FORM
10-Q





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549





(Mark
One)


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





For the
quarterly period ended July 5, 2009


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  x  NO   ̈





Indicate by check mark whether the
registrant submitted electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T of this Chapter during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files).





YES   ̈  NO  ̈ (not yet applicable to
registrant)





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





Large
accelerated filer  ̈    Accelerated
filer  ̈    Non-accelerated
filer  ̈    Smaller
reporting company x





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





YES  ̈  NO x





The
number of shares of common stock outstanding as of August 5, 2009 was
9,322,036.








POMEROY
IT SOLUTIONS, INC.


TABLE OF
CONTENTS





PagePart
      I.
                                                        Financial Information
                                                        
                                                        3Item
      1.
                                                        Financial
      Statements:
                                                        3Consolidated
      Balance Sheets as of  July 5,  2009 and January 5,
      2009
                                                        3Consolidated
      Statements of Operations for the Three Months Ended July 5, 2009 and
      2008
                                                        5Consolidated
      Statements of Comprehensive Income for the Three Months Ended July
      5,  2009 and  2008
                                                        6Consolidated
      Statements of Operations for the Six Months Ended July 5, 2009 and
      2008
                                                        7Consolidated
      Statements of Comprehensive Income (Loss) for the Six Months Ended July
      5,  2009 and  2008
                                                        8Consolidated
      Statements of Cash Flows for the Six Months Ended July 5, 2009
      and  2008
                                                        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 Information
                                                        
                                                        30Item
      1.
                                                        Legal
      Proceedings
                                                        30Item
      1A.
                                                        Risk
      Factors
                                                        30Item
      2.
                                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                        30Item
      3.
                                                        Defaults
      Upon Senior Securities
                                                        31Item
      4.
                                                        Submission
      of Matters to a Vote of Security Holders
                                                        32Item
      5.
                                                        Other
      Information
                                                        32Item
      6.
                                                        Exhibits
                                                        33SIGNATURE
                                                        
                                                        34








PART
I. FINANCIAL INFORMATION


ITEM
1. FINANCIAL STATEMENTS





POMEROYIT SOLUTIONS,
INC.


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





(in
      thousands)July
      5,
                
                
                January
      5,2009
                
                
                2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
                
                $
                38,065
                
                
                $
                30,787Certificates
      of deposit
                
                
                1,159
                
                
                
                1,142Accounts
      receivable:Trade,
      less allowance of $3,096 and $3,233, respectively
                
                
                68,054
                
                
                
                89,654Vendor,
      less allowance of $318 and $293, respectively
                
                
                1,875
                
                
                
                1,299Net
      investment in leases
                
                
                34
                
                
                
                74Other
                
                
                327
                
                
                
                622Total
      receivables
                
                
                70,290
                
                
                
                91,649Inventories
                
                
                8,809
                
                
                
                7,890Other
                
                
                4,231
                
                
                
                3,861Total
      current assets
                
                
                122,554
                
                
                
                135,329Equipment
      and leasehold improvements:Furniture,
      fixtures and equipment
                
                
                14,564
                
                
                
                14,040Leasehold
      Improvements
                
                
                5,370
                
                
                
                5,055Total
                
                
                19,934
                
                
                
                19,095Less
      accumulated depreciation
                
                
                14,012
                
                
                
                12,748Net
      equipment and leasehold improvements
                
                
                5,922
                
                
                
                6,347Intangible
      assets, net
                
                
                620
                
                
                
                752Other
      assets
                
                
                454
                
                
                
                559Total
      assets
                
                $
                129,550
                
                
                $
                142,987





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


3





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





(in
      thousands)July
      5,
                
                
                January
      5,2009
                
                
                2009LIABILITIES
      AND EQUITYCurrent
      Liabilities:Floor
      plan financing
                
                $
                17,899
                
                
                $
                11,709Accounts
      payable - trade
                
                
                20,694
                
                
                
                30,774Deferred
      revenue
                
                
                1,648
                
                
                
                1,557Employee
      compensation and benefits
                
                
                7,072
                
                
                
                7,081Accrued
      facility closing cost and severance
                
                
                339
                
                
                
                1,149Other
      current liabilities
                
                
                15,045
                
                
                
                23,772Total
      current liabilities
                
                
                62,697
                
                
                
                76,042Equity:Preferred
      stock,  $.01 par value; authorized 2,000 shares, (no shares
      issued or outstanding)
                
                
                -
                
                
                
                -Common
      stock, $.01 par value; authorized 20,000 shares, (13,724 and 13,693
      shares issued, respectively)
                
                
                143
                
                
                
                142Paid
      in capital
                
                
                94,252
                
                
                
                93,858Accumulated
      other comprehensive income
                
                
                4
                
                
                
                13Accumulated
      deficit
                
                
                (4,156
                )
                
                
                (3,889
                )90,243
                
                
                
                90,124Less
      treasury stock, at cost (4,402 and 4,340 shares,
    respectively)
                
                
                23,390
                
                
                
                23,179Total
      equity
                
                
                66,853
                
                
                
                66,945Total
      liabilities and equity
                
                $
                129,550
                
                
                $
                142,987





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


4





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





(in
      thousands, except per share data)
                                                        
                                                        Three
      Months EndedJuly
      5,
                                                        
                                                        
                                                        July
      5,2009
                                                        
                                                        
                                                        2008Net
      revenues:Product
                                                        
                                                        $
                                                        65,483
                                                        
                                                        
                                                        $
                                                        92,678Service
                                                        
                                                        
                                                        35,317
                                                        
                                                        
                                                        
                                                        62,315Total
      net revenues
                                                        
                                                        
                                                        100,800
                                                        
                                                        
                                                        
                                                        154,993Cost
      of revenues:Product
                                                        
                                                        
                                                        59,232
                                                        
                                                        
                                                        
                                                        83,243Service
                                                        
                                                        
                                                        26,907
                                                        
                                                        
                                                        
                                                        52,207Total
      cost of revenues
                                                        
                                                        
                                                        86,139
                                                        
                                                        
                                                        
                                                        135,450Gross
      profit
                                                        
                                                        
                                                        14,661
                                                        
                                                        
                                                        
                                                        19,543Operating
      expenses:Selling,
      general and administrative
                                                        
                                                        
                                                        13,708
                                                        
                                                        
                                                        
                                                        16,630Depreciation
      and amortization
                                                        
                                                        
                                                        671
                                                        
                                                        
                                                        
                                                        1,218Total
      operating expenses
                                                        
                                                        
                                                        14,379
                                                        
                                                        
                                                        
                                                        17,848Income
      from operations
                                                        
                                                        
                                                        282
                                                        
                                                        
                                                        
                                                        1,695Other
      income (expense):Interest
      income
                                                        
                                                        
                                                        122
                                                        
                                                        
                                                        
                                                        42Interest
      expense
                                                        
                                                        
                                                        (111
                                                        )
                                                        
                                                        
                                                        (247
                                                        )Other
                                                        
                                                        
                                                        31
                                                        
                                                        
                                                        
                                                        -Other
      income (expense), net
                                                        
                                                        
                                                        42
                                                        
                                                        
                                                        
                                                        (205
                                                        )Income
      before income tax
                                                        
                                                        
                                                        324
                                                        
                                                        
                                                        
                                                        1,490Income
      tax expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Net
      income
                                                        
                                                        $
                                                        324
                                                        
                                                        
                                                        $
                                                        1,490Weighted
      average shares outstanding:Basic
                                                        
                                                        
                                                        9,760
                                                        
                                                        
                                                        
                                                        12,343Diluted
                                                        
                                                        
                                                        9,760
                                                        
                                                        
                                                        
                                                        12,343Earnings
      per common share:Basic
                                                        
                                                        $
                                                        0.03
                                                        
                                                        
                                                        $
                                                        0.12Diluted
                                                        
                                                        $
                                                        0.03
                                                        
                                                        
                                                        $
                                                        0.12





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


5





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)





(in
      thousands)
                        
                        Three
      Months EndedJuly
      5,
                        
                        
                        July
      5,2009
                        
                        
                        2008Net
      income
                        
                        $
                        324
                        
                        
                        $
                        1,490Other
      comprehensive income (loss):Foreign
      currency translation adjustment
                        
                        
                        (14
                        )
                        
                        
                        26Comprehensive
      income
                        
                        $
                        310
                        
                        
                        $
                        1,516





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


6





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





(in
      thousands, except per share data)
                                                    
                                                    Six
      Months EndedJuly
      5,
                                                    
                                                    
                                                    July
      5,2009
                                                    
                                                    
                                                    2008Net
      revenues:Product
                                                    
                                                    $
                                                    118,644
                                                    
                                                    
                                                    $
                                                    174,155Service
                                                    
                                                    
                                                    71,616
                                                    
                                                    
                                                    
                                                    126,007Total
      net revenues
                                                    
                                                    
                                                    190,260
                                                    
                                                    
                                                    
                                                    300,162Cost
      of revenues:Product
                                                    
                                                    
                                                    106,876
                                                    
                                                    
                                                    
                                                    156,314Service
                                                    
                                                    
                                                    55,763
                                                    
                                                    
                                                    
                                                    108,629Total
      cost of revenues
                                                    
                                                    
                                                    162,639
                                                    
                                                    
                                                    
                                                    264,943Gross
      profit
                                                    
                                                    
                                                    27,621
                                                    
                                                    
                                                    
                                                    35,219Operating
      expenses:Selling,
      general and administrative
                                                    
                                                    
                                                    26,479
                                                    
                                                    
                                                    
                                                    35,026Depreciation
      and amortization
                                                    
                                                    
                                                    1,374
                                                    
                                                    
                                                    
                                                    2,434Total
      operating expenses
                                                    
                                                    
                                                    27,853
                                                    
                                                    
                                                    
                                                    37,460Loss
      from operations
                                                    
                                                    
                                                    (232
                                                    )
                                                    
                                                    
                                                    (2,241
                                                    )Other
      income (expense):Interest
      income
                                                    
                                                    
                                                    208
                                                    
                                                    
                                                    
                                                    127Interest
      expense
                                                    
                                                    
                                                    (271
                                                    )
                                                    
                                                    
                                                    (598
                                                    )Other
                                                    
                                                    
                                                    27
                                                    
                                                    
                                                    
                                                    -Other
      expense, net
                                                    
                                                    
                                                    (36
                                                    )
                                                    
                                                    
                                                    (471
                                                    )Loss
      before income tax
                                                    
                                                    
                                                    (268
                                                    )
                                                    
                                                    
                                                    (2,712
                                                    )Income
      tax expense
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      loss
                                                    
                                                    $
                                                    (268
                                                    )
                                                    
                                                    $
                                                    (2,712
                                                    )Weighted
      average shares outstanding:Basic
                                                    
                                                    
                                                    9,339
                                                    
                                                    
                                                    
                                                    12,027Diluted
      (1)
                                                    
                                                    
                                                    9,339
                                                    
                                                    
                                                    
                                                    12,027Earnings
      per common share:Basic
                                                    
                                                    $
                                                    (0.03
                                                    )
                                                    
                                                    $
                                                    (0.23
                                                    )Diluted
      (1)
                                                    
                                                    $
                                                    (0.03
                                                    )
                                                    
                                                    $
                                                    (0.23
                                                    )





(1)
            Diluted
      loss per common share for the six month periods ending July 5, 2009 and
      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 unvested restricted
  shares.





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


7





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





(in
      thousands)
                        
                        Six
      Months EndedJuly
      5,
                        
                        
                        July
      5,2009
                        
                        
                        2008Net
      loss
                        
                        $
                        (268
                        )
                        
                        $
                        (2,712
                        )Other
      comprehensive income (loss):Foreign
      currency translation adjustment
                        
                        
                        (9
                        )
                        
                        
                        18Comprehensive
      income (loss)
                        
                        $
                        (277
                        )
                        
                        $
                        (2,694
                        )





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


8





POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





(in
      thousands)Six
      Months EndedJuly
      5, 2009
                                          
                                          
                                          July
      5, 2008Cash
      Flows from (used in) Operating Activities:Net
      loss
                                          
                                          
                                          (268
                                          )
                                          
                                          
                                          (2,712
                                          )Adjustments
      to reconcile net loss to net cash flows from (used in) operating
      activities:Depreciation
      and amortization
                                          
                                          
                                          1,397
                                          
                                          
                                          
                                          2,499Stock
      option, restricted stock compensation and employee purchase plan
      expense
                                          
                                          
                                          311
                                          
                                          
                                          
                                          1,237Provision
      for doubtful accounts
                                          
                                          
                                          67
                                          
                                          
                                          
                                          600Amortization
      of unearned income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (4
                                          )Changes
      in working capital accounts:Accounts
      receivable
                                          
                                          
                                          21,252
                                          
                                          
                                          
                                          4,678Inventories
                                          
                                          
                                          (919
                                          )
                                          
                                          
                                          146Other
      current assets
                                          
                                          
                                          (370
                                          )
                                          
                                          
                                          3,462Net
      investment in leases
                                          
                                          
                                          40
                                          
                                          
                                          
                                          424Accounts
      payable trade
                                          
                                          
                                          (10,080
                                          )
                                          
                                          
                                          (668
                                          )Deferred
      revenue
                                          
                                          
                                          91
                                          
                                          
                                          
                                          (291
                                          )Other,
      net
                                          
                                          
                                          (9,430
                                          )
                                          
                                          
                                          (2,398
                                          )Net
      operating activities
                                          
                                          
                                          2,091
                                          
                                          
                                          
                                          6,973Cash
      Flows used in Investing Activities:Capital
      expenditures
                                          
                                          
                                          (867
                                          )
                                          
                                          
                                          (2,386
                                          )Net
      investing activities
                                          
                                          
                                          (867
                                          )
                                          
                                          
                                          (2,386
                                          )Cash
      Flows from (used in) Financing Activities:Net
      increase (reduction) in floor plan financing
                                          
                                          
                                          6,190
                                          
                                          
                                          
                                          (6,631
                                          )Purchase
      of treasury stock
                                          
                                          
                                          (211
                                          )
                                          
                                          
                                          (2,270
                                          )Proceeds
      from issuance of common shares for employee stock purchase
      plan
                                          
                                          
                                          84
                                          
                                          
                                          
                                          172Net
      financing activities
                                          
                                          
                                          6,063
                                          
                                          
                                          
                                          (8,729
                                          )Effect
      of exchange rate changes on cash and cash equivalents
                                          
                                          
                                          (9
                                          )
                                          
                                          
                                          18Increase
      (decrease) in cash and cash equivalents
                                          
                                          
                                          7,278
                                          
                                          
                                          
                                          (4,124
                                          )Cash
      and cash equivalents:Beginning
      of period
                                          
                                          
                                          30,787
                                          
                                          
                                          
                                          13,282End
      of period
                                          
                                          $
                                          38,065
                                          
                                          
                                          $
                                          9,158





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


9





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 Company has evaluated subsequent events through August 24, 2009, which
is the date the financial statements were issued. The results of operations for
the three and six month periods ended July 5, 2009 are not necessarily
indicative of the results that may be expected for future interim periods or for
the year ending January 5, 2010.





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,
unclaimed property liabilities, 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.





2.
            Pending
      Merger





On May
19, 2009, the Company entered into an agreement and plan of merger (“Merger
Agreement”) with Hebron LLC (“Parent”), Desert Mountain Acquisition Co.
(“Desert”), a wholly-owned subsidiary of Parent, and with respect to only
certain sections of the Merger Agreement, David B. Pomeroy,
II.  Parent and Desert are affiliates of Mr. Pomeroy, who is a
Director of the Company and its largest stockholder. The Agreement was amended
on June 8, 2009 and June 20, 2009.  Pursuant to the Merger Agreement,
as amended, Desert will merge with and into the Company (with the Company
continuing as the surviving corporation), the Company will become a wholly-owned
subsidiary of Parent, and each outstanding share of the Company’s common stock
will be converted into the right to receive $6.00 in cash. The Merger Agreement,
as amended, also provides that if the Company terminates the Merger Agreement to
accept an acquisition proposal by another party, the Company would be required
to pay a termination fee of up to $2.1 million to Parent.





The
transaction, which is subject to shareholder approval, is expected to close in
the fourth quarter of fiscal 2009.





3.
            Recent
      Accounting Pronouncements





During
fiscal 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 had only partially applied the provisions of
SFAS 157 as management had elected the deferral provisions of FASB Staff
Position (“FSP”) 157-2 which delayed 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 January 6, 2009 for the
Company.   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 impact
to the Company’s consolidated financial position, results of operations, or cash
flows as a result of the adoption of SFAS 157 for non-financial assets and
liabilities.


10





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





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 subsequent to
January 5, 2009.





In April
2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.”
The FSP amends SFAS 141(R) related to the accounting for assets and liabilities
arising from contingencies in a business combination. The FSP requires that an
asset or a liability arising from a contingency in a business combination be
recognized at fair value if fair value can be reasonably determined and provides
guidance on how to make that determination. If the fair value of an asset or
liability cannot be reasonably determined, the FSP requires that an asset or
liability be recognized at the amount that would be recognized in accordance
with SFAS 5, “Accounting for Contingencies”, and FASB Interpretation 14,
“Reasonable Estimation of the Amount of a Loss”, for liabilities and an amount
using similar criteria for assets. The FSP 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. 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
141(R)-1.





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 became effective for the
Company in fiscal year 2009.  The adoption of this FSP had no impact
on the consolidated financial statements.





In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities.”  FSP EITF 03-6-1 concludes that non-vested shares with
non-forfeitable dividend rights are considered participating securities and,
thus, subject to the two-class method pursuant to SFAS 128, “Earnings per
Share”, when computing basic and diluted EPS. The Company adopted FSP EITF
03-6-1 effective January 6, 2009. Upon adoption, the Company is required to
adjust all prior period EPS data on a retrospective basis to conform with the
provisions of this FSP. Due to net losses incurred for the six month period
ended July 5, 2008, for the nine month period ended October 5, 2008 and for the
years ended January 5, 2009 and 2008, the Company’s previously-reported basic
and diluted weighted average shares outstanding, and earnings (loss) per share,
for these periods are not affected by the adoption of this
Statement.  For the three month period ended July 5, 2008, basic
weighted average shares outstanding is adjusted from 11,946 to 12,343 with no
impact on previously-reported basic earnings per share. No adjustment is
necessary for diluted weighted average shares outstanding and diluted earnings
per share for the three month period ended July 5, 2008. For the three month
period ended October 5, 2008, basic and diluted weighted average shares
outstanding are adjusted from 11,994 and 12,217, respectively, to 12,370 and
12,370, respectively, with no impact on previously-reported basic and diluted
earnings per share. See additional discussion in Note 7 to the consolidated
financial statements.


11





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





In May
2009, the FASB issued SFAS 165, “Subsequent Events.” SFAS 165 establishes
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. SFAS 165 is effective for interim and annual periods ending after
June 15, 2009. The Company adopted the provisions of SFAS 165 for the second
quarter of fiscal 2009, in accordance with the effective date. See “Basis of
Presentation” above.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” which enhances consistency in financial
reporting by increasing the frequency of fair value disclosures. This FSP is
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for interim and annual periods ending after March 15, 2009
subject to certain restrictions. The adoption of FSP FAS 107-1 and APB 28-1 did
not have a material impact on the Company’s consolidated financial
statements.





In June
2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 will become
the single source of authoritative nongovernmental U.S. generally accepted
accounting principles, superseding existing accounting literature. While not
intended to change U.S. GAAP, the Codification significantly changes the way in
which accounting literature is organized. SFAS 168 is effective for interim and
annual periods ending after September 15, 2009. The adoption of SFAS 168 will
not have an impact on the Company’s consolidated financial position, results of
operations or cash flows. However, because the Codification completely replaces
existing standards, it will affect the way U.S. GAAP is referenced in the
Company’s consolidated financial statements.





4.
            Borrowing
      Arrangements





The
Company has a Syndicated Credit Facility Agreement with GE Commercial
Distribution Finance (“GECDF”), which became effective June 25, 2004 (the
“Credit Facility”). The Credit Facility, which has been the subject of
subsequent modifications, 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.





The
maximum available borrowings under the Credit Facility total $80.0 million for
inventory financing and the revolving loan. The Credit Facility permitted
distributions up to a maximum of $18 million for the period June 25, 2008
through June 25, 2009 only if specified criteria were met.  The term
distribution is defined in the Credit Facility and included dividends,
acquisitions of outstanding stock, reinvestment of debt securities and
compensation to a shareholder in excess of normal compensation including
performance bonuses. The agreement provides 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.  The Credit Facility was most recently amended on June 24,
2009, which extended its maturity date to October 30, 2009 and set forth the
financial covenants for the periods subsequent to June 25, 2009.





A
significant part of the Company’s inventories are financed by floor plan
arrangements with third parties. At July 5, 2009 and January 5, 2009, these
lines of credit totaled $88.0 million, including $80.0 million with GE
Commercial Distribution Finance (“GECDF”) and $8.0 million with IBM Credit
Corporation (“ICC”). Borrowings under the GECDF floor plan arrangements are made
on 30 day notes. Borrowings under the ICC floor plan arrangement are made on 15
day notes. All such borrowings are secured by the related inventory. The Company
classifies amounts outstanding under the floor plan arrangements as floor plan
financing liability which is a current liability in the consolidated balance
sheets. Payments made under floor plan arrangements are classified as financing
activities in the consolidated statements of cash flows. Outstanding amounts
under the floor plan financing arrangements totaled $17.9 million at July 5,
2009 and $11.7 million at January 5, 2009. Interest was imputed on these
borrowings at a rate of 6.0% per annum for the three and six month periods ended
July 5, 2009 and 2008. Related interest expense totaled $63 thousand and $164
thousand for the respective three and six month periods ended July 5, 2009, and
$128 and $324 thousand for the respective three and six month periods ended July
5, 2008.


12





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





As of
July 5, 2009 and January 5, 2009, there was no balance outstanding under the
Credit Facility other than the floor plan financing liability.  At
July 5, 2009 and January 5, 2009, the amounts available under the Credit
Facility were $31.1 million and $50.2 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, 2009, the adjusted LIBOR
rate was 2.81%.  The credit facility is collateralized by
substantially all the assets of Pomeroy, except those assets that collateralize
certain other financing arrangements.  Under the terms of the credit
facility, the Company is subject to various financial covenants. As of July 5,
2009, Pomeroy was in compliance with these financial covenants.





The
Company’s credit facility expires October 30, 2009. The Company intends to
negotiate a new credit facility with terms sufficient for its financing needs
and does not anticipate any problems securing a new credit facility before
October 30, 2009. However, if the Company is unable to negotiate a new credit
facility, it could adversely affect the Company’s ability to
operate.





5.
            Financial
      Instruments





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, floor plan financing arrangements 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, payables and floor plan financing arrangements 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





6.
            Stock-Based
      Compensation





Restricted Common Stock
Awards





During
the six months ended July 5, 2009, the Company awarded 211,884 shares of
restricted common stock, which vest over a 4-year period.  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. Total compensation expense
recognized for unvested shares was $11 thousand and $228 thousand for the three
months ended July 5, 2009 and 2008, respectively. Total compensation expense
recognized for unvested shares was $146 thousand and $720 thousand for the six
months ended July 5, 2009 and 2008, respectively.  During the quarter
ended July 5, 2009, forfeiture adjustments resulted in a reversal of
previously-recognized expense totaling $161 thousand. As of July 5, 2009, 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 3.0
years.





Shares
                          
                          
                          Weighted average
                            fair value at
                            grant dateRestricted
      common stock outstanding January 5, 2009
                          
                          
                          348,397
                          
                          
                          $
                          7.13Granted
                          
                          
                          158,404
                          
                          
                          
                          3.55Vested
                          
                          
                          -
                          
                          
                          
                          -Forfeitures
                          
                          
                          (80,000
                          )
                          
                          
                          7.61Restricted
      common stock outstanding April  5, 2009
                          
                          
                          426,801
                          
                          
                          
                          5.57Granted
                          
                          
                          53,480
                          
                          
                          
                          4.79Vested
                          
                          
                          -
                          
                          
                          
                          -Forfeitures
                          
                          
                          (21,721
                          )
                          
                          
                          5.90Restricted
      common stock outstanding July  5, 2009
                          
                          
                          458,560
                          
                          
                          $
                          5.59




13





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Stock Option
Awards





For the
three months ended July 5, 2009, the Company did not grant any stock option
awards to employees. For the six months ended July 5, 2009, the Company granted
293,072 stock option awards to employees.  The fair values range from
$1.64 to $1.65, based upon the following assumptions:  underlying
exercise price ranging from $3.50 to $3.61; expected life ranging from 3.5 to
4.5 years; volatility ranging from 58.92% to 61.38%; risk-free interest rates
ranging from 1.12% to 1.41%; and dividend yield of 0.00%.





For the
three months ended July 5, 2009 and 2008, the Company recognized approximately
$(84) and $222 thousand, respectively, in expense related to stock options. For
the six months ended July 5, 2009 and 2008, the Company recognized approximately
$125 thousand and $454 thousand, respectively, in expense related to stock
options.  During the quarter ended July 5, 2009, forfeiture
adjustments resulted in a reversal of previously-recognized expense totaling
$210 thousand. The approximate unamortized stock option compensation as of July
5, 2009, which will be recorded as expense in future periods, is $587 thousand.
The weighted average time over which this expense will be recorded is
approximately 2.2 years.





Employee Stock Purchase
Plan





For the
three months ended July 5, 2009 and 2008, the Company recognized approximately
$20 thousand and $32 thousand, respectively, in expense related to the employee
stock purchase plan being compensatory under FAS 123R. For the six months ended
July 5, 2009 and 2008, the Company recognized approximately $40 thousand and $63
thousand, respectively, in expense related to the employee stock purchase
plan.





7.
              Earnings
      per Common Share





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





(in
thousands, except per share data)




Three
      Months Ended July 5,2009
              
              
              2008Per
      Share
              
              
              
              
              
              Per
      ShareShares
              
              
              Amount
              
              
              Shares
              
              
              AmountBasic
      EPS
              
              
              9,760
              
              
              $
              0.03
              
              
              
              12,343
              
              
              $
              0.12Effect
      of dilutive stock options and unvested restricted shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Diluted
      EPS
              
              
              9,760
              
              
              $
              0.03
              
              
              
              12,343
              
              
              $
              0.12




Six
      Months Ended July 5,2009
              
              
              2008Per
      Share
              
              
              
              
              
              Per
      ShareShares
              
              
              Amount
              
              
              Shares
              
              
              AmountBasic
      EPS
              
              
              9,339
              
              
              $
              (0.03
              )
              
              
              12,027
              
              
              $
              (0.23
              )Effect
      of dilutive stock options and unvested restricted shares
              
              
              -
              *
              
              
              -
              *
              
              
              -
              *
              
              
              -Diluted
      EPS
              
              
              9,339
              
              
              $
              (0.03
              )
              
              
              12,027
              
              
              $
              (0.23
              )




*Not
presented herein since effect on loss per common share is anti-dilutive for the
six months ended July 5, 2009 and 2008.


14





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Effective
January 6, 2009, the Company adopted FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities.”  As a result of the adoption of FSP EITF 03-6-1,
non-vested shares with non-forfeitable dividend rights are considered
participating securities and, thus, subject to the two-class method pursuant to
SFAS 128, “Earnings per Share”, when computing basic and diluted EPS. 
Losses are only allocable to participating securities if the holder has a
contractual obligation to share in the losses of the Company as further defined
in EITF 03-6-1, “Participating Securities and the Two-Class Method under FASB
Statement No. 128.”  The Company’s restricted stock awards contain
non-forfeitable dividend rights but do not contractually obligate the holders to
share in losses of the Company.  Accordingly, during periods of net
income unvested restricted shares are included in the determination of both
basic and diluted earnings per share.  During periods of net loss,
these shares are excluded from both basic and diluted earnings per
share.





For the
three month periods ended July 5, 2009 and 2008, a total of 436,000 and 397,000
unvested restricted share awards, respectively, were included in the basic EPS
calculation.  For the six month periods ended July 5, 2009 and 2008, a
total of 459,000 and 409,000 unvested share awards, respectively, were excluded
from the basic and diluted EPS calculation due to net losses incurred for these
periods. For the three and six month periods ended July 5, 2009, 1,011,000 and
1,310,000 stock options, respectively, were excluded from the diluted EPS
calculations as their effect would have been anti-dilutive. For the six month
period ended July 5, 2008, 1,474,000 stock options were excluded from the
diluted EPS calculations as their effect would have been
anti-dilutive.





8.
            Treasury
      Stock




On
November 14, 2008, the Company announced that the Board of Directors of the
Company had authorized a program to repurchase up to $5.0 million of its
outstanding common stock.  On November 19, 2008, the Board of
Directors of the Company authorized a $5.0 million increase in its stock
repurchase program, therefore authorizing the Company to purchase up to $10.0
million of its outstanding common stock under the program.  All stock
repurchases are to be made through open market purchases, block purchases or
privately negotiated transactions as deemed appropriate by the Company within a
period of one year from the date of the first purchase under the
program.  The Company has no obligation to repurchase shares under the
program, and the timing, manner and actual number of shares repurchased will
depend on a variety of factors including price, corporate and regulatory
requirements and other market conditions. The Company intends to utilize
available working capital to fund the stock repurchase program. The acquired
shares will be held in treasury or cancelled.  During fiscal 2008, the
Company purchased 2,656,155 shares at a total cost of $7.9 million under this
program.  During the six month period ended July 5, 2009, the Company
purchased an additional 62,705 shares at a total cost of $211 thousand under
this program.





9.
            Supplemental
      Cash Flow Disclosures





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





(in
      thousands)
                  
                  Six Months Ended July 5,2009
                  
                  
                  2008Interest
      paid
                  
                  $
                  252
                  
                  
                  $
                  548Income
      taxes paid (refunded)
                  
                  $
                  82
                  
                  
                  $
                  (3,045
                  )


15





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





10.
            Contingencies





The
Company is party to various negotiations, customer bankruptcies and legal
proceedings in the normal course of business.  Management believes
these matters will not have a material adverse effect on the Company's financial
position or results of operations.





As
discussed in Note 2, the Company entered into a Merger Agreement with Hebron LLC
(“Parent”), Desert Mountain Acquisition Co. (“Desert”), a wholly-owned
subsidiary of Parent, and with respect to only certain sections of the Merger
Agreement, David B. Pomeroy, II. The Merger Agreement provides that Desert will
merge with and into the Company, with the Company continuing as the surviving
corporation. The Merger Agreement, as amended, provides that if the Company
terminates the Merger Agreement to accept an acquisition proposal by another
party, the Company would be required to pay a termination fee of up to $2.1
million to Parent.





The
Company is party to change in control bonus agreements with executive officers
of the Company whereby the Company may be required to pay a bonus equal to each
executive officer’s base annual salary upon change in control prior to December
31, 2009. Furthermore, the agreements provide that bonuses are payable in
certain circumstances if a termination of employment occurs prior to a change in
control and in certain circumstances if a change in control occurs after
December 31, 2009.





On May
22, 2009, a purported class action complaint was filed in the Commonwealth of
Kentucky Boone Circuit Court by Kenneth Hanninen, an alleged Pomeroy
stockholder, on behalf of himself and all others similarly situated, against the
Company and each of its current directors as of the filing date: David G.
Boucher, Keith R. Coogan, Ronald E. Krieg, David B. Pomeroy, II, Richard S.
Press, Michael A. Ruffolo, Jonathan Starr and Debra Tibey.  Hebron LLC
and Desert Mountain Acquisition Co., affiliates of Mr. Pomeroy, were also named
as defendants in the lawsuit.  The complaint alleges, among other
things, that the directors of the Company are in breach of their fiduciary
duties to stockholders in connection with the Company’s entry into an agreement
and plan of merger dated May 19, 2009 (the “Agreement”), with Hebron LLC, Desert
Mountain Acquisition Co., and, with respect to certain sections of the merger
agreement only, David B. Pomeroy, II.  The complaint seeks, among
other things, injunctive relief to enjoin the Company and its directors from
consummating the transaction contemplated under the Agreement, along with
attorneys’ fees and costs.  The Company and its directors believe that
the allegations in the complaint are without merit and intend to vigorously
defend against the claims and causes of action asserted in this legal
matter.





11.  Restructuring
and Severance Charges





During
the three month period ended July 5, 2008, the Company recorded charges of $308
thousand for severance related to the realignment of the Company’s operations.
No severance charges related to a restructuring plan were recorded during the
three month period ended July 5, 2009. During the six month periods ended July
5, 2009 and 2008, the Company recorded charges of $101 thousand and $889
thousand, respectively, for severance related to the realignment of the
Company’s operations. As of July 5, 2009, all accrued severance charges have
been paid.





As of
July 5, 2009, facility-related restructuring liabilities totaled $339 thousand,
consisting primarily of the remaining liability recorded in fiscal 2004 in
connection with the ARC acquisition for certain duplicative leased facilities.
The outstanding balance as of July 5, 2009 will be paid out in fiscal
2009.





The
expenses associated with restructuring and severance charges are recorded in
selling, general and administrative expenses in the Company’s consolidated
statements of operations.


16





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





As of
July 5, 2009, the restructuring and severance charge accrual, consisted of the
following:




(in
      thousands)
                    
                    Severance
                    
                    
                    Facilities
                    
                    
                    TotalLiability
      balance at January 5, 2009
                    
                    $
                    78
                    
                    
                    $
                    1,071
                    
                    
                    $
                    1,149Cash
      payments
                    
                    
                    (91
                    )
                    
                    
                    (397
                    )
                    
                    
                    (488
                    )Charges
      accrued
                    
                    
                    101
                    
                    
                    
                    -
                    
                    
                    
                    101Liability
      balance at April 5, 2009
                    
                    
                    88
                    
                    
                    
                    674
                    
                    
                    
                    762Charges
      accrued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cash
      payments
                    
                    
                    (88
                    )
                    
                    
                    (335
                    )
                    
                    
                    (423
                    )Liability
      balance at July 5, 2009
                    
                    $
                    -
                    
                    
                    $
                    339
                    
                    
                    $
                    339





12.Income
Taxes





For the
three and six months ended July 5, 2009 and 2008, the Company had no income tax
expense or income tax benefit. For the three months ended July 5, 2009 and 2008,
the Company decreased its tax valuation allowance by $93 thousand and $647
thousand. For the six months ended July 5, 2009 and 2008, the Company increased
its tax valuation allowance by $107 thousand and $931 thousand, respectively.
The tax valuation allowance totaled $22.5 million at July 5, 2009. The tax
valuation allowance is due to the future uncertainty of the Company’s ability to
utilize its deferred tax assets.  For the six months ended July 5,
2009 and 2008, these adjustments to the tax valuation allowance offset what
would have been an income tax benefit.  The effective income tax rate
would have been 40.0% and 34.3% for the six month periods ended July 5, 2009 and
2008, respectively, prior to the recording of the tax valuation
reserves.





As of
July 5, 2009 there have been no material changes in the Company’s uncertain tax
positions disclosures as provided in note 7 of the 2008 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, 2009,
the Company had accrued $815 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 2006.





13.  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.


17





POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





(in
      millions)For
      the Three
                                                                                    
                                                                                    
                                                                                    For
      the SixService
      Revenue:
                                                                                    
                                                                                    Months
      Ended July 5,
                                                                                    
                                                                                    
                                                                                    Months
      Ended July 5,2009
                                                                                    
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    2009
                                                                                    
                                                                                    
                                                                                    2008Technical
      Staffing Services
                                                                                    
                                                                                    $
                                                                                    7.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    31.6
                                                                                    
                                                                                    
                                                                                    $
                                                                                    14.9
                                                                                    
                                                                                    
                                                                                    $
                                                                                    64.1Infrastructure
      Services
                                                                                    
                                                                                    
                                                                                    28.0
                                                                                    
                                                                                    
                                                                                    
                                                                                    30.7
                                                                                    
                                                                                    
                                                                                    
                                                                                    56.7
                                                                                    
                                                                                    
                                                                                    
                                                                                    61.9Total
      Service Revenue
                                                                                    
                                                                                    $
                                                                                    35.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    62.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    71.6
                                                                                    
                                                                                    
                                                                                    $
                                                                                    126.0For
      the Three
                                                                                    
                                                                                    
                                                                                    For
      the SixService
      Cost of Revenues:
                                                                                    
                                                                                    Months
      Ended July 5,
                                                                                    
                                                                                    
                                                                                    Months
      Ended July 5,2009
                                                                                    
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    2009
                                                                                    
                                                                                    
                                                                                    2008Technical
      Staffing Services
                                                                                    
                                                                                    $
                                                                                    5.9
                                                                                    
                                                                                    
                                                                                    $
                                                                                    28.0
                                                                                    
                                                                                    
                                                                                    $
                                                                                    12.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    57.9Infrastructure
      Services
                                                                                    
                                                                                    
                                                                                    21.0
                                                                                    
                                                                                    
                                                                                    
                                                                                    24.2
                                                                                    
                                                                                    
                                                                                    
                                                                                    43.5
                                                                                    
                                                                                    
                                                                                    
                                                                                    50.7Total
      Service Cost of Revenues
                                                                                    
                                                                                    $
                                                                                    26.9
                                                                                    
                                                                                    
                                                                                    $
                                                                                    52.2
                                                                                    
                                                                                    
                                                                                    $
                                                                                    55.8
                                                                                    
                                                                                    
                                                                                    $
                                                                                    108.6For
      the Three
                                                                                    
                                                                                    
                                                                                    For
      the SixService
      Gross Profit:
                                                                                    
                                                                                    Months
      Ended July 5,
                                                                                    
                                                                                    
                                                                                    Months
      Ended July 5,2009
                                                                                    
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    2009
                                                                                    
                                                                                    
                                                                                    2008Technical
      Staffing Services
                                                                                    
                                                                                    $
                                                                                    1.4
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3.6
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2.6
                                                                                    
                                                                                    
                                                                                    $
                                                                                    6.2Infrastructure
      Services
                                                                                    
                                                                                    
                                                                                    7.0
                                                                                    
                                                                                    
                                                                                    
                                                                                    6.5
                                                                                    
                                                                                    
                                                                                    
                                                                                    13.2
                                                                                    
                                                                                    
                                                                                    
                                                                                    11.2Total
      Service Gross Profit
                                                                                    
                                                                                    $
                                                                                    8.4
                                                                                    
                                                                                    
                                                                                    $
                                                                                    10.1
                                                                                    
                                                                                    
                                                                                    $
                                                                                    15.8
                                                                                    
                                                                                    
                                                                                    $
                                                                                    17.4




18





Item
2-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





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)
                    
                    For the Three Months Ended July
      5,
                    
                    
                    For the Six Months Ended July
      5,2009
                    
                    
                    % of
                      Revenues
                    
                    
                    2008
                    
                    
                    % of
                      Revenues
                    
                    
                    2009
                    
                    
                    % of
                      Revenues
                    
                    
                    2008
                    
                    
                    % of
                      RevenuesNet
      revenues:Product
                    
                    $
                    65,483
                    
                    
                    
                    65.0
                    %
                    
                    $
                    92,678
                    
                    
                    
                    59.8
                    %
                    
                    $
                    118,644
                    
                    
                    
                    62.4
                    %
                    
                    $
                    174,155
                    
                    
                    
                    58.0
                    %Service
                    
                    
                    35,317
                    
                    
                    
                    35.0
                    %
                    
                    
                    62,315
                    
                    
                    
                    40.2
                    %
                    
                    
                    71,616
                    
                    
                    
                    37.6
                    %
                    
                    
                    126,007
                    
                    
                    
                    42.0
                    %Total
      net revenues
                    
                    
                    100,800
                    
                    
                    
                    100.0
                    %
                    
                    
                    154,993
                    
                    
                    
                    100.0
                    %
                    
                    
                    190,260
                    
                    
                    
                    100.0
                    %
                    
                    
                    300,162
                    
                    
                    
                    100.0
                    %Gross
      profitProduct
                    
                    
                    6,251
                    
                    
                    
                    6.2
                    %
                    
                    
                    9,435
                    
                    
                    
                    6.1
                    %
                    
                    
                    11,768
                    
                    
                    
                    6.2
                    %
                    
                    
                    17,841
                    
                    
                    
                    5.9
                    %Service
                    
                    
                    8,410
                    
                    
                    
                    8.3
                    %
                    
                    
                    10,108
                    
                    
                    
                    6.5
                    %
                    
                    
                    15,853
                    
                    
                    
                    8.3
                    %
                    
                    
                    17,378
                    
                    
                    
                    5.8
                    %Total
      gross profit
                    
                    
                    14,661
                    
                    
                    
                    14.5
                    %
                    
                    
                    19,543
                    
                    
                    
                    12.6
                    %
                    
                    
                    27,621
                    
                    
                    
                    14.5
                    %
                    
                    
                    35,219
                    
                    
                    
                    11.7
                    %Gross
      profit %Product
      %
                    
                    
                    9.5
                    %
                    
                    
                    
                    
                    
                    
                    10.2
                    %
                    
                    
                    
                    
                    
                    
                    9.9
                    %
                    
                    
                    
                    
                    
                    
                    10.2
                    %Service
      %
                    
                    
                    23.8
                    %
                    
                    
                    
                    
                    
                    
                    16.2
                    %
                    
                    
                    
                    
                    
                    
                    22.1
                    %
                    
                    
                    
                    
                    
                    
                    13.8
                    %Operating
      expenses:Selling,
      general and administrative
                    
                    
                    13,708
                    
                    
                    
                    13.6
                    %
                    
                    
                    16,630
                    
                    
                    
                    10.7
                    %
                    
                    
                    26,479
                    
                    
                    
                    13.9
                    %
                    
                    
                    35,026
                    
                    
                    
                    11.7
                    %Depreciation
      and amortization
                    
                    
                    671
                    
                    
                    
                    0.7
                    %
                    
                    
                    1,218
                    
                    
                    
                    0.8
                    %
                    
                    
                    1,374
                    
                    
                    
                    0.7
                    %
                    
                    
                    2,434
                    
                    
                    
                    0.8
                    %Total
      operating expenses
                    
                    
                    14,379
                    
                    
                    
                    14.3
                    %
                    
                    
                    17,848
                    
                    
                    
                    11.5
                    %
                    
                    
                    27,853
                    
                    
                    
                    14.6
                    %
                    
                    
                    37,460
                    
                    
                    
                    12.5
                    %Income
      (loss) from operations
                    
                    
                    282
                    
                    
                    
                    0.2
                    %
                    
                    
                    1,695
                    
                    
                    
                    1.1
                    %
                    
                    
                    (232
                    )
                    
                    
                    -0.1
                    %
                    
                    
                    (2,241
                    )
                    
                    
                    -0.8
                    %Other
      income (expense):Interest
      income
                    
                    
                    122
                    
                    
                    
                    0.1
                    %
                    
                    
                    42
                    
                    
                    
                    0.0
                    %
                    
                    
                    208
                    
                    
                    
                    0.1
                    %
                    
                    
                    127
                    
                    
                    
                    0.0
                    %Interest
      expense
                    
                    
                    (111
                    )
                    
                    
                    -0.1
                    %
                    
                    
                    (247
                    )
                    
                    
                    -0.2
                    %
                    
                    
                    (271
                    )
                    
                    
                    -0.1
                    %
                    
                    
                    (598
                    )
                    
                    
                    -0.2
                    %Other
                    
                    
                    31
                    
                    
                    
                    0.0
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    27
                    
                    
                    
                    0.0
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Other
      income (expense), net
                    
                    
                    42
                    
                    
                    
                    0.0
                    %
                    
                    
                    (205
                    )
                    
                    
                    -0.2
                    %
                    
                    
                    (36
                    )
                    
                    
                    0.0
                    %
                    
                    
                    (471
                    )
                    
                    
                    -0.2
                    %Income
      (loss) before income tax
                    
                    
                    324
                    
                    
                    
                    0.2
                    %
                    
                    
                    1,490
                    
                    
                    
                    0.9
                    %
                    
                    
                    (268
                    )
                    
                    
                    -0.1
                    %
                    
                    
                    (2,712
                    )
                    
                    
                    -1.0
                    %Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %
                    
                    
                    -
                    
                    
                    
                    0.0
                    %Net
      income (loss)
                    
                    $
                    324
                    
                    
                    
                    0.2
                    %
                    
                    $
                    1,490
                    
                    
                    
                    0.9
                    %
                    
                    $
                    (268
                    )
                    
                    
                    -0.1
                    %
                    
                    $
                    (2,712
                    )
                    
                    
                    -1.0
                    %




20




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Second
Quarter 2009 versus Second Quarter 2008





Total Net
Revenues:  Total net revenues decreased $54.2 million or 35.0%
in the second quarter of fiscal 2009, compared to the second quarter of fiscal
2008. For the second quarters of fiscal 2009 and fiscal 2008, the net revenues
were $100.8 million and $155.0 million, respectively.





Product
revenues were $65.5 million in the second quarter of fiscal 2009, a decrease of
$27.2 million or 29.3% from the second quarter of fiscal 2008. The decrease in
revenue was primarily generated by a reduction in capital expenditures of large
customers within the Financial, Health Care and Retail markets.  Many of
these expenditures were previously approved in the current year budgets of our
customers but were delayed due to ongoing economic uncertainty.




Service
revenues were $35.3 million in the second quarter of fiscal 2009, a decrease of
$27.0 million or 43.3% from the second quarter of fiscal 2008. The Company
groups services sales into Technical Staffing and Infrastructure Services.
Technical Staffing Services support clients’ project requirements, ensures
regulatory and customer compliance requirements and fulfills interim and
permanent staffing requirements 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.




(in millions)Quarter ended July 5,2009
                          
                          
                          2008Service RevenueTechnical
      Staffing
                          
                          $
                          7.3
                          
                          
                          $
                          31.6Infrastructure
      Services
                          
                          
                          28.0
                          
                          
                          
                          30.7Total
      Service Revenue
                          
                          $
                          35.3
                          
                          
                          $
                          62.3




Technical
Staffing revenue decreased $24.3 million, or 76.9%, in the second quarter of
fiscal 2009. In June 2008, the Company elected not to renew a technical services
contract with a major customer because the proposed terms would have been
unprofitable for the Company. As a result of the loss of this business, we
expect a decline of approximately $80 million in technical staffing revenue for
the full year in fiscal 2009. Technical Staffing revenue accounted for
approximately 20.7% of total service revenues in the second quarter of fiscal
2009 compared to 50.7% in the second quarter of fiscal 2008.





Infrastructure
Service revenues decreased $2.7 million, or 8.8%, in the second quarter of
fiscal 2009, primarily due to a decline in short-term project engagements and a
loss contract which was exited at the end of the second quarter of fiscal
2008.  Infrastructure Service revenues accounted for approximately
79.3% of total service revenues in the second quarter of fiscal 2009 compared to
49.3% in the second quarter of fiscal 2008.





Gross
Profit:  Gross profit was $14.7 million in the second quarter
of fiscal 2009, compared to $19.5 million in the second quarter of fiscal 2008.
Gross profit margin, as a percentage of revenue, was 14.5% in the second quarter
of fiscal 2009, compared to 12.6% in the second quarter of fiscal
2008.





Product
gross profit was $6.3 million in the second quarter of fiscal 2009, compared to
$9.4 million in the second quarter of fiscal 2008. Product gross profit margin
as a percentage of product revenues decreased to 9.5% in the second quarter of
fiscal 2009, compared to 10.2% in the second quarter of fiscal 2008 as a result
of transactions at lower gross profit margins in order to retain or gain market
share.





Service
gross profit was $8.4 million in the second quarter of fiscal 2009, compared to
$10.1 million in the second quarter of fiscal 2008.  Service gross
profit margins were 23.8% in the second quarter of fiscal 2009, compared to
16.2% in the second quarter of fiscal 2008.




21




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





(in millions)Quarter ended July 5,2009
                        
                        
                        2008Service
      Gross ProfitTechnical
      Staffing
                        
                        $
                        1.4
                        
                        
                        $
                        3.6Infrastructure
      Services
                        
                        
                        7.0
                        
                        
                        
                        6.5Total
      Service Gross Profit
                        
                        $
                        8.4
                        
                        
                        $
                        10.1




Gross
profit from Technical Staffing Services was $1.4 million for the second quarter
of fiscal 2009, compared to $3.6 million for the second quarter of fiscal
2008.  Gross profit margin increased to 18.7% in the second quarter of
fiscal 2009 from 11.5% in the second quarter of fiscal 2008.  The
decrease in gross profit dollars and increase in gross margin is primarily the
result of the non-renewal of the technical services contract with a major
customer in June 2008 which would have been unprofitable for the Company. We
expect a decline in technical staffing gross profit of approximately $6.4
million for the full year in fiscal 2009.





Gross
profit from Infrastructure Services was $7.0 million for the second quarter of
fiscal 2009 compared to $6.5 million for the second quarter of fiscal
2008.  Gross profit margin increased to 25.2% in the second quarter of
fiscal 2009 from 21.1% in the second quarter of fiscal 2008.  The
increase in gross profit margin is the result of cost reductions in the second
and third quarters of fiscal 2008 resulting in improved utilization and
productivity of technical resources.




Operating
Expenses:Total operating expenses were $14.4 million in the
second quarter of fiscal 2009, compared to $17.8 million in the second quarter
of fiscal 2008, a decrease of $3.4 million or 19.4%. The decrease is primarily
the result of the following:





·
            Payroll
      and payroll related expenses decreased approximately $1.9 million in the
      second quarter of fiscal 2009 as compared to the second quarter of fiscal
      2008 due to changes the company made in order to right-size the business
      as a result of the overall decline in
revenues.


·
            Selling
      expenses were reduced by $1.3 million in the second quarter of fiscal 2009
      as a result of decreased revenues.


·
            Depreciation
      expense decreased $0.5 million in the second quarter of fiscal 2009 as
      compared to the second quarter of fiscal 2008 due to a significant asset
      being fully depreciated.


·
            The
      provision for bad debts decreased $0.3 million in the second quarter of
      fiscal 2009 as compared to the second quarter of fiscal
    2008.





The
decreases in operating expenses described above were partially offset by a $0.6
million increase in professional fees in the second quarter of fiscal 2009
associated with the proposed merger related activities.




Income from
Operations:  Income from operations decreased $1.4 million, to
$0.3 million in the second quarter of fiscal 2009 from $1.7 million in the
second quarter of fiscal 2008. The decrease in income from operations is the
result of the decrease in revenues and gross profit, offset by the decrease in
operating expenses, as described above.




Other income
(expense):  Net other income (expense) was income of $42
thousand in the second quarter of fiscal 2009 compared to expense of $0.2
million during the second quarter of fiscal 2008. The decrease in net other
expense is primarily the result of a $0.1 million decrease in interest expense
for outstanding borrowings under the Company’s credit facility during the second
quarter of fiscal 2009 compared to the second quarter of fiscal 2008. The
decrease in interest expense resulted from the timing of payments of accounts
payable and payroll, as well as a lower outstanding floor plan liability during
the second quarter of fiscal 2009 as compared to the second quarter of fiscal
2008.





Income Taxes:  For
the second quarters of fiscal 2009 and fiscal 2008, the Company had no income
tax expense or benefit.  During the second quarters of fiscal 2009 and
2008, the Company decreased its tax valuation allowance by $0.1 million and $0.6
million, respectively, as a result of generating net income for these
periods.


22




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Net Income:  Net
income was $0.3 million in the second quarter of fiscal 2009, compared to $1.5
million in the second quarter of fiscal 2008.  The decrease in net
income is a result of the factors described above.




July
5, 2009 YTD versus July 5, 2008 YTD





Total Net
Revenues:  Total net revenues decreased $109.9 million or 36.6%
in the first six months of fiscal 2009, compared to the first six months of
fiscal 2008. For the first six months of fiscal 2009 and fiscal 2008, the net
revenues were $190.3 million and $300.2 million, respectively.





Product
revenues were $118.7 million in the first six months of fiscal 2009, a decrease
of $55.5 million or 31.9% from the first six months of fiscal 2008. The decrease
in revenue was primarily generated by a reduction in capital expenditures of
large customers within the Financial, Manufacturing, Health Care and Retail
markets.  Many of these expenditures were previously approved in the
current year budgets of our customers but were delayed due to ongoing economic
uncertainty.




Service
revenues were $71.6 million in the first six months of fiscal 2009, a decrease
of $54.4 million or 43.2% from the first six months of fiscal 2008. The Company
groups services sales into Technical Staffing and Infrastructure Services.
Technical Staffing Services support clients’ project requirements, ensures
regulatory and customer compliance requirements and fulfills interim and
permanent staffing requirements 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.




(in millions)Six months ended July 5,2009
                    
                    
                    2008Service RevenueTechnical
      Staffing
                    
                    $
                    14.9
                    
                    
                    $
                    64.1Infrastructure
      Services
                    
                    
                    56.7
                    
                    
                    
                    61.9Total
      Service Revenue
                    
                    $
                    71.6
                    
                    
                    $
                    126.0




Technical
Staffing revenue decreased $49.2 million, or 76.8%, in the first six months of
fiscal 2009. In June 2008, the Company elected not to renew a technical services
contract with a major customer because the proposed terms would have been
unprofitable for the Company. As a result of the loss of this business, we
expect a decline of approximately $80 million in technical staffing revenue for
the full year in fiscal 2009. Technical Staffing revenue accounted for
approximately 20.8% of total service revenues in the first six months of fiscal
2009 compared to 50.8% in the first six months of fiscal 2008.





Infrastructure
Service revenues decreased $5.2 million, or 8.5%, in the first six months of
fiscal 2009, primarily due to a decline in short-term project engagements and a
loss contract which was exited at the end of the second quarter of fiscal
2008.  Infrastructure Service revenues accounted for approximately
79.2% of total service revenues in the first six months of fiscal 2009 compared
to 49.2% in the first six months of fiscal 2008.





Gross
Profit:  Gross profit was $27.6 million in the first six months
of fiscal 2009, compared to $35.2 million in the first six months of fiscal
2008. Gross profit margin, as a percentage of revenue, was 14.5% in the first
six months of fiscal 2009, compared to 11.7% in the first six months of fiscal
2008.





Product
gross profit was $11.8 million in the first six months of fiscal 2009, compared
to $17.8 million in the first six months of fiscal 2008. Product gross profit
margin as a percentage of product revenues decreased slightly to 9.9% in the
first six months of fiscal 2009, compared to 10.2% in the first six months of
fiscal 2008 as a result of transactions with lower gross profit margins in order
to retain or gain market share primarily in the second quarter of fiscal
2009.


23




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Service
gross profit was $15.8 million in the first six months of fiscal 2009, compared
to $17.4 million in the first six months of fiscal 2008.  Service
gross profit margins were 22.1% in the first six months of fiscal 2009, compared
to 13.8% in the first six months of fiscal 2008.





(in millions)Six months ended July 5,2009
                    
                    
                    2008Service Gross ProfitTechnical
      Staffing
                    
                    $
                    2.6
                    
                    
                    $
                    6.2Infrastructure
      Services
                    
                    
                    13.2
                    
                    
                    
                    11.2Total
      Service Gross Profit
                    
                    $
                    15.8
                    
                    
                    $
                    17.4




Gross
profit from Technical Staffing Services was $2.6 million for the first six
months of fiscal 2009, compared to $6.2 million for the first six months of
fiscal 2008.  Gross profit margin increased to 17.4% in the first six
months of fiscal 2009 from 9.7% in the first six months of fiscal
2008.  The decrease in gross profit dollars and increase in gross
margin is primarily the result of the non-renewal of the technical services
contract with a major customer in June 2008 which would have been unprofitable
for the Company. We expect a decline in technical staffing gross profit of
approximately $6.4 million for the full year in fiscal 2009.





Gross
profit from Infrastructure Services was $13.2 million for the first six months
of fiscal 2009 compared to $11.2 million for the first six months of fiscal
2008.  Gross profit margin increased to 23.3% in the first six months
of fiscal 2009 from 18.0% in the first six months of fiscal 2008.  The
increase in gross profit margin is the result of engagements during the first
quarter of fiscal 2008 that generated revenue of approximately $1.4 million at
zero gross profit and cost reductions in the second and third quarters of fiscal
2008 resulting in improved utilization and productivity of the technical
resources.




Operating
Expenses:Total operating expenses were $27.9 million in the
first six months of fiscal 2009, compared to $37.5 million in the first six
months of fiscal 2008, a decrease of $9.6 million or 25.6%. The decrease is
primarily the result of the following:





·
            In
      the first quarter of fiscal 2008, the Company recorded a $1.0 million
      charge to reserve against the collection of Technical Staffing Services
      revenues that were overbilled by subcontractors in 2005 and 2006. During
      the first quarter of fiscal 2009, the Company reversed $0.2 million of
      this charge after reevaluating the amounts
  overbilled.


·
            Severance
      charges decreased $0.5 million in the first six months of fiscal 2009
      compared to the first six months of fiscal
2008.


·
            Depreciation
      expense decreased $1.1 million in the first six months of fiscal 2009 as
      compared to the first six months of fiscal 2008 due to a significant asset
      being fully depreciated.


·
            The
      provision for bad debts decreased $0.5 million in the first six months of
      fiscal 2009 compared to the first six months of fiscal
    2008.


·
            Selling
      expenses were reduced by $2.2 million in the first six months of fiscal
      2009 as a result of decreased
revenues.


·
            During
      the first quarter of fiscal 2008, the Company recorded accruals for loss
      contracts of $0.3 million, as well as a $0.3 million start-up penalty for
      a new contract.


·
            Payroll
      and payroll related expenses decreased approximately $4.8 million in the
      first six months of fiscal 2009 as compared to the first six months of
      fiscal 2008 due to changes the Company made in order to right-size the
      business as a result of the overall decline in
  revenues.





The
decreases in operating expenses described above were partially offset by a $0.4
million charge in the first quarter of fiscal 2009 associated with the Company’s
leased aircraft and $0.6 million increase in professional fees in the second
quarter of fiscal 2009 associated with the proposed merger related
activities.




24




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Loss from
Operations:  Loss from operations decreased $2.0 million in the
first six months of fiscal 2009 as compared to the first six months of fiscal
2008, from $2.2 million in the first six months of fiscal 2008 to $0.2 in the
first six months of fiscal 2009.  The decrease in loss from operations
is the result of the decrease in operating expenses, offset by the decrease in
revenues and gross profit, as described above.




Other income
(expense):  Net other expense was $36 thousand in the first six
months of fiscal 2009 compared to $0.5 million during the first six months of
fiscal 2008. Although the Company has significant cash balances, the Company’s
interest expense exceeds its interest income due primarily to outstanding
balances under its floor plan and credit facilities at rates that exceed those
rates earned on the Company’s cash and cash equivalents. The decrease in net
other expense is primarily the result of a $0.3 million decrease in interest
expense for outstanding borrowings under the Company’s credit facility during
the first six months of fiscal 2009 compared to the first six months of fiscal
2008 resulting from the timing of payments of accounts payable and payroll, as
well as a lower outstanding floor plan liability during the first six months of
fiscal 2009 as compared to the first six months of fiscal 2008.





Income Taxes:  For
the first six months of fiscal 2009 and fiscal 2008, the Company had no income
tax expense or benefit.  During the first six months of fiscal 2009
and 2008, the Company increased its tax valuation allowance by $0.1 million and
$0.9 million, respectively, due to uncertainty of the Company’s ability to
utilize its deferred tax assets.





Net Loss:  Net loss
was $0.3 million in the first six months of fiscal 2009, compared to $2.7
million in the first six months of fiscal 2008.  The decrease in net
loss is a result of the factors described above.




25


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 $2.1 million for the first six months of
fiscal 2009. Cash used in investing activities was $0.9 million, consisting
solely of capital expenditures.  Cash generated by financing
activities was $6.1 million, which includes a $6.2 million net increase in floor
plan financing liability and $0.1 million for the issuance of common shares,
offset by $0.2 million for the purchase of treasury stock.





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, up or down turns in the Company’s business
and up or down turns 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 a 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.  Product revenue has a shorter cash outlay period, as the
time difference between paying vendors for products purchased and receiving cash
from customers is typically 0 to 60 days. 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.





Cash
flows generated by operating activities in the first six months of fiscal 2009
totaled $2.1 million, compared to $7.0 million for the same period of fiscal
2008.  A reduction in accounts receivable generated $21.3 million in
operating cash flows during the first six months of fiscal 2009 compared to $4.7
million for the first six months of fiscal 2008.  Reductions in
accounts payable and other assets and liabilities utilized cash of $10.1 million
and $9.4 million, respectively, during the first six months of fiscal 2009
compared to $0.7 million and $2.4 million, respectively, in the first six months
of fiscal 2008.  The reduction in receivables and payables is
associated with the decline in revenues during the first six months of fiscal
2009 compared to the first six months of fiscal 2008.





The
Company has a Syndicated Credit Facility Agreement with GE Commercial
Distribution Finance (“GECDF”), which became effective June 25, 2004 (the
“Credit Facility”). The Credit Facility, which has been the subject of
subsequent modifications, 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.





The
maximum available borrowings under the Credit Facility total $80.0 million for
inventory financing and the revolving loan. The Credit Facility permitted
distributions up to a maximum of $18 million for the period June 25, 2008
through June 25, 2009 only if specified criteria were met.  The term
distribution is defined in the Credit Facility and included dividends,
acquisitions of outstanding stock, reinvestment of debt securities and
compensation to a shareholder in excess of normal compensation including
performance bonuses. The agreement provides 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.  The Credit Facility was most recently amended on June 24,
2009, which extended its maturity date to October 30, 2009 and set forth the
financial covenants for the periods subsequent to June 25, 2009.




26




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




LIQUIDITY
AND CAPITAL RESOURCES




A
significant part of the Company’s inventories are financed by floor plan
arrangements with third parties. At July 5, 2009 and January 5, 2009, these
lines of credit totaled $88.0 million, including $80.0 million under its Credit
Facility with GECDF and $8.0 million with IBM Credit Corporation (“ICC”).
Borrowings under the GECDF floor plan arrangements are made on 30 day notes.
Borrowings under the ICC floor plan arrangement are made on 15 day notes. All
such borrowings are secured by the related inventory. The Company classifies
amounts outstanding under the floor plan arrangements as floor plan financing
liability which is a current liability in the consolidated balance sheets.
Payments made under floor plan arrangements are classified as financing
activities in the consolidated statements of cash flows. Outstanding amounts
under the floor plan financing arrangements totaled $17.9 million at July 5,
2009 and $11.7 million at January 5, 2009. Interest was imputed on these
borrowings at a rate of 6.0% per annum for the three and six month periods ended
July 5, 2009 and 2008. Related interest expense totaled $63 thousand and $164
thousand for the respective three and six month periods ended July 5, 2009, and
$128 and $324 thousand for the respective three and six month periods ended July
5, 2008.





As of
July 5, 2009 and January 5, 2009, there was no balance outstanding under the
Credit Facility other than the floor plan financing liability.  At
July 5, 2009 and January 5, 2009, the amounts available under the Credit
Facility were $31.1 million and $50.2 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, 2009, the adjusted LIBOR
rate was 2.81%.  The credit facility is collateralized by
substantially all the assets of Pomeroy, except those assets that collateralize
certain other financing arrangements.  Under the terms of the credit
facility, the Company is subject to various financial covenants. As of July 5,
2009, Pomeroy was in compliance with these financial covenants.





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’s credit facility expires
October 30, 2009. The Company intends to negotiate a new credit facility with
terms sufficient for its financing needs and does not anticipate any problems
securing a new credit facility before October 30, 2009. However, if the Company
is unable to negotiate a new credit facility, it could adversely affect the
Company’s ability to operate.




As of
July 5, 2009 and January 5, 2009, the Company has an unclaimed property
liability approximating $5 million recorded in its consolidated balance sheets.
This would require a cash outflow from the Company to the applicable state or a
combination of states, customers or vendors. The Company estimates that the
final settlement of this liability may take several months or possibly years as
the Company remediates these credits with customers and vendors. The Company
anticipates that the liability may ultimately be settled for less than the
estimated $5 million. However, the Company cannot provide any assurance that the
final settlement will be materially lower.




On
November 14, 2008, the Company announced that the Board of Directors of the
Company had authorized a program to repurchase up to $5.0 million of its
outstanding common stock.  On November 19, 2008, the Board of
Directors of the Company authorized a $5.0 million increase in its stock
repurchase program, therefore authorizing the Company to purchase up to $10.0
million of its outstanding common stock under the program.  All stock
repurchases are to be made through open market purchases, block purchases or
privately negotiated transactions as deemed appropriate by the Company within a
period of one year from the date of the first purchase under the
program.  The Company has no obligation to repurchase shares under the
program, and the timing, manner and actual number of shares repurchased will
depend on a variety of factors including price, corporate and regulatory
requirements and other market conditions. The Company intends to utilize
available working capital to fund the stock repurchase program. The acquired
shares will be held in treasury or cancelled.  During fiscal 2008, the
Company purchased 2,656,155 shares at a total cost of $7.9 million under this
program.  During the six month period ended July 5, 2009, the Company
purchased an additional 62,705 shares at a total cost of $211 thousand under
this program.




27


Item
3-Quantitative and 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 2009.





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





The
recent global financial crisis affecting the banking system and financial
markets and the going concern threats to investment banks and other financial
institutions have resulted in a tightening in the credit markets. There could be
a number of follow-on effects from the global financial crisis and resulting
economic slowdown on our business, including lower overall demand, insolvency of
suppliers resulting in product delays, inability of customers to obtain credit
to finance purchases of our projects, payment delays by customers and/or
customer insolvencies, more onerous credit and commercial terms from our
suppliers, delays in accessing our current credit facilities or obtaining new
credit facilities on terms we deem commercially reasonable or at all and an
inability of GECDF to fulfill their funding obligations. In an extreme case of
banking instability, the Company might not be able to access its cash accounts
or money market investments. Any further deterioration of economic conditions
would likely exacerbate these adverse effects and could result in a wide-ranging
and prolonged impact on general business conditions, thereby negatively
impacting our operations, financial results and/or liquidity.





Item
4-Controls and 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. Despite the
material weakness described below, management has taken subsequent actions to
ensure that the financial statements reported in this Quarterly Report on Form
10-Q as of and for the quarter ended July 5, 2009, fairly present, in all
material respects, the consolidated financial condition and results of
operations of the Company for the periods presented.





Changes
in Internal Control Over Financial Reporting





On July
31, 2009, the Audit Committee of the Board of Directors concluded that the
Company’s financial statements for fiscal years ended January 5, 2007, January
5, 2008 and January 5, 2009 and for the quarter ended April 5, 2009 should no
longer be relied upon due to errors in the Company’s historical accounting
treatment since 1991 of certain aged trade credits created in the ordinary
course of business. The errors relate primarily to the recognition in the
Company’s income statement (prior to the legal discharge of the underlying
liabilities under applicable laws) of certain aged trade credits affecting
accounts receivable, accounts payable and selling, general and administrative
expenses. As a result of the errors identified, the Company restated the
financial statements included in its Annual Report on Form 10-K for the year
ended January 5, 2009 and in its Quarterly Report on Form 10-Q for the quarter
ended April 5, 2009.





After
evaluating the nature of the above error and the resulting restatement, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that a material weakness as discussed below existed in the Company’s internal
controls over financial reporting at July 5, 2009.





The
identified material weakness in our internal control over financial reporting
related to the proper disposition, reconciliation, monitoring and consequent
accounting of aged trade credits, specifically as follows:





1.
            The
      Company did not have an adequate understanding of its unclaimed property
      obligations and utilized unsupported assumptions regarding trade
      credits.





2.
            Policies
      and procedures were not adequate to timely determine the proper
      disposition of all overpayments and duplicate payments received from
      clients.


28





3.
            Policies
      and procedures were not adequate to timely reconcile and determine the
      proper disposition of credit memos issued to clients in exchange for
      returned products, billing errors and other customer service
      reasons.





4.
            Policies
      and procedures were not adequate to timely determine the proper
      disposition of outstanding un-cashed client and personnel
      disbursements.




Pomeroy
management has taken action to remediate this material weakness described above,
including identification of the following remediation plan:





1.
            Discontinuing
      the practice of taking certain aged trade credits into the income
      statement unless the Company is released from its obligation or it is
      determined that there is an error (such that no credit or other obligation
      in fact exists). This has been implemented as of July 5,
    2009.





2.
            Policies
      and procedures will be implemented to research and properly dispose of
      client credit balances or un-cashed disbursements. This has been
      implemented as of July 5, 2009.





3.
            System
      enhancements will be identified and implemented to strengthen control
      procedures including the automation of issuance of credit memos and
      statements to clients.





4.
            A
      comprehensive unclaimed property reporting methodology will be implemented
      to timely and accurately comply with applicable state
  laws.





Pomeroy
management will assign the highest priority to the Company’s remediation
efforts, with the goal of remediating the material weakness by the end of 2009.
However, due to the nature of the remediation process and the need to allow
adequate time after implementation to evaluate and test the effectiveness of the
implemented controls, no assurance can be given as to the timing of achievement
of remediation.




29





PART II -
OTHER INFORMATION





Item
1-Legal Proceedings





The
Company is party to various negotiations, customer bankruptcies and legal
proceedings in the normal course of business.  Management believes
these matters will not have a material adverse effect on the Company's financial
position or results of operations.


As
previously reported in the Company’s Current Report on Form 8-K filed August 20,
2009, on August 14, 2009, the Company entered into a Memorandum of Understanding
concerning the settlement of certain litigation  (the “Lawsuit”)
relating to the Agreement and Plan of Merger, dated May 19, 2009, as amended by
a First Amendment to Agreement and Plan of Merger, dated June 9, 2009, and a
Second Amendment to Agreement and Plan of Merger, dated June 20, 2009
(collectively referred to as the “Merger Agreement”), among the Company and
Hebron LLC, Desert Mountain Acquisition Co., and, with respect to certain
sections of the Merger Agreement only, David B. Pomeroy,
II.   The Lawsuit was filed on May 22, 2009 in the Commonwealth
of Kentucky Boone Circuit Court by plaintiff Keith Hanninen, an alleged
stockholder of the Company on behalf of a putative class of the public
stockholders of the Company, against the Company; the Company’s directors David
G. Boucher, Ronald E. Krieg, Richard S. Press, Michael A. Ruffolo, Jonathan
Starr, Debra E. Tibey and David B. Pomeroy, II; the Company’s former director,
Keith R. Coogan; and Hebron LLC and Desert Mountain Acquisition Co. The
purported class action complaint, which was amended on July 10, 2009, alleges
among other things, that the Company’s directors were in breach of their
fiduciary duties to stockholders in connection with the Company’s entry into the
Merger Agreement.    The amended complaint seeks, among other
things, injunctive relief to enjoin the Company and its directors from
consummating the transaction contemplated under the Merger Agreement (the
“Merger”), along with attorneys' fees and costs.
 
 The
Memorandum of Understanding reflects an agreement in principle to settle the
Lawsuit.  The settlement includes the Company’s agreement to include
certain additional disclosures relating to the Merger in the definitive proxy
statement for the meeting of stockholders at which the stockholders will vote on
Merger (the “Meeting”).  All of such disclosures are included in the
first amendment to the preliminary proxy statement filed by the Company with the
SEC on August 20, 2009.  The defendants in the Lawsuit, including the
Company, each have denied, and continue to deny, any wrongdoing whatsoever in
connection with the Merger, and the Company’s directors expressly maintain that
they complied with their fiduciary duties.  The defendants in the
Lawsuit, including the Company, believe the Lawsuit is without merit and they
entered into the Memorandum of Understanding solely to avoid the burdens and
expense of further litigation.  The Memorandum of Understanding is
subject to customary conditions including completion of appropriate settlement
documentation, completion of due diligence to confirm the fairness of the
settlement, approval by the Boone County Circuit Court, and consummation of the
Merger.  If the settlement is consummated, the Lawsuit will be
dismissed with prejudice and the defendants and other released persons will
receive from or on behalf of all record holders and beneficial owners of the
Company's common stock on May 20, 2009 through the date of consummation of the
Merger a release of all claims relating to the Merger, the Merger Agreement and
the transactions contemplated therein, other than rights provided to
stockholders under Delaware law to seek appraisal of the value of their shares.
Members of the purported plaintiff class will be sent notice of the proposed
settlement, and a hearing before the Boone County Circuit Court will be
scheduled regarding, among other things, approval of the proposed settlement and
any application by plaintiffs’ counsel for an award of attorneys’ fees and
expenses.
 
 There can
be no assurance that the parties will ultimately enter into a stipulation of
settlement, that the Boone Circuit Court will approve the settlement even if the
parties were to enter into such stipulation or the amount of the attorneys’ fees
and expenses that plaintiffs’ counsel may be awarded.  In the event
the court does not approve the proposed settlement, the terms of the settlement
contemplated under the Memorandum of Understanding may be
terminated.


Item
1A-Risk Factors





Other
than as described below, 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, 2009.





Failure to complete the merger could
negatively affect the stock price and the future business and financial results
of the Company.





On May
19, 2009, the Company entered into a definitive merger agreement, as amended
June 9, 2009 and June 22, 2009, pursuant to which Desert Mountain Acquisition
Co., a wholly-owned subsidiary of Hebron LLC and an affiliate of David B.
Pomeroy II, would merge with and into the Company for $6.00 per
share.  The merger is subject to the approval by the Company’s
stockholders. In the event that the merger agreement is not approved by the
stockholders or if the merger is not completed for any other reason, the
Company’s stockholders will not receive any payment for their shares of Company
common stock. Instead, the Company will continue to operate as a public company
and Pomeroy’s stockholders will be subject to the same risks and opportunities
as they are currently with respect to their ownership of Company common stock.
If the merger is not completed, there is a risk that the market price of the
Company’s common stock may decline to the extent that the current market price
of the stock reflects a market assumption that the merger will be completed. In
addition, in such case, there can be no assurance that any other transaction
acceptable to the Company or its stockholders would be offered.





The
Company may terminate the merger agreement subject to a termination fee of up to
$2.1 million.





Item
2-Unregistered Sales of Equity Securities and Use of Proceeds





a.
            None





b.
            None





30




PART II -
OTHER INFORMATION




Item
2-Unregistered Sales of Equity Securities and Use of Proceeds





c.
            Repurchase
      of Securities





On
November 14, 2008, the Company announced that the Board of Directors of the
Company had authorized a program to repurchase up to $5.0 million of its
outstanding common stock.  On November 19, 2008, the Board of
Directors of the Company authorized a $5.0 million increase in its stock
repurchase program, therefore authorizing the Company to purchase up to $10.0
million of its outstanding common stock under the program.  All stock
repurchases are to be made through open market purchases, block purchases or
privately negotiated transactions as deemed appropriate by the Company within a
period of one year from the date of the first purchase under the
program.  The Company has no obligation to repurchase shares under the
program, and the timing, manner and actual number of shares repurchased will
depend on a variety of factors including price, corporate and regulatory
requirements and other market conditions. The Company intends to utilize
available working capital to fund the stock repurchase program. The acquired
shares will be held in treasury or cancelled.  During fiscal 2008, the
Company purchased 2,656,155 shares at a total cost of $7.9 million under this
program.  During the three month period ended April 5, 2009, the
Company purchased an additional 55,804 shares at a total cost of $185 thousand
under this program. During the three month period ended July 5, 2009, the
Company purchased an additional 6,901 shares at a total cost of $26 thousand.
The following table contains information for shares repurchased under this
program during the three months ended July 5, 2009:




The
      maximumTotal
      number of
            
            
            amountTotal
            
            
            
            
            
            shares
      purchased
            
            
            that
      may yet benumber
      of
            
            
            Average
      price
            
            
            as
      part of
            
            
            purchased
      undershares
            
            
            paid
            
            
            publicly
      announced
            
            
            the
      plan (2)Period
            
            purchased
            
            
            per
      share ($) (1)
            
            
            plan
      (2)
            
            
            ($)
      (thousands)April
      6, 2009 - May 5, 2009
            
            
            4,690
            
            
            $
            3.47
            
            
            
            4,690
            
            
            $
            1,862May
      6, 2009 - June 5, 2009
            
            
            2,211
            
            
            $
            3.52
            
            
            
            2,211
            
            
            $
            1,852June
      6, 2009 - July 5, 2009
            
            
            -
            
            
            $
            0.00
            
            
            
            -
            
            
            $
            1,8526,901
            
            
            $
            3.48
            
            
            
            6,901
            
            
            $
            1,852




(1)
      Average price includes transaction
costs.





(2)
      All shares were repurchased pursuant to the repurchase program described
      above.





Item
3-Defaults Upon Senior Securities





None


31




PART II -
OTHER INFORMATION





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





The
Company’s 2009 Annual Meeting of Shareholders (the “Annual Meeting”) was held on
May 27, 2009. Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Exchange Act. At the meeting, two matters were
submitted to the stockholders for a vote. The results were as
follows:





1.
            Election of
      Directors





The
following individuals were elected to serve as directors:





Directors
              
              For
              
              WithheldDavid
      G. Boucher
              
              7,531,919
              
              1,627,408Christopher
      C. Froman
              
              8,988,686
              
              170,641Ronald
      E. Krieg
              
              7,701,592
              
              1,457,735David
      B. Pomeroy, II
              
              7,402,367
              
              1,756,960Richard
      S. Press
              
              7,764,093
              
              1,395,234Michael
      A. Ruffolo
              
              7,549,892
              
              1,609,435Jonathan
      Starr
              
              7,694,221
              
              1,465,106Debra
      E. Tibey
              
              7,686,185
              
              1,473,142




The above
individuals represent all of the directors of the Company.  Mr. Froman
was elected to replace Mr. Coogan who decided not to run for re-election due to
personal reasons.





2.
            Ratify Appointment of
      BDO Seidman, LLP





The
following number of shares were voted as indicated regarding approving the
ratification of appointment of BDO Seidman, LLP as independent registered public
accounting firm:




For
                9,073,739Against
                20,252Non-Votes
                -Abstain
                65,336




Item
5-Other Information





(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.





(c)
            Other
      Information





None.




32


PART II -
OTHER INFORMATION





Item
6-Exhibits





(a)         Exhibits





2.1
                    Agreement
      and Plan of Merger dated May 19, 2009, by and among Pomeroy IT Solutions,
      Inc., Hebron LLC, Desert Mountain Acquisition Co., and David B. Pomeroy II
      (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed
      May 20, 2009)2.1(a)
                    First
      Amendment to Agreement and Plan of Merger, dated June 8, 2009, by and
      among Pomeroy IT Solutions, Inc., Hebron LLC, Desert Mountain Acquisition
      Co. and David B. Pomeroy II (incorporated by reference to Exhibit 2.1 of
      the Company’s Form 8-K filed June 9, 2009)2.1(b)
                    Second
      Amendment to Agreement and Plan of Merger, dated June 8, 2009, by and
      among Pomeroy IT Solutions, Inc., Hebron LLC, Desert Mountain Acquisition
      Co. and David B. Pomeroy II (incorporated by reference to Exhibit 2.1 of
      the Company’s Form 8-K filed June 22, 2009)3(i)(a)1
                    Certificate
      of Incorporation of Pomeroy Computer Resources, dated February, 1992
      (incorporated by reference to Exhibit 3(i)(a)1 of the Company’s Form 10-Q
      filed August 11, 2000)3(i)(a)2
                    Certificate
      of Amendment to Certificate of Incorporation, dated July 1997
      (incorporated by reference to Exhibit 3(i)(a)2 of the Company’s Form 10-Q
      filed August 11, 2000)3(i)(a)4
                    Certificate
      of Amendment to Certificate of Incorporation, dated August 2000
      (incorporated by reference to Exhibit 3(i)(a)4 of the Company’s Form 10-Q
      filed August 11, 2000)3(i)(a)5
                    Certificate
      of Amendment to Certificate of Incorporation for Pomeroy Computer
      Resources, Inc., dated June 19, 2003 (incorporated by reference to Exhibit
      3(i)(a)5 of the Company’s Form 10-Q filed August 19,
  2003)3(i)(a)6
                    Certificate
      of Amendment to Certificate of Incorporation for Pomeroy Computer
      Resources Sales Company, Inc., dated June 19, 2003 (incorporated by
      reference to Exhibit 3(i)(a)6 of the Company’s Form 10-Q filed August 19,
      2003)3(ii)
                    Bylaws
      of the Company as amended on January 24, 2008 (incorporated by reference
      to Exhibit 3(ii) of the Company’s Form 10-Q filed on May 15,
      2008)10.1
                    Amendment
      No. 8 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, 2009)10.1(a)
                    Form
      of Amended and Restated Special Change in Control Bonus Agreement approved
      May 18, 2009, entered into between Pomeroy IT Solutions, Inc. and each of
      Christopher Froman, Keith Blachowiak, Luther K. Kearns, Craig Propst and
      Peter Thelen11.1
                    Statement
      regarding computation of per share earnings (See Note 1 of Notes to
      Consolidated Financial Statements in the Company’s Form 10K for fiscal
      2008, filed on March 20, 2009).31.1
                    Section
      302 CEO Certification31.2
                    Section
      302 CFO Certification32.1
                    Section
      906 CEO Certification32.2
                    Section
      906 CFO
Certification




33




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 24, 2009
                          By:  /s/
      Craig J. PropstCraig
      J. PropstSenior Vice President, Treasurer and Chief
                            Financial
      Officer




34