2003, as the Company began to realize the benefit of a more favorable mix of color and production technologies and benefits from strategic investments that enhance the potential for aftermarket revenues. Outsourcing and other services increased 1.5%, or $3,000, compared to 2003, due primarily to an increase in professional services. Finance income increased due to growth in the lease portfolio compared to 2003, partially offset by a decrease in the Company's average financing rate charged on our lease receivables compared to 2003. Finance interest expense decreased due to lower average borrowing rates compared to 2003. The Company incurred a loss of $12,100 from the divestiture of the U.S. leasing business resulting from the difference between the carrying amount of assets sold and proceeds received and certain costs associated with the Transaction. Operating income decreased due to lower revenues and lower profit margins on revenues compared to 2003 and the loss from the divestiture of the U.S. leasing business.

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IKON Europe

      Net sales increased as a result of currency benefits of approximately $10,600. Excluding the impact of currency, sales of copier/printer equipment remained relatively flat compared to 2003. Services and finance income increased as a result of currency benefits of approximately $6,900 and $860, respectively. Operating income for 2004 remained relatively flat compared to 2003.

Corporate/Operations

      Corporate/Operations, which is not treated as a business segment, includes certain selling and administrative functions such as finance, supply chain, and customer service. Operating costs in Corporate/Operations were $88,400 and $74,300 in 2004 and 2003, respectively.

Six Months Ended March 31, 2004
Compared to the Six Months Ended March 31, 2003

Revenues

      The decrease in revenues of 0.7% compared to 2003, which includes a currency benefit of 2.0% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is a result of an overall decrease in net sales, partially offset by increases in services and finance income.

      Net sales includes revenues from the sale of copier/printer multi-function equipment, direct supplies, and technology hardware. The decrease in net sales includes a currency benefit of 2.8%. Sales of technology hardware declined by $13,100, compared to the six months ended 2003, as several large customer relationships were not renewed by the Company for 2004 as we continue to de-emphasize this business. Direct supply sales of $94,300 remained relatively flat compared to the prior year. Equipment revenue, which comprised over 87% of the Company's net sales mix during the six months ended March 31, 3004, decreased approximately 1%, or $9,100, compared to the prior year. Revenues generated from the sale of color devices increased by 62% compared to 2003 due to higher demand for these products, particularly higher-end color production equipment, as new products were introduced at more affordable prices. As a percentage of equipment revenue, color devices increased from approximately 12% in 2003 to approximately 19% in 2004. The Company also experienced growth in black & white production equipment (segment 5 - 6 devices with page outputs greater than 70 pages per minute) of approximately 1%, due in part, to an increase of approximately 16% in Canon imageRUNNER 110/150 placements. Sales of black & white production and color devices, a high growth area for the Company, represented 35% of our equipment revenues in 2004 compared to 28% in 2003. These increases were offset by decreases from the sale of black & white office equipment (segment 1 - 4 devices with page outputs less than 70 pages per minute) of approximately 7%, compared to 2003. This decrease was due to lower demand for these products compared to the prior year, due in part, to the shift of sales to color devices and lower average selling prices for these products. As a percentage of equipment revenue, sales of black & white office equipment (including miscellaneous equipment) represented 65% in 2004 compared to 72% in 2003.

      Services consists of revenue from the servicing of copier/printer equipment and outsourcing and other services, such as facilities management, digital print production, legal document services, professional services and other services, and rentals. Services increased by 0.1%, which includes a currency benefit of 1.5%. Excluding this currency benefit, overall services decreased approximately 1.4% compared to 2003. Outsourcing and other services increased by $18,500, or 4.2%, compared to 2003. The Company earned no profit related to the completion of a multi-year commercial imaging contract, which accounted for approximately 55% of the outsourcing and other services revenue increase and negatively impacted the services gross margin percentage by seventy basis points. Equipment service, which is significantly impacted by the level and mix of copy volumes, decreased by $17,000, or 2.4%, compared to the six months ended March 31, 2003, due to the unfavorable impact of price and mix of copy volumes, particularly during the first quarter of 2004 compared to the first quarter of 2003 (which experienced unusually strong equipment service revenues). However, the Company began to realize the benefit of a more favorable mix of color and production technologies and benefits from strategic investments that enhance the potential for aftermarket revenues during the second quarter of 2004. Total copy volume grew by approximately 5% compared to 2003.

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      Finance income is generated by IKON's wholly-owned leasing subsidiaries. IOSC, IKON's former leasing subsidiary in the United States, accounted for 88% of the Company's finance income during 2004, compared to 91% during 2003. Approximately 83% of IKON's copier and equipment revenues in the United States were financed by IOSC during 2004, compared to approximately 79% during 2003. The increase in finance income is primarily due to growth in the gross lease portfolio of 4.4% compared to 2003 (prior to the Transaction on March 31, 2004) and a currency benefit of 1.3%. These increases were partially offset by a decrease in the Company's average financing rate charged on our lease receivables compared to 2003. Although we will receive finance income under certain leases that will be financed directly by the Company, our total finance income will decrease in future periods as a result of the Transaction.

Gross Margin

      Total gross margin decreased from 38.3% in 2003 to 37.7% in 2004. Over 50% of the decrease in gross margin on net sales was due to less favorable product and customer mix and a more competitive environment for copier/printer equipment that resulted in additional pricing pressures compared to 2003. Changes in customer and product mix negatively impacted gross margin, as new technology was introduced at more affordable prices. Color was the largest driver of this change, as average selling price decreased by over 18% compared to the first half of 2003. While color pricing has declined with new technology introductions, lower pricing led to a stronger acceptance of color in the marketplace, resulting in increased unit placements and a 62% increase in color equipment revenues compared to the first half of 2003. The remaining decrease in gross margin was primarily attributable to lower sales of high-margin used equipment and write-offs related to our continued centralization efforts, partially offset by continued benefits realized from the centralization of our supply chain function.

      The gross margin on services decreased slightly compared to 2003 due mainly to the impact from the completion of a multi-year commercial imaging contract in which no profit was earned.

      The gross margin on finance income increased compared to 2003 due to the effect of lower average borrowing rates, partially offset by a decrease in the Company's average financing rate charged on our lease receivables. The average financing rate on our lease receivables during the six months ended March 31, 2004 and 2003, was approximately 10.7% and 11.0%, respectively. Additionally, our average cost of debt supporting finance contracts was approximately 4.7% and 5.4% for the six months ended March 31, 2004 and 2003, respectively.

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Other

      Selling and administrative expense remained relatively consistent compared to 2003. Selling and administrative expense was unfavorably impacted by $11,800 due to foreign currency translation compared to the prior year. Pension and bad debt expense increased $8,700 and $4,400, respectively, compared to 2003. These increases were offset by a decrease in compensation expense of $16,600 due primarily to headcount reductions compared to 2003 as the Company continues its efforts to consolidate and centralize certain administrative functions. In addition, the provision for lease defaults decreased by $8,800 due to the strengthening of the lease portfolio compared to 2003.

      The Company incurred a loss of $12,100 from the divestiture of the U.S. leasing business relating to expenses resulting from the difference from the carrying amount of assets sold and proceeds received and certain costs associated with the Transaction.

      Our operating income decreased by 22.4% compared to the six months ended March 31, 2003, as a result of the factors discussed above.

      During the six months ended March 31, 2004, the Company recorded a loss from early extinguishment of debt of $3,200, as a result of the repurchases of debt and other financing related actions discussed below under "Debt Structure." During 2003, the Company recorded a gain from the early extinguishment of debt of $1,300, as a result of the repurchase of various debt instruments.

      The decrease in interest expense was due to lower average outstanding debt balances in 2004 compared to 2003. This decrease is partially offset by higher weighted average interest rates during the six months ended 2004 compared to the six months ended March 31, 2003.

      The effective income tax rate was 28.72% and 37.75%, respectively for 2004 and 2003. This decrease was due to the reversal of valuation allowances on state net operating loss carryovers of $4,700 as a result of the tax gain generated by the Transaction in 2004. In addition, during 2004, the Company reversed valuation allowances on the Company's Canadian net operating loss carryovers of $2,600 as a result of improved financial performance achieved by the Company's Canadian operations.

      Diluted earnings per common share were $0.37 for the six months ended March 31, 2004 compared to $0.44 for the six months ended March 31, 2003.

Review of Business Segments

IKON North America

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

      Approximately 60% of the net sales decrease was due to a decline in sales of copier/printer equipment of $24,000, or 3.2%, due to lower average selling prices and less favorable product mix. Technology hardware decreased $12,000 as a result of several large customer relationships that were not renewed for 2004 by the Company. Services decreased by approximately 0.6%, or $6,700, due primarily to declines in equipment services of 4.5% compared to 2003. This decrease was partially offset by an increase in outsourcing and other services of 4.0%, or $16,400, compared to 2003, benefiting from a one-time commercial imaging contract, which accounted for a significant portion of this growth. Finance income increased due to growth in the lease portfolio compared to 2003, partially offset by a decrease in the Company's average financing rate charged on our lease receivables compared to 2003. Finance interest expense decreased due to lower average borrowing rates compared to 2003. The Company incurred a loss of $12,100 from the divestiture of the U.S. leasing business resulting from the difference between the carrying amount of assets sold and proceeds received and certain costs associated with the Transaction. Operating income decreased due to lower revenues and lower profit margins on revenues compared to 2003 and the loss from the divestiture of the U.S. leasing business.

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IKON Europe

      Net sales increased as a result of currency benefits of approximately $18,400. Excluding the impact of currency, sales of copier/printer equipment remained relatively flat compared to 2003. Services increased as a result of currency benefits of approximately $12,000, offset by a decrease of $3,800 due to declines in equipment services compared to 2003. Finance income increased as a result of currency benefits of $1,400. Operating income decreased during 2004 due to an increase in cost of goods sold of $13,200 and services costs of $11,300. These increases are primarily due to an unfavorable currency impact compared to 2003.

Corporate/Operations

      Corporate/Operations, which is not treated as a business segment, includes certain selling and administrative functions such as finance, supply chain, and customer service. Operating costs in Corporate/Operations were $179,300 and $163,100 in 2004 and 2003, respectively.

Financial Condition and Liquidity

Cash Flows and Liquidity

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Operating Cash Flows

      Cash provided from operating activities was $56,700 during the six months ended March 31, 2004. The most significant use of cash was from the decrease of accounts payable, deferred revenues and accrued expenses of $151,100 during the six months ended March 31, 2004, due to decreases in trade accounts payable as a result of higher inventory purchases compared to the fourth quarter of 2003 and the timing of terms with some of our vendors at March 31, 2004, compared to September 30, 2003, and decreases in accrued salaries due to the payment for 2003 performance compensation. During the first half of 2004, the Company used $13,700 of cash to replenish inventories that were at historically low levels at September 30, 2003, due to improved inventory management as a result of the Company's centralization initiatives and the fourth quarter sales initiative. In addition, the Company used $4,600 of cash as a result of an increase in accounts receivable compared to September 30, 2003. This increase was due primarily to higher than normal cash collection efforts during the fourth quarter of 2003. Net income was $57,800 during the six months ended March 31, 2004, and non-cash operating expenses were $170,600, including depreciation, amortization, provision for losses on accounts receivable and lease receivables, provision for deferred taxes, pension expense, loss from early extinguishment of debt, and loss on divestiture of business.

Investing Cash Flows

      During fiscal 2004, the Company received $1,432,600 from investing activities, which included proceeds from the divestiture of business totaling $1,504,800 from the Transaction with GE. The Company had capital expenditures for property and equipment of $12,000 and capital expenditures for equipment on operating leases of $23,900. Capital expenditures for equipment on operating leases represent purchases of equipment that are placed on rental with customers. Proceeds from the sale of property and equipment during the first half of 2004 were $7,800. Cash provided from investing activities includes net cash used by finance subsidiaries of $39,900 due to additions exceeding collections of lease receivables.

Financing Cash Flows

      During the first half of fiscal 2004, the Company used $998,300 of cash for financing activities. Also during the first half of fiscal 2004, the Company received proceeds of $500 and made repayments of $45,300 related to corporate debt and other borrowings. During the six months ended March 31, 2004, the Company's repaid $1,238,200 of debt supporting finance contracts, of which $796,400 was related to the repayment of the Company's U.S. revolving asset securitization conduit financing arrangements (the "Conduits") upon the completion of the Transaction with GE. During the six months ended March 31, 2004, the Company received $317,900 from the issuance of debt supporting finance contracts. Repayments of debt supporting finance contracts includes the early extinguishment of $2,000 par value of the Company's 2004 Notes for $2,100, $5,000 par value of the Company's 2008 Notes for $5,300 and $4,000 par value of the Company's 2004 Bonds for $4,100. As a result of these repurchases and the termination of the U.S. Conduits and Credit Facility, the Company recognized a loss of $3,200, which is included in loss from early extinguishment of debt, in the consolidated statements of income for the six months ended March 31, 2004.

      The Company paid $11,800 of dividends to shareholders, or $0.08 per common share during the six months ended March 31, 2004.

      Cash flows from financing activities includes a $26,300 increase in restricted cash. Restricted cash primarily represents the cash that has been collected on the leases that are pledged as collateral for lease-backed notes. This cash must be segregated within two business days into a trust account and the cash is used to pay the principal and interest on lease-backed notes as well as any associated administrative expenses. The level of restricted cash is impacted from one period to the next by the volume of leases pledged as collateral on the lease-backed notes and timing of collections on such leases. Restricted cash includes $32,700 deposited with an escrow agent during 2003 to defease the Company's 2004 Notes. Restricted cash also includes $27,700 deposited into an escrow account during 2004 as collateral for standby letters of credit which were previously supported by the Company's Credit Facility which was terminated in March 2004.

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Debt Structure

      * The convertible subordinated notes and notes payable presented at September 30, 2003 have been reclassified from debt supporting finance contracts to corporate debt at March 31, 2004.

      Our debt to capital ratio was 56.3% at March 31, 2004, compared to 67.8% at September 30, 2003. This decrease is primarily a result of the Transaction and the repayment of $796,100 of the Conduits from the proceeds received from the Transaction. Also contributing to the decrease was the early extinguishment of $11,000 of notes payable during the six months ended March 31, 2004 as discussed below. In April 2004, the Company completed its tender of $250,200 of aggregate principal of its outstanding $345 million 7.25% notes due 2008 which will further reduce our debt to capital ratio.

      During the six months ended March 31, 2004, the Company repaid $1,238,200 of debt supporting finance contracts and received $317,900 from the issuance of related debt instruments.

      As of March 31, 2004, IKON Capital, PLC, IKON's leasing subsidiary in the United Kingdom, and IKON Capital, Inc., IKON's leasing subsidiary in Canada, had approximately $9,800 and CN$84,000 available under their Conduits. During the six months ended March 31, 2004, the Company pledged or transferred $175,300 in financing lease receivables for $150,100 in cash in connection with these Conduits.

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      During the six months ended March 31, 2004, the Company pledged or transferred $362,000 in financing lease receivables for $306,100 in cash in connection with the U.S. Conduits. Immediately following the close of the Transaction, the outstanding balances of the U.S. Conduits were repaid and the U.S. Conduit arrangements were terminated.

      The Company terminated its $300,000 unsecured credit facility (the "Credit Facility") on March 31, 2004. The Company intends to replace the Credit Facility in the future with an arrangement with terms more appropriate for the Company's new capital structure.

      During the six months ended March 31, 2004, the Company repurchased the following notes payable:

      As a result of these repurchases and the termination of the U.S. Conduits and Credit Facility discussed above, the Company recognized a loss, including the write-off of unamortized costs, of $3,200, which is included in loss from early extinguishment of debt, in the consolidated statements of income for the six months ended March 31, 2004.

      In April 2004, the Company completed its tender of $250,200 of aggregate principal of its outstanding $345 million 7.25% notes due 2008. As a result of the completion of the tender, the Company expects to incur a pretax loss on early extinguishment of debt of approximately $32 million, including $5 million related to the write-off of unamortized costs, in the third quarter of fiscal 2004.

      The Company has certain commitments available to it in the form of standby letters of credit. As of March 31, 2004, the Company had $27,600 utilized under standby letters of credit. These letters of credit were supported by the Credit Facility prior to its termination. In March 2004, the Company deposited $27,700 into an escrow account as collateral for outstanding letters of credit until a new credit facility is established. The cash collateral is recorded in restricted cash in the Company's balance sheet as of March 31, 2004.

      As of March 31, 2004, the credit ratings on the Company's senior unsecured debt were designated Ba1 with negative outlook by Moody's Investor Services and BB with stable outlook by Standard and Poor's. On April 27, 2004, Moody's Investor Services lowered the Company's senior unsecured debt rating to Ba2 with a stable outlook.

      The Company uses interest rate swaps to fix the interest rates on its variable rate classes of lease-backed notes, which results in a lower cost of capital than if it had issued fixed rate notes. During the six months ended March 31, 2004, unrealized gains totaling $10,600 after taxes, were recorded in accumulated other comprehensive loss. As of March 31, 2004, all of the Company's derivatives designated as hedges are interest rate swaps which qualify for evaluation using the "short cut" method for assessing effectiveness. As such, there is an assumption of no ineffectiveness.

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Outlook

      The following summarizes IKON’s significant contractual obligations and commitments as of March 31, 2004: