content: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D. C. 20549
  
                                      Form 10-Q
  
  (Mark One)*
  [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
  Act of 1934 for the quarterly period ended December 31, 1997 or [ ] Transition
  report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
  for the transition period from to
  
  Commission file number              0-20405
  
                                  IOS CAPITAL, INC.
               (Exact name of registrant as specified in its charter)
  
             DELAWARE                                      23-2493042
  (State or other jurisdiction of                       (I.R.S. Employer
  incorporation or organization)                         Identification No.)
  
                        1738 Bass Road, Macon, Georgia 31210
                      (Address of principal executive offices)
                                     (Zip Code)
  
                                   (912) 471-2300
                (Registrant's telephone number, including area code)
  
                                 IKON CAPITAL, INC.
                (Former name, former address and former fiscal year,
                            if changed since last report)
  
  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
  
  * Applicable only to issuers involved in bankruptcy proceedings during the
  preceding five years:
  
  Indicate by check mark whether the registrant has filed all documents and
  reports required to be filed by Sections 12, 13 or 15(d) of the Securities
  Exchange Act of 1934 subsequent to the distribution of securities under a plan
  confirmed by a court.
  
  Yes        No
  
  * Applicable only to corporate issuers:
  
  Indicate the number of shares outstanding of each of the issuer's classes of
  common stock, as of January 31, 1998.
  
  Common Stock, $.01 par value per share                            1,000 shares
  Registered Debt Outstanding as of January 31, 1998              $1,800,750,000
  
  The registrant, an indirect wholly owned subsidiary of IKON Office Solutions,
  Inc. ("IKON"), meets the conditions set forth in General Instruction H(1)(a) and
  (b) of Form 10-Q and is, therefore, filing with the reduced disclosure format
  contemplated thereby.
  
  <PAGE>
  
                                        INDEX
  
                                  IOS CAPITAL, INC.
                            (formerly IKON Capital, Inc.)
  
  
  
  PART I.  FINANCIAL INFORMATION
  
  
        Item 1.              Financial Statements (Unaudited)
  
                             Balance Sheets--December 31, 1997 and
                                 September 30, 1997
  
                             Statements of Income--Three months ended
                             December 31, 1997 and December 31, 1996
  
                             Statements of Cash Flows--Three months ended
                             December 31, 1997 and December 31, 1996
  
                             Notes to Financial Statements--December 31, 1997
  
  
        Item 2.              Management's Discussion and Analysis of
                             Financial Condition and Results of Operations
  
  
  PART II.  OTHER INFORMATION
  
  
        Item 6.              Exhibits and Reports on Form 8-K
  
  
  
  SIGNATURES
  
  <PAGE>
  
                           PART I . FINANCIAL INFORMATION
  
  Item 1: Financial Statements (unaudited)
  
                                  IOS CAPITAL, INC.
                                   BALANCE SHEETS
                 (in thousands, except share and per share amounts)
  <TABLE>
  <CAPTION>
                                                         December 31,   September 30,
                                                            1997            1997
  Assets
  <S>                                                   <C>              <C>       
  Investment in leases:
       Direct financing leases                          $1,733,713       $1,640,559
       Less: Unearned income                              (300,868)        (286,769)
                                                       -----------      -----------
                                                         1,432,845        1,353,790
       Funded leases, net                                  521,876          485,658
                                                       -----------      -----------
                                                         1,954,721        1,839,448
  
  Accounts receivable                                       63,638           55,589
  Due  from  IKON Office Solutions                          41,936            4,463
  Prepaid expenses and other assets                         13,390           13,436
  Leased equipment-operating rentals at cost
       less accumulated depreciation of:
       12/97 - $36,385;  9/97 - $ 33,598                    62,058           50,945
  Property and equipment at cost, less
       accumulated depreciation of:
       12/97 - $4,195;  9/97 - $ 3,771                      11,852           12,330
                                                       -----------      -----------
  Total assets                                          $2,147,595       $1,976,211
                                                       ===========      ===========
  
  Liabilities and shareholder's equity
  
  Liabilities:
       Accounts payable and accrued expenses               $53,518          $51,018
       Accrued interest                                      7,390           27,785
       Notes payable to banks                               25,000           25,000
       Medium term notes                                 1,705,750        1,542,250
       Deferred income taxes                                71,177           64,177
                                                       -----------      -----------
  Total liabilities                                      1,862,835        1,710,230
  
  Shareholder's equity:
       Common Stock - $.01 par value, 1,000 shares
           authorized, issued, and outstanding
       Contributed capital                                 149,415          144,415
       Retained earnings                                   135,345          121,566
                                                       -----------      -----------
  Total shareholder's equity                               284,760          265,981
                                                       -----------      -----------
  Total liabilities and shareholder's equity            $2,147,595       $1,976,211
                                                       ===========      ===========
  </TABLE>
  
  
  See notes to financial statements.
  
  <PAGE>
  
                                  IOS CAPITAL, INC.
                                STATEMENTS OF INCOME
                                   (in thousands)
  
                                           Three Months Ended
                                              December 31
                                           1997        1996
  Revenues:
      Lease finance income               $51,479     $36,900
      Rental income                        9,051       4,792
      Interest on IKON tax deferrals       3,661       2,736
      Other income                         2,235       1,734
                                         -------     -------
                                          66,426      46,162
  
  Expenses:
      Interest                            25,865      17,626
      General and administrative          17,771      12,959
                                         -------     -------
                                          43,636      30,585
  
  Gain on sale of lease receivables          564         613
                                         -------     -------
  
  
  Income before income taxes              23,354      16,190
  
  Provision for income taxes               9,575       6,638
                                         -------     -------
  
  Net income                             $13,779      $9,552
                                         =======     =======
  
  See notes to financial statements.
  
  
  
  <PAGE>
                                  IOS CAPITAL, INC.
                              STATEMENTS OF CASH FLOWS
                                   (in thousands)
  
  <TABLE>
  <CAPTION>
                                                                Three Months Ended
                                                                   December 31,
                                                                1997           1996
  <S>                                                          <C>             <C>   
  Operating activities:
  Net income                                                   $13,779         $9,552
  Adjustments to reconcile net income to net
       cash provided (used) in operating activities
          Depreciation and amortization                          8,092          4,585
          Provision for deferred taxes                           7,000          5,621
          Gain on sale of lease receivables                       (564)          (613)
          Changes in operating assets and liabilities:
              Accounts receivable                               (8,049)        (7,031)
              Prepaid expenses and other assets                    610          4,685
              Accounts payable and accrued expenses              2,500         (2,173)
              Accrued interest                                 (20,395)       (16,229)
                                                             ---------      ---------
                                Net cash provided (used)         2,973         (1,603)
                                                             ---------      ---------
  
  Investing activities:
  Purchases of leased equipment, net                           (18,782)        (6,880)
  Purchases of property and equipment, net                          54         (1,446)
  Direct financing leases:
       Additions                                              (285,578)      (239,350)
       Cancellations                                            51,870         35,751
       Collections                                             128,893         92,205
       Proceeds from sale                                       25,760         25,433
  Funded leases:
       Additions                                              (110,139)      (111,244)
       Cancellations                                            20,005         16,616
       Collections                                              53,917         50,410
                                                             ---------      ---------
                                Net cash used                 (134,000)      (138,505)
                                                             ---------      ---------
  
  Financing activities:
  Payments on bank borrowings                                        0        (18,000)
  Proceeds from issuance of medium term notes                  248,500        177,000
  Payments on medium term notes                                (85,000)        (8,000)
  Capital contributed by IKON                                    5,000          6,000
                                                             ---------      ---------
                                Net cash provided              168,500        157,000
                                                             ---------      ---------
  
  Increase in amounts due from IKON                             37,473         16,892
  Due from (to) IKON at beginning of year                        4,463        (24,330)
                                                             ---------      ---------
  Due from (to) IKON at end of period                          $41,936        ($7,438)
                                                             =========      =========
  </TABLE>
  
  See notes to financial statements.
  
  
  <PAGE>
                                  IOS Capital, Inc.
                            Notes to Financial Statements
                                  December 31, 1997
  
  
  Note 1:    Basis of Presentation
  
             The accompanying unaudited condensed financial statements have been
  prepared in accordance with generally accepted accounting principles for interim
  financial information and the instructions to Form 10-Q and Rule 10-01 of
  Regulation S-X. In the opinion of management, all adjustments (consisting of
  normal recurring accruals) considered necessary for a fair presentation have
  been included. For further information, refer to the financial statements and
  footnotes thereto included in the Company's annual report on Form 10-K for the
  year ended September 30, 1997.
  
  
  Note 2:    Medium Term Note Program
  
             During the three months ended December 31, 1997, IOS Capital issued
  $248.5 million under its medium term note program. At December 31, 1997,
  $1,705.8 million of medium term notes were outstanding with a weighted average
  interest rate of 6.6%. The remaining amount available under this program is
  $1,398.2 million.
  
  
  Note 3:    Asset Securitization
  
             IOS Capital has asset securitization agreements for $275 million of
  eligible direct financing receivables that expire March 1998 ($125 million) and
  September 1998 ($150 million). Both of these agreements are expected to be
  renewed. Under these agreements, the Company sold $25.8 million in direct
  financing leases during the first three months of fiscal 1998, replacing leases
  which had been liquidated during the period and recognized a pretax gain of
  approximately $564,000. Under the terms of the sales agreements, the Company
  will continue to service the lease portfolio.
  
  Note 4:  Name Change
  
             On January 22, 1998, the Company changed its name from IKON Capital,
  Inc. to IOS Capital, Inc.
  
  <PAGE>
  Item 2: Management's Discussion and Analysis of Financial Condition 
  and Results of Operations
  
  Pursuant to General Instruction H(2) (a) of Form 10-Q, the following analysis of
  the results of operations is presented in lieu of Management's Discussion and
  Analysis of Financial Condition and Results of Operations.
  
                    Three Months Ended December 31, 1997 Compared
                    with the Three Months Ended December 31, 1996
  
  Comparative summarized results of operations for the three months ended December
  31, 1997 and 1996 are set forth in the table below. This table also shows the
  increase in the dollar amounts of major revenue and expense items between
  periods, as well as the related percentage increase.
  
  <TABLE>
  <CAPTION>
                                                Three Months
  (dollars in thousands)                     Ended December 31              Increase
                                             1997         1996        Amount        Percent
  <S>                                      <C>          <C>          <C>             <C>  
  Revenues:
       Lease finance income                $51,479      $36,900      $14,579         39.5%
       Rental income                         9,051        4,792        4,259         88.9%
       Interest on IKON tax deferrals        3,661        2,736          925         33.8%
       Other income                          2,235        1,734          501         28.9%
                                            ------       ------       ------   
                                            66,426       46,162       20,264         43.9%
  
  Expenses:
       Interest                             25,865       17,626        8,239         46.7%
       General and administrative           17,771       12,959        4,812         37.1%
                                            ------       ------       ------   
                                            43,636       30,585       13,051         42.7%
  
  Gain on sale of lease receivables            564          613          (49)        (8.0)%
                                            ------       ------       ------   
  
  Income before income taxes                23,354       16,190        7,164         44.2%
  Provision for income taxes                 9,575        6,638        2,937         44.2%
                                            ------       ------       ------   
  Net income                               $13,779       $9,552       $4,227         44.2%
                                            ======       ======       ======        
  </TABLE>
  
  
  Revenues
  
  Total revenues increased $20.3 million or 43.9% in the first quarter of fiscal
  1998 compared to the first quarter of fiscal 1997. Approximately 71.9% or $14.6
  million of this increase in revenues was a result of increased lease finance
  income due to continued growth in the portfolio of direct financing and funded
  leases. The lease portfolio, net of lease receivables that were sold in asset
  securitization transactions, increased 41.5 % from December 31, 1996 to December
  31, 1997.
  
  Office equipment placed on rental by the IKON marketplaces to customers, with
  cancelable terms, may be purchased by the Company. During the first quarter of
  fiscal 1998 and 1997, IOS Capital purchased operating lease equipment of $18.8
  million and $6.9 million, respectively. Operating leases contributed $9.1
  million in rental income during the first quarter of fiscal 1998, compared to
  $4.8 million in the first quarter of fiscal 1997.
  
  
  
  <PAGE>
  
  
  
  The Company earns interest income on the deferred tax liabilities of the IKON
  marketplaces associated with leases funded through the Company at a rate
  consistent with the Company's weighted average outside borrowing rate of
  interest. The Company's average rate was 6.6% for the first quarter of fiscal
  1998 and 6.7% for the first quarter of fiscal 1997. In addition, the deferred
  tax base upon which these payments are calculated increased 37.8% to $237.6
  million at December 31, 1997 from $172.4 million at December 31, 1996. Primarily
  as a result of the increased deferred tax liabilities, interest income on
  deferred taxes rose $925,000 or 33.8% when comparing the three months ended
  December 31, 1997 to the three months ended December 31, 1996.
  
  Other income consists primarily of late payment charges and various billing
  fees. The structure of these fees has remained basically unchanged from fiscal
  1997. The growth in other income from fees is primarily due to the increased
  size of the lease portfolio upon which these fees are based. Overall, fee income
  from these sources grew by $501,000 or 28.9%, when comparing the first quarter
  of fiscal 1998 to the same period of fiscal 1997.
  
  Expenses
  
  Average borrowings to finance the lease portfolio in the form of loans from
  banks and the issuance of medium term notes in the public market increased by
  46.8%, to $1,730.8 million outstanding at December 31, 1997 from December 31,
  1996. The Company paid a weighted average interest rate on all borrowings of
  6.6% for the first quarter of fiscal 1998 and 6.7% for the first quarter of
  fiscal 1997. Primarily as a result of the increased borrowings, interest expense
  grew by $8.2 million or 46.7% when comparing the first quarter of fiscal 1998 to
  the first quarter of fiscal 1997. At December 31, 1997, the Company's debt to
  equity ratio, including intercompany amounts due from IKON, was 5.9 to 1.
  
  Total general and administrative expenses for the quarter ended December 31,
  1997 increased by $4.8 million or 37.1%, over the quarter ended December 31,
  1996. However, the general and administrative expense category in the first
  quarter of fiscal 1998 includes depreciation expense on leased equipment
  totaling $7.7 million, compared to $4.2 million for the first quarter of fiscal
  1997. In addition, the general and administrative expense category includes
  lease bonus subsidy payments to either IKON or directly to the IKON
  marketplaces, based on the level of dealer participation in the Company's
  leasing programs or for the funding of targeted new lease volume. During the
  first quarter of fiscal 1998, lease bonus subsidy payments totaled $3.8 million
  as compared to $2.1 million during the first quarter of fiscal 1997. Excluding
  the effects of increased depreciation expense on operating leases and lease
  bonus subsidy payments, remaining general and administrative expenses decreased
  by $349,000 or 5.2% compared to general and administrative expenses in the first
  quarter of fiscal 1997.
  
  Gain on Sale of Lease Receivables
  
  The Company has asset securitization agreements for $275 million of eligible
  direct financing lease receivables that expire in March 1998 ($125 million) and
  September 1998 ($150 million). Both of these agreements are expected to be
  renewed. As collections reduce previously sold interests, new leases can be sold
  up to the agreement amount. During the three months ended December 31, 1997,
  collections reduced previously sold interests by approximately $25.8 million on
  these two agreements. The Company sold an additional $25.8 million in net
  eligible direct financing leases during the first quarter of fiscal 1998 and
  recognized pretax gains of $564,000.
  
  
  <PAGE>
  
  
  Income Before Income Taxes
  
  Income before income taxes for the first quarter of fiscal 1998 increased by
  $7.2 million or 44.2% over the first quarter of fiscal 1997. This increase in
  income before income taxes was essentially the effect of higher earnings on a
  larger lease portfolio base net of increased general and administrative
  expenses, partially offset by higher borrowing costs due to the increased debt
  to fund the lease portfolio.
  
  Provision for Income Taxes
  
  Income taxes for the first quarter of fiscal 1998 increased by $2.9 million or
  44.2% over the first quarter of fiscal 1997. This increase in income taxes is
  directly attributable to the increase in income before taxes in the first
  quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The
  effective tax rate was 41% for both the first quarter of fiscal 1998 and 1997.
  
  
  
                             FORWARD-LOOKING INFORMATION
  
  This document contains disclosures which are forward-looking statements relating
  to the Company or its parent, IKON, within the meaning of Section 27A of the
  Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
  the 1934 Act. Such forward-looking statements address, among other things,
  strategic initiatives (including plans for enhancing the Company's or IKON's
  business through new acquisitions, information technology systems, sales
  strategies, market growth plans, margin enhancement initiatives, capital
  expenditure requirements and financing sources). Such forward-looking
  information is based upon management's current plans or expectations and is
  subject to a number of uncertainties and risks that could significantly affect
  the Company's and/or IKON's current plans, anticipated actions and future
  financial condition and results. These uncertainties and risks include, but are
  not limited to, those relating to IKON's successful management of an aggressive
  program to acquire and integrate new companies, including companies with
  technical services and products that are relatively new to IKON, and also
  including companies outside the United States, which present additional risks
  relating to international operations; risks and uncertainties (applicable to
  both the Company and IKON) relating to conducting operations in a competitive
  environment; delays, difficulties, technological changes and employment issues
  (applicable to both the Company and IKON) associated in a large-scale
  transformation project; debt service requirements (applicable to both the
  Company and IKON) including sensitivity to fluctuation in interest rates; and
  general economic conditions. As a consequence, current plans, anticipated
  actions and future financial condition and results may differ from those
  expressed in any forward-looking statements made by or on behalf of the Company
  or IKON.
  
  <PAGE>
                             PART II. OTHER INFORMATION
  
  
  
  Item 6.      Exhibits and Reports on Form 8-K
  
        (a)    The following Exhibits are furnished pursuant to Item 601 of
               Regulation S-K:
  
               Exhibit No. (27) Financial Data Schedule
  
        (b)    Reports on Form 8-K
  
               On October 22, 1997, the registrant filed a Current Report on Form
               8-K to file, under Item 5 of the form, information contained in a
               press release issued by its parent, IKON Office Solutions, Inc.
               ("IKON") concerning IKON's earnings for the fiscal quarter and year
               ended September 30, 1997.
  
  
  
  <PAGE>
                                     SIGNATURES
  
  
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized. This report has also been signed by the
  undersigned in his capacity as the chief accounting officer of the Registrant.
  
  
                                               IOS CAPITAL, INC.
  
  
  Date February 12, 1998                       /s/ Harry G. Kozee
                                               Harry G. Kozee
                                               Vice President - Finance
                                               (Chief Accounting Officer)
  
  <PAGE>
  
                                  Index to Exhibits
  
  
  
  Exhibit Number
  
          (27)               Financial Data Schedule
metadata_documents: [{"type": "10-Q", "sequence": "1", "description": "FORM 10-Q", "secsgml_size_bytes": 25462}]
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text: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D. C. 20549
  
                                      Form 10-Q
  
  (Mark One)*
  [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
  Act of 1934 for the quarterly period ended December 31, 1997 or [ ] Transition
  report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
  for the transition period from to
  
  Commission file number              0-20405
  
                                  IOS CAPITAL, INC.
               (Exact name of registrant as specified in its charter)
  
             DELAWARE                                      23-2493042
  (State or other jurisdiction of                       (I.R.S. Employer
  incorporation or organization)                         Identification No.)
  
                        1738 Bass Road, Macon, Georgia 31210
                      (Address of principal executive offices)
                                     (Zip Code)
  
                                   (912) 471-2300
                (Registrant's telephone number, including area code)
  
                                 IKON CAPITAL, INC.
                (Former name, former address and former fiscal year,
                            if changed since last report)
  
  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
  
  * Applicable only to issuers involved in bankruptcy proceedings during the
  preceding five years:
  
  Indicate by check mark whether the registrant has filed all documents and
  reports required to be filed by Sections 12, 13 or 15(d) of the Securities
  Exchange Act of 1934 subsequent to the distribution of securities under a plan
  confirmed by a court.
  
  Yes        No
  
  * Applicable only to corporate issuers:
  
  Indicate the number of shares outstanding of each of the issuer's classes of
  common stock, as of January 31, 1998.
  
  Common Stock, $.01 par value per share                            1,000 shares
  Registered Debt Outstanding as of January 31, 1998              $1,800,750,000
  
  The registrant, an indirect wholly owned subsidiary of IKON Office Solutions,
  Inc. ("IKON"), meets the conditions set forth in General Instruction H(1)(a) and
  (b) of Form 10-Q and is, therefore, filing with the reduced disclosure format
  contemplated thereby.
  INDEX
  
                                  IOS CAPITAL, INC.
                            (formerly IKON Capital, Inc.)
  
  PART I.  FINANCIAL INFORMATION
  
        Item 1.              Financial Statements (Unaudited)
  
                             Balance Sheets--December 31, 1997 and
                                 September 30, 1997
  
                             Statements of Income--Three months ended
                             December 31, 1997 and December 31, 1996
  
                             Statements of Cash Flows--Three months ended
                             December 31, 1997 and December 31, 1996
  
                             Notes to Financial Statements--December 31, 1997
  
        Item 2.              Management's Discussion and Analysis of
                             Financial Condition and Results of Operations
  
  PART II.  OTHER INFORMATION
  
        Item 6.              Exhibits and Reports on Form 8-K
  
  SIGNATURES
  PART I . FINANCIAL INFORMATION
  
  Item 1: Financial Statements (unaudited)
  
                                  IOS CAPITAL, INC.
                                   BALANCE SHEETS
                 (in thousands, except share and per share amounts)
  December 31,   September 30,
                                                            1997            1997
  Assets
  Investment in leases:
       Direct financing leases                          $1,733,713       $1,640,559
       Less: Unearned income                              (300,868)        (286,769)
                                                       -----------      -----------
                                                         1,432,845        1,353,790
       Funded leases, net                                  521,876          485,658
                                                       -----------      -----------
                                                         1,954,721        1,839,448
  
  Accounts receivable                                       63,638           55,589
  Due  from  IKON Office Solutions                          41,936            4,463
  Prepaid expenses and other assets                         13,390           13,436
  Leased equipment-operating rentals at cost
       less accumulated depreciation of:
       12/97 - $36,385;  9/97 - $ 33,598                    62,058           50,945
  Property and equipment at cost, less
       accumulated depreciation of:
       12/97 - $4,195;  9/97 - $ 3,771                      11,852           12,330
                                                       -----------      -----------
  Total assets                                          $2,147,595       $1,976,211
                                                       ===========      ===========
  
  Liabilities and shareholder's equity
  
  Liabilities:
       Accounts payable and accrued expenses               $53,518          $51,018
       Accrued interest                                      7,390           27,785
       Notes payable to banks                               25,000           25,000
       Medium term notes                                 1,705,750        1,542,250
       Deferred income taxes                                71,177           64,177
                                                       -----------      -----------
  Total liabilities                                      1,862,835        1,710,230
  
  Shareholder's equity:
       Common Stock - $.01 par value, 1,000 shares
           authorized, issued, and outstanding
       Contributed capital                                 149,415          144,415
       Retained earnings                                   135,345          121,566
                                                       -----------      -----------
  Total shareholder's equity                               284,760          265,981
                                                       -----------      -----------
  Total liabilities and shareholder's equity            $2,147,595       $1,976,211
                                                       ===========      ===========
  See notes to financial statements.
  IOS CAPITAL, INC.
                                STATEMENTS OF INCOME
                                   (in thousands)
  
                                           Three Months Ended
                                              December 31
                                           1997        1996
  Revenues:
      Lease finance income               $51,479     $36,900
      Rental income                        9,051       4,792
      Interest on IKON tax deferrals       3,661       2,736
      Other income                         2,235       1,734
                                         -------     -------
                                          66,426      46,162
  
  Expenses:
      Interest                            25,865      17,626
      General and administrative          17,771      12,959
                                         -------     -------
                                          43,636      30,585
  
  Gain on sale of lease receivables          564         613
                                         -------     -------
  
  Income before income taxes              23,354      16,190
  
  Provision for income taxes               9,575       6,638
                                         -------     -------
  
  Net income                             $13,779      $9,552
                                         =======     =======
  
  See notes to financial statements.
  IOS CAPITAL, INC.
                              STATEMENTS OF CASH FLOWS
                                   (in thousands)
  Three Months Ended
                                                                   December 31,
                                                                1997           1996
  Operating activities:
  Net income                                                   $13,779         $9,552
  Adjustments to reconcile net income to net
       cash provided (used) in operating activities
          Depreciation and amortization                          8,092          4,585
          Provision for deferred taxes                           7,000          5,621
          Gain on sale of lease receivables                       (564)          (613)
          Changes in operating assets and liabilities:
              Accounts receivable                               (8,049)        (7,031)
              Prepaid expenses and other assets                    610          4,685
              Accounts payable and accrued expenses              2,500         (2,173)
              Accrued interest                                 (20,395)       (16,229)
                                                             ---------      ---------
                                Net cash provided (used)         2,973         (1,603)
                                                             ---------      ---------
  
  Investing activities:
  Purchases of leased equipment, net                           (18,782)        (6,880)
  Purchases of property and equipment, net                          54         (1,446)
  Direct financing leases:
       Additions                                              (285,578)      (239,350)
       Cancellations                                            51,870         35,751
       Collections                                             128,893         92,205
       Proceeds from sale                                       25,760         25,433
  Funded leases:
       Additions                                              (110,139)      (111,244)
       Cancellations                                            20,005         16,616
       Collections                                              53,917         50,410
                                                             ---------      ---------
                                Net cash used                 (134,000)      (138,505)
                                                             ---------      ---------
  
  Financing activities:
  Payments on bank borrowings                                        0        (18,000)
  Proceeds from issuance of medium term notes                  248,500        177,000
  Payments on medium term notes                                (85,000)        (8,000)
  Capital contributed by IKON                                    5,000          6,000
                                                             ---------      ---------
                                Net cash provided              168,500        157,000
                                                             ---------      ---------
  
  Increase in amounts due from IKON                             37,473         16,892
  Due from (to) IKON at beginning of year                        4,463        (24,330)
                                                             ---------      ---------
  Due from (to) IKON at end of period                          $41,936        ($7,438)
                                                             =========      =========
  See notes to financial statements.
  IOS Capital, Inc.
                            Notes to Financial Statements
                                  December 31, 1997
  
  Note 1:    Basis of Presentation
  
             The accompanying unaudited condensed financial statements have been
  prepared in accordance with generally accepted accounting principles for interim
  financial information and the instructions to Form 10-Q and Rule 10-01 of
  Regulation S-X. In the opinion of management, all adjustments (consisting of
  normal recurring accruals) considered necessary for a fair presentation have
  been included. For further information, refer to the financial statements and
  footnotes thereto included in the Company's annual report on Form 10-K for the
  year ended September 30, 1997.
  
  Note 2:    Medium Term Note Program
  
             During the three months ended December 31, 1997, IOS Capital issued
  $248.5 million under its medium term note program. At December 31, 1997,
  $1,705.8 million of medium term notes were outstanding with a weighted average
  interest rate of 6.6%. The remaining amount available under this program is
  $1,398.2 million.
  
  Note 3:    Asset Securitization
  
             IOS Capital has asset securitization agreements for $275 million of
  eligible direct financing receivables that expire March 1998 ($125 million) and
  September 1998 ($150 million). Both of these agreements are expected to be
  renewed. Under these agreements, the Company sold $25.8 million in direct
  financing leases during the first three months of fiscal 1998, replacing leases
  which had been liquidated during the period and recognized a pretax gain of
  approximately $564,000. Under the terms of the sales agreements, the Company
  will continue to service the lease portfolio.
  
  Note 4:  Name Change
  
             On January 22, 1998, the Company changed its name from IKON Capital,
  Inc. to IOS Capital, Inc.
  Item 2: Management's Discussion and Analysis of Financial Condition 
  and Results of Operations
  
  Pursuant to General Instruction H(2) (a) of Form 10-Q, the following analysis of
  the results of operations is presented in lieu of Management's Discussion and
  Analysis of Financial Condition and Results of Operations.
  
                    Three Months Ended December 31, 1997 Compared
                    with the Three Months Ended December 31, 1996
  
  Comparative summarized results of operations for the three months ended December
  31, 1997 and 1996 are set forth in the table below. This table also shows the
  increase in the dollar amounts of major revenue and expense items between
  periods, as well as the related percentage increase.
  Three Months
  (dollars in thousands)                     Ended December 31              Increase
                                             1997         1996        Amount        Percent
  Revenues:
       Lease finance income                $51,479      $36,900      $14,579         39.5%
       Rental income                         9,051        4,792        4,259         88.9%
       Interest on IKON tax deferrals        3,661        2,736          925         33.8%
       Other income                          2,235        1,734          501         28.9%
                                            ------       ------       ------   
                                            66,426       46,162       20,264         43.9%
  
  Expenses:
       Interest                             25,865       17,626        8,239         46.7%
       General and administrative           17,771       12,959        4,812         37.1%
                                            ------       ------       ------   
                                            43,636       30,585       13,051         42.7%
  
  Gain on sale of lease receivables            564          613          (49)        (8.0)%
                                            ------       ------       ------   
  
  Income before income taxes                23,354       16,190        7,164         44.2%
  Provision for income taxes                 9,575        6,638        2,937         44.2%
                                            ------       ------       ------   
  Net income                               $13,779       $9,552       $4,227         44.2%
                                            ======       ======       ======
  Revenues
  
  Total revenues increased $20.3 million or 43.9% in the first quarter of fiscal
  1998 compared to the first quarter of fiscal 1997. Approximately 71.9% or $14.6
  million of this increase in revenues was a result of increased lease finance
  income due to continued growth in the portfolio of direct financing and funded
  leases. The lease portfolio, net of lease receivables that were sold in asset
  securitization transactions, increased 41.5 % from December 31, 1996 to December
  31, 1997.
  
  Office equipment placed on rental by the IKON marketplaces to customers, with
  cancelable terms, may be purchased by the Company. During the first quarter of
  fiscal 1998 and 1997, IOS Capital purchased operating lease equipment of $18.8
  million and $6.9 million, respectively. Operating leases contributed $9.1
  million in rental income during the first quarter of fiscal 1998, compared to
  $4.8 million in the first quarter of fiscal 1997.
  The Company earns interest income on the deferred tax liabilities of the IKON
  marketplaces associated with leases funded through the Company at a rate
  consistent with the Company's weighted average outside borrowing rate of
  interest. The Company's average rate was 6.6% for the first quarter of fiscal
  1998 and 6.7% for the first quarter of fiscal 1997. In addition, the deferred
  tax base upon which these payments are calculated increased 37.8% to $237.6
  million at December 31, 1997 from $172.4 million at December 31, 1996. Primarily
  as a result of the increased deferred tax liabilities, interest income on
  deferred taxes rose $925,000 or 33.8% when comparing the three months ended
  December 31, 1997 to the three months ended December 31, 1996.
  
  Other income consists primarily of late payment charges and various billing
  fees. The structure of these fees has remained basically unchanged from fiscal
  1997. The growth in other income from fees is primarily due to the increased
  size of the lease portfolio upon which these fees are based. Overall, fee income
  from these sources grew by $501,000 or 28.9%, when comparing the first quarter
  of fiscal 1998 to the same period of fiscal 1997.
  
  Expenses
  
  Average borrowings to finance the lease portfolio in the form of loans from
  banks and the issuance of medium term notes in the public market increased by
  46.8%, to $1,730.8 million outstanding at December 31, 1997 from December 31,
  1996. The Company paid a weighted average interest rate on all borrowings of
  6.6% for the first quarter of fiscal 1998 and 6.7% for the first quarter of
  fiscal 1997. Primarily as a result of the increased borrowings, interest expense
  grew by $8.2 million or 46.7% when comparing the first quarter of fiscal 1998 to
  the first quarter of fiscal 1997. At December 31, 1997, the Company's debt to
  equity ratio, including intercompany amounts due from IKON, was 5.9 to 1.
  
  Total general and administrative expenses for the quarter ended December 31,
  1997 increased by $4.8 million or 37.1%, over the quarter ended December 31,
  1996. However, the general and administrative expense category in the first
  quarter of fiscal 1998 includes depreciation expense on leased equipment
  totaling $7.7 million, compared to $4.2 million for the first quarter of fiscal
  1997. In addition, the general and administrative expense category includes
  lease bonus subsidy payments to either IKON or directly to the IKON
  marketplaces, based on the level of dealer participation in the Company's
  leasing programs or for the funding of targeted new lease volume. During the
  first quarter of fiscal 1998, lease bonus subsidy payments totaled $3.8 million
  as compared to $2.1 million during the first quarter of fiscal 1997. Excluding
  the effects of increased depreciation expense on operating leases and lease
  bonus subsidy payments, remaining general and administrative expenses decreased
  by $349,000 or 5.2% compared to general and administrative expenses in the first
  quarter of fiscal 1997.
  
  Gain on Sale of Lease Receivables
  
  The Company has asset securitization agreements for $275 million of eligible
  direct financing lease receivables that expire in March 1998 ($125 million) and
  September 1998 ($150 million). Both of these agreements are expected to be
  renewed. As collections reduce previously sold interests, new leases can be sold
  up to the agreement amount. During the three months ended December 31, 1997,
  collections reduced previously sold interests by approximately $25.8 million on
  these two agreements. The Company sold an additional $25.8 million in net
  eligible direct financing leases during the first quarter of fiscal 1998 and
  recognized pretax gains of $564,000.
  Income Before Income Taxes
  
  Income before income taxes for the first quarter of fiscal 1998 increased by
  $7.2 million or 44.2% over the first quarter of fiscal 1997. This increase in
  income before income taxes was essentially the effect of higher earnings on a
  larger lease portfolio base net of increased general and administrative
  expenses, partially offset by higher borrowing costs due to the increased debt
  to fund the lease portfolio.
  
  Provision for Income Taxes
  
  Income taxes for the first quarter of fiscal 1998 increased by $2.9 million or
  44.2% over the first quarter of fiscal 1997. This increase in income taxes is
  directly attributable to the increase in income before taxes in the first
  quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The
  effective tax rate was 41% for both the first quarter of fiscal 1998 and 1997.
  
                             FORWARD-LOOKING INFORMATION
  
  This document contains disclosures which are forward-looking statements relating
  to the Company or its parent, IKON, within the meaning of Section 27A of the
  Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
  the 1934 Act. Such forward-looking statements address, among other things,
  strategic initiatives (including plans for enhancing the Company's or IKON's
  business through new acquisitions, information technology systems, sales
  strategies, market growth plans, margin enhancement initiatives, capital
  expenditure requirements and financing sources). Such forward-looking
  information is based upon management's current plans or expectations and is
  subject to a number of uncertainties and risks that could significantly affect
  the Company's and/or IKON's current plans, anticipated actions and future
  financial condition and results. These uncertainties and risks include, but are
  not limited to, those relating to IKON's successful management of an aggressive
  program to acquire and integrate new companies, including companies with
  technical services and products that are relatively new to IKON, and also
  including companies outside the United States, which present additional risks
  relating to international operations; risks and uncertainties (applicable to
  both the Company and IKON) relating to conducting operations in a competitive
  environment; delays, difficulties, technological changes and employment issues
  (applicable to both the Company and IKON) associated in a large-scale
  transformation project; debt service requirements (applicable to both the
  Company and IKON) including sensitivity to fluctuation in interest rates; and
  general economic conditions. As a consequence, current plans, anticipated
  actions and future financial condition and results may differ from those
  expressed in any forward-looking statements made by or on behalf of the Company
  or IKON.
  PART II. OTHER INFORMATION
  
  Item 6.      Exhibits and Reports on Form 8-K
  
        (a)    The following Exhibits are furnished pursuant to Item 601 of
               Regulation S-K:
  
               Exhibit No. (27) Financial Data Schedule
  
        (b)    Reports on Form 8-K
  
               On October 22, 1997, the registrant filed a Current Report on Form
               8-K to file, under Item 5 of the form, information contained in a
               press release issued by its parent, IKON Office Solutions, Inc.
               ("IKON") concerning IKON's earnings for the fiscal quarter and year
               ended September 30, 1997.
  SIGNATURES
  
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned, thereunto duly authorized. This report has also been signed by the
  undersigned in his capacity as the chief accounting officer of the Registrant.
  
                                               IOS CAPITAL, INC.
  
  Date February 12, 1998                       /s/ Harry G. Kozee
                                               Harry G. Kozee
                                               Vice President - Finance
                                               (Chief Accounting Officer)
  Index to Exhibits
  
  Exhibit Number
  
          (27)               Financial Data Schedule