FORM
10-Q





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549











(Mark
One)


T           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended July 5, 2008





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 0-20022





POMEROY
IT SOLUTIONS, INC.


(Exact
name of registrant as specified in its charter)





DELAWARE


31-1227808


(State or
other jurisdiction of incorporation (IRS Employer or organization)
Identification No.)





1020
Petersburg Road, Hebron, KY 41048


(Address
of principal executive offices)





(859)
586-0600


(Registrant's
telephone number, including area code)





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 requirements for the
past 90 days.





YES  T  NO  £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):





Large
accelerated filer £    Accelerated
filer T    Non-accelerated
filer £    Smaller
reporting company £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





YES  £  NO  T





The
number of shares of common stock outstanding as of August 6, 2008 was
11,965,776.













POMEROY IT SOLUTIONS, INC.


TABLE OF
CONTENTS





Part
      I.
            Financial
      InformationItem
      1.
            Financial
      Statements:
            PageConsolidated Balance Sheets as
      of  July  5,  2008 and January 5,
      2008
            3Consolidated Statements of Income (Loss) for the Three Months
      Ended July 5, 2008 and 2007
            5Consolidated Statements of Comprehensive Income (Loss) for the
      Three Months Ended  July 5,  2008
      and  2007
            6Consolidated Statements of Income (Loss) for the Six Months
      Ended July 5, 2008 and 2007
            7Consolidated Statements of Comprehensive Income (Loss) for the
      Six Months Ended  July 5,  2008
      and  2007
            8Consolidated Statements of Cash Flows for the Six Months Ended
      July 5, 2008 and  2007
            9Notes to Consolidated Financial Statements
            10Item
      2.
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            19Item
      3.
            Quantitative and Qualitative Disclosure about Market
      Risk
            28Item
      4.
            Controls and Procedures
            28Part
      II.Other
      InformationItem
      1.
            Legal Proceedings
            29Item
      1A.
            Risk Factors
            29Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            30Item
      3.
            Defaults Upon Senior Securities
            30Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            31Item
      5.
            Other Information
            31Item
      6.
            Exhibits
            33SIGNATURE
            33





Table of Contents





PART
I. FINANCIAL INFORMATION


ITEM
1. FINANACIAL STATEMENTS





POMEROYIT
SOLUTIONS, INC.


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





(in
      thousands)July 5,
            
            
            January 5,2008
            
            
            2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            9,158
            
            
            $
            13,282Certificates
      of deposit
            
            
            1,128
            
            
            
            1,113Accounts
      receivable:Trade,
      less allowance of $3,238 and $3,522, respectively
            
            
            133,988
            
            
            
            140,167Vendor,
      less allowance of $1,138 and $562, respectively
            
            
            13,257
            
            
            
            11,352Net
      investment in leases
            
            
            336
            
            
            
            756Other
            
            
            284
            
            
            
            1,288Total
      receivables
            
            
            147,865
            
            
            
            153,563Inventories
            
            
            15,665
            
            
            
            15,811Other
            
            
            6,734
            
            
            
            10,196Total
      current assets
            
            
            180,550
            
            
            
            193,965Equipment
      and leasehold improvements:Furniture,
      fixtures and equipment
            
            
            17,556
            
            
            
            15,180Leasehold
      Improvements
            
            
            7,262
            
            
            
            7,262Total
            
            
            24,818
            
            
            
            22,442Less
      accumulated depreciation
            
            
            14,849
            
            
            
            12,645Net
      equipment and leasehold improvements
            
            
            9,969
            
            
            
            9,797Intangible
      assets, net
            
            
            1,732
            
            
            
            2,017Other
      assets
            
            
            727
            
            
            
            805Total
      assets
            
            $
            192,978
            
            
            $
            206,584





(The
accompanying notes are an integral part of the financial
statements.)





3
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





(in
      thousands)July 5,
            
            
            January 5,2008
            
            
            2008LIABILITIES
      AND EQUITYCurrent
      Liabilities:Accounts
      payable:Floor
      plan financing
            
            $
            19,698
            
            
            $
            26,328Trade
            
            
            56,346
            
            
            
            57,016Total
      accounts payable
            
            
            76,044
            
            
            
            83,344Deferred
      revenue
            
            
            1,657
            
            
            
            1,949Employee
      compensation and benefits
            
            
            9,487
            
            
            
            10,248Accrued
      facility closing cost and severance
            
            
            1,653
            
            
            
            1,678Other
      current liabilities
            
            
            14,581
            
            
            
            15,542Total
      current liabilities
            
            
            103,422
            
            
            
            112,761Accrued
      facility closing cost and severance
            
            
            340
            
            
            
            1,056Equity:Preferred
      stock,  $.01 par value; authorized 2,000 shares, (no shares
      issued or outstanding)
            
            
            -
            
            
            
            -Common
      stock, $.01 par value; authorized 20,000 shares, (13,611 and 13,513 shares
      issued, respectively)
            
            
            141
            
            
            
            140Paid
      in capital
            
            
            92,808
            
            
            
            91,399Accumulated
      other comprehensive income
            
            
            39
            
            
            
            20Retained
      earnings
            
            
            11,489
            
            
            
            14,200104,477
            
            
            
            105,759Less
      treasury stock, at cost (1,683 and 1,323 shares,
    respectively)
            
            
            15,261
            
            
            
            12,992Total
      equity
            
            
            89,216
            
            
            
            92,767Total
      liabilities and equity
            
            $
            192,978
            
            
            $
            206,584





(The
accompanying notes are an integral part of the financial
statements.)





4
 Table of Contents





POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


(UNAUDITED)





(in
      thousands, except per share data)
            
            Three Months EndedJuly 5,
            
            
            July 5,2008
            
            
            2007Net
      revenues:Product
            
            $
            92,678
            
            
            $
            91,599Service
            
            
            62,315
            
            
            
            46,662Total
      net revenues
            
            
            154,993
            
            
            
            138,261Cost
      of revenues:Product
            
            
            83,489
            
            
            
            84,280Service
            
            
            52,207
            
            
            
            38,373Total
      cost of revenues
            
            
            135,696
            
            
            
            122,653Gross
      profit
            
            
            19,297
            
            
            
            15,608Operating
      expenses:Selling,
      general and administrative
            
            
            16,512
            
            
            
            15,870Depreciation
      and amortization
            
            
            1,218
            
            
            
            1,149Total
      operating expenses
            
            
            17,730
            
            
            
            17,019Income
      (loss) from operations
            
            
            1,567
            
            
            
            (1,411
            )Interest
      income
            
            
            42
            
            
            
            220Interest
      expense
            
            
            (119
            )
            
            
            (130
            )Interest
      income (expense)
            
            
            (77
            )
            
            
            90Income
      (loss) before income tax
            
            
            1,490
            
            
            
            (1,321
            )Income
      tax expense (benefit)
            
            
            -
            
            
            
            (468
            )Net
      income (loss)
            
            $
            1,490
            
            
            $
            (853
            )Weighted
      average shares outstanding:Basic
            
            
            11,946
            
            
            
            12,330Diluted
      (1)
            
            
            12,343
            
            
            
            12,330Earnings
      (loss) per common share:Basic
            
            $
            0.12
            
            
            $
            (0.07
            )Diluted
      (1)
            
            $
            0.12
            
            
            $
            (0.07
            )








(1)
Dilutive loss per common share for the 3 months ended July 5, 2007 would have
been anti-dilutive if the number of weighted average shares outstanding were
adjusted to reflect the dilutive effect of outstanding stock options and
unearned restricted shares.








(The
accompanying notes are an integral part of the financial
statements.)





5
 Table of Contents





POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





(in
      thousands)
            
            Three Months EndedJuly 5,
            
            
            July 5,2008
            
            
            2007Net
      income (loss)
            
            $
            1,490
            
            
            
            (853
            )Other
      comprehensive income:Foreign
      currency translation adjustment
            
            
            26
            
            
            
            3Comprehensive
      income (loss)
            
            $
            1,516
            
            
            
            (850
            )





(The
accompanying notes are an integral part of the financial
statements.)





6
 Table of Contents





POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


(UNAUDITED)





(in
      thousands, except per share data)
            
            Six Months EndedJuly 5,
            
            
            July 5,2008
            
            
            2007Net
      revenues:Product
            
            $
            174,155
            
            
            $
            183,809Service
            
            
            126,007
            
            
            
            96,445Total
      net revenues
            
            
            300,162
            
            
            
            280,254Cost
      of revenues:Product
            
            
            156,987
            
            
            
            168,560Service
            
            
            108,629
            
            
            
            78,845Total
      cost of revenues
            
            
            265,616
            
            
            
            247,405Gross
      profit
            
            
            34,546
            
            
            
            32,849Operating
      expenses:Selling,
      general and administrative
            
            
            34,677
            
            
            
            29,149Depreciation
      and amortization
            
            
            2,434
            
            
            
            2,269Total
      operating expenses
            
            
            37,111
            
            
            
            31,418Income
      (loss) from operations
            
            
            (2,565
            )
            
            
            1,431Interest
      income
            
            
            127
            
            
            
            530Interest
      expense
            
            
            (274
            )
            
            
            (269
            )Interest
      income (expense)
            
            
            (147
            )
            
            
            261Income
      (loss) before income tax
            
            
            (2,712
            )
            
            
            1,692Income
      tax expense
            
            
            -
            
            
            
            719Net
      income (loss)
            
            $
            (2,712
            )
            
            $
            973Weighted
      average shares outstanding:Basic
            
            
            12,027
            
            
            
            12,339Diluted
      (1)
            
            
            12,027
            
            
            
            12,647Earnings
      (loss) per common share:Basic
            
            $
            (0.23
            )
            
            $
            0.08Diluted
      (1)
            
            $
            (0.23
            )
            
            $
            0.08








(1)
Dilutive loss per common share for the 6 months ended July 5, 2008 would have
been anti-dilutive if the number of weighted average shares outstanding were
adjusted to reflect the dilutive effect of outstanding stock options and
unearned restricted shares.








(The
accompanying notes are an integral part of the financial
statements.)





7
 Table of Contents





POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





(in
      thousands)
            
            Six Months EndedJuly 5,
            
            
            July
       5,2008
            
            
            2007Net
      income (loss)
            
            
            (2,712
            )
            
            
            973Other
      comprehensive income (loss):Foreign
      currency translation adjustment
            
            
            18
            
            
            
            (78
            )Comprehensive
      income (loss)
            
            
            (2,694
            )
            
            
            895





(The
accompanying notes are an integral part of the financial
statements.)





8
 Table of Contents





POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





(in
      thousands)
            
            Six Months EndedCash
      Flows from Operating Activities:
            
            July 5, 2008
            
            
            July 5, 2007Net
      income (loss)
            
            
            (2,712
            )
            
            
            973Adjustments
      to reconcile net income (loss) to net cash flows from (used in) operating
      activities:Depreciation
      and amortization
            
            
            2,499
            
            
            
            2,525Stock
      option, restricted stock compensation and employee purchase plan
      expense
            
            
            1,237
            
            
            
            226Severance
            
            
            889
            
            
            
            -Provision
      for doubtful accounts
            
            
            600
            
            
            
            650Amortization
      of unearned income
            
            
            (4
            )
            
            
            (27
            )Deferred
      income taxes
            
            
            -
            
            
            
            564Changes
      in working capital accounts:Accounts
      receivable
            
            
            4,678
            
            
            
            7,041Inventories
            
            
            146
            
            
            
            (1,048
            )Other
      current assets
            
            
            3,462
            
            
            
            387Net
      investment in leases
            
            
            424
            
            
            
            546Accounts
      payable - floor plan financing
            
            
            (6,631
            )
            
            
            (1,335
            )Accounts
      payable trade
            
            
            (668
            )
            
            
            (11,193
            )Deferred
      revenue
            
            
            (291
            )
            
            
            (109
            )Employee
      compensation and benefits
            
            
            (761
            )
            
            
            175Other,
      net
            
            
            (2,511
            )
            
            
            155Net
      operating activities
            
            
            357
            
            
            
            (470
            )Cash
      Flows used in Investing Activities:Capital
      expenditures
            
            
            (2,386
            )
            
            
            (1,662
            )Purchases
      of certificate of deposits
            
            
            (15
            )
            
            
            (18
            )Net
      investing activities
            
            
            (2,401
            )
            
            
            (1,680
            )Cash
      Flows from Financing Activities:Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            90Purchase
      of treasury stock
            
            
            (2,270
            )
            
            
            (405
            )Proceeds
      from issuance of common shares for employee stock purchase
      plan
            
            
            172
            
            
            
            146Net
      financing activities
            
            
            (2,098
            )
            
            
            (169
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            18
            
            
            
            (78
            )Decrease
      in cash and cash equivalents
            
            
            (4,124
            )
            
            
            (2,397
            )Cash
      and cash equivalents:Beginning
      of period
            
            
            13,282
            
            
            
            13,562End
      of period
            
            $
            9,158
            
            
            $
            11,165





(The
accompanying notes are an integral part of the financial
statements.)




9
 Table of Contents




POMEROY IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.
            Basis
      of Presentation





The
consolidated financial statements of Pomeroy IT Solutions, Inc. (“the Company”)
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X.   Accordingly, they do not include all the information and
footnotes required by US GAAP for complete financial statements.  In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the interim periods have been
made. The results of operations for the three and six month periods ended July
5, 2008 are not necessarily indicative of the results that may be expected for
future interim periods or for the year ending January 5, 2009.





Use of
Estimates in Financial Statements - In preparing financial statements in
conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting
period.  Accounting estimates in these financial statements include
allowances for trade accounts receivable and vendor accounts receivable,
deferred tax valuation allowances and estimates related to assessing the
impairment of long-lived assets. Such estimates and assumptions are subject to
inherent uncertainties, which may result in actual amounts differing from
reported amounts.





During
fiscal 2008, the amounts for the three and six months ended July 5, 2007
have been reclassified in the consolidated financial statements to conform to
the current period presentation.  The reclassified amounts include
cost of revenues and operating expenses.  Below is the three and six
months of fiscal 2007, as previously reported and after the reclassifications to
conform to the current period presentation.








(in
      thousands)
            
            For The Three Months Ended July 5,
      2007As Previously Reported
            
            
            As RestatedNet
      revenues
            
            $
            138,261
            
            
            $
            138,261Cost
      of revenues
            
            
            116,238
            
            
            
            122,653Gross
      profit
            
            
            22,023
            
            
            
            15,608Operating
      expenses
            
            
            23,434
            
            
            
            17,019Loss
      from operations
            
            
            (1,411
            )
            
            
            (1,411
            )Net
      Interest - income
            
            
            90
            
            
            
            90Income
      taxes (benefit)
            
            
            (468
            )
            
            
            (468
            )Net
      loss
            
            $
            (853
            )
            
            $
            (853
            )





10
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





(in
      thousands)
            
            For The Six Months Ended July 5,
      2007As Previously Reported
            
            
            As RestatedNet
      revenues
            
            $
            280,254
            
            
            $
            280,254Cost
      of revenues
            
            
            234,529
            
            
            
            247,405Gross
      profit
            
            
            45,725
            
            
            
            32,849Operating
      expenses
            
            
            44,294
            
            
            
            31,418Income
      from operations
            
            
            1,431
            
            
            
            1,431Net
      Interest - income
            
            
            261
            
            
            
            261Income
      taxes
            
            
            719
            
            
            
            719Net
      income
            
            $
            973
            
            
            $
            973





2.
            Recent
      Accounting Pronouncements





Effective
January 6, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“SFAS 157”).  SFAS 157 establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements.





The
Company has only partially applied the provisions of SFAS 157 as management has
elected the deferral provisions of FASB Staff Position 157-2 which delays the
effective date of SFAS157 for non-financial assets and liabilities which are not
measured at fair value on a recurring basis (at least annually) until fiscal
years beginning after November 15, 2008.   The major categories
of assets and liabilities that are recognized or disclosed at fair value on a
nonrecurring basis include intangible assets and equipment and leasehold
improvements that may be reported at fair value as a result of impairment
testing, and certain assets and liabilities recognized as a result of business
combinations.





There was
no material impact to the Company’s consolidated financial position, results of
operations, or cash flows as a result of the adoption of SFAS 157.





Financial
instruments carried at fair value will be classified and disclosed in one of the
following three categories:





Level 1 – Quoted market prices
in active markets for identical assets and liabilities





Level 2 – Observable
market-based inputs or unobservable inputs that are corroborated by market
data





Level 3 – Unobservable inputs
that are not corroborated by market data





The
Company’s financial instruments consist primarily of cash and cash equivalents,
certificates of deposit, and accounts receivable, as well as obligations under
accounts payable and the Company’s credit facility.  The estimated
fair values of the Company’s short-term financial instruments, including cash
and cash equivalents, certificates of deposit, receivables and payable arising
in the ordinary course of business approximate their carrying amounts due to the
relatively short period of time between origination and
realization.  The carrying amount of outstanding borrowings under the
credit facility approximates fair value because the interest rates fluctuate
with market interest rates.





11
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 allows entities the option to measure eligible financial
instruments at fair value as of specified dates.  Such election, which
may be applied on an instrument by instrument basis, is typically irrevocable
once elected.  SFAS No. 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and became effective
for the Company beginning with the first quarter of 2008. The Company
determined there is no impact from the adoption of SFAS No. 159 on the
consolidated financial statement and note disclosures.





InDecember 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141(R), “Business Combinations” which replaces SFAS No. 141, “Business
Combinations.” This Statement retains the fundamental requirements in SFAS No.
141 that the acquisition method of accounting (formerly referred to as purchase
method) is to be used for all business combinations and that an acquirer is
identified for each business combination. This Statement defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as of the date that the
acquirer achieves control. This Statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values. This Statement
requires the acquirer to recognize acquisition-related costs and restructuring
costs separately from the business combination as period expense. This Statement
is effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company will implement SFAS No. 141(R) for any business
combinations occurring at or subsequent to January 5, 2009.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities; an amendment of FASB Statement No. 133, (SFAS No. 161). This
statement requires additional disclosures for derivative instruments and hedging
activities that include how and why an entity uses derivatives, how these
instruments and the related hedged items are accounted for under SFAS No. 133
and related interpretations, and how derivative instruments and related hedged
items affect the entity’s financial position, results of operations and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company
determined there is no impact from the adoption of SFAS No. 161 on the
consolidated financial statement and note disclosures.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States. This statement will be effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The Company does not expect the
adoption of this statement will have a material impact on the consolidated
financial statements.





In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets”. The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under SFAS 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS 141R and other
U.S. generally accepted accounting principles. This FSP is effective for fiscal
years beginning after December 15, 2008 and therefore is effective for the
Company in fiscal year 2009.  The Company does not expect the adoption
of this FSP will have a material impact on the consolidated financial
statements.





12
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








3.
            Cash
      and Short-Term Borrowings





The
Company has a Syndicated Credit Facility Agreement with GE Commercial
Distribution Finance, which became effective June 25, 2004 (the “Credit
Facility”) and was scheduled to expire on June 25, 2008.   The
Credit Facility, which has been the subject of subsequent modifications, was
originally comprised of seven participating lenders, with GE Commercial
Distribution Finance (“GECDF”) designated as the “agent” for the
lenders.   The Credit Facility provides for a floor plan loan
facility and a revolving loan commitment, both of which are collateralized
primarily by the Company’s accounts receivable.  The Credit Facility
also provides for a letter of credit facility.  The funds available
for borrowing by the Company under the Credit Facility are reduced by an amount
equal to outstanding advances made to the Company to finance inventory under the
floor plan loan facility and the aggregate amount of letters of credit
outstanding at any given time.





Effective
April 15, 2008, the Credit Facility was amended.  The primary changes
made to the Credit Facility by the  amendment were as
follows:  (i)  decrease in the total Credit Facility from
$100 million to $68.7 million with a maximum of $68.7 million (previously $80.0
million) available under the floor plan loan facility and the revolving loan,
both of which are collateralized primarily by the Company’s accounts receivable
up to a maximum of $68.7 million (previously $80.0 Million); (ii) memorialize
the departure of certain lenders from the Credit Facility and the assignment of
their respective commitments under the Credit Facility to the remaining lenders,
GECDF and National City Bank, and (iii) revise the tangible net worth covenant
on the last day of each fiscal quarter to  be no less
than  $70 million (previously $85.4 million).  The Credit
Facility allows for either the Company or GECDF, in its capacity as agent for
the lenders, to require participating lenders to assign their respective
commitments under the Credit Facility to either GECDF or another participating
lender.  In accordance with the amendment to the Credit Facility,
GECDF is extending 72.78% of the credit to the Company and National City Bank is
extending 27.22% of the credit to the Company.





Effective
June 25, 2008, the Credit Facility was further amended.  The primary
provisions of this amendment are as follows:  (i) to extend the
termination date under the revolving loan commitment from June 25, 2008 to June
25, 2009; (ii) to increase the total credit facility back to $80.0 million from
$68.7 million, with a maximum of $80.0 million (previously $68.7 million) for
inventory financing and the revolving loan, and to revise the participating
lenders so that GECDF is the sole lender and will extend 100% of the credit;
(iii) to revise the tangible net worth covenant on the last day of each fiscal
quarter to be no less than $65 million for the quarters ending July 5, 2008 and
October 5, 2008 (previously $70 million) and no less than $70 million for the
quarter ending January 5, 2009; (iv) to specify a minimum fixed charge coverage
ratio (as defined in the agreement) of 1.25 to 1.00 for the quarters ending
October 5, 2008 and January 5, 2009 and 1.50 to 1.00 for the quarter ending
April 5, 2009, (v) to specify a maximum total funded indebtedness to EBITDA (as
defined in the agreement) of 2.75 to 1.00 for the quarters ending October 5,
2008, January 5, 2009 and April 5, 2009, and (vi) to provide for a termination
fee of up to $250 thousand to be paid by the Company in the event the Company
terminates the agreement prior to the maturity date of the revolving loan
commitment.





A
significant part of the Company’s inventory is financed under the floor plan
loan facility provided under the Credit Facility.  In addition, the
Company also finances certain inventory under a separate line of credit with IBM
Credit Corporation (“ICC”).  At July 5, 2008, the Company’s aggregate
line of credit for financing inventory totaled $88.0 million, including $80.0
million under the Credit Facility and $8.0 million with
ICC.   Borrowings under the Credit Facility floor plan loan
facility are made on 30 day notes. Borrowings under the ICC floor plan
arrangement are made on 15 day notes. All such borrowings by the Company are
secured by the related inventory. Financing on substantially all the advances
made under either of these floor plan arrangements is interest free. The Company
classifies amounts outstanding under the Credit Facility and ICC floor plan
arrangements as accounts payable.





13
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








As of
July 5, 2008 and January 5, 2008, there was no balance outstanding under the
Credit Facility.  At July 5, 2008 and January 5, 2008 the amounts
available under the Credit Facility were $68.6 million and $56.7 million,
respectively.  Interest on outstanding borrowings under the Credit
Facility is payable monthly based on the LIBOR rate and a pricing
grid.  As of July 5, 2008 and January 5, 2008, the adjusted LIBOR rate
was 5.46% and 7.57% respectively.





For the
fiscal quarter ended July 5, 2008, the Company was in compliance with its
financial covenants.  At January 5, 2008, the Company was in violation
of its financial covenants; the Company requested and received a
waiver.





4.
            Stock-Based
      Compensation





During
the six months ended July 5, 2008, the Company awarded 133,821 shares of
restricted common stock, which vest over a 4-year period.  During the
six months ended July 5, 2007, the Company awarded 191,103 shares of restricted
common stock. Restricted stock awards are valued at the closing market value of
the Company’s common stock on the date of the grant, and the total value of the
award is recognized as expense ratably over the vesting period. During the six
months ended July 5, 2008 there were 12,325 restricted shares that were
forfeited.  During the six months ended July 5, 2007 there were
107,045 restricted shares that were forfeited.  The forfeitures for
the six months ended July 5, 2007 resulted in the reversal of accrued expense of
$0.3 million.  Total compensation expense recognized for unvested
shares was $228 thousand and ($129) thousand for the three months ended July 5,
2008 and July 5, 2007, respectively.  Total compensation expense
recognized for unvested shares was $720 thousand and ($13) thousand for the six
months ended July 5, 2008 and July 5, 2007, respectively.  As of July
5, 2008, the total amount of unrecognized compensation expense related to
nonvested restricted stock awards was approximately $2.9 million, which is
expected to be recognized over a weighted-average period of approximately 2.8
years.








Shares
            
            
            Weighted average fair value at grant
      dateRestricted
      common stock outstanding January 6, 2008
            
            
            338,614
            
            
            $
            9.21Granted
            
            
            55,175
            
            
            
            6.09Vested
            
            
            (25,938
            )
            
            
            8.20Forfeitures
            
            
            (2,500
            )
            
            
            7.08Restricted
      common stock outstanding April  5, 2008
            
            
            365,351
            
            
            $
            9.83Granted
            
            
            78,646
            
            
            
            5.99Vested
            
            
            (26,400
            )
            
            
            8.48Forfeitures
            
            
            (9,825
            )
            
            
            9.22Restricted
      common stock outstanding July  5, 2008
            
            
            407,772
            
            
            $
            7.72








For the
six months ended July 5, 2008, the Company granted 250,000 stock option awards
to employees.  The values range from $2.18 to $2.45, based upon the
following assumptions:  underlying price of stock ranging from $5.72
to $6.49; expected life of 3.5 years; volatility ranging from 47.37% to 50.44%;
risk-free interest rates ranging from 1.78% to 2.55%; and dividend yield of
0.00%.





For the
three months ended July 5, 2008 and July 5, 2007, the Company recognized
approximately $222 thousand and $91 thousand, respectively, in expense related
to stock options.  For the six months ended July 5, 2008 and July 5,
2007, the Company recognized approximately $454 thousand and $203 thousand,
respectively, in expense related to stock options. The approximate unamortized
stock option compensation as of July 5, 2008, which will be recorded as expense
in future periods, is $849 thousand. The weighted average time over which this
expense will be recorded is approximately 2.4 years.





14
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








For the
three months ended July 5, 2008 and July 5, 2007, the Company recognized
approximately $32 thousand and $22 thousand, respectively, in expense related to
the employee stock purchase plan being compensatory under FAS
123R.  For the six months ended July 5, 2008 and July 5, 2007, the
Company recognized approximately $63 thousand and $36 thousand, respectively, in
expense related to the employee stock purchase plan due to it being compensatory
under FAS 123R.








5.
            Earnings
      per Common Share





The
following is a reconciliation of the number of shares used in the basic EPS and
diluted EPS computations:





Three
      Months Ended July 5,2008
            
            
            2007Per
      Share
            
            
            
            
            
            Per
      ShareShares
            
            
            Amount
            
            
            Shares
            
            
            AmountBasic
      EPS
            
            
            11,946
            
            
            $
            0.12
            
            
            
            12,330
            
            
            $
            (0.07
            )Effect
      of dilutive stock options and unvested restricted shares
            
            
            397
            
            
            
            -
            
            
            
            -
            *
            
            
            -
            *Diluted
      EPS
            
            
            12,343
            
            
            $
            0.12
            
            
            
            12,330
            
            
            $
            (0.07
            )





*Not
presented herein since effect on loss per common share is anti-dilutive for the
three months ended July 5, 2007.





Six
      Months Ended July 5,2008
            
            
            2007Per
      Share
            
            
            
            
            
            Per
      ShareShares
            
            
            Amount
            
            
            Shares
            
            
            AmountBasic
      EPS
            
            
            12,027
            
            
            $
            (0.23
            )
            
            
            12,339
            
            
            $
            0.08Effect
      of dilutive stock options and unvested restricted shares
            
            
            -
            *
            
            
            -
            *
            
            
            308
            
            
            
            -Diluted
      EPS
            
            
            12,027
            
            
            $
            (0.23
            )
            
            
            12,647
            
            
            $
            0.08





*Not
presented herein since effect on loss per common share is anti-dilutive for the
six months ended July 5, 2008.








For the
quarter ended July 5, 2008, a total of 1,474,166 stock options were excluded
from the diluted EPS calculation as their effect would have been
anti-dilutive.  For the quarter and six-month periods ended July 5,
2008, a total of 407,772 unvested restricted share awards were excluded from the
diluted EPS calculation as their effect would have been
anti-dilutive.





For the
quarter ended July 5, 2007, a total of 1,752,767 stock options and 267,577
unvested restricted share awards were excluded from the diluted EPS calculation
as their effect would have been anti-dilutive.  For the six months
ended July 5, 2007, a total of 1,740,959 stock options were excluded from the
diluted EPS calculation as their effect would have been
anti-dilutive.





6.
            Treasury
      Stock





On
December 3, 2007, the Board of Directors of the Company authorized a program to
repurchase up to $5.0 million of its outstanding common stock. Pomeroy suspended
this stock repurchase program on June 3, 2008.  Prior to the
suspension, a total of 497,572 shares of the Company’s common stock, with an
aggregate cost of $3.2 million, had been repurchased under this
program.  The acquired shares will be held in treasury or
cancelled.  This stock redemption program was initially approved to
remain in place through December 5, 2008, or the date on which $5 million in
repurchases was completed, whichever came first.  In addition, the
Board adopted a written trading plan under Rule 10b5-1 of the Securities
Exchange Act of 1934 to facilitate the repurchase of its common stock
pursuant to the stock repurchase program.  Rule 10b5-1 allowed the
Company to purchase its shares at times when the Company would not ordinarily be
in the market because of the Company’s trading policies or the possession of
material non-public information.  129,780 and 360,722 shares were
repurchased during the respective three month and six month periods ended July
5, 2008.  In addition during the first six months of fiscal 2008, the
Company purchased 8,416 shares withheld at the election of certain holders
of restricted stock, from the vested portion of restricted stock awards with a
market value approximating the amount of the withholding taxes due from such
restricted stock holders.





15
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








During
the first six months of fiscal 2007, the Company repurchased 47,400 shares of
common stock at a total cost of $403 thousand under its share repurchase program
that expired October 31, 2007.





7.
            Supplemental
      Cash Flow Disclosures





During
the first six months of 2008, the Company purchased an additional 8,416 shares
withheld at the election of certain holders of restricted stock, from the vested
portion of restricted stock awards with a market value approximating the amount
of the withholding taxes due from such restricted stock holders.  The
Company added these shares into treasury resulting in an increase of treasury
stock of $47 thousand.





Supplemental
disclosures with respect to cash flow information and non-cash investing and
financing activities are as follows:





(in
      thousands)
            
            Six Months Ended
    July 5,2008
            
            
            2007Interest
      paid
            
            $
            224
            
            
            $
            92Income
      taxes paid (refunded)
            
            $
            (3,045
            )
            
            $
            (560
            )








8.
            Litigation





On April
9, 2008, we filed a report on Form 8-K reporting that our Board of Directors
received a letter from David B. Pomeroy, II, a director of the Company and its
largest stockholder, proposing to acquire, with Charlesbank Equity Fund VI, LP,
all of the outstanding common stock of the Company not owned by him for a price
of $7.05 per share and that the non-binding indication of interest was referred
to a Special Committee for review and consideration.    On
May 9, 2008, the Company reported that a purported class action complaint was
filed on May 6, 2008 in the Commonwealth of Kentucky Boone Circuit Court against
the Company, each of its directors and two executive
officers.  Charlesbank Equity Fund VI Limited Partnership and
Charlesbank Capital Partners LLC were also named as defendants in the
lawsuit.  Shortly thereafter, on May 21, 2008, Charlesbank Equity Fund
VI notified us in writing of its withdrawal from the proposed acquisition of the
Company.





On May
22, 2008, we filed a report on Form 8-K reporting that our Board of Directors
received a letter from Mr. Pomeroy concerning his formation of a new agreement
with another financial partner, ComVest Investment Partners III LP, for the
purpose of submitting a joint proposal to acquire all of the outstanding common
stock for the Company not owned by Mr. Pomeroy for a price of $6.00 per
share.  Incident to the change in Mr. Pomeroy’s financial partners,
counsel for the Plaintiff, Kenneth Hanninen, an alleged Pomeroy shareholder, who
brought the action on behalf of himself and all others similarly situated, filed
a First Amended and Restated Class Action Complaint with the Boone Circuit
Court.  The allegations in the First Amended and Restated Complaint,
which are
substantially the same as those made in the original complaint, are, among other
things, that the directors and officers of the Company are in breach of their
fiduciary duties to shareholders in connection with the offer letter that the
Company received from Mr. Pomeroy.  The First Amended and Restated
Class Action Complaint seeks, among other things, injunctive relief to enjoin
the Company, its directors and named executive officers from consummating the
acquisition proposed by Mr. Pomeroy and ComVest Investment Partners III LP,
along with attorneys’ fees and costs.





16
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








The
Company believes that the allegations in the First Amended and Restated Class
Action Complaint are without merit and intends to vigorously defend the Company
and its directors and officers in this matter.





There are
various other legal actions arising in the normal course of business that have
been brought against the Company. Management believes these matters will not
have a material adverse effect on the Company's financial position or results of
operations.








9.
            Restructuring
      and Severance Charges





During
the fourth quarter of 2007 and the first six months of fiscal 2008, the
Company recorded $355 thousand and $889 thousand, respectively, for severance
due to the realignment of the Company’s operations. As of July 5, 2008 the
remaining balance of severance payments is $282 thousand which will be paid out
in fiscal 2008.





During
fiscal 2004, the Company recorded a charge for severance in the amount of $1.447
million which will be paid through January 2009, related to the resignation of
David B. Pomeroy II as Chief Executive Officer.   As of July 5,
2008 the remaining balance due to Mr. Pomeroy was $50 thousand, which will be
paid out in fiscal 2008.





In 2004
the Company recorded a restructuring charge liability in connection with the
merger with the Alternative Resources Corporation (“ARC”) acquisition to
eliminate certain duplicative activities and reduce facility
requirements.  As a result, approximately $6.4 million of costs were
recorded as part of the liabilities assumed in the ARC acquisition in October
2004. The restructuring charge consisted of costs of vacating duplicative leased
facilities of ARC and severance costs associated with exiting
activities.  These costs are accounted for under EITF 95-3,
"Recognition of Liabilities in Connection with Purchase Business Combinations."
These costs were recognized as a liability assumed in the purchase business
combination and included in the allocation of the cost to acquire ARC. As of
July 5, 2008 the remaining balance of the restructuring liability was $1.66
million.





As of
July 5, 2008, the restructuring and severance charge accrual, consisted of the
following:





(in
      thousands)
            
            TotalLiability
      balance at January 5, 2008
            
            $
            2,734Cash
      payments and write offs
            
            
            (1,029
            )Charges
      accrued
            
            
            581Liability
      balance at April 5, 2008
            
            $
            2,286Cash
      payments and write offs
            
            
            (601
            )Charges
      accrued
            
            
            308Liability
      balance at July 5, 2008
            
            $
            1,993








10.
            Income
      Taxes





For the
three and six months ended July 5, 2008, the Company had no income tax expense
or income tax benefit. For the three and six months ended July 5, 2008, the
Company decreased its tax valuation allowance by $647 thousand and increased its
tax valuation allowance by $931 thousand, respectively, for a total allowance of
$15.9 million at July 5, 2008. The tax valuation allowance is due to the future
uncertainty of the Company’s ability to utilize its deferred tax
assets.  For the three and six months ended July 5, 2008, these
adjustments to the tax valuation allowance offset what would have been an income
tax expense and benefit, respectively.  The effective income tax rate
would have been 43.4% for the three month period and 34.3% for the six month
period, prior to the recording of the tax valuation reserve.  The
effective income tax rate for the three and six months ended July 5, 2007 was
35.4% and 42.5%, respectively.





17
 Table of Contents





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








As of
July 5, 2008 there have been no material changes in the Company’s uncertain tax
positions disclosures as provided in note 8 of the 2007 Annual Report on Form
10-K.





The
Company includes interest and penalties related to gross unrecognized tax
benefits within the provision for income taxes.  As of July 5, 2008,
the Company had accrued $270 thousand for payment of such interest.





The
Company and its subsidiaries file income tax returns in various tax
jurisdictions, including the United States and several U.S. states. The Company
has substantially concluded all U.S. Federal and State income tax matters for
years up to and including 2003.








11.
            Segment
      Information





The
Company follows the provisions of SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information."  This statement establishes
standards for the reporting of information about operating segments in annual
and interim financial statements.  Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker(s)
in deciding how to allocate resources and in assessing
performance.  The Company is aligned into functional lines: Sales,
Service Operations, Finance and Administrative.  Management and the
board of directors review operating results on a consolidated
basis.  As a result, the Company has one operating segment and the
Company reports one reportable segment. The following is a summary of the two
major components of service revenue as viewed by the chief decision makers of
the Company.





(in
      thousands)Service
      Revenue:
            
            For the Three Months Ended
      July 5,2008
            
            
            2007Technical
      Staffing Services
            
            $
            31,560
            
            
            $
            18,899Infrastructure
      Services
            
            
            30,755
            
            
            
            27,763Total
      Service Revenue
            
            
            62,315
            
            
            $
            46,662








Service
      Revenue:
            
            For the Six Months Ended
      July 5,2008
            
            
            2007Technical
      Staffing Services
            
            $
            64,064
            
            
            $
            39,372Infrastructure
      Services
            
            $
            61,943
            
            
            $
            57,073Total
      Service Revenue
            
            $
            126,007
            
            
            $
            96,445





18
 Table of Contents





Item2-Management’s Discussion and Analysis of Financial
Condition and Results of Operations





Special Cautionary Notice
Regarding Forward-Looking Statements





Certain
of the matters discussed under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contain certain
forward-looking statements regarding future financial results of the Company.
The words “expect,” “estimate,” “anticipate,” “predict,” and similar expressions
are intended to identify forward-looking statements. Such statements are
forward-looking statements for purposes of the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are disclosed in our Annual Report on Form 10-K under
“Item 1A Risk Factors” and in this document including, without limitation, those
statements made in conjunction with the forward-looking statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by such factors.





19
 Table of Contents





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





RESULTS
OF OPERATIONS


The
following table sets forth for the periods presented information derived from
our consolidated statements of operations expressed as a percentage of net
product and service revenues:





(in
      thousands)
            
            Net
      Product and Service Revenues
            
            
            
            Net
      Product and Service RevenuesFor
      the Three Months Ended July 5,
            
            
            
            For
      the Six Months Ended July 5,2008
            
            
            %
      of Revenues
            
            
            2007
            
            
            %
      of Revenues
            
            
            
            2008
            
            
            %
      of Revenues
            
            
            2007
            
            
            %
      of RevenuesNet
      revenues:Product
            
            $
            92,678
            
            
            
            59.8
            %
            
            $
            91,599
            
            
            
            66.3
            %
            
            
            $
            174,155
            
            
            
            58.0
            %
            
            $
            183,809
            
            
            
            65.6
            %Service
            
            
            62,315
            
            
            
            40.2
            %
            
            
            46,662
            
            
            
            33.7
            %
            
            
            
            126,007
            
            
            
            42.0
            %
            
            
            96,445
            
            
            
            34.4
            %Total
      net revenues
            
            
            154,993
            
            
            
            100.0
            %
            
            
            138,261
            
            
            
            100.0
            %
            
            
            
            300,162
            
            
            
            100.0
            %
            
            
            280,254
            
            
            
            100.0
            %Gross
      profitProduct
            
            
            9,189
            
            
            
            5.9
            %
            
            
            7,319
            
            
            
            5.3
            %
            
            
            
            17,168
            
            
            
            5.7
            %
            
            
            15,249
            
            
            
            5.4
            %Service
            
            
            10,108
            
            
            
            6.5
            %
            
            
            8,289
            
            
            
            6.0
            %
            
            
            
            17,378
            
            
            
            5.8
            %
            
            
            17,600
            
            
            
            6.3
            %Total
      gross profit
            
            
            19,297
            
            
            
            12.4
            %
            
            
            15,608
            
            
            
            11.3
            %
            
            
            
            34,546
            
            
            
            11.5
            %
            
            
            32,849
            
            
            
            11.7
            %Gross
      profit %Product
      %
            
            
            9.9
            %
            
            
            
            
            
            
            8.0
            %
            
            
            
            
            
            
            
            9.9
            %
            
            
            
            
            
            
            8.3
            %Service
      %
            
            
            16.2
            %
            
            
            
            
            
            
            17.8
            %
            
            
            
            
            
            
            
            13.8
            %
            
            
            
            
            
            
            18.2
            %Operating
      expenses:Selling,
      general and administrative
            
            
            16,512
            
            
            
            10.7
            %
            
            
            15,870
            
            
            
            11.5
            %
            
            
            
            34,677
            
            
            
            11.6
            %
            
            
            29,149
            
            
            
            10.4
            %Depreciation
      and amortization
            
            
            1,218
            
            
            
            0.8
            %
            
            
            1,149
            
            
            
            0.8
            %
            
            
            
            2,434
            
            
            
            0.8
            %
            
            
            2,269
            
            
            
            0.8
            %Total
      operating expenses
            
            
            17,730
            
            
            
            11.5
            %
            
            
            17,019
            
            
            
            12.3
            %
            
            
            
            37,111
            
            
            
            12.4
            %
            
            
            31,418
            
            
            
            11.2
            %Income
      (loss) from operations
            
            
            1,567
            
            
            
            0.9
            %
            
            
            (1,411
            )
            
            
            -1.0
            %
            
            
            
            (2,565
            )
            
            
            -0.9
            %
            
            
            1,431
            
            
            
            0.5
            %Interest
      income
            
            
            42
            
            
            
            0.0
            %
            
            
            220
            
            
            
            0.2
            %
            
            
            
            127
            
            
            
            0.0
            %
            
            
            530
            
            
            
            0.2
            %Interest
      expense
            
            
            (119
            )
            
            
            -0.1
            %
            
            
            (130
            )
            
            
            -0.1
            %
            
            
            
            (274
            )
            
            
            -0.1
            %
            
            
            (269
            )
            
            
            -0.1
            %Net
      interest income (expense)
            
            
            (77
            )
            
            
            -0.1
            %
            
            
            90
            
            
            
            0.1
            %
            
            
            
            (147
            )
            
            
            -0.1
            %
            
            
            261
            
            
            
            0.1
            %Income
      (loss) before income tax
            
            
            1,490
            
            
            
            1.0
            %
            
            
            (1,321
            )
            
            
            -1.0
            %
            
            
            
            (2,712
            )
            
            
            -0.9
            %
            
            
            1,692
            
            
            
            0.6
            %Income
      tax expense
            
            
            -
            
            
            
            -
            
            
            
            (468
            )
            
            
            -0.4
            %
            
            
            
            -
            
            
            
            -
            
            
            
            719
            
            
            
            0.3
            %Net
      income (loss)
            
            $
            1,490
            
            
            
            1.0
            %
            
            $
            (853
            )
            
            
            -0.6
            %
            
            
            $
            (2,712
            )
            
            
            -0.9
            %
            
            $
            973
            
            
            
            0.3
            %





See Note
1 to the Consolidated Financial Statements herein for descriptions of
reclassifications to financial statements for the three and six months ended
July 5, 2007 in order to conform to the current year presentation.





20
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








Second
Quarter 2008 versus Second Quarter 2007





Total Net Revenues:Total
net revenues increased $16.7 million or 12.1% in the second quarter of fiscal
2008 as compared to the second quarter of fiscal 2007.  For the second
quarters of fiscal 2008 and fiscal 2007, the net revenues were $155.0 million
and $138.3 million, respectively.





Product
revenue was $92.7 million and $91.6 million, respectively, for the second
quarters of fiscal 2008 and fiscal 2007. Product revenue increased $1.1 million,
an increase of 1.2% in the second quarter of fiscal 2008 as compared to the
second quarter of fiscal 2007.  This increase was due primarily to
growth in our state, local and education customers and also in our commercial
healthcare, retail and financial services accounts offset by continued delays in
product deployment.





Service
revenue was $62.3 million in the second quarter of fiscal 2008 compared to $46.7
million in the second quarter of fiscal 2007, an increase of $15.6 million or
33.5% from fiscal 2007. The Company groups services revenue into Technical
Staffing and Infrastructure Services. Technical Staffing Services support
clients’ project requirements, ensures regulatory and customer compliance
requirements and promotes success of the staffing
projects.  Infrastructure Services help clients optimize the various
elements of distributed computing environments.  Encompassing the
complete IT lifecycle, these services include desktop and mobile computing,
server and network environments.





Technical
Staffing revenue was $31.6 million and accounted for approximately 50.6% of
total service revenues in the second quarter of fiscal 2008, compared to $18.9
million and 40.5% for the second quarter of fiscal 2007.  This
increase is primarily the result of recognizing revenue for the gross billings
on subcontractor personnel which historically have been recorded as fee based
services in our vendor management business.  Overall, volume in our
staffing business was relatively consistent.





We
anticipate technical staffing revenue to decrease in subsequent quarters as a
result of the announcement made in June 2008 that we elected to not renew a
technical staffing services contract with a major customer because the terms
they required meant this business would not be profitable for our
company.





Infrastructure
Service revenue was $30.7 million and $27.8 million, respectively, for the
second quarter of fiscal 2008 and 2007. Infrastructure Service revenues were
approximately 49.4% of total service revenues in the second quarter of fiscal
2008, compared to 59.5% for the second quarter of fiscal 2007.  The
increase in revenue is primarily the result of new service engagements started
at the beginning of 2008.





Gross
Profit:  Gross profit was $19.3 million in the second quarter
of fiscal 2008, compared to $15.6 million in the second quarter of 2007. Gross
profit, as a percentage of revenue, was 12.4% in second quarter of fiscal 2008,
compared to 11.3% in the second quarter of fiscal 2007.





Product
gross profit was $9.2 million for the second quarter of fiscal 2008, compared to
$7.3 million for the same period of fiscal 2007. Product gross profit as a
percentage of product revenue increased to 9.9% in the second quarter of fiscal
2008, compared to 8.0% for the same period of fiscal 2007. The increase in
product gross margin is due primarily to margin improvements as a result of
increased rebates from improved tracking of OEM partner promotional initiatives
and targeting more profitable growth segments such as networking, server,
storage and peripherals.





Service
gross profit was $10.1 million for the second quarter of fiscal 2008,
compared to $8.3 million in the second quarter of fiscal
2007.  Service gross profit as a percentage of service revenue
decreased to 16.2% in the second quarter of fiscal 2008, compared to 17.8% for
the same period of fiscal 2007.





Gross
profit from Technical Staffing Services was $3.6 million for the second quarter
of fiscal 2008, compared to $3.2 million for the second quarter of fiscal
2007.  This increase of $0.4 million is primarily due to increased use
of higher-margin Pomeroy employees on staffing projects. Gross profit as a
percentage of technical staffing revenues decreased to 11.5% in the second
quarter of fiscal 2008 from 17.1% in the second quarter of fiscal
2007.  This decrease in gross margin is primarily the result of
recognizing revenue at very low incremental margin for billings on subcontractor
personnel which historically have been recorded as fee based services in our
vendor management business.





21
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








Gross
profit from Infrastructure Services was $6.5 million for the second quarter of
fiscal 2008 compared to $5.1 million for the second quarter of fiscal
2007.  Gross profit as a percentage of infrastructure service revenues
increased to 21.1% in the second quarter of fiscal 2008 from 18.2% in the second
quarter of fiscal 2007.  This
increase in gross profit and margin is primarily a result of driving higher
utilization of personnel, reduction of work force and as a result of
renegotiation and termination of unprofitable contracts.





Operating
Expenses





Total
operating expenses were $17.7 million in the second quarter of 2008, compared to
$17.0 million in the second quarter of 2007, an increase of $0.7
million.  This increase is primarily driven by an increase of $1.0
million in personnel-related expenditures, and related general and
administrative expenses, to support our product and service businesses and
investments to improve customer, vendor and back office support functions;
severance charges of $0.3 million; offset by a decrease of $0.6 million related
to professional and outside service provider fees.





Operating
expenses as a percentage of revenue were 11.5% for the second quarter of fiscal
2008 compared to 12.3% for the second quarter of fiscal 2007.





Income
(Loss) from Operations





Income
from operations was $1.6 million in the second quarter of 2008, as compared to a
loss of $1.4 million for the same period of 2007. This increase is a result of
the increase in gross profit offset by the increase in operating expenses in the
second quarter of 2008, as described above.





Net
Interest Income (Expense)





Net
interest expense was $77 thousand during the second quarter of 2008 as compared
to income of $90 thousand during the second quarter of 2007. During the second
quarter of 2008, the Company had amounts outstanding under its credit facility
due to the timing of payments of accounts payables and payroll and collections
of receivables.





Income
Tax





For the
second quarter of 2008, the Company had no income tax expense or income tax
benefit. During the second quarter of fiscal 2008, the Company decreased its tax
valuation allowance by $0.6 million for a total allowance of $15.9 million at
July 5, 2008. The tax valuation allowance results from the future uncertainty of
the Company’s ability to utilize its deferred tax assets.  For the
second quarter of fiscal 2008, the $0.6 million decrease in tax valuation
reserve offset what would have been an income tax expense; the effective income
tax rate would have been 43.4% prior to recording the tax valuation
reserve.  The effective income tax rate for the second quarter of
fiscal 2007 was 35.4%.





Net
Income (Loss)





Net
income was $1.5 million in the second quarter of 2008 as compared to a net loss
of $0.9 million in the second quarter of 2007, resulting from the factors
described above.





22
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








July
5, 2008 YTD versus July 5, 2007 YTD





Total Net Revenues:Total
net revenues increased $19.9 million or 7.1% in the first six months of fiscal
2008 as compared to the same period of fiscal 2007.  For the first six
months of fiscal 2008 and fiscal 2007, the net revenues were $300.2 million and
$280.3 million, respectively.





Product
revenue was $174.2 million and $183.8 million, respectively, for the first six
months of fiscal 2008 and fiscal 2007. Product revenue decreased $9.6 million, a
decrease of 5.3% in the first six months of fiscal 2008 as compared to the first
six months of fiscal 2007.  This decrease was due primarily to
continued delays of product deployments.





Service
revenue was $126.0 million in the first six months of fiscal 2008 compared to
$96.4 million in the first six months of fiscal 2007, an increase of $29.6
million or 30.7% from fiscal 2007. The Company groups services revenue into
Technical Staffing and Infrastructure Services. Technical Staffing Services
support clients’ project requirements, ensures regulatory and customer
compliance requirements and promotes success of the staffing
projects.  Infrastructure Services help clients optimize the various
elements of distributed computing environments.  Encompassing the
complete IT lifecycle, these services include desktop and mobile computing,
server and network environments.





Technical
Staffing revenue was $64.1 million and accounted for approximately 50.8% of
total service revenues in the first six months of fiscal 2008, compared to $39.3
million and 40.8% for the first six months of fiscal 2007.  This
increase is primarily the result of recognizing revenue for the gross billings
on subcontractor personnel which historically have been recorded as fee based
services in our vendor management business.





We
anticipate technical staffing revenue to decrease in subsequent quarters as a
result of the announcement made in June 2008 that we elected to not renew a
technical staffing services contract with a major customer because the terms
they required meant this business would not be profitable for our
company.





Infrastructure
Service revenue was $61.9 million and $57.1 million, respectively, for the first
six months of fiscal 2008 and 2007. Infrastructure Service revenues were
approximately 49.2% of total service revenues in the first six months of fiscal
2008, compared to 59.2% for the first six months of fiscal 2007.  The
increase in revenue is primarily the result of new service engagements started
at the beginning of 2008.





Gross
Profit:  Gross profit was $34.5 million in the first six months
of fiscal 2008, compared to $32.8 million in the first six months of 2007. Gross
profit, as a percentage of revenue, was 11.5% in the first six months of fiscal
2008, compared to 11.7% in the first six months of fiscal 2007.








Product
gross profit was $17.2 million for the first six months of fiscal 2008, compared
to $15.2 million for the same period of fiscal 2007. Product gross profit as a
percentage of product revenue increased to 9.9% in the first six months of
fiscal 2008, compared to 8.3% for the same period of fiscal 2007. The increase
in product gross margin is due primarily to margin improvements as a result of
the increased rebates from improved tracking of OEM partner promotional
initiatives and targeting more profitable growth segments such as networking,
server, storage and peripherals.





Service
gross profit was $17.4 million for the first six months of fiscal 2008, compared
to $17.6 million in the first six months of fiscal 2007 for a decline in service
gross profit of $0.2 million. Service gross profit as a percentage of service
revenue decreased to 13.8% in the first six months of fiscal 2008, compared to
18.2% for the same period of fiscal 2007.





Gross
profit from Technical Staffing Services was $6.2 million for the first six
months of fiscal 2008, compared to $6.7 million for the first six months of
fiscal 2007.  Gross profit as a percentage of technical staffing
revenues decreased to 9.7% in the first six months of fiscal 2008 from 17.1% in
the first six months of fiscal 2007.  This decrease in gross margin is
primarily the result of recognizing revenue at very low incremental margin for
billings on subcontractor personnel which historically have been recorded as fee
based services in our vendor management business.





23
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








Gross
profit from Infrastructure Services was $11.2 million for the first six months
of fiscal 2008 compared to $10.9 million for the first six months of fiscal 2007
due to the increase in revenue related to new service engagements started at the
beginning of 2008.  Gross profit as a percentage of infrastructure
service revenues decreased to 18.0% in the first six months of fiscal 2008 from
19.0% in the first six months of fiscal 2007.  This decrease in gross
profit margin is primarily the result of unprofitable customer contracts during
the first quarter that were exited during the second quarter and reduced
utilization and productivity of infrastructure services technical resources in
the first quarter of 2008.





Operating
Expenses





Total
operating expenses were $37.1 million in the first six months of 2008, compared
to $31.4 million in the first six months of 2007, an increase of $5.7
million.  This increase is primarily driven by an increase of $0.9
million in sales and marketing costs, primarily related to
increased commissions relating to improved product margins; an increase of
$2.5 million in personnel-related expenditures, and related general and
administrative expenses, to support our product and service businesses and
investments to improve customer, vendor and back office support functions; a net
charge of approximately $0.9 million to reserve against the
collection  of amounts incorrectly billed  by subcontractors
in our technical staffing business for years 2005 and 2006, as a result of an
audit by our largest staffing customer; an increase related to severance charges
of $0.9 million; an increase of $0.3 million for start up expenses related to
new engagements; and an increase of $0.2 million related to costs for the
retirement of directors.





Operating
expenses as a percentage of revenue were 12.4% for the first six months of
fiscal 2008 compared to 11.2% for the first six months of fiscal
2007.





Income
(Loss) from Operations





Loss from
operations was $2.6 million in the first six months of 2008, as compared to
income of $1.4 million for the same period of 2007. This decrease is primarily
the result of an increase in operating expenses for the first six months of
fiscal 2008, as described above.





Net
Interest Income (Expense)





Net
interest expense was $147 thousand during the first six months of 2008 as
compared to income of $261 thousand during the first six months of 2007. During
the first six months of 2008, the Company had amounts outstanding under its
credit facility due to the timing of payments of accounts payables and payroll
and collections of receivables.





Income
Tax





For the
first six months of 2008, the Company had no income tax expense or income tax
benefit. During the first six months of fiscal 2008, the Company increased its
tax valuation allowance by $931 thousand for a total allowance of $15.9 million
at July 5, 2008. The tax valuation allowance results from the future uncertainty
of the Company’s ability to utilize its deferred tax assets.  For the
first six months of fiscal 2008, the $931 thousand increase in tax valuation
reserve offset what would have been an income tax benefit; the effective income
tax rate would have been 34.3% prior to recording the tax valuation
reserve.  The effective income tax rate for the first six months of
fiscal 2007 was 42.5%.





Net
Income (Loss)





Net loss
was $2.7 million in the first six months of 2008 as compared to net income of
$1.0 million in the first six months of 2007, resulting from the factors
described above.





24
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








LIQUIDITY
AND CAPITAL RESOURCES





Cash
generated by operating activities was $0.4 million for the first six months of
2008. Cash used in investing activities was $2.4 million, which included $2.4
million for capital expenditures.  Cash used in financing activities
was $2.1 million, which includes $2.3 million for the purchase of treasury
stock, offset by $0.2 million for the issuance of common shares.





The
amount of cash derived from or used by operating activities will vary based on a
number of business factors which may change from time to time, including terms
of available financing from vendors, downturns in the Company’s business and/or
downturns in the businesses of the Company’s customers.  However, a
growth or decline in services revenue in conjunction with a change in the
proportion of services revenue to total revenue is an underlying driver of
operating cash flow during the period of growth because a majority of the
Company’s service revenue is generated based upon the billings of the Company’s
technicians.  The cash outlay for these labor/payroll costs is
incurred bi-weekly with each pay period.  The invoicing for the
service is generated on various billing cycles as dictated by the customers, and
the respective cash inflow typically follows within 30 to 60 days of invoice
date, which may be as long as 60 to 120 days from the time the services are
performed.   This differs from product revenue in that the time
period between the time that the Company incurs the cost to purchase the
products and collects the revenue from its customer is typically shorter,
usually from 0 to 60 days, and the Company primarily orders inventory for a
particular customer rather than stocking large amounts of
inventory.  If an increase in service revenue occurs, it may result in
a significant decrease in cash flows from operating activities during periods of
significant growth or periods of excess technical capacity.  In
addition, certain services, primarily outsourcing contracts for the Company’s
Life Cycle Services, require that the Company maintain a specific parts
inventory for servicing the customer; thus, an increase or decrease in the type
of services provided can impact inventory levels and operating cash
flows.  The Company’s largest services contract for the provision of
staffing services expired on June 30, 2008 and the contract is not being renewed
as the Company did not feel it was financially prudent to do so under the
conditions required by the customer.  The expiration of this contract
is expected to free up approximately $15 million in annualized working capital
for use in more profitable aspects of the business.





Cash
flows generated by operating activities in first six months of 2008 was $0.4
million, compared to cash flows used by operating activities of $0.5 million,
for the same period of 2007.  Increases in stock-based compensation
expense, timing of payments on accounts payables and changes in other current
assets, primarily resulting from income tax refunds received, accounted for $1.0
million, $5.2 million and $3.1 million, respectively, of the increase in the
operating cash flow for the first six months of fiscal 2008, compared to the
same period of fiscal 2007.  This was largely offset by a $3.7 million
reduction in net income for this period, and changes in accounts receivable and
other working capital accounts accounted for decreases in operating cash flow of
$2.4 million and $2.5 million, respectively.





The
Company has a Syndicated Credit Facility Agreement with GE Commercial
Distribution Finance, which became effective June 25, 2004 (the “Credit
Facility”) and was scheduled to expire on June 25, 2008.   The
Credit Facility, which has been the subject of subsequent modifications, was
originally comprised of seven participating lenders, with GE Commercial
Distribution Finance (“GECDF”) designated as the “agent” for the
lenders.   The Credit Facility provides for a floor plan loan
facility and a revolving loan commitment, both of which are collateralized
primarily by the Company’s accounts receivable.  The Credit Facility
also provides for a letter of credit facility.  The funds available
for borrowing by the Company under the Credit Facility are reduced by an amount
equal to outstanding advances made to the Company to finance inventory under the
floor plan loan facility and the aggregate amount of letters of credit
outstanding at any given time.





Effective
April 15, 2008, the Credit Facility was amended.  The primary changes
made to the Credit Facility by the  amendment were as
follows:  (i)  decrease in the total Credit Facility from
$100 million to $68.7 million with a maximum of $68.7 million (previously $80.0
million) available under the floor plan loan facility and the revolving loan,
both of which are collateralized primarily by the Company’s accounts receivable
up to a maximum of $68.7 million (previously $80 Million); (ii) memorialize the
departure of certain lenders from the Credit Facility and the assignment of
their respective commitments under the Credit Facility to the remaining lenders,
GECDF and National City Bank, and (iii) revise the tangible net worth covenant
on the last day of each fiscal quarter to  be no less
than  $70 million (previously $85.4 million).





25
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








LIQUIDITY
AND CAPITAL RESOURCES








The
Credit Facility allows for either the Company or GECDF, in its capacity as agent
for the lenders, to require participating lenders to assign their respective
commitments under the Credit Facility to either GECDF or another participating
lender.  In accordance with the amendment to the Credit Facility,
GECDF is extending 72.78% of the credit to the Company and National City Bank is
extending 27.22% of the credit to the Company.





Effective
June 25, 2008, the Credit Facility was further amended.  The primary
provisions of this amendment are as follows:  (i) to extend the
termination date under the revolving loan commitment from June 25, 2008 to June
25, 2009; (ii) to increase the total credit facility back to $80.0 million from
$68.7 million, with a maximum of $80.0 million (previously $68.7 million) for
inventory financing and the revolving loan, and to revise the participating
lenders so that GECDF is the sole lender and will extend 100% of the credit;
(iii) to revise the tangible net worth covenant on the last day of each fiscal
quarter to be no less than $65 million for the quarters ending July 5, 2008 and
October 5, 2008 (previously $70 million) and no less than $70 million for the
quarter ending January 5, 2009; (iv) to specify a minimum fixed charge coverage
ratio (as defined in the agreement) of 1.25 to 1.00 for the quarters ending
October 5, 2008 and January 5, 2009 and 1.50 to 1.00 for the quarter ending
April 5, 2009, (v) to specify a maximum total funded indebtedness to EBITDA (as
defined in the agreement) of 2.75 to 1.00 for the quarters ending October 5,
2008, January 5, 2009 and April 5, 2009, and (vi) to provide for a termination
fee of up to $250 thousand to be paid by the Company in the event the Company
terminates the agreement prior to the maturity date of the revolving loan
commitment.





A
significant part of the Company’s inventory is financed under the floor plan
loan facility provided under the Credit Facility.  In addition, the
Company also finances certain inventory under a separate line of credit with IBM
Credit Corporation (“ICC”).  At July 5, 2008, the Company’s aggregate
line of credit for financing inventory totaled $88.0 million, including $80.0
million under the Credit Facility and $8.0 million with
ICC.   Borrowings under the Credit Facility floor plan loan
facility are made on 30 day notes. Borrowings under the ICC floor plan
arrangement are made on 15 day notes. All such borrowings by the Company are
secured by the related inventory. Financing on substantially all the advances
made under either of these floor plan arrangements is interest free. The Company
classifies amounts outstanding under the Credit Facility and ICC floor plan
arrangements as accounts payable.





As of
July 5, 2008 and January 5, 2008, there was no balance outstanding under the
Credit Facility.  At July 5, 2008 and January 5, 2008 the amounts
available under the Credit Facility were $68.6 million and $56.7 million,
respectively.  Interest on outstanding borrowings under the Credit
Facility is payable monthly based on the LIBOR rate and a pricing
grid.  As of July 5, 2008 and January 5, 2008, the adjusted LIBOR rate
was 5.46% and 7.57% respectively.




The
payment of dividends is limited to $10 million through June 25, 2009 pursuant to
the amended Credit Facility. However, the ability to pay such dividends is
contingent upon maintaining minimum levels of availability, as defined in the
agreement. The Company has no plans to pay cash dividends in the foreseeable
future.




For the
fiscal quarter ended July 5, 2008, the Company was in compliance with its
financial covenants.  At January 5, 2008, the Company was in violation
of its financial covenants; the Company requested and received a
waiver.





The
Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company’s capital
requirements for the next twelve months.





The
Company elected to purchase a new ERP software system in October
2007.  It is anticipated that the ultimate cost of the system will
range from $7.0 million to $8.0 million, depending upon final
specifications.  Through July 5, 2008, the Company has spent $2.5
million, of which $1.5 million was incurred in the first six months of fiscal
2008.  The Company began designing the ERP software system in fiscal
2007, but temporarily suspended design and development activities during the
quarter ended July 5, 2008.  The project is scheduled to restart
during the fourth quarter of fiscal 2008, with initial deployments anticipated
in 2009.





26
 Table of Contents





POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








On
December 3, 2007, the Board of Directors of the Company authorized a program to
repurchase up to $5.0 million of its outstanding common stock. Pomeroy suspended
this stock repurchase program on June 3, 2008.  Prior to the
suspension, a total of 497,572 shares of the Company’s common stock, with an
aggregate cost of $3.2 million, had been repurchased under this
program.  The acquired shares will be held in treasury or
cancelled.  This stock redemption program was initially approved to
remain in place through December 5, 2008, or the date on which $5 million in
repurchases was completed, whichever came first.  In addition, the
Board adopted a written trading plan under Rule 10b5-1 of the Securities
Exchange Act of 1934 to facilitate the repurchase of its common stock
pursuant to the stock repurchase program.  Rule 10b5-1 allowed the
Company to purchase its shares at times when the Company would not ordinarily be
in the market because of the Company’s trading policies or the possession of
material non-public information.  129,780 and 360,722 shares were
repurchased during the respective three month and six month periods ended July
5, 2008.  In addition during the first six months of fiscal 2008, the
Company purchased 8,416 shares withheld at the election of certain holders
of restricted stock, from the vested portion of restricted stock awards with a
market value approximating the amount of the withholding taxes due from such
restricted stock holders.





During
the first six months of fiscal 2007, the Company repurchased 47,400 shares of
common stock at a total cost of $403 thousand under its share repurchase program
that expired October 31, 2007.





27
 Table of Contents





Item 3-Quantitativeand Qualitative Disclosures about Market
Risk





The
Company is exposed to interest rate risk primarily through its credit facility
with GECDF.  The Company did not experience a material impact from
interest rate risk for the first six months of fiscal 2008.





Currently,
the Company does not have any significant financial investments for trading or
other speculative purposes or to manage interest rate exposure.





Item 4-Controlsand Procedures





Management’s
Evaluation of Disclosure Controls and Procedures





Our
management, with the participation of our principal executive and principal
financial officers, has evaluated the effectiveness of our disclosure controls
and procedures over financial reporting designed to ensure that the information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, and to
ensure that such information is accumulated and communicated to management,
including our principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Based on
such evaluation, our principal executive and principal financial officers have
concluded that such disclosure controls and procedures were effective, as of
July 5, 2008 (the end of the period covered by this Quarterly Report on Form
10-Q).





Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





28
 Table of Contents








PART II -
OTHER INFORMATION





Item 1-LegalProceedings





On April
9, 2008, we filed a report on Form 8-K reporting that our Board of Directors
received a letter from David B. Pomeroy, II, a director of the Company and its
largest stockholder, proposing to acquire, with Charlesbank Equity Fund VI, LP,
all of the outstanding common stock of the Company not owned by him for a price
of $7.05 per share and that the non-binding indication of interest was referred
to a Special Committee for review and consideration.    On
May 9, 2008, we reported that a purported class action complaint was filed on
May 6, 2008 in the Commonwealth of Kentucky Boone Circuit Court against the
Company, each of its directors and two executive
officers.  Charlesbank Equity Fund VI Limited Partnership and
Charlesbank Capital Partners LLC were also named as defendants in the
lawsuit.  Shortly thereafter, on May 21, 2008, Charlesbank Equity Fund
VI notified us in writing of its withdrawal from the proposed acquisition of the
Company.





On May
22, 2008, we filed a report on Form 8-K reporting that our Board of Directors
received a letter from Mr. Pomeroy concerning his formation of a new agreement
with another financial partner, ComVest Investment Partners III LP, for the
purpose of submitting a joint proposal to acquire all of the outstanding common
stock for the Company not owned by Mr. Pomeroy for a price of $6.00 per
share.  Incident to the change in Mr. Pomeroy’s financial partners,
counsel for the Plaintiff, Kenneth Hanninen, an alleged Pomeroy shareholder, who
brought the action on behalf of himself and all others similarly situated, filed
a First Amended and Restated Class Action Complaint with the Boone Circuit
Court.  The allegations in the First Amended and Restated Complaint,
which are substantially the same as those made in the original complaint, are,
among other things, that the directors and officers of the Company are in breach
of their fiduciary duties to shareholders in connection with the offer letter
that the Company received from Mr. Pomeroy.  The First Amended and
Restated Class Action Complaint seeks, among other things, injunctive relief to
enjoin the Company, its directors and named executive officers from consummating
the acquisition proposed by Mr. Pomeroy and ComVest Investment Partners III LP,
along with attorneys’ fees and costs.





The
Company believes that the allegations in the First Amended and Restated Class
Action Complaint are without merit and intends to vigorously defend the Company
and its directors and officers in this matter.





There are
various other legal actions arising in the normal course of business that have
been brought against the Company. Management believes these matters will not
have a material adverse effect on the Company's financial position or results of
operations.








Item 1A-RiskFactors





There are
no material changes in the risk factors previously disclosed in our annual
report on Form 10-K for the fiscal year ended January 5, 2008.





29
 Table of Contents





PART II -
OTHER INFORMATION





Item 2-UnregisteredSales of Equity Securities and Use of
Proceeds





a.
            None





b.
            None





c.
            Repurchase
      of Securities





On
December 3, 2007, the Board of Directors of the Company authorized a program to
repurchase up to $5.0 million of its outstanding common stock as announced on
December 6, 2007. Pomeroy suspended this stock repurchase program on June 3,
2008.  Prior to the suspension, a total of 497,572 shares of the
Company’s common stock, with an aggregate cost of $3.2 million, had been
repurchased under this program.  The acquired shares will be held in
treasury or cancelled.  This stock redemption program was initially
approved to remain in place through December 5, 2008, or the date on which $5
million in repurchases was completed, whichever came first.  In
addition, the Board adopted a written trading plan under Rule 10b5-1 of the
Securities Exchange Act of 1934 to facilitate the repurchase of its common stock
pursuant to the stock repurchase program.  Rule 10b5-1 allowed the
Company to purchase its shares at times when the Company would not ordinarily be
in the market because of the Company’s trading policies or the possession of
material non-public information.  In addition during the first six
months of fiscal 2008, the Company purchased 8,416 shares withheld at the
election of certain holders of restricted stock, from the vested portion of
restricted stock awards with a market value approximating the amount of the
withholding taxes due from such restricted stock holders.





The
following table contains information for shares repurchased under this
program:





Period
            
            Total
      number of shares purchased
            
            
            Average
      price paid per share ($)
            
            
            Total
      number of shares purchased as part of publicly
      announced plan (1)
            
            
            The
      maximum amount that may yet be purchased under the plan (1) ($)
      (thousands)December
      6, 2007 - January 5, 2008
            
            
            145,266
            
            
            $
            6.78
            
            
            
            145,266
            
            
            $
            4,015January
      6, 2008 - February 5, 2008
            
            
            113,740
            
            
            $
            6.36
            
            
            
            113,740
            
            
            $
            3,291February
      6, 2008 - March 5, 2008
            
            
            57,734
            
            
            $
            6.67
            
            
            
            57,734
            
            
            $
            2,906March
      6, 2008 - April 5, 2008
            
            
            51,052
            
            
            $
            5.83
            
            
            
            51,052
            
            
            $
            2,609April
      6, 2008 - May 5, 2008
            
            
            79,781
            
            
            $
            6.12
            
            
            
            79,781
            
            
            $
            2,121May
      6, 2008 - June 5, 2008
            
            
            49,999
            
            
            $
            6.04
            
            
            
            49,999
            
            
            $
            1,819497,572
            
            
            $
            6.41
            
            
            
            497,572
            
            
            $
            1,819





(1) All
share repurchases were made under the share repurchase program described above
which was terminated on June 3, 2008.





Item 3-DefaultsUpon Senior Securities





None





30
 Table of Contents





PART II -
OTHER INFORMATION





Item 4-Submissionof Matters to a Vote of Security
Holders





The
Company’s 2008 Annual Meeting of Shareholders (the "Annual Meeting") was held on
May 29, 2008.  Proxies for the Annual Meeting were solicited pursuant
to Regulation 14A under the Exchange Act.





In
connection with the May 29, 2008 annual meeting of the Company’s stockholders,
Computershare Investor Services received executed proxies from stockholders of
record as of the close of business on April 24, 2008.  The total
number of issued and outstanding shares as of the record date was 12,720,079
shares, each one vote per share.








The
following individuals were elected to serve as directors:








Directors
            
            For
            
            
            WithheldDavid G. Boucher
            
            
            8,433,400
            
            
            
            3,150,457Keith R. Coogan
            
            
            10,075,743
            
            
            
            1,508,114Ronald E. Krieg
            
            
            10,063,776
            
            
            
            1,520,081David B. Pomeroy,
      II
            
            
            9,452,129
            
            
            
            2,131,728Richard S. Press
            
            
            10,058,801
            
            
            
            1,525,056Michael A. Ruffolo
            
            
            10,058,351
            
            
            
            1,525,506Jonathan Starr
            
            
            10,051,071
            
            
            
            1,532,786Debra E. Tibey
            
            
            8,434,025
            
            
            
            3,149,832







These
eight directors that were nominated to the Company’s Board of Directors will
serve until the 2009 Annual Meeting of Shareholders.





Of the
proxies referred to above, the following numbers of shares were voted as
indicated regarding approving the Amendments to the Company’s 2002 Amended and
Restated Outside Directors’ Stock Incentive Plan:





For
            7,571,148Against
            2,047,415Non-Votes
            1,888,830Abstain
            76,464





Of the
proxies referred to above, the following numbers of shares were voted as
indicated regarding approving the ratification of appointment of BDO Seidman,
LLP as independent registered public accounting firm:





For
            11,078,107Against
            498,539Non-Votes
            -Abstain
            7,211








Item 5-OtherInformation





(a)
            Information Required
      to be Disclosed on Form 8-K that has not been
    reported.





None.





(b)
            Material Changes to
      the Procedures by Which Shareholders May Recommend Nominees to the Board
      of Directors.





None.





31
 Table of Contents





PART II -
OTHER INFORMATION





(c)
            Other
      Information





(1)
            As
      of July 3, 2008 (the last business day of the second quarter), the Company
      calculated its public float in accordance with SEC Rule 12b-2 and
      determined that, beginning with the Company’s annual report on Form 10-K
      for the fiscal year ended January 5, 2009, the Company’s filing status
      will change from an accelerated filer to a non-accelerated
      filer.  In addition, the Company’s reporting status will change
      to a smaller reporting company.





(2)
            In
      the Company’s 10K for fiscal 2007, the historical financial statements
      were revised to reclassify revenue and cost related to the sale of third
      party manufacture warranty and service agreements.  For fiscal
      2008, the Company has reclassified amounts previously included in
      operating expenses.  Note 1 to the Consolidated Financial
      Statements herein provides the three and six months ended July 5, 2007, as
      previously reported and after the reclassifications.  Below are
      the third and fourth quarters of fiscal 2007 and the fiscal 2007 year, as
      previously reported in the Company’s 10K for 2007 and after the
      reclassifications to conform to the fiscal 2008
    presentation.





(in
thousands)





Third Quarter of Fiscal
2007
            
            
            
            Fourth Quarter of Fiscal
    2007As
      Previously Reported
            
            
            As
      Restated
            
            
            
            As
      Previously Reported
            
            
            As
      RestatedNet
      revenues
            
            $
            144,392
            
            
            $
            144,392
            
            Net
      revenues
            
            $
            162,261
            
            
            $
            162,261Cost
      of revenues
            
            
            123,662
            
            
            
            129,637
            
            Cost
      of revenues
            
            
            144,731
            
            
            
            152,155Gross
      profit
            
            
            20,730
            
            
            
            14,755
            
            Gross
      profit
            
            
            17,530
            
            
            
            10,106Operating
      expenses
            
            
            124,265
            
            
            
            118,290
            
            Operating
      expenses
            
            
            26,691
            
            
            
            19,267Loss
      from operations
            
            
            (103,535
            )
            
            
            (103,535
            )
            Loss
      from operations
            
            
            (9,161
            )
            
            
            (9,161
            )Net
      Interest - income
            
            
            70
            
            
            
            70
            
            Net
      Interest - income
            
            
            119
            
            
            
            119Income
      taxes benefit
            
            
            (11,671
            )
            
            
            (11,671
            )
            Income
      taxes
            
            
            12,369
            
            
            
            12,369Net
      loss
            
            $
            (91,794
            )
            
            $
            (91,794
            )
            Net
      loss
            
            $
            (21,411
            )
            
            $
            (21,411
            )











2007 Fiscal YearAs
      Previously Reported
            
            
            As
      RestatedNet
      revenues
            
            $
            586,907
            
            
            $
            586,907Cost
      of revenues
            
            
            502,922
            
            
            
            529,197Gross
      profit
            
            
            83,985
            
            
            
            57,710Operating
      expenses
            
            
            195,251
            
            
            
            168,976Loss
      from operations
            
            
            (111,266
            )
            
            
            (111,266
            )Net
      Interest - income
            
            
            451
            
            
            
            451Income
      taxes
            
            
            1,418
            
            
            
            1,418Net
      loss
            
            $
            (112,233
            )
            
            $
            (112,233
            )





32
 Table of Contents





PART II -
OTHER INFORMATION





Item 6-Exhibits





(a)
            Exhibits





10.1
            Amendment
      No. 6 to Amended and Restated Credit Facilities Agreement (incorporated by
      reference to Exhibit 10.1 to the Company’s Form 8-K Report filed on June
      26, 2008).





11.1
            Statement
      regarding computation of per share earnings (See Note 2 of Notes to
      Consolidated Financial Statements in the Company’s Form 10K for fiscal
      2007, filed on March 26, 2008).





31.1
            Section
      302 CEO Certification





31.2
            Section
      302 CFO Certification





32.1
            Section
      906 CEO Certification





32.2
            Section
      906 CFO Certification











SIGNATURE





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.





POMEROY IT SOLUTIONS,
      INC.(Registrant)Date:
      August 8, 2008
            
            By:  /s/
      Craig J. PropstCraig
      J. PropstVice
      President, Treasurer and Interim ChiefFinancial
      Officer






33