FELLOW SHAREHOLDERS,

Fiscal 2003 was a year of progress for IKON, but also a year in which market conditions presented us with ongoing challenges. In the face of those challenges, IKON continued to compete successfully for market share, to meet our customers’ high expectations, and to execute on a clear long-term strategy, making the investments needed to fully leverage our strengths.

FINANCIAL OVERVIEW In the year ended September 30, 2003, IKON recorded net income of $116 million, or $.75 per diluted share, a figure that includes $.07 per diluted share in losses due to the early extinguishment of debt throughout the year. Revenues declined by 4.4 percent to $4.7 billion, primarily from a $156 million decline attributable to the last stages of our exit from non-strategic and low-margin businesses, in addition to weaker than expected demand and some price pressure in our core businesses.
     Although the year’s financial results clearly reflected a more competitive environment, they also held promise. Revenues showed improvement, quarter-to-quarter, over the course of the year, and revenues from equipment sales declined considerably less than the market—about 1 percent—further strengthening IKON’s market share. At $439 million, cash from operations was exceptionally strong, led by working capital benefits from our centralization investments. These operational benefits carried into our infrastructure, yielding a $60 million net reduction in selling and administrative expenses, despite increases in pension and health care expenses and vital long-term investments such as e-IKON—a multi-year centralization, process redesign, and ERP initiative centered on the Oracle E-Business Suite.

CORE STRENGTHS I had just joined the IKON team when I first wrote to you a year ago. In the 12 months since then, I have developed a clear understanding of the real value of this organization, and it has become my foremost priority to unleash that value. Doing so will result in a company operating from a position of tremendous competitive advantage, offering its customers an unsurpassed combination of products and services, and presenting shareholders with a return on investment commensurate with our real worth.
     I would like to review a few of the key facts that define this organization and underscore IKON’s value. We are the largest independent channel for document management products and services in the world. We are also the largest distributor for two of the top three manufacturers in our industry—Canon and Ricoh—and enjoy an expanded relationship with HP. This means we can offer a product portfolio deeper and broader than any single competitor, providing our customers with unsurpassed choice. This strength in product is matched by our scale and powerful lineup of service capabilities. From equipment service supported by 7,000 service professionals to an outsourcing business that ranks as one of the top three in industry market share, we are well positioned to serve not just the middle market, but an increasing listing of national and global customers.
     IKON generates roughly one-third of its revenues from equipment sales. These sales, in turn, drive a profitable and steady demand for services, consumables, and equipment financing, resulting in the remaining two-thirds of our revenues. It’s a robust business model that continues to produce healthy cash flow year after year on a base of largely recurring revenues.

CHANNEL OF CHOICE Over the course of the past year, I have learned a great deal not only about IKON, but also about our industry. I see a market that has developed to the stage at which IKON’s strengths, properly developed, will position us to realize tremendous opportunity.
     A decade ago, the world of printers, copiers, and fax machines was ruled by technological advances. The vendor who could deliver the latest features had the advantage in the marketplace. IKON thrived in this environment by bringing to market the best products that the best manufacturers had to offer. Today the race continues, but new product features are less meaningful than just a few years ago. Customers have the choice of largely equivalent offerings from several sources, and factors other than functional features are becoming decisive—factors such as responsiveness and reliability, service and support, and the expertise to apply technology effectively. Phrased another way, our market is reaching a point of maturity at which the quality of the distribution channel is just as important as the quality of product. These factors equate precisely with IKON’s strengths, leaving us well positioned to stand apart in the industry as the channel of choice.
     This realization is not only encouraging, but it is also the foundation for our long-term strategy. By strengthening our growth platforms, driving efficiencies into every aspect of our operation, and achieving greater financial flexibility, we will translate our core strengths into real performance. Execution on these initiatives is required for IKON to become the model of an efficient and customer-focused sales and service organization. They are also the steps we need to take to unleash value and deliver consistent and increasingly stronger earnings per share growth over the next several years. Each of these efforts, underway last year, has acquired real momentum.

STRENGTHENING GROWTH PLATFORMS IKON’s long-term strategy for revenue growth has three components: enhancing supplier partnerships, expanding our sales channels, and improving our business mix.

Enhancing Supplier Partnerships—IKON partners with Canon, Ricoh, Electronics For Imaging, and other top manufacturers and software providers for best-in-class products supported by well-funded R&D efforts.
     In working with our suppliers, IKON’s priorities are to ensure optimal pricing, to develop IKON-exclusive offerings, and to make sure our joint execution in the field is effective. This means joining forces to target key accounts, to launch products, and to conduct training. Canon has for some time committed a dedicated sales support team to IKON, and Ricoh recently announced that it will do the same in 2004. These supplier resources leverage our own, enhancing IKON’s sales efforts and opening opportunities to our partners that they could not pursue without us.
     In 2003, we continued to be highly instrumental in winning market share for both Canon and Ricoh. We also reenergized our relationship with HP, launching a customer-specific pilot program for leveraging IKON’s capabilities in fleet management and outsourcing, and just recently, we announced a new agreement through which IKON will serve as HP’s national partner for distributing and servicing its new copier-based multifunction devices.

Expanding Sales Channels—Our share of the market has continued to grow over the years, but with just 10 percent share of the U.S. market and even less in Europe, the potential for further market share gains is compelling. This is particularly true in the nation’s largest metropolitan markets, where we hadn’t focused our efforts as intensely prior to 2003. It is also true among large, national, and global organizations, where our reach and range of capabilities make us one of only two organizations that can effectively support today’s more service-centric customers.
     We are working aggressively to realize the potential in both these areas. Our metro markets initiative brings increased resources and focus to 12 of North America’s largest markets, and in 2003 we delivered 2 percent growth in equipment sales in these markets—this from a program still in its infancy and against a backdrop of decreased overall demand. Similarly, our national accounts program, started with limited resources in 2000, yielded a 60 percent increase in national accounts in 2003, and has brought us customers such as PNC, National City Bank, CB Richard Ellis, Cadbury Schweppes, and Union Pacific—an impressive and growing record of wins. We have substantially increased sales resources targeting the Fortune 500 and the largest 250 private and regional companies, and we are organizing our outreach by document-intensive vertical markets to provide a truly customer-centric approach.

Improving Our Business Mix—In a complex and changing market environment, it is critical that IKON target the optimal business mix—focusing our efforts on those segments that offer increasing demand and healthy margins.
     Outsourcing is an industry expected to grow in the mid to high single digits through 2006. In 2003, we continued to see significant growth in facilities management—our largest outsourcing offering. In North America, while economic pressures slowed the rate of growth in facilities management, we launched IKON Service Excellence—a methodology to ensure that our customers receive more value-added services over the course of these long-term contracts. These efforts facilitated growth in our customer locations to over 1,400 sites, a result achieved by tripling the number of new contracts in 2003. Our legal and digital print capabilities were similarly impacted by the economy in 2003, but strategically strengthened as we pursued, and won, national business as a result of our increased scanning and imaging capabilities.
     The growing demand for document workflow and productivity solutions—a market expected to grow by over 30 percent through 2006—offers great potential for IKON’s professional services team. In this area, we have developed both local and high-end national capabilities, which enable us to offer customers of all sizes the expertise required to improve cost-effectiveness through enterprise-wide document strategies.
     While the majority of our equipment sales continue to come from the traditional office environment, we have successfully expanded into higher-volume production and color technologies, further strengthening future service and consumable opportunities. In fact, in the area of color our sales team achieved a 15 percent increase in equipment revenues in 2003, with the help of new color products from Canon and Ricoh. We also just recently launched the IKON CPP 8050, a 50-page-per-minute color system co-branded with Konica and EFI that directly targets the fastest growing part of the color market, high-volume color. In the production segment, IKON continues to perform well, especially with the largest and fastest devices, Canon’s imageRUNNER 110 and 150. In 2003, we placed more than 80 percent of these machines for Canon in North America.

DRIVING EFFICIENCY IKON’s success depends not only on aggressively developing revenue streams, but also on maximizing the efficiency of our organization through a streamlined infrastructure, far-reaching IT system and process improvements, and effective asset management.
     While still very much in progress, our efforts to date have shown impressive results. The transformation of our organizational structure now allows our local marketplaces to focus primarily on sales and service, supported by centralized resources. We have consolidated accounting functions in two shared service centers; we reorganized 25 customer service locations into three mega centers in the U.S. and one in Canada; and we continue to develop an advanced, centralized supply chain function. Since September 2000, IKON’s real estate square footage has decreased by 20 percent, with facilities down from 900 to 600 locations. We’ve made productivity gains as well, increasing operating income per employee over this same time period by 34 percent. Inventory turns and days sales outstanding have improved, freeing working capital.

e-IKON: Efficient and Scalable Infrastructure—IKON’s single most valuable investment in driving efficiency and scalability into our support structure is e-IKON. A new operations organization dedicated to the customer experience, and common processes redesigned for the Oracle E-Business Suite, offer continued productivity and cost-saving opportunities and a much more suitable platform to support growth.
     To date, 25 percent of our marketplaces and two of our three mega customer care centers in the U.S. are up and running on e-IKON, encompassing more than 7,000 employees. The next wave of marketplaces should launch in the first half of calendar 2004. Frankly, we had originally anticipated that the U.S. implementation would be concluded by the end of calendar 2003, but we are seeing a six-month cycle needed to complete work to the standards we demand—to migrate data, train employees, and fine-tune performance under the new system. As a result, we are planning for a slower rollout schedule—taking the opportunity to embed Six Sigma findings, and to focus on customer issues that deserve more immediate attention.
     Even as the implementation continues, we are seeing benefits. In fact, e-IKON-related savings, primarily through headcount, outpaced the ongoing funding of this initiative in 2003. By the end of 2004, we expect to have realized over half of the anticipated $80 million in annual benefits.

Six Sigma: Enhanced, Customer-Focused Processes—IKON’s greatest potential for further efficiencies and world-class customer service lies in developing an enterprise-wide culture that is customer-focused and rich with process knowledge and discipline.
     In my first months here, I recognized that our business processes had not kept pace with the rapid structural change that has transformed our organization, frustrating employees and customers alike. As a result, one of the easiest decisions I made in my first year with IKON was to launch our Six Sigma initiative. IKON’s Six Sigma program is designed to embed disciplines of efficiency deep into our culture and to equip our people with the working tools to achieve it. We already have 47 black belts in training, working on specific process improvement projects selected by our executive team. Today, the majority of our projects support our e-IKON initiative—where we are effecting the greatest changes and having the most impact on the experience of our customers. By 2005, it is our goal to have 1 percent of the organization trained as black belts—a resource that experience has taught me will prove invaluable to this company.

Effective Asset Management—IKON has a tremendous opportunity to support future growth requirements through sound asset management. In 2003, days sales outstanding improved, despite the learning process underway in our customer care centers, and a strengthened supply chain delivered record inventory turns for 2003, showcasing the benefits of centralization. Looking ahead, we are excited about the new opportunities a dedicated operations team brings and the ongoing benefits of e-IKON and Six Sigma.

IMPROVING FINANCIAL FLEXIBILITY Closely linked with our growth and efficiency goals is the competitive strength achieved by improving our financial flexibility.
     Over the past five years we’ve produced $2.2 billion in cash from operations. We’ve used that cash wisely for investments such as e-IKON; we’ve strengthened the balance sheet by significantly reducing non-lease financing debt; we’ve paid dividends and repurchased shares; and we’ve funded our leasing operation. In response to a conservative capital market environment in 2003, we extinguished some long-term debt early, resulting in a loss for the year, but significantly strengthening our balance sheet going forward.
     As we look to 2004 and beyond, it is with full commitment to continue this progress toward financial flexibility. In December 2003 we announced an agreement to form a strategic alliance with GE Vendor Financial Services, a business unit of GE Commercial Finance, which will move us substantially toward this goal. Under the agreement, we will be transitioning out of the captive leasing business in North America some time in the first quarter of calendar 2004. This alliance with GE will give our customers access to a world-class financing capability, complementing technology from industry leaders like Canon, Ricoh, EFI, and HP. For IKON, this transaction will substantially improve our balance sheet, and provide for a strong earnings stream and cash flows, while freeing up a significant amount of invested capital. By optimizing the value we created in our captive leasing business, we will enhance our ability to be more responsive to growth opportunities as they arrive and return value to our investors.

A STRONGER ORGANIZATION Integrity, diversity, employee development, responsible corporate governance and depth of leadership are all organizational assets further developed in 2003 that will contribute to even greater value in the years ahead. Over the course of the last year, we dramatically streamlined our executive reporting structure; we strengthened our succession planning and leadership selection processes; and we continued to expand our diversity program—both internally and with suppliers. In the area of corporate governance, we strengthened the Board, adding four new Board members, and enhanced our committee structure and policies and procedures well ahead of regulatory requirements.
     As we continue the hard work needed to reach our long-term goals, we are energized by our recognition of the value built into this organization and its brand. This value resides in our size and reach, our customer and supplier partnerships, our portfolio of products and services, and our wealth of human capital. The path forward is clear, and we are taking it, moving with determination to unleash IKON’s value.

    SINCERELY,
    MATTHEW J. ESPE
    CHAIRMAN AND CEO