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As filed with the Securities and Exchange Commission on December 29, 2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

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

Securities registered pursuant to Section 12(g) of the Act:  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 31, 2003 was approximately $1,025,360,636 based upon the closing sales price on the New York Stock Exchange Composite Tape of $7.10 per common share. For purposes of the foregoing sentence only, all directors and executive officers of the registrant were assumed to be affiliates.

The number of shares of common stock, no par value, of the registrant outstanding as of December 15, 2003 was 146,533,249.

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

DOCUMENTS INCORPORATED BY REFERENCE

Part III—Portions of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Shareholders

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INDEX

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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-K, which constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Litigation Reform Act”). These forward-looking statements include, but are not limited to, statements regarding the following (and certain matters discussed in greater detail herein): plans to consummate the proposed transaction with General Electric Capital Corporation involving IOS Capital, LLC; 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 and color equipment and outsourcing industries; the effect of foreign currency exchange risk; the reorganization of the Company’s business segments and the anticipated benefits of operational synergies related thereto; and the Company’s ability to finance its current operations and its growth initiatives. Although IKON believes the expectations contained in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove correct. References herein to “we”, “us”, “our”, “IKON”, or the “Company” refer to IKON and its subsidiaries unless the context specifically requires otherwise.

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

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

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

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

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Vendor Relationships.    IKON’s access to equipment, parts and supplies depends upon its relationships with, and its ability to purchase equipment on competitive terms from its principal vendors, Canon, Ricoh, Hewlett-Packard 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 these vendors. Significant deterioration in relationships with, or in the financial condition of, these significant vendors could have an adverse impact on IKON’s ability to sell and lease equipment as well as its ability to provide effective service and technical support. If one of these vendors terminated or significantly curtailed its relationship with IKON, or if one of these vendors ceased operations, IKON would be forced to expand its relationship with other vendors, seek out new relationships with other vendors or risk a loss in market share due to diminished product offerings and availability.

Financing Business.    A significant portion of our profits are derived from the financing of equipment provided to our customers. Our ability to provide such financing at competitive rates and to realize profitable margins is highly dependent upon our costs of borrowing. If IKON is unable to continue to have access to its funding sources on terms that allow it to provide leases on competitive terms, IKON’s business could be adversely affected, as IKON’s customers could seek to lease equipment from competitors offering more favorable leasing terms. For the fiscal year ended September 30, 2003, approximately 81% of equipment sold by IKON in the United States was financed through IOS Capital, LLC (“IOSC”), IKON’s captive leasing subsidiary. IOSC accesses capital using asset securitization transactions, including revolving asset securitization conduit arrangements, public and private offerings of its debt securities, borrowings from commercial lenders and loans from IKON. IOSC relies primarily on asset securitization transactions to finance its lease receivables. There is no assurance that we will continue to have access to our current funding sources, or that we will be able to obtain additional funding on terms that would allow us to provide leases on competitive terms. In particular, during the year ended September 30, 2003, Moody’s Investor Services (“Moody’s”) lowered the Company’s senior unsecured credit rating from Baa2 to Ba1 (maintaining our rating under review for further downgrade) and Standard and Poor’s (“S&P”) designated the Company’s BBB- rating with a negative outlook. Furthermore, in December 2003, S&P placed the Company’s rating on CreditWatch for possible downgrade as a result of the announced sale of certain assets and liabilities of IOSC (see “Business — Recent Developments”). Our access to certain credit markets is dependent upon our credit ratings. Although the Company is currently rated investment grade by S&P, any negative changes to our credit ratings, including any further downgrades, could reduce or foreclose our access to certain credit markets and may require that excess cash flows under IOSC’s securitization arrangements be used to pay principal amounts outstanding under such arrangements. There is no assurance that these credit ratings can be maintained or that the credit markets can be readily accessed.

As of December 10, 2003, IKON entered into a definitive asset purchase agreement (the “Agreement”) with General Electric Capital Corporation (“GE”) to sell certain assets and liabilities of IOSC to GE. As a condition to the consummation of the transactions contemplated by the Agreement, IKON and GE will enter into a program agreement (the “Program Agreement”) to provide for the funding of IKON’s lease originations in the United States and Canada. The transaction is subject to the execution of other agreements and customary closing conditions. We cannot assure you that the transactions contemplated by the Agreement will occur. In the event this transaction does not close, or we are unable to successfully integrate our equipment distribution business with a third party vendor finance program, which involves the integration and transition of complex systems and processes, our liquidity, financial position and results of operations may be adversely affected (see “Business — Recent Developments”).

Liquidity.    The Company maintains a $300,000,000 unsecured credit facility (the “Credit Facility”) with a group of lenders. The Credit Facility contains affirmative and negative covenants, including limitations on certain fundamental changes, investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends, intercompany loans and certain restricted payments. The Credit Facility does not affect our ability to continue to securitize lease receivables. The Credit Facility matures on May 24, 2005. During fiscal 2003, the Company tendered and defeased all of IOSC’s 9.75% notes due June 15, 2004 (the “2004 Notes”), which removed an early maturity provision within the Credit Facility. The Credit

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Facility also contains certain financial covenants, including: (i) corporate leverage ratio; (ii) consolidated interest expense ratio; (iii) consolidated asset test ratios; and (iv) limitations on capital expenditures. The Credit Facility contains defaults customary for facilities of this type. In order to provide certain financial flexibility under the corporate leverage ratio, the covenant was modified during the third quarter of fiscal 2003 as follows: (i) at September 30, 2003, 3.75 to 1.00; (ii) at December 31, 2003, 3.60 to 1.00; (iii) at March 31, 2004, 3.40 to 1.00 and (iv) at June 30, 2004 and as of the last day of each quarterly period thereafter, 3.00 to 1.00. This covenant measures a ratio of the Company’s corporate non-finance subsidiary debt to business earnings (excluding finance income and interest expense associated with our financing operations). As of September 30, 2003, the corporate leverage ratio was 3.41 to 1.00. Failure to be in compliance with any material provision of the Credit Facility, including, without limitation, the financial covenants described above, could have a material adverse effect on our liquidity, financial position and results of operations.

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

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. 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 15% of our revenues are derived from our international operations, and approximately 76% 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 I

Item 1.    Business.

Recent Developments

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

Under the terms of the Agreement, and subject to closing adjustments, IKON will receive approximately $1.5 billion of gross proceeds. The Company will retain approximately $1.4 billion of IOSC’s net lease receivables and the corresponding residuals, of which approximately $1.2 billion are supported by lease-backed notes issued in our two most recent asset-backed notes offerings. In addition, the Company will retain the Canadian leasing portfolio and assume IOSC’s $350 million 7.25% notes due 2008 (the “2008 Notes”), $300 million 5% convertible notes due 2007 (the “Convertible Notes”) and the remaining $34,714 of 9.75% notes due 2004 (the “2004 Notes”). The retained portfolio will be serviced by GE, and most of the retained portfolio is expected to run-off over the next twenty-four months.

The Agreement contains representations, warranties, covenants, indemnifications and provisions that are customary for a transaction of this type. The closing of the transaction is subject to the execution of the definitive Program Agreement, other agreements and customary conditions, including receipt of certain third party consents. This description of the transaction, including the Agreement and the Program Agreement, is qualified in its entirety by reference to the full text of the agreements included with IKON’s current report on Form 8-K as filed with the U.S. Securities and Exchange Commission (the “Commission”) on December 15, 2003. The transaction is expected to close in the second quarter of fiscal 2004. We cannot assure you that the transactions contemplated by the Agreement will occur.

General

IKON was incorporated in Ohio in 1952 and is the successor to a business incorporated in 1928. References herein to “we”, “us”, “our” or the “Company” refer to IKON and its consolidated subsidiaries unless the context specifically requires otherwise. The address of the Company’s principal executive offices is 70 Valley Stream Parkway, Malvern, Pennsylvania 19355 (telephone number: 610-296-8000).

IKON integrates imaging systems and services that help businesses manage document workflow and increase efficiency. As the world’s largest independent distribution channel for copier and printer technologies, IKON offers best-in-class systems from leading manufacturers such as Canon, Ricoh, Hewlett-Packard and Océ and service support through its team of 7,000 service professionals worldwide. IKON also represents 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. IKON also provides lease financing services to its customers through its wholly-owned finance subsidiaries, including IOSC (see “Recent Developments”).

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

IKON primarily distributes equipment made by Canon, Ricoh, Hewlett-Packard and Océ. IKON has not and does not currently enter into long-term supply contracts with our vendors, and we have no current plans to do so in the future. Customers include large and small businesses, professional firms and municipal and government agencies.

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In fiscal 2003, IKON generated $4.7 billion in revenues, and net income of $116.0 million, or $0.75 per diluted common share, which includes $19.2 million in pre-tax net losses related to the early extinguishment of debt (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

Strategy Overview

IKON integrates imaging systems and services to help businesses manage document workflow and increase efficiency. IKON will continue to execute on the following key strategies to leverage IKON’s strengths and position IKON for long-term success:

Enhance Growth Platforms

Supplier integration.    We seek to work collaboratively with our vendors, so we can respond more quickly to market changes.

Business mix shift.    We need to ensure that our product and services portfolio is flexible, services-centric and customer-focused. To this end, we continue to emphasize key growth areas such as professional services, outsourcing and color and production equipment.

Channel expansion.    We seek to identify opportunities in the market and extend our reach through initiatives such as our national accounts program and our metro-market and European city strategies.

Operational Efficiencies

e-IKON.    In order to serve our customers consistently, we are implementing an enterprise-wide IT platform known as e-IKON.

Process improvements.    We are working to streamline operations, improve quality and eliminate defects in our processes through Six Sigma and other process improvement initiatives.

Asset management.    We seek to enhance our financial and operational foundations to enable growth.

Organizational development.    We intend to continue to invest in development opportunities across our organization.

Financial Flexibility

We continue to seek to strengthen our financial flexibility by strengthening our balance sheet and focusing on maintaining financial flexibility in order to implement our strategies.

Our General Business Development

From 1994 through 1998, IKON aggressively acquired businesses providing traditional office equipment products and services, outsourcing and imaging services and technology products and services. Beginning in fiscal 1999, IKON ceased making acquisitions in North America and focused on executing strategies to integrate acquired companies in order to organize IKON into a more efficient and cohesive organization. During fiscal 1999, we conducted a broad-based review of our business in an effort to improve our cost-competitiveness and productivity. The focus of this effort was not only to identify cost-cutting initiatives, but also to identify areas of opportunity to gain efficiencies and to invest the resulting savings in areas that are critical to our long-term success. During the past several years we have changed our business in the following major areas:

Business Division Integration.    Beginning in fiscal 1999, we created our largest operating units, IKON North America (“INA”) and IKON Europe (“IE”), by integrating our business services, outsourcing and captive finance subsidiaries. Our business service offerings include traditional copiers, printers, and other office

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equipment and services. Outsourcing handles the management of our customers’ mailrooms, copy centers and general administrative facilities, as well as distributed printing, and legal document solutions (see “Product and Service Offerings”). Through our captive finance subsidiaries, we arrange lease financing primarily for equipment marketed by IKON. Our largest finance subsidiary is IOSC, a wholly-owned subsidiary of IKON. As of September 30, 2003, IOSC represented approximately 90% of our finance income and had over $3.1 billion of net lease receivables. IOSC, as well as our other captive finance subsidiaries, finance copiers, facsimile machines and related accessories and peripheral equipment, the majority of which are manufactured by Canon and Ricoh (see “Recent Developments”). During the past several years we have focused on INA and IE and de-emphasized the sale of lower margin technology services hardware and software in North America and Europe. In addition, our business imaging services operations and our Sysinct^SM operating unit, which had been included in Other, are now included in INA, which is consistent with the way management now makes operating decisions (see “Operating Segments”).

Operations Integration and Enhancements.    As we have integrated our business divisions over the past several years, we have centralized and consolidated a variety of operational functions, which include: (i) integrating and consolidating our financial and accounting functions in shared service centers; (ii) establishing consolidated customer care centers; and (iii) developing a national supply chain organization to leverage our buying power with vendors and streamline our distribution and inventory management processes. We have divided our marketplace activities into service and sales functions and have implemented a sales coverage model to align our sales professionals with the right opportunities. This provides them with territory analysis and sales automation tools to effectively manage their territories (see “Efficiency Initiatives”).

Product Transition.    Virtually all of the new office equipment we distribute is digital, which has the ability to communicate with other office equipment and often eliminates the distinction between traditional copiers, facsimile equipment and printers. We have continued to focus on the distribution of color products and digital multi-functional office equipment that enables customers to print, copy, scan and fax, all from one device. We believe that the office equipment market will continue to change with the increasing acceptance of black and white multi-function and color technology, and the manufacturers of the products we distribute will continue to focus on developing and manufacturing these products. The evolution of digital technology has allowed our vendors to develop high-end segment 5 and 6 equipment (equipment with output speeds in excess of 70 pages per minute) and color products. We have pursued opportunities to market these high-end products. During fiscal 2003, sales of high-end equipment and color products represented approximately 37% of our office equipment revenues in North America.

Operating Segments

Statement of Financial Accounting Standards (“SFAS”) 131, “Disclosures about Segments of an Enterprise and Related Information”, requires segment data to be measured and analyzed on a basis that is consistent with how business activities are reported internally to management.

Revenue and profit information about the Company’s operating segments in accordance with SFAS 131 is presented on pages 65 through 67 of this report. Additional financial data and commentary on financial results for operating segments are provided on pages 22, 23, 24, 26 and 27 of this report and in note 14 to the consolidated financial statements appearing under Item 8 of this report.

Operating businesses that are reported as segments are INA and IE. These segments provide copiers, printers, color solutions, distributed printing, facilities management, business imaging services, legal document solutions and other office equipment and services, as well as design, planning and support services for network platforms and IT integration projects. These segments also include our captive finance subsidiaries in North America and Europe (see “Recent Developments”). During the past several years, we either disposed of operations formerly included in Other or integrated such operations into INA.

Board and Management Changes

In February 2003, the Company’s Board of Directors elected Matthew J. Espe, President and Chief Executive Officer, to the additional position of Chairman of the Board. Mr. Espe succeeded James J. Forese, who had retired as President and CEO of the Company during fiscal 2002.

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In fiscal 2003, Anthony P. Terracciano and William E. McCracken were elected as members of the Company’s Board of Directors. Mr. Terracciano currently serves as a director of Avaya, Inc., Monmouth University and Monmouth Medical Center. Mr. Terracciano also served as Chairman of Dime Bancorp, Inc. (2000-2002). Prior to retiring in 1997, Mr. Terracciano held a number of executive positions in the banking industry, including President of First Union Corporation (1995 to 1997) and Chairman and President of First Fidelity Bank Corporation (1990 to 1997). Mr. McCracken spent over 35 years at International Business Machines Corporation (IBM) before retiring in 2001. During his career at IBM, Mr. McCracken held a variety of management positions, including President of Executive Consulting Group, LLC, General Manager of Worldwide Marketing for IBM PC Company (1994 to 1998); President of IBM’s PC Division, EMEA/Asia Pacific (1993-1994); General Manager of the PC Division in Europe, Middle East and Africa (1991-1993); and Vice President of Channel Management for the PC Division (1988-1990).

In November 2003, Gerald Luterman was elected as a member of the Company’s Board of Directors, effective January 2004. Mr. Luterman has been Executive Vice President and Chief Financial Officer of KeySpan Corporation since February 2002, and was Senior Vice President and Chief Financial Officer from July 1999 to February 2002. Prior to joining KeySpan Corporation in July 1999, he served as Chief Financial Officer of barnesandnoble.com and Senior Vice President and Chief Financial Officer of Arrow Electronics, Inc. Prior to that, from 1985 through 1996, he held various executive positions with American Express Company. Mr. Luterman is a director of The Houston Exploration Company, a publicly traded U.S. natural gas exploration and production company; KeySpan Facilities Income Fund, an unincorporated open-ended trust that trades on the Toronto Stock Exchange; and Technology Solutions Company.

In December 2003, William L. Meddaugh was elected as a member of the Company’s Board of Directors, effective January 2004. Prior to retiring from General Electric Company (“General Electric”) in 2003, Mr. Meddaugh spent 37 years in various management and executive positions at General Electric. At retirement, Mr. Meddaugh was the President and Chief Executive Officer of General Electric Supply, a position he took on in 1996. Prior to 1996, Mr. Meddaugh held several management positions in sales and marketing at General Electric, including General Manager – Industrial & Developer Sales, General Manger – Industrial Sales Department, General Manager – Marketing Department, Western Regional Manager of General Electric Apparatus Distribution Sales Division, and Marketing Manager – Wiring Devices.

During fiscal 2003, the Company announced the following appointments and promotions: Carlyle S. Jones was appointed to a newly created senior executive position, Senior Vice President of Operations; Theodore E. Strand was promoted to the position of Vice President and Controller; Simon B. Knight was promoted to Senior Vice President and Chief Information Officer; Andrew Twadelle was appointed as Vice President, Six Sigma; and Neil Daniels was promoted to Vice President of Internal Audit.

Realignment to Cross-Functional Leadership

In September 2003, IKON announced a plan to realign its leadership in an effort to promote efficiency and greater responsiveness to market and customer requirements. Under this realignment, the Company’s six regional vice presidents in North America became direct reports to the Company’s Chairman and CEO, Matthew J. Espe, giving Mr. Espe direct oversight of all North American and European field operations. In addition, IKON’s sales support organization has been consolidated under Cathy L. Lewis, Senior Vice President of Marketing, who will also oversee IKON’s national accounts program. All after-sale customer support functions have been consolidated under Carlyle S. Jones, Senior Vice President of Operations, leading initiatives and strategies for customer service, logistics and equipment service delivered by IKON’s national team of service technicians. As part of this realignment, Dennis P. LeStrange, formerly the Senior Vice President of IKON North America, left the Company effective October 1, 2003.

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Marketing, Sales and Service Organizations

Our customer loyalty is built on our employees’ ability to form strong working relationships with the people they serve in the marketplace and our employees’ ability to consistently deliver superior service and support. IKON’s sales force coverage model is intended to align our sales professionals with opportunities in the market. The model uses a three-tiered system for deploying sales teams and assigns coverage for each geographic territory and for specific named, major and strategic accounts. Our sales professionals, which act as primary client contacts, are supported by specialists in color, high-volume, outsourcing and technology applications. The coverage plan works together with IKON’s sales compensation plan. Our sales compensation plan provides incentives to help ensure that efforts in the field are fully coordinated with corporate goals. We continue to expand our sales coverage by providing our sales professionals with territory analysis and sales automation tools to effectively manage sales territories. Sales personnel turnover is common in the industry, and the Company is making a considerable effort to attract and retain qualified sales personnel.

We have a worldwide service force of approximately 7,000 employees. Our service force is continually trained on our new products through a national training center. We are able to provide a consistent level of service worldwide because our service force covers metropolitan and rural areas, and we do not generally rely on independent local dealers for service.

Product and Service Offerings

INA and IE integrate products and services to manage document workflow and increase efficiency.

IKON’s current products and services solutions include:

Digital Copying and Printing.    Sales, integration and support of an array of digital copiers, printers and print controllers for network and production copying and printing, including products from vendors such as Canon, Ricoh, Hewlett-Packard, and Océ.

Maintenance Services.    Preventative maintenance and break-fix service support for office equipment distributed by IKON.

Facilities Management.    On-site, turnkey copy center and mailroom solutions that blend equipment, staff, service and supplies to maximize resources, minimize costs and improve customer operations.

Legal Document Services.    Specialized document services for the legal industry, including reproduction, electronic data storage and discovery and legal document coding and imaging.

Digital Imaging and Conversion.    Storage, conversion and backup of paper and electronic digital documents, as well as archiving and records management.

Professional Services.    Installation, configuration and connectivity of digital network devices, as well as end user training and application customization.

Workflow Management Solutions.    High technology document management solutions designed to improve efficiency and increase the productivity of daily business communications.

Lease Financing.    Equipment lease financing to IKON customers through financing subsidiaries (see “Recent Developments”).

We are in the midst of a rapidly changing competitive industry. IKON recognizes the shifts taking place in our industry and we have been positioning IKON to compete in this dynamic environment. We continue to refine our strategy by forming alliances with leading vendors to expand and enhance our products and services portfolio.

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During fiscal 2003, IKON continued to implement its strategy of moving toward higher-end solutions. Offering equipment such as the Canon imageRunner 105, 110, 150, 7200 and 8500 and the CLC3900+ and CLC5000+ and the Ricoh 1075, 2090, and 2105 has solidified our competitive presence in this market. Placements of this equipment are also a key building block to developing growth opportunities in our equipment service business.

In fiscal 2003, IKON introduced IKON PowerPRESS^™ universal server, a front-end system powered by T/R Systems software that is intended to streamline document workflow through a broad array of digital pre-press and make-ready tools targeted to production print providers, large corporate workgroups and paper intensive production spaces. IKON also introduced IKON DocSend^™, a “scan-to” solution powered by Electronics For Imaging technology that integrates with products across the IKON portfolio. IKON DocSend transforms paper documents into digital files for secure, instantaneous distribution and/or simplified storage.

In October 2003, IKON launched its new high-speed digital color-printing and copier system, the IKON CCP 8050. This new product offering utilizes the breakthrough technology of the Konica Minolta ColorForce 8050 to consistently provide customers with high-quality and high-performance output.

Efficiency Initiatives

We continued to invest in new market opportunities and to streamline our infrastructure. These investments are aimed at making the Company more profitable and competitive in the long-term. We have continued to build on, and reap rewards from, centralizing our organizational structure with initiatives such as centralized credit and purchasing and shared services.

In fiscal 2003, we launched a company-wide Six Sigma initiative to drive increased customer satisfaction and process improvement. 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.

In fiscal 2003, we continued to make significant investments in our e-IKON initiative, a comprehensive, multi-year initiative that has the goal of centralizing operational support functions and re-designing enterprise-wide processes. We anticipate e-IKON will continue to provide benefits to IKON and our customers in terms of improved productivity and competitive differentiation. As of the end of fiscal 2003, we implemented e-IKON in approximately 25% of our marketplaces, as well as two of our three mega care centers located in the United States. In conjunction with the rollout of e-IKON across our business regions, we have outsourced the storage and distribution of our equipment, parts and supplies inventory as part of our broad-based centralized supply chain initiative. We believe the outsourcing of these non-core competencies will provide IKON with operational efficiencies. The transition of the storage and distribution activities will be synchronized with the rollout of e-IKON across the United States.

Customers

No single customer accounted for more than 10% of IKON’s net sales in fiscal 2003. IKON does, however, have certain major customers. The loss of, or major reduction in business from, one or more of IKON’s major customers could have a negative effect on IKON’s financial position or results of operations.

Vendors and Inventory

The Company’s business is dependent upon close relationships with its vendors and its ability to purchase products from these vendors on competitive terms. Products distributed by IKON are purchased from numerous domestic and international vendors, primarily Canon, Ricoh, Hewlett-Packard and Océ. The Company also relies on its equipment vendors for parts and supplies (see “Our General Business Development” and “Product and Service Offerings”).

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The Company conducts its business in reliance upon its continuing ability to purchase equipment, supplies, and parts from its current vendors pursuant to authorized retail dealer and wholesale agreements. However, 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.

Many of the Company’s operations carry inventory to meet rapid delivery requirements of customers. At September 30, 2003, inventories accounted for approximately 8% of IKON’s current assets, which we believe is consistent with general industry standards.

Proprietary Matters

The Company has a number of trademarks, trade names and service marks, which the Company uses in the conduct of its business. Other than the “IKON” and “IKON Office Solutions” marks and their related marks, the Company does not believe that any single name, trademark, trade name or service mark is material to its businesses taken as a whole. Further, the Company has a policy of protecting its proprietary rights. However, any of the Company’s proprietary rights could be challenged, invalidated, or circumvented or may not provide significant competitive advantages.

Environmental Regulation

IKON presently is engaged in distribution and services businesses that do not generate significant hazardous wastes. Some of IKON’s distribution facilities have tanks for storage of diesel fuel and other petroleum products that are subject to laws regulating such storage tanks. Federal, state and local provisions relating to the protection of the environment have not had and are not expected to have a material adverse effect upon the Company’s capital expenditures, liquidity, financial position and results of operations.

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. 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. See pages 13 and 14 under Item 3 of this report for additional information.

Employees

At September 30, 2003, IKON had approximately 30,250 employees. IKON believes its relations with its employees are good.

Competition

IKON operates in a highly competitive environment. A number of companies worldwide with significant financial resources compete with IKON to provide similar products and services in each of its segments. INA and IE provide substantially similar products and services and each compete directly against companies such as

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Xerox, Pitney Bowes and Danka. INA and IE also compete against certain of their significant vendors, such as Canon, Ricoh and Hewlett-Packard. In addition, INA and IE compete against smaller local independent office equipment distributors.

In all of our businesses, we compete primarily on the basis of technology, performance, price, quality, reliability, distribution, customer service and support. In order to remain competitive, we must obtain from our vendors new products and services, periodically enhance our existing products and services and compete effectively on the basis of the factors described above. IKON’s success in its future performance is largely dependent upon its ability to compete successfully in its currently-served markets and to expand into additional product and services offerings. In each segment, we believe our continued focus on the needs of our customers, our ability to consistently deliver superior service and support and our strong customer relationships will distinguish us from our competitors.

Foreign Operations

IKON has operations in Canada, Mexico, the United Kingdom, France, Germany, Ireland, Denmark and the Netherlands. Information concerning the Company’s revenues and long-lived assets by geographic location for each of the three years during the period ended September 30, 2003 is set forth in note 14 to the consolidated financial statements (included on pages 65 through 67 of this report). Revenues from exports during the last three fiscal years were not significant.

Availability of SEC Reports

Our website is located at www.ikon.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, available, without charge, on our website as soon as reasonably practicable after we file them electronically with the Commission.

Item 2.    Properties.

At September 30, 2003, IKON owned or leased approximately 600 facilities in the United States, Canada, Europe and Mexico, of which approximately 1% are owned and 99% are leased under lease agreements with various expiration dates. These properties occupy a total of approximately 7 million square feet.

Item 3.    Legal Proceedings.

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 of $7,913,000 and $8,314,000 as of September 30, 2003 and 2002, 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.

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

During fiscal years 2001 through 2003, the Company did not incur any expenses for environmental capital projects. During fiscal years 2001 through 2003, the Company 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 fiscal years ending September 30, 2003, 2002 and 2001, these expenses were $498,000, $2,436,000 and $1,919,000, 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 and settlement agreements and other actions to comply with environmental laws and regulations.

The Company has an accrual related to black lung and worker’s compensation liabilities relating to the operations of a former subsidiary, Barnes & Tucker Company (“B&T”). B&T owned and operated coal mines 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 September 30, 2003 and 2002, the Company’s accrual for black lung and worker’s compensation liabilities related to B&T was $15,515,000 and $16,734,000, respectively.

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.

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

(No response to this item is required.)

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EXECUTIVE OFFICERS OF IKON

The following is a list of the Company’s executive officers, their ages and their positions for at least the last five years. Unless otherwise indicated, positions shown are with IKON or its subsidiaries.

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters.

The New York Stock Exchange is the principal market on which the Company’s common stock is traded (ticker symbol IKN). As of December 15, 2003, there were approximately 11,264 holders of record of IKON’s common stock. The information regarding the quarterly market price ranges of IKON’s common stock and dividend payments under “Quarterly Financial Summary” on page 71 of this report is incorporated herein by reference.

IKON anticipates that it will pay a quarterly dividend of $0.04 per common share in March 2004. The Company currently expects to continue its policy of paying regular cash dividends, although there can be no assurance as to future dividends because they are dependent upon future operating results, capital requirements and financial condition and may be limited by covenants in certain loan and debt agreements.

Information regarding IKON’s equity compensation plans appearing under “Equity Compensation Plan Information” in IKON’s Notice of Annual Meeting of Shareholders and Proxy Statement for the annual meeting of shareholders to be held on February 24, 2004 is incorporated herein by reference.

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Item 6.    Selected Financial Data.

Notes:

Selected Financial Data:

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, we have identified below the accounting principles critical to our business and results of operations. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We discuss these accounting policies at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements contained in this annual report on Form 10-K. In addition, we believe our most critical accounting policies include the following:

Revenue Recognition.    We install the majority of the equipment we sell. Revenues for company-installed copier/printer equipment and technology hardware, included in net sales, are recognized upon receipt of a signed sales contract and “delivery and acceptance” certificate. The “delivery and acceptance” certificate confirms that the product has been delivered, installed, accepted, is in good condition, and is satisfactory. Revenues for customer installed copier/printer equipment and technology hardware, included in net sales, are recognized upon receipt of a sales contract and delivery. Generally, the Company does not offer any equipment warranties in addition to those which are provided by the equipment manufacturer. Revenues for sales of supplies are recognized at the time of shipment following the placement of an order from a customer. Revenues for monthly equipment service and facilities management service are recognized in the month in which the service is performed. Revenues for other services and rentals are recognized in the period performed. The present value of payments due under sales-type lease contracts is recorded as revenue within net sales and cost of goods sold is charged with the book value of the equipment when products are delivered to and accepted by the customer. Finance income is recognized over the related lease term.

Supporting the Company’s objective to provide complete solutions to its customers, the Company generally bundles a service agreement with copier/printer equipment when sold. The typical agreement includes a minimum number of copies for a base service fee plus an overage charge for any copies in excess of the minimum. Revenue for each element of a bundled contract is derived from our national price lists for equipment and service. The national price list for equipment includes a price range between the manufacturers’ suggested retail price (“MSRP”) and the minimum price for which our sales force is permitted to sell equipment. The price list for equipment is updated monthly to reflect any vendor-communicated changes in MSRP and any changes in the fair value for which equipment is being sold to customers. The national price list for service reflects the price of service charged to customers. The price list for service is updated quarterly to reflect new service offerings and any changes in the competitive environment affecting the fair value for which service is being provided to customers. The national price list, therefore, is representative of the fair value of each element of a bundled agreement when it is sold unaccompanied by the other elements.

Revenue for a bundled contract is first allocated to service revenue using the fair value per our national price list. The remaining revenue is allocated to equipment revenue and finance income based on a net present value calculation utilizing an appropriate interest rate that considers the creditworthiness of the customer, term of the lease, transaction size, and costs of financing. The equipment revenue is compared to the national price list. If the equipment revenue falls within the price range per the national price list, no adjustment is required. If the equipment revenue is not within the price range per the national price list, service and equipment revenues are proportionately adjusted while holding the interest rate constant, so that both service and equipment revenues fall within the price range per the national price list.

Goodwill.    IKON evaluates goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) 142. SFAS 142 prescribes a two-step method for determining goodwill impairment. In the first step, we determine the fair value of the reporting unit using expected future discounted cash flows. If the net book value of the reporting unit exceeds the fair value, we would then perform the second step of the impairment test which requires allocation of the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. The fair value of the

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goodwill is then compared to its carrying amount to determine impairment. If future discounted cash flows are less favorable than those anticipated, goodwill may be impaired.

Inventories.    Inventories are stated at the lower of cost or market using the average cost or specific identification methods and consist of finished goods available for sale. IKON writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those anticipated, inventory adjustments may be required.

Allowances for Receivables.    IKON maintains allowances for doubtful accounts and lease defaults for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of IKON’s customers were to significantly deteriorate, resulting in an impairment of their ability to make required payments, changes to our allowances may be required.

Income Taxes.    Income taxes are determined in accordance with SFAS 109, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between the financial statement and tax basis of liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years. A valuation allowance has been established for deferred tax assets for which realization is not likely. In assessing the valuation allowance, IKON has considered future taxable income and ongoing prudent and feasible tax planning strategies. However, in the event that IKON determines the value of a deferred tax asset has fluctuated from its net recorded amount, an adjustment to the deferred tax asset would be necessary.

Pension.    Certain assumptions are used in the calculation of the actuarial valuation of our company-sponsored defined benefit pension plans. These assumptions include the weighted average discount rate, rates of increase in compensation levels and expected long-term rates of return on assets. If actual results are less favorable than those assumed, additional pension expense may be required.

Residual Values.    IKON estimates the residual value of equipment sold under sales-type leases. Our residual values are based on the dollar value of the equipment and generally range between 0% to 24% of MSRP, depending on the equipment model and lease term. We evaluate residual values quarterly for impairment. Changes in market conditions could cause actual residual values to differ from estimated values, which could accelerate the write-down of the value of the equipment.

Other Accounting Policies.    Other accounting polices, not involving the same level of significance as those discussed above, are nevertheless important to an understanding of our financial statements. See note 1 to the consolidated financial statements, Significant Accounting Policies, which discusses other accounting policies.

Our preparation of this annual report on Form 10-K 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. In addition, certain policies described above may be modified or affected by our announced sale of certain assets and liabilities of IOSC to GE (see “Business — Recent Developments”).

RESULTS OF OPERATIONS

This discussion reviews the results of operations of the Company 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 2003, 2002, 2001, and 2000 refer to the fiscal years ended September 30, 2003, 2002, 2001 and 2000, respectively.

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2003 Compared to 2002

Revenues

The decrease in revenues compared to 2002, which includes a currency benefit of 1.3% (revenues denominated in foreign currencies impacted favorably when converted to U.S. dollars for reporting purposes), is primarily the result of our actions to exit, sell or downsize certain non-strategic or unprofitable businesses (telephony, education and technology hardware businesses, and certain digital print centers) during 2002, which accounted for 71.6% of the decline in 2003. Excluding the impact of these downsizing actions and including the currency benefit described above, revenues for 2003 decreased by approximately 1.3%.

Net sales includes revenues from the sale of copier/printer equipment, supplies, and technology hardware. The decrease in net sales includes a currency benefit of 1.5%. Sales of technology-related hardware (a business the Company exited as described above), such as computers, routers and servers, contributed to 71.6% of the net sales decline compared to 2002. Excluding the impact of technology-related hardware and including the currency benefit described above, net sales decreased by approximately 1.8%. Revenues from the sale of copier/printer equipment decreased by 1.1%, or $19,700, compared to 2002 due to changes in product sales mix, delays in purchasing decisions by our customers and lower selling prices as new technologies were introduced at lower price points, particularly in color equipment. Revenues from the sale of black and white equipment declined in the mid-single digits, while revenues from the sale of color equipment grew by over 15% compared to 2002. In 2003, approximately 37% of copier/printer equipment revenues were from sales of high-end black and white and color products, compared to approximately 34% in 2002. Sales of supplies decreased by 4.5% compared to 2002 due to declines in the sale of fax supplies and generally lower volumes on equipment usage.

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. The decrease in services includes a currency benefit of 1.0%. Revenues from outsourcing and other service offerings were impacted by our actions to exit, sell or downsize certain non-strategic or unprofitable businesses during 2002, which accounted for 60.7% of the total services decline in 2003. Excluding the impact of these actions and including the currency benefit described above, outsourcing and other services decreased by approximately 1.3% compared to 2002. The primary reason for this decrease was due to customers’ business downsizing, customers’ decisions to in-source and reduced demand for business document services and legal document services, arising from a slowdown in the legal business and fewer commercial transactions that utilize such services. Revenues from the servicing of copier/printer equipment decreased by 1.8%, or $21,400, as declines in copy volume of segment 1 – 4 devices (equipment with maximum page output of less than 70 pages per minute) outpaced an increase in copy volume for color and segment 5 and 6 devices (equipment with minimum page output of over 70 pages per minute).

Finance income is generated by IKON’s wholly-owned leasing subsidiaries. IOSC, IKON’s leasing subsidiary in the United States, accounted for approximately 90% of the Company’s finance income during 2003 compared to approximately 93% during 2002 (see “Business—Recent Developments”). Approximately 81% of IKON’s copier and equipment revenues in the United States were financed by IOSC during 2003, compared to approximately 79% during 2002. The increase in finance income is primarily due to growth in the net lease portfolio of 4.3% compared to 2002 and a currency benefit of 0.8%.

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Gross Margin

Total gross margin remained relatively consistent compared to 2002. The decrease in gross margin on net sales was primarily due to a less favorable product and supplies mix, increased competition for copier/printer equipment (particularly in the second half of the year), and a higher level of inventory write-offs compared to 2002. The impact of these items was partially offset by reduced sales of lower-margin technology-related hardware. The gross margin on services remained consistent compared to 2002. The gross margin on finance income increased compared to 2002 primarily due to lower average borrowing rates. The average financing rate on our lease receivables was approximately 11% for 2003 and 2002. Additionally, our finance subsidiaries’ average cost of debt was approximately 5% and 6% for 2003 and 2002, respectively.

Other

Selling and administrative expenses decreased by 3.8% compared to 2002, but increased slightly as a percentage of revenue. The dollar decrease was due to $53,700 from improved productivity, centralization and consolidation initiatives, including headcount reductions, and $35,900 from the downsizing or elimination of unprofitable businesses. The Company incurred $46,400 of increased pension costs and information technology expenses (including expense related to the implementation of e-IKON) and $8,700 of higher bad debt expense, which were partially offset by a $16,900 decrease in expenses related to operational performance compensation costs. During 2003, the Company experienced better than anticipated results in certain litigation matters which reduced net legal expenses by $3,000. Furthermore, during 2002 the Company recorded a charge of $6,000 related to the settlement of the legal matter of Whetman, et al. v. IKON Office Solutions, Inc., et al.

In the fourth quarter of 2002, the Company reversed $10,500 of prior restructuring charges (see “Restructuring and Asset Impairment Charges”). The reversed charges consisted of $7,400 related to severance, $1,700 related to leasehold termination costs and $1,400 related to contractual commitments. The severance reversal was the result of the average cost of severance per employee being less than estimated and 188 fewer positions eliminated than estimated due to voluntary resignations and our decision not to close a digital print center due to changing business dynamics. The reversal of leasehold termination costs and contractual commitments resulted from our decision not to close a digital print center. Additionally, we were also able to reduce our liability through successful equipment and real property lease termination negotiations.

Our operating income in 2003 decreased by 13.3% compared to 2002, as a result of the factors discussed above.

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As a result of the following debt repurchases, the Company recognized a net loss, including the write-off of unamortized costs, of $19,200 during 2003, which is included in loss from early extinguishment of debt in the consolidated statements of income:

During 2003, interest expense, net, decreased due to lower average outstanding debt combined with lower average borrowing rates compared to 2002.

The effective income tax rate was 37.75% in 2003, compared to 37.15% in 2002. The increase in the effective tax rate is primarily attributable to an increase in our state taxes during 2003. The Company’s tax valuation allowance was $38,400 and $35,000 at September 30, 2003 and 2002, respectively. The net increase in the valuation allowance is primarily attributable to a change in our assessment that it is more likely than not that tax benefits from losses incurred in certain foreign jurisdictions will be realized. No individual jurisdiction had a material impact on the change.

Diluted earnings per common share were $0.75 in 2003, compared to $0.99 in 2002. The diluted earnings per common share calculation reflects the impact of the Convertible Notes issued in May 2002. The Company accounts 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 2003 assumes the Convertible Notes were outstanding for all of 2003, whereas the calculation of diluted earnings per common share for 2002 assumes the Convertible Notes were outstanding since May 2002. As a result, there was $0.03 of additional dilution in 2003 compared to 2002.

Review of Business Segments

During 2003, the Company made certain changes to its segment reporting to reflect the way management views IKON’s business. Due to the Company’s organizational structure change related to centralization of the supply chain function and customer care centers announced in October 2002, IKON no longer allocates corporate administrative charges to IKON North America (“INA”). As a result, these administrative costs are included in Corporate and Eliminations(see “Notes to Consolidated Financial Statements—Note 14”) . In addition, our business imaging services and Sysinct operations which had been included in Other are now included in INA consistent with the way management now makes operating decisions. Prior year amounts have been reclassified to conform with the current year presentation.

Our reportable business segments are INA, IKON Europe (“IE”) and Other. INA and IE provide copiers, printers, color solutions, distributed printing, facilities management, legal document solutions, business imaging services and other office equipment and services, as well as design, planning and support services for network platforms and IT integration projects. These segments also include our captive finance subsidiaries in North America and Europe, respectively (see “Recent Developments”).

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Other had included our technology education and telephony businesses, which the Company exited during 2002. The results of operations of technology education and telephony are included through their respective disposition dates. Accordingly, during 2003, the Company had no remaining businesses included in the Other segment.

IKON North America

Approximately 61% of the net sales decrease was due to a decline in sales of technology-related hardware (a business the Company exited as described above). The remaining decrease was due to changes in product sales mix, delays in purchasing decisions by our customers, and lower selling prices as new technologies were introduced at lower price points, especially in color equipment (particularly in the second half of the year). Sales of supplies decreased by approximately $21,500 due to declines in the sales of fax supplies and generally lower volumes on equipment usage. Approximately 35% of the services decline resulted from a decrease in revenue from servicing of copier/printer equipment. This decrease was primarily due to a change in the mix of products serviced as declines in copy volume of segment 1 – 4 devices outpaced an increase in copy volume for color and segment 5 and 6 devices compared to 2002. Approximately 65% of the services decline resulted from a decrease in revenue from outsourcing and other service offerings, of which approximately 62% was due to the impact of our actions to exit, sell or downsize certain non-strategic or unprofitable businesses during 2002. The remainder of the decline in revenue from outsourcing and other service offerings was due to customers’ business downsizing, customers’ decisions to in-source and reduced demand for legal and business document services, arising from a slowdown in the legal industry and fewer commercial transactions that utilize such services. Finance income increased due to growth in the lease portfolio compared to 2002, while finance interest expense decreased due to lower average borrowing rates compared to 2002. Operating income decreased due to lower revenues and lower profit margins on revenues compared to 2002. These changes were partially offset by a decrease in selling and administrative expenses in 2003 compared to 2002, which was substantially due to headcount reductions. In addition, during 2002, INA reversed $8,400 related to prior restructuring programs.

IKON Europe

Net sales increased as a result of currency benefits of approximately $30,000, partially offset by a decrease in sales of copier/printer equipment of approximately $12,400 and a decrease in technology-related hardware of approximately $7,700 as a result of the downsizing actions discussed above. Services increased as a result of currency benefits of approximately $18,700 and an increase in equipment service and outsourcing and other services compared to 2002. Finance income increased primarily as a result of strengthened foreign currencies,

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which contributed to approximately $2,100 of the increase. Operating income increased during 2003 due to reduced headcount as a result of infrastructure improvements and exchange rate benefits.

Other

Net sales, services revenue and operating losses decreased as a result of the downsizing, sale, and closure of non-strategic or unprofitable businesses such as telephony, technology education and other technology-related operations during 2002. In addition, during 2002, the Company reversed $1,400 related to prior restructuring programs.

Corporate and Eliminations, which is not treated as a business segment, includes certain selling and administrative functions including finance, supply chain, and customer service. In addition, Corporate and Eliminations represent the balance sheets of certain locations that were previously reported in INA which have been combined with the Corporate balance sheet. Operating losses in Corporate and Eliminations were $322,600 and $336,200 in 2003 and 2002, respectively. The decrease in operating losses from 2002 to 2003 were due to continued benefits realized from the implementation of various centralization initiatives.

2002 Compared to 2001

Revenues

During 2002, our revenues decreased by $429,600, or 8.0%, compared to 2001. This resulted in part from the impact of our actions to exit, sell or downsize certain non-strategic or unprofitable businesses during 2002, which accounted for approximately $265,000 of the decline. Excluding the impact of these downsizing actions, revenues for 2002 were down approximately 3.1%.

Net sales, which includes the sale of copier/printer equipment, supplies, and technology hardware, decreased by $286,300, or 10.5%, compared to 2001. Sales of technology hardware, such as computers, routers and servers, decreased by approximately $115,000, or 36%. This decrease was primarily due to the Company’s de-emphasis of this offering as part of its margin improvement strategy, choosing instead to redirect its technical capabilities to services that support other customer opportunities, including document management and digital connectivity. Sales of copier/printer equipment decreased by approximately $141,000, or 8%, due to ongoing economic pressures as well as the Company’s strategic focus on moving from low-end, lower margin products to high-end, higher margin products. High-end segment 5 and 6 equipment sales increased by over 25%, compared to 2001, partially offsetting decreases in revenue from the sale of lower segment equipment. Supply sales decreased by

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approximately $47,000, or 9%, due to competitive market pressures and a decline in supply consumption resulting from the transition from analog to digital technology. In 2002, approximately 18% of copier/printer equipment revenues were from sales of segment 5 and 6 products, compared to approximately 12% in 2001.

Services revenue, which 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 decreased by $158,500, or 7.0%, compared to 2001. Approximately $150,000 of this decline was due to the downsizing, sale, and closure of non-strategic outsourcing and other services businesses during 2002. Revenues from the servicing of copier/printer equipment were flat year over year. Outsourcing and other services accounted for the remaining decline, down approximately 1% for the year.

Finance income increased by $15,200, or 4.2%, compared to 2001, primarily due to growth in the net lease portfolio of approximately 2.9% compared to 2001. Finance income is generated by IKON’s wholly-owned leasing subsidiaries. IOSC, IKON’s leasing subsidiary in the United States, accounted for approximately 93% of IKON’s finance income for 2002. Approximately 79% of IKON’s copier and equipment revenues in the United States were financed by IOSC during 2002, compared to approximately 75% during 2001.

Gross Margin

In 2002, gross margin was 38.1%, compared to 37.6% in 2001. The gross margin on net sales decreased to 32.9% from 33.8% in 2001, primarily due to less favorable revenue mix resulting from a decrease in supply sales. The gross margin on services increased to 40.6%, compared to 40.0% in 2001, due to improved productivity in the servicing of copier/printer equipment. The gross margin on finance income increased to 57.9% from 50.7% in 2001 primarily due to higher average portfolio yields and lower average borrowing rates. The average financing rate on our lease receivables was approximately 11% for 2002 and 2001. Additionally, our finance subsidiaries’ average cost of debt was approximately 6% and 7% for 2002 and 2001, respectively.

Other

During 2002, selling and administrative expenses as a percent of revenue was 32.4%, compared to 33.8% in 2001. Selling and administrative expenses decreased by $218,300, or 12.0%, compared to 2001. Of this decrease, approximately $41,000 was due to the elimination of goodwill amortization, approximately $65,000 was due to the Company’s exit from its telephony and technology education operations and the closure of certain digital

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print centers and approximately $112,000 was due to our centralization and consolidation initiatives, decreased selling costs resulting from lower sales of equipment and decreased sales and support costs.

During 2002 the Company reversed $10,500 related to prior restructuring programs (see “Restructuring and Asset Impairment Charges”). During 2001, the Company recorded restructuring charges (net) and asset impairment charges of $63,600.

Our operating income in 2002 increased by $156,400, compared to 2001, as a result of the items discussed above.

Interest expense was $54,400 in 2002, compared to $69,400 in 2001. The decrease was due to lower average outstanding debt combined with lower average short-term borrowing rates compared to 2001.

The effective income tax rate was 37.15% in 2002, compared to 79.3% in 2001. The income tax rate reduction was primarily due to the cessation of goodwill amortization, the majority of which was non-deductible for tax purposes, as a result of our adoption of SFAS 142 effective October 1, 2001. In addition, the Company made a $10,000 tax reserve adjustment related to the Company’s use of leveraged corporate owned life insurance programs during 2001. The completion of certain tax planning initiatives during the first quarter of 2002 also contributed to the reduced tax rate. The initiatives completed included the conversion of IOSC from a corporation to a limited liability company (“LLC”) and the designation of the IKON Stock Fund in the Company’s Retirement Savings Plan as an employee stock ownership plan (“ESOP”). The conversion to an LLC allows the Company, for state income tax purposes, to combine current year taxable income and losses that were previously reported separately, which results in the reduction of state income taxes. The ESOP designation allows the Company to deduct dividends on IKON common stock that participants and beneficiaries in the Company’s Retirement Savings Plan can elect to receive in cash. The Company’s valuation allowance was $35,000 and $46,500 at September 30, 2002 and 2001, respectively. The decrease in the valuation allowance is primarily attributable to the removal of valuation allowances due to the expiration of the carryforward period for certain foreign tax credit carryforwards. This decrease had no impact on our effective income tax rate.

In 2001, we recognized a gain of $2,100 ($1,200 after-tax) related to net favorable dispositions of environmental matters at locations we had previously accounted for as discontinued operations. The gain was recorded as discontinued operations in the consolidated statements of income.

Diluted earnings per common share were $0.99 in 2002, compared to $0.11 in 2001. As discussed above, the diluted earnings per share calculation for 2002 reflects the impact of the Convertible Notes.

Review of Business Segments

IKON North America

Net sales decreased by $246,600 or 10.3%, to $2,159,100 in 2002 from $2,405,700 in 2001. The decrease was primarily due to a decline in revenue from sales of technology hardware and sales of copier/printer equipment. Services decreased by $117,900, or 5.7%, to $1,957,700 in 2002 from $2,075,600 in 2001. This decrease was due to the downsizing, sale, and closure of non-strategic outsourcing and other services businesses during 2002. Finance income increased by $14,800, or 4.4%, to $354,400 in 2002 from $339,600 in 2001. The

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increase was primarily due to growth in the lease portfolio as compared to 2001. Finance interest expense decreased by $17,400, or 10.3%, to $151,400 in 2002 from $168,800 in 2001 as growth in the lease portfolio was offset by lower average borrowing rates. Operating income increased by $161,800, or 36.2%, to $608,400 in 2002 from $446,600 in 2001. The increase was primarily due to the downsizing or elimination of unprofitable businesses, centralization and consolidation initiatives and decreased selling costs due to lower sales of equipment. In addition, in 2001, INA incurred $33,400 related to restructuring and asset write-offs compared to a reversal of $8,400 of such charges in 2002.

IKON Europe

Net sales decreased by $22,500, or 7.7%, to $270,500 in 2002 from $293,000 in 2001. This decrease was due mainly to declines in sales of technology-related hardware. Services increased by $14,600, or 10.3%, to $155,800 in 2002 from $141,200 in 2001 due to growth in outsourcing. Finance income increased by $400, or 2.0%, to $20,500 in 2002 from $20,100 in 2001. Finance interest expense decreased by $2,200, or 25.3%, to $6,500 in 2002 from $8,700 in 2001 primarily due to lower average borrowings and lower average short-term rates. Operating income increased by $900, or 4.1%, to $23,100 in 2002 from $22,200 in 2001 due primarily to improvements to our operational infrastructure. In addition, in 2001, IE incurred $1,300 related to restructuring and asset write-offs compared to a reversal of $100 of such charges in 2002.

Other

Net sales decreased by $17,200, or 80.8%, to $4,100 in 2002 from $21,300 in 2001. Services decreased by $55,200, or 88.3%, to $7,300 in 2002 from $62,500 in 2001. These declines were primarily due to the downsizing, sale, and closure of non-strategic or unprofitable businesses such as telephony, technology education and other technology-related operations. There was an operating loss of $1,800 in 2002, compared to an operating loss of $40,800 in 2001. The decrease in operating loss reflects the impact of the actions described above concerning the downsizing, sale or closure of certain non-strategic or unprofitable businesses. In addition, in 2001, Other incurred $16,900 related to restructuring and asset write-offs compared to a reversal of $1,400 of such charges in 2002.

Corporate and Eliminations, which is not treated as a business segment, includes certain selling and administrative functions including finance, supply chain, and customer service. In addition, Corporate and Eliminations represent the balance sheets of certain locations that were previously reported in INA which have been combined with the Corporate balance sheet. Operating losses in Corporate and Eliminations were $336,200 and $290,800 in 2002 and 2001, respectively. The increase in operating losses from 2001 to 2002 was due to higher information technology costs due to the implementation of e-IKON, higher performance compensation costs and higher benefits costs compared to 2001. These increases were partially offset by the impact of the cessation of goodwill amortization beginning October 1, 2002. In addition, during 2001, $12,000 of restructuring and asset impairment charges were included in Corporate and Eliminations compared to a $600 reversal of restructuring charges in 2002.

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FINANCIAL CONDITION AND LIQUIDITY

Cash Flows and Liquidity

The following summarizes cash flows for 2003 and 2002 as reported in our consolidated statements of cash flows in the accompanying consolidated financial statements:

Operating Cash Flows

Cash provided by operating activities of $439,300 for 2003 decreased by $37,300 compared to 2002 due to lower cash inflows resulting from collections on accounts receivable, higher cash outflows as a result of additional accounts payable, deferred revenues and accrued expenses, partially offset by cash inflows from a reduction in inventory and lower payments on restructuring related programs. The reduction in inventory was driven by continued centralization and organizational benefits of the Company’s supply chain and the e-IKON initiative, including processes that integrate logistics through third parties. As a result, inventory turns increased to 9.9 turns at September 30, 2003 compared to 7.9 turns at September 30, 2002.

Valuation and Qualifying Accounts included on page 73 provides a rollforward of the allowance for doubtful accounts. IKON’s provisions for losses on accounts receivable were $13,400, $4,700 and $7,800, and write-offs, net of recoveries, were $13,400, $13,900 and $19,600, for 2003, 2002 and 2001, respectively. In 2000 and 2001, IKON standardized and centralized its accounts receivable collection processes and functions. As a result, write-offs of accounts receivable, net of recoveries, decreased to $19,600 and the percentage of accounts receivable aged greater than 150 days decreased to 4.4% at September 30, 2001. During 2002, IKON continued to focus on improving its accounts receivable collection procedures and launched its first centralized customer care center which consolidated service capabilities such as dispatch, customer service and supply sales into one center. As a result, write-offs of accounts receivable, net of recoveries, decreased to $13,900. The percentage of accounts receivable aged greater than 150 days increased to 4.6% at September 30, 2002. During 2003, the Company continued to obtain benefits in accounts receivable, due to additional synergies received from these prior efforts. As a result, IKON’s days sales outstanding on trade accounts receivable decreased from 51 days at September 30, 2002 to 50 days at September 30, 2003. However, during 2003, write-offs of accounts receivable, net of recoveries, increased to $15,700 and the percentage of accounts receivable aged greater than 150 days increased to 6.3% at September 30, 2003. These increases were partially due to lower productivity as a result of the Company’s implementation of e-IKON in additional U.S. regions during the year. IKON’s policy is to calculate its allowance as a percentage of accounts receivable aged greater than 150 days plus an additional allowance for any amount that the Company has specifically identified as potential bad debts.

The provision for lease defaults increased slightly to $67,900 in 2003 from $67,700 in 2002. The Company’s lease default reserve increased slightly to $58,500 at September 30, 2003 compared to $58,100 at September 30, 2002, but decreased as a percentage of the lease portfolio. Charge-offs of lease receivables decreased from $79,800 during 2002 to $69,300 in 2003. As of September 30, 2003, 95.2% of IOSC’s lease portfolio was current compared to 93.2% at September 30, 2002. These improvements reflect the Company’s continued investment in portfolio management and improved credit quality resulting from the centralization of the Company’s leasing functions (see “Business — Recent Developments”).

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Investing Cash Flows

During 2003, the Company used $237,000 of cash in investing activities, which included net finance subsidiaries’ use of $170,500, capital expenditures for property and equipment of $62,600 and capital expenditures for equipment on operating leases of $63,000. Capital expenditures for property and equipment include expenditures for the purchase of properties resulting from terminated synthetic lease agreements, expenditures for our e-IKON initiative and equipment purchases to support our legal and business document services businesses. 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 2003 were $41,000, which included approximately $35,000 related to the sale of properties that were previously leased under synthetic lease agreements.

Financing Cash Flows

During 2003, the Company used $111,600 of cash for financing activities. As discussed below, during 2003, the Company early extinguished $175,000 par value of non-finance subsidiary debt for $172,300 and made $27,200 of additional payments of long-term debt. In addition, the Company early extinguished $215,100 par value of finance subsidiary debt for $233,400 and deposited $34,900 in escrow to defease a portion of its finance subsidiary debt. Net issuances of finance subsidiary debt were $160,200 during 2003 (see “Business—Recent Developments”).

During 2003, the Company paid $23,200 of dividends to shareholders compared to $22,900 during 2002. During 2003 and 2002, the Company paid dividends of $0.16 per common share to shareholders of record.

Cash flows from financing activities include a $49,200 change in restricted cash which primarily represents the cash that has been collected on the leases that are pledged as collateral for lease-backed notes. This cash must be segregated within two business days into a trust account and the cash is used to pay the principal and interest on lease-backed notes as well as any associated administrative expenses. The level of restricted cash is impacted from one period to the next by the volume of leases pledged as collateral on the lease-backed notes and timing of collections on such leases. Restricted cash also includes amounts deposited with an escrow agent to defease the remaining $34,900 of 2004 Notes discussed below. At September 30, 2003, the remaining amount of restricted cash in escrow, including accrued interest, related to this defeasance was $38,400.

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Capital Structure

Including finance subsidiaries’ debt, our debt to capital ratio was 67.8% at September 30, 2003 compared to 69.0% at September 30, 2002. Excluding finance subsidiaries’ debt, our debt to capital ratio was 20.8% at September 30, 2003, compared to 28.5% at September 30, 2002 (finance subsidiaries’ debt is excluded from this calculation because finance subsidiaries’ lease receivables represent the primary source of repayment of finance subsidiaries’ debt).

During 2003, the Company repurchased the following debt:

As a result of these repurchases, the Company recognized a net loss, including the write-off of unamortized costs, of $19,200 during 2003, which is included in loss from early extinguishment of debt in the consolidated statements of income.

In June 2003, IOSC issued $350,000 of notes payable with an interest rate of 7.25% (the “2008 Notes”) (7.43% yield including the original issue discount), which mature on June 30, 2008. Interest is paid on the notes semi-annually in June and December beginning December 30, 2003. With the proceeds from the issuance, the Company tendered $215,100 of its 2004 Notes, deposited sufficient funds with an escrow agent to defease the remaining $34,900 of 2004 Notes not tendered and used the remainder of the proceeds for general corporate purposes. Amounts held in escrow to defease the remaining $34,700 of 2004 Notes at September 30, 2003 are included in restricted cash on the Company’s balance sheets.

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On April 23, 2003, IKON Receivables Funding, LLC (a wholly-owned subsidiary of IOSC) issued Series 2003-1 lease-backed notes (the “2003 Notes”) as described below:

Proceeds from the issuance of the 2003 Notes were used to make payments on the Company’s revolving asset securitization conduit financing agreements (the “Conduits”), repay borrowings under our unsecured credit facility and increase the Company’s cash balance.

The 2003 Notes were issued pursuant to certain indentures (the “Indentures”) between IKON Receivables Funding, LLC, IOSC and certain Indenture trustees. The 2003 Notes are collateralized by a pool of office equipment leases or contracts and related assets (the “Leases”) acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under the Leases on or after the related indenture date) and all related casualty payments, retainable deposits, and termination payments. Payments on the 2003 Notes are made from payments on the Leases. The 2003 Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancelable insurance policies from Ambac Assurance Corporation with respect to the 2003 Notes. On each payment date, funds available from the collection of lease receivables will be paid to the noteholders in the order of their priority class.

In addition to the issuance of the 2003 Notes and the 2008 Notes, IOSC issued $840,000 of Conduit borrowings, $321,100 of unsecured credit facility borrowings and $4,300 of other notes during 2003. During 2003, the Company’s foreign finance subsidiaries issued $53,400 of debt. In addition to the early extinguishment of $215,300 of 2004 Notes for $233,400 as described above, IOSC repaid $952,500 of lease-backed notes, $638,600 of Conduit borrowings, $321,100 of unsecured credit facility borrowings and $38,000 of other notes during 2003. During 2003, the Company’s foreign finance subsidiaries repaid $77,100 of debt.

In addition to the early extinguishment of $175,000 of non-finance subsidiary debt as described above, the Company repaid $24,500 and issued $1,000 of long-term non-finance subsidiary debt during 2003.

In 2002, the Company obtained a $300,000 unsecured credit facility (the “Credit Facility”), which matures on May 24, 2005. Revolving loans are available, with certain sub-limits, to IOSC; IKON Capital, PLC, IKON’s leasing subsidiary in the United Kingdom; and IKON Capital, Inc., IKON’s leasing subsidiary in Canada. As of September 30, 2003, the Company had no borrowings outstanding under the Credit Facility. The Credit Facility also provides support for letters of credit for the Company and its subsidiaries. As of September 30, 2003, letters of credit supported by the Credit Facility amounted to $27,600. The amount available under the Credit Facility is determined by the level of certain of the Company’s unsecured assets and the open letters of credit for the Company and its subsidiaries. The amount available under the Credit Facility for borrowings or additional letters of credit was $164,500 as of September 30, 2003.

The Credit Facility contains affirmative and negative covenants, including limitations on certain fundamental changes, investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends, intercompany loans and certain restricted payments. The Credit Facility does not affect our ability to continue to securitize lease receivables. Cash dividends may be paid on common

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stock subject to certain limitations. The Credit Facility also contains certain financial covenants, including: (i) corporate leverage ratio; (ii) consolidated interest expense ratio; (iii) consolidated asset test ratios; and (iv) limitations on capital expenditures. The Credit Facility contains default provisions customary for facilities of this type. In order to provide certain additional financial flexibility under the corporate leverage ratio, the covenant was modified during the third quarter of 2003 as follows: (i) at September 30, 2003, 3.75 to 1.00; (ii) at December 31, 2003, 3.60 to 1.00; (iii) at March 31, 2004, 3.40 to 1.00 and (iv) at June 30, 2004 and as of the last day of each quarterly period thereafter, 3.00 to 1.00. This covenant measures a ratio of the Company’s corporate non-finance subsidiary debt to business earnings (excluding financing income and interest expense associated with our financing operations). As of September 30, 2003, the corporate leverage ratio was 3.41 to 1.00. Failure to be in compliance with any material provision of the Credit Facility, including, without limitation, the financial covenants described above, could have a material adverse effect on our liquidity, financial position and results of operations.

During 2003, Moody’s Investor Services (“Moody’s”) lowered the Company’s senior unsecured credit rating from Baa2 to Ba1 (maintaining our rating under review for further downgrade) and Standard and Poor’s (“S&P”) placed the Company’s BBB- rating on CreditWatch. On August 1, 2003, S&P designated the Company’s BBB- rating with a negative outlook. Furthermore, in December 2003, S&P placed the Company’s ratings on CreditWatch for possible downgrade as a result of the announced sale of certain assets and liabilities of IOSC. Our access to certain credit markets is dependent upon our credit ratings. Although the Company is currently rated investment grade by S&P, any negative changes to our credit ratings, including any further downgrades, could reduce or foreclose our access to certain credit markets and may require that excess cash flows under IOSC’s securitization arrangements be used to pay principal amounts outstanding under such arrangements. There is no assurance that these credit ratings can be maintained or that the credit markets can be readily accessed.

As of September 30, 2003, IOSC, IKON Capital, PLC and IKON Capital, Inc. had approximately $166,100, $31,400 and CN$67,400, respectively, available under their Conduits.

The Company has certain commitments available to it in the form of lines of credit and standby letters of credit. As of September 30, 2003, the Company had $177,600 available under lines of credit, including the $164,500 available under the Credit Facility and had open standby letters of credit totaling $28,000. All commitments, except those under the Credit Facility, expire within one year.

The Company uses interest rate swaps to fix the interest rates on its variable rate classes of lease-backed notes, which results in a lower cost of capital than if it had issued fixed rate notes. During 2003, unrealized gains totaling $12,200 after taxes, were recorded in accumulated other comprehensive loss. As of September 30, 2003, all of the Company’s derivatives designated as hedges are interest rate swaps which qualify for evaluation using the “short cut” method for assessing effectiveness. As such, there is an assumption of no ineffectiveness.

As of September 30, 2003, the Company had $52,900 available for common stock repurchases under its 2001 share repurchase authorization. From time to time, the Retirement Savings Plan of the Company may acquire shares of the common stock of the Company in open market transactions or from treasury shares held by the Company. Additionally, from time to time, the Company may repurchase outstanding debt in open market and private transactions.

The following summarizes IKON’s significant contractual obligations and commitments as of September 30, 2003:

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Payments on long-term debt of finance subsidiaries are generally made from collections of our finance receivables. At September 30, 2003, long-term debt of finance subsidiaries was $3,008,700 and net finance receivables were $3,576,000.

Purchase commitments represent future cash payments related to our implementation of the Oracle e-business suite. Contractual obligations for software of $3,100 is included in fixed assets and accrued liabilities as of September 30, 2003.

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

On December 11, 2003, the Company announced its intent to amend or replace its Credit Facility in connection with the sale of IOSC’s operations to GE. There can be no assurance that the Company will successfully renegotiate the Credit Facility or, in the event the Credit Facility is terminated, that the Company will be able to replace the Credit Facility on an unsecured basis or on similar or improved terms and conditions. In connection with the Agreement (see “Business—Recent Developments”), the Company will retain approximately $1.4 billion of IOSC’s net lease receivables and corresponding residuals, of which approximately $1.2 billion are supported by lease-backed notes. In addition, the Company will assume IOSC’s 2008 Notes, Convertible Notes and 2004 Notes.

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

In the fourth quarter of 2001, the Company announced the acceleration of certain cost cutting and infrastructure improvements (as described below) and recorded a pre-tax restructuring and asset impairment charge of $60,000, and reserve adjustments related primarily to the exit of the Company’s telephony operations of $5,300. The related reserve adjustments were included in cost of goods sold for the write-off of obsolete inventory and selling and administrative expense for the write-off of accounts receivable in the consolidated statements of income. The asset impairments included fixed asset write-offs totaling $6,078 as follows: $100 from technology services businesses closures; $897 from digital print center business closures; $338 from digital print center business sales; and $4,743 relating to IKON infrastructure. The asset impairments also included goodwill write-offs totaling $19,422 as follows: $955 from technology services businesses closures; $6,591 from digital print center business sales; and $11,876 relating to telephony business sales. The Company developed this plan as part of our continuing effort to streamline IKON’s infrastructure to increase future productivity, and to address economic changes within specific marketplaces. This resulted in a charge of $65,300 ($49,235 after-tax). These actions addressed the sale of the Company’s telephony operations and the closing of twelve non-strategic digital print centers as the Company shifts its focus from transactional work toward contract print work and the support of major accounts. These actions also addressed further downsizing of operational infrastructures throughout the organization as the Company leveraged and intensified prior standardization and centralization initiatives. These actions included the ongoing centralization and consolidation of many selling and administrative functions, including marketplace consolidation, supply chain, finance, customer service, sales support and the realignment of sales coverage against our long-term growth objectives. Additionally, the Company recorded an asset impairment charge of $3,582 ($3,300 after-tax) related to the sale of the Company’s technology education operations. The asset impairments included fixed asset write-offs totaling $828. The asset impairments also included goodwill write-offs totaling $2,754. Therefore, the aggregate charge recorded in 2001 (the “2001 Charge”) was $68,882 ($52,535 after-tax).

During fiscal 2000, the Company announced plans to improve efficiency and incurred two pre-tax restructuring and asset impairment charges (the “2000 Charges”) totaling $121,129. These costs represented severance, leasehold termination costs and contractual commitments related to the closure or downsizing of our technology education integration and education businesses, digital print centers and other infrastructure improvements. In the fourth quarter of fiscal 2000, the Company determined that some first quarter restructuring initiatives would not require the level of spending that had been originally estimated, and certain other initiatives

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would not be implemented due to changing business dynamics, accordingly, $15,961 of restructuring reserves were reversed in fiscal 2000. The net fiscal 2000 restructuring and asset impairment charge was $105,168.

In the fourth quarter of 2002, the Company reversed $10,497 ($6,823 after-tax) of its restructuring charges described above. The reversed charges consisted of $7,418 related to severance, $1,667 related to leasehold termination costs and $1,412 related to contractual commitments. The severance reversal was the result of the average cost of severance per employee being less than estimated and 188 fewer positions eliminated than estimated due to voluntary resignations and our decision not to close a digital print center due to changing business dynamics. The reversal of leasehold termination costs and contractual commitments resulted from our decision not to close a digital print center. Additionally, we were also able to reduce our liability through successful equipment and real property lease termination negotiations.

The pre-tax components of the net restructuring (reversal) charges, and asset impairment charges for 2002 and 2001 were as follows:

The Company calculated the asset and goodwill impairments as required by SFAS 121 “Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of”. The proceeds received for businesses sold were not sufficient to cover the fixed asset and goodwill balances. As such, those balances were written-off. Goodwill directly associated with businesses that were closed was also written-off.

The following presents a rollforward of the balances of the 2001 Charge and the 2000 Charges from September 30, 2001 to the balance remaining at September 30, 2003, which is included in other accrued expenses on the consolidated balance sheets:

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The projected payments of the remaining balances of the 2001 Charge and 2000 Charges, by year, are as follows: