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, 2007
 
 OR
 
 o           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
                (IRS
                    Employerincorporation
                    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  o
 
 Indicate
        by check mark whether the
        registrant is a large accelerated filer, an accelerated filer or a
        non-accelerated filer.  See definition of “accelerated filer and large
        accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
        one):
 
 Large
                  accelerated filer o
              Accelerated
                  filer x
              Non-accelerated
                  filer o
 
 Indicate
        by check mark whether the
        registrant is a shell company (as defined in Rule 12b-2 of the Exchange
        Act).
 
 YES
o  NO
x
 
 The
        number of shares of common stock outstanding as of July 5, 2007 was
        12,335,136
  POMEROY
        IT SOLUTIONS, INC.
 TABLE
        OF
        CONTENTS
  Part
                  I.
              Financial
                  InformationItem
                  1.
              Financial
                  Statements:
              PageConsolidated
                  Balance Sheets as of  July
                  5,  2007 (Unaudited) and January
                  5,  2007
              1Consolidated
                  Statements of Operations for the
                  Three  Months Ended  July 5,  2007
                  and  2006 (Unaudited)
              3Consolidated
                  Statements of Comprehensive Income (Loss)
                  for the Three Months Ended  July 5,  2007
                  and  2006 (Unaudited)
              4Consolidated
                  Statements of Operations for the Six Months
                  Ended  July 5,  2007 and  2006
                  (Unaudited)
              5Consolidated
                  Statements of Comprehensive Income (Loss)
                  for the Six Months Ended  July 5,  2007
                  and  2006 (Unaudited)
              6Consolidated
                  Statements of Cash Flows for the Six Months
                  Ended  July 5,  2007 and  2006
                  (Unaudited)
              7Notes
                  to Consolidated Financial Statements
                  (Unaudited)
              8Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosure about Market
                  Risk
              21Item
                  4.
              Controls
                  and Procedures
              21Part
                  II.
              Other
                  InformationItem
                  1.
              Legal
                  Proceedings
              22Item
                  1A.
              Risk
                  Factors
              22Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              22Item
                  3.
              Defaults
                  Upon Senior Securities
              23Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              23Item
                  5.
              Other
                  Information
              24Item
                  6.
              Exhibits
              24SIGNATURE
              
              
              26
 *Table
              of Contents*
  **POMEROY
        ITSOLUTIONS, INC**.
 **CONSOLIDATED
        BALANCE SHEETS**
 
 (in
                  thousands)
              
              July
                  5,
              
              
              January
                  5,2007
              
              
              2007(Unaudited)**ASSETS**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              11,165
              
              
              $
              13,562Certificates
                  of deposit
              
              
              1,093
              
              
              
              1,076Accounts
                  receivable:Trade,
                  less allowance of  $2,721 at July 5, 2007 and $4,390 at January
                  5, 2007
              
              
              128,647
              
              
              
              136,055Vendor
                    receivables, less allowance of $155 at July 5, 2007 and January
                    5,
                    2007
              
              
              7,785
              
              
              
              8,095Net
                  investment in leases
              
              
              1,089
              
              
              
              1,587Other
              
              
              1,044
              
              
              
              1,016Total
                  receivables
              
              
              138,565
              
              
              
              146,753Inventories
              
              
              17,321
              
              
              
              16,274Other
              
              
              9,855
              
              
              
              10,791Total
                  current assets
              
              
              177,999
              
              
              
              188,456Equipment
                  and leasehold improvements:Furniture,
                  fixtures and equipment
              
              
              24,183
              
              
              
              22,540Leasehold
                  improvements
              
              
              8,477
              
              
              
              8,459Total
              
              
              32,660
              
              
              
              30,999Less
                  accumulated depreciation
              
              
              20,605
              
              
              
              18,406Net
                  equipment and leasehold improvements
              
              
              12,055
              
              
              
              12,593Net
                  investment in leases, net of current portion
              
              
              21
              
              
              
              42Goodwill
              
              
              98,314
              
              
              
              98,314Intangible
                  assets, net
              
              
              2,309
              
              
              
              2,634Other
                  assets
              
              
              2,841
              
              
              
              3,403Total
                  assets
              
              $
              293,539
              
              
              $
              305,442




See
      notes
      to consolidated financial statements.





1
 *Table
            of Contents*


**POMEROY
        IT SOLUTIONS, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
  (in
                  thousands, except per share data)
              
              July
                  5,
              
              
              January
                  5,2007
              
              
              2007(Unaudited)**LIABILITIES
                  AND EQUITY**Current
                  Liabilities:Accounts
                  payable
              
              $
              61,847
              
              
              $
              74,375Deferred
                  revenue
              
              
              2,495
              
              
              
              2,604Employee
                  compensation and benefits
              
              
              8,817
              
              
              
              8,642Accrued
                  restructuring and severance charges
              
              
              1,267
              
              
              
              1,286Other
                  current liabilities
              
              
              11,474
              
              
              
              11,242Total
                  current liabilities
              
              
              85,900
              
              
              
              98,149Accrued
                  restructuring and severance charges
              
              
              1,708
              
              
              
              2,313Equity:Preferred
                  stock,  $.01 par value; authorized 2,000 shares (no shares
                  issued or outstanding)
              
              
              -
              
              
              
              -Common
                  stock, $.01 par value; authorized 20,000 shares (13,513 and 13,476
                  shares
                  issued at July 5, 2007 and January 5, 2007, respectively)
              
              
              138
              
              
              
              137Paid-in
                  capital
              
              
              90,453
              
              
              
              89,992Accumulated
                  other comprehensive income
              
              
              (64
              )
              
              
              15Retained
                  earnings
              
              
              127,406
              
              
              
              126,433217,933
              
              
              
              216,577Less
                    treasury stock, at cost (1,177 and 1,130 shares atJuly
                    5, 2007 and January 5, 2007)
              
              
              12,002
              
              
              
              11,597Total
                  equity
              
              
              205,931
              
              
              
              204,980Total
                  liabilities and equity
              
              $
              293,539
              
              
              $
              305,442




See
      notes
      to consolidated financial statements.





2
 *Table
            of Contents*





**POMEROY
      IT SOLUTIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





(in
                    thousands,except per share data)
                
                Three
                    Months EndedJuly
                    5,
                
                
                July
                    5,2007
                
                
                2006(Unaudited)
                
                
                (Unaudited)Product
                    and service revenues:Product
                
                $
                91,599
                
                
                $
                92,081Service
                
                
                59,228
                
                
                
                72,037Total
                    revenues
                
                
                150,827
                
                
                
                164,118Cost
                    of product and service revenues:Product
                
                
                84,044
                
                
                
                84,322Service
                
                
                44,760
                
                
                
                55,013Total
                    cost of revenues
                
                
                128,804
                
                
                
                139,335Gross
                    profit
                
                
                22,023
                
                
                
                24,783Operating
                    expenses:Selling,
                    general and administrative
                
                
                22,285
                
                
                
                20,157Depreciation
                    and amortization
                
                
                1,149
                
                
                
                1,235Total
                    operating expenses
                
                
                23,434
                
                
                
                21,392Income
                    (loss) from operations
                
                
                (1,411
                )
                
                
                3,391Interest
                    Income
                
                
                220
                
                
                
                161Interest
                    Expense
                
                
                (130
                )
                
                
                (323
                )Interest
                    income (expense), net
                
                
                90
                
                
                
                (162
                )Income
                    (loss) before income tax
                
                
                (1,321
                )
                
                
                3,229Income
                    tax expense (benefit)
                
                
                (468
                )
                
                
                1,198Net
                    income (loss)
                
                $
                (853
                )
                
                $
                2,031Weighted
                    average shares outstanding:Basic
                
                
                12,330
                
                
                
                12,629Diluted
                
                
                12,330
                *
                
                
                12,637Earnings
                    (loss) per common share:Basic
                
                $
                (0.07
                )
                
                $
                0.16Diluted
                
                $
                (0.07
                )*
                
                $
                0.16




*Dilutive
        loss per common share for the three months ended July 5, 2007  would
        have been  anit-dilutive if the number of weighted average shares
        outstanding were adjusted to reflect the dilutive  effect
        of  outstanding stock options.






See
      notes
      to consolidated financial statements.





3
 *Table
            of Contents*





**POMEROY
        IT SOLUTIONS, INC.**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
  (in
                    thousands)
                
                Three
                    Months EndedJuly
                    5,
                
                
                July
                    5,2007
                
                
                2006(Unaudited)
                
                
                (Unaudited)Net
                    income
                
                $
                (853
                )
                
                $
                2,031Other
                    comprehensive income :Foreign
                    currency translation adjustment
                
                
                3
                
                
                
                (4
                )Comprehensive
                    income
                
                $
                (850
                )
                
                $
                2,027





See
      notes
      to consolidated financial statements.





4
 *Table
            of Contents*




**POMEROY
      ITSOLUTIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





(in
                      thousands,except per share data)
                  
                  Six
                      Months EndedJuly
                      5,
                  
                  
                  July
                      5,2007
                  
                  
                  2006(Unaudited)
                  
                  
                  (Unaudited)Product
                      and service revenues:Product
                  
                  $
                  183,810
                  
                  
                  $
                  180,958Service
                  
                  
                  114,801
                  
                  
                  
                  133,852Total
                      revenues
                  
                  
                  298,611
                  
                  
                  
                  314,810Cost
                      of product and service revenues:Product
                  
                  
                  168,111
                  
                  
                  
                  166,307Service
                  
                  
                  84,774
                  
                  
                  
                  102,684Total
                      cost of revenues
                  
                  
                  252,885
                  
                  
                  
                  268,991Gross
                      profit
                  
                  
                  45,726
                  
                  
                  
                  45,819Operating
                      expenses:Selling,
                      general and administrative
                  
                  
                  42,026
                  
                  
                  
                  41,776Depreciation
                      and amortization
                  
                  
                  2,269
                  
                  
                  
                  2,569Total
                      operating expenses
                  
                  
                  44,295
                  
                  
                  
                  44,345Income
                      from operations
                  
                  
                  1,431
                  
                  
                  
                  1,474Interest
                      Income
                  
                  
                  530
                  
                  
                  
                  308Interest
                      Expense
                  
                  
                  (269
                  )
                  
                  
                  (779
                  )Interest
                      income (expense), net
                  
                  
                  261
                  
                  
                  
                  (471
                  )Income  before
                      income tax
                  
                  
                  1,692
                  
                  
                  
                  1,003Income
                      tax expense
                  
                  
                  719
                  
                  
                  
                  391Net
                      income
                  
                  $
                  973
                  
                  
                  $
                  612Weighted
                      average shares outstanding:Basic
                  
                  
                  12,339
                  
                  
                  
                  12,622Diluted
                  
                  
                  12,647
                  
                  
                  
                  12,639Earnings
                      per common share:Basic
                  
                  $
                  0.08
                  
                  
                  $
                  0.05Diluted
                  
                  $
                  0.08
                  
                  
                  $
                  0.05





See
      notes
      to consolidated financial statements.





5
 *Table
            of Contents*




**POMEROYIT SOLUTIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**








(in
                  thousands)
              
              Six
                  Months EndedJuly
                  5,
              
              
              July
                  5,2007
              
              
              2006(Unaudited)
              
              
              (Unaudited)Net
                  income
              
              $
              973
              
              
              $
              612Other
                  comprehensive income:Foreign
                  currency translation adjustment
              
              
              (78
              )
              
              
              (4
              )Comprehensive
                  income
              
              $
              895
              
              
              $
              608




See
      notes
      to consolidated financial statements.




6
 *Table
          of Contents*




**POMEROY
      IT SOLUTIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




(in
                  thousands)
              
              Six
                  Months EndedJuly
                  5,
              
              
              July
                  5,2007
              
              
              2006(Unaudited)
              
              
              (Unaudited)Cash
                  flows from operating activities:Net
                  income
              
              $
              973
              
              
              $
              612Adjustments
                    to reconcile net income to net cashfrom
                    operating activities:Depreciation
                  and amortization
              
              
              2,525
              
              
              
              2,569Stock
                  option, restricted stock compensation and employee purchase plan
                  expense
              
              
              226
              
              
              
              896Restructuring
                  and severance charges
              
              
              -
              
              
              
              133Goodwill
                  Impairment
              
              
              -Bad
                  debt expense
              
              
              650
              
              
              
              -Amortization
                  of unearned income
              
              
              (27
              )
              
              
              -Deferred
                  income taxes
              
              
              564
              
              
              
              605Loss
                  on disposal of fixed assets
              
              
              -
              
              
              
              11Changes
                  in working capital accountsAccounts
                  receivable
              
              
              7,041
              
              
              
              (2,585
              )Inventories
              
              
              (1,048
              )
              
              
              (1,558
              )Other
                  current assets
              
              
              387
              
              
              
              62Net
                  investment in leases
              
              
              546
              
              
              
              520Cash
                  overdraft
              
              
              0
              
              
              
              1,992Accounts
                  payable
              
              
              (12,528
              )
              
              
              19,235Deferred
                  revenue
              
              
              (109
              )
              
              
              (622
              )Income
                  tax payable
              
              
              -
              
              
              
              (58
              )Employee
                  compensation and benefits
              
              
              -
              
              
              
              287Other,
                  net
              
              
              330
              
              
              
              (5,988
              )Net
                  operating activities
              
              
              (470
              )
              
              
              16,111Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              (1,662
              )
              
              
              (793
              )Proceeds
                  from redemption of certificates of deposit
              
              
              -
              
              
              
              531Purchases
                  of certificates of deposit
              
              
              (18
              )
              
              
              (91
              )Payment
                  for covenant not-to-compete
              
              
              -
              
              
              
              (285
              )Acquisition
                  of businesses
              
              
              0
              
              
              
              (738
              )Net
                  investing activities
              
              
              (1,680
              )
              
              
              (1,376
              )Cash
                  flows from financing activities:Net
                  payments of  short-term borrowings
              
              
              -
              
              
              
              (15,304
              )Proceeds
                  from exercise of stock options
              
              
              90
              
              
              
              192Purchase
                  of treasury stock
              
              
              (405
              )
              
              
              (144
              )Proceeds
                  from issuance of common shares for employee stock purchase
                  plan
              
              
              146
              
              
              
              163Net
                  financing activities
              
              
              (169
              )
              
              
              (15,093
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (78
              )
              
              
              (4
              )Change
                  in cash and cash equivalents
              
              
              (2,397
              )
              
              
              (362
              )Cash
                  and cash equivalents:Beginning
                  of period
              
              
              13,562
              
              
              
              447End
                  of period
              
              $
              11,165
              
              
              $
              85




See
      notes
      to consolidated financial statements.





7
 *Table
            of Contents*





POMEROY
      IT SOLUTIONS, INC.





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
            Basis
                of Presentation





The
      consolidated financial statements 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 of the information and footnotes required by US GAAP for complete
      financial statements.  In the opinion of management, all adjustments
      (consisting of normal recurring accruals) necessary for a fair presentation
      of
      the interim periods have been made. The results of operations for the three
      and
      six-month period ended July 5, 2007 are not necessarily indicative of the
      results that may be expected for future interim periods or for the year ending
      January 5, 2008.





2.
            Recent
                Accounting Pronouncements





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
      interpretation of FASB Statement No. 109 (“FIN 48”).  Effective
      January 6, 2007, we adopted the provisions of Financial Standards Accounting
      Board Interpretation FIN 48. This interpretation clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with SFAS No. 109 and prescribes a recognition threshold of
      more-likely-than-not to be sustained upon examination. As a result of the
      implementation of FIN 48, we recognized a $231,000 increase in the liability
      for
      unrecognized tax benefits related to tax positions taken in prior periods.
      This
      increase was accounted for as an adjustment to retained earnings in accordance
      with the provisions of this statement.





The
      Company’s policy is to include interest and penalties related to gross
      unrecognized tax benefits within our provision for income taxes.  As
      of January 5, 2007, we had accrued $309,000 for payment of such
      interest.





Our
      total
      unrecognized tax benefits as of January 5, 2007 (the date of adoption) totaled
      approximately $1,823,000. Also, our unrecognized benefits that, if recognized,
      would affect our effective tax rate totaled approximately $342,000 as of January
      5, 2007.





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 US Federal and State income tax matters for
      years up to and including 2002.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. The provisions of SFAS No.
      157 are effective as of the beginning of the Company’s 2008 fiscal
      year.  The Company is currently evaluating the impact of adopting SFAS
      No. 157 on its financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities*.  SFAS No. 159 permits
      entities to choose to measure, at fair value, many financial instruments and
      certain other items that are not currently required to be measured at fair
      value.  The objective is to improve financial reporting by providing
      entities with the opportunity to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions.  SFAS No. 159 establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between entities that choose different measurement attributes for similar types
      of assets and liabilities.  The statement will be effective as of the
      beginning of an entity's first fiscal year beginning after November 15,
      2007.   The Company is evaluating the impact of adopting SFAS No.
      159 in its consolidated financial statements when it is adopted in
      2008.





8
 *Table
            of Contents*





In
      June
      2006, the Financial Accounting Standards Board ("FASB") issued Emerging Issues
      Task Force ("EITF") No. 06-3, *How Taxes Collected from Customers and
      Remitted to Governmental Authorities Should be Presented in the Income Statement
      (That Is, Gross versus Net Presentation)*.  EITF 06-3 addresses
      the income statement presentation of any tax collected from customers and
      remitted to a government authority and concludes that the presentation of taxes
      on either a gross basis or a net basis is an accounting policy decision that
      should be disclosed pursuant to Accounting Principles Board ("APB") No. 22,
      *Disclosures of Accounting Policies*.  For taxes that are
      reported on a gross basis (included in revenues and costs), EITF 06-3 requires
      disclosure of the amounts of those taxes in interim and annual financial
      statements, if those amounts are significant.  EITF 06-3 became
      effective for interim and annual reporting periods beginning after December
      15,
      2006.  The adoption of the standard, effective January 6, 2007, did
      not have a significant impact on the consolidated financial
      statements.  The Company's existing accounting policy is to present
      taxes within the scope of EITF 06-3 on a net basis.








3.
            Cash
                and Short-Term Borrowings





A
      significant part of Pomeroy's inventories are financed by floor plan
      arrangements with third parties. At July 5, 2007, these lines of credit totaled
      $91.5 million, including $80.0 million with GE Commercial Distribution Finance
      (“GECDF”), $8 million with Hewlett-Packard Company and $3.5 million with IBM
      Credit Corporation (“ICC”). Borrowings under the GECDF floor plan arrangements
      are made on thirty-day notes. Borrowings under the ICC floor plan arrangements
      are made on fifteen-day notes. All such borrowings are secured by the related
      inventory. Financing on substantially all of the arrangements is interest free.
      Overall, the average rate on these arrangements is less than 1.0%. The Company
      classifies amounts outstanding under the floor plan arrangements as accounts
      payable.





Effective
      June 25, 2007, the Company amended its Syndicated Credit Facility Agreement
      with
      GE Commercial Distribution Finance.  The primary provisions
      of  the Amendment  were to:  (i)  to
      extend the Revolving Credit Termination Date from June 25, 2007 to June 25,
      2008; (ii)  to decrease the total credit facility to $100MM
      (previously $165MM) with  a maximum of $80.0MM (previously $75.0MM)
      for inventory financing and revolver collateralized primarily by accounts
      receivable, of up to $80 million (previously $110 Million); (iii)  to
      revise the participating lenders so that as amended GECDF (also known as the
      “Agent”) will extend fifty percent of the credit with the continuing banks
      extending credit in the following percentages: National City Bank at 18.7%,
      PNC
      Bank at 18.7% and Bank of America at 12.6%; and (iv)  allows for
      either the Borrower or Agent, with a certain notice period, to require that
      the
      continuing Lenders assign their commitments to either the GECDF or another
      Lender.





Interest
      on outstanding borrowings under the credit facility is payable monthly based
      on
      the LIBOR rate and a pricing grid.  As of July 5, 2007, the adjusted
      LIBOR rate was 7.57%.





The
      Company maintains a sweep account with its bank whereby daily cash receipts
      are
      automatically transferred as payment towards balances outstanding under the
      Company’s credit facility. As of July 5, 2007 and January 5, 2007, the Company
      had no outstanding balance under the Company’s credit facility. At July 5, 2007
      the amount available was $51.9 million.





Under
      the
      terms of the credit facility, the Company is subject to various financial
      covenants including maintenance of a minimum level of tangible net worth, a
      minimum fixed charge coverage ratio, a maximum ratio of total funded
      indebtedness to EBITDA, and a maximum net loss after tax.  As of July
      5, 2007, the Company was in compliance with those 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
      credit facility also provides a letter of credit facility of $5.0
      million.  At July 5, 2007 and January 5, 2007, the Company had several
      outstanding letters of credit issued to worker’s compensation insurance
      providers totaling $1.3 million and $1.4 million, respectively, that have
      various expiration dates through December 2007.  The outstanding
      letters of credit reduce the amount available under the credit
      facility.





9
 *Table
            of Contents*





During
      first six months of 2007, the Company did not pay any cash
      dividends.  Pomeroy has no plans to pay cash dividends in the
      foreseeable future and the payment of such dividends are restricted under
      Pomeroy’s current credit facility.  Under such credit facility, cash
      dividends and stock redemptions are limited to $5 million annually.











4.
            Stock-Based
                Compensation








During
      the six months ended July 5, 2007, the Company awarded 46,500 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 of the employees receiving the
      grants.   During the six months ended July 5, 2007 there were
      100,250 restricted shares that were forfeited.  The accrued expense
      associated with these shares of $0.3 million was reversed during this period.
      Total compensation expense recognized in the six months ended July 5, 2007
      for
      unvested shares was ($13) thousand.  During the six months ended July
      5, 2006, the Company made no restricted stock awards.  As of July 5,
      2007, the total amount of unrecognized compensation expense related to nonvested
      restricted stock awards was approximately $1.9 million, which is expected to
      be
      recognized over a weighted-average period of approximately 3.3
      years.




Weighted
                  AverageShares
              
              
              Exercise
                  priceRestricted
                  common stock outstanding January 5, 2007
              
              
              183,519
              
              
              $
              9.46Granted
              
              
              144,603
              
              
              
              7.44Vested
              
              
              -
              
              
              
              -Forfeitures
              
              
              (6,795
              )
              
              
              -Restricted
                  common stock outstanding April 5, 2007
              
              
              321,327
              
              
              $
              8.57Granted
              
              
              46,500
              
              
              
              9.62Vested
              
              
              -
              
              
              
              -Forfeitures
              
              
              (100,250
              )
              
              
              -Restricted
                  common stock outstanding July 5, 2007
              
              
              267,577
              
              
              $
              8.20




The
      approximate unamortized stock option compensation as of July 5, 2007, which
      will
      be recorded as expense in future periods, is $201 thousand.  The
      weighted average time over which this expense will be recorded is approximately
      6 months.   Total compensation expense recognized in the six
      months ended July 5, 2007 for stock options was $203 thousand.





For
      the
      three and six months ended July 5, 2007, the Company recognized approximately
      $21 thousand and $36 thousand in expense related to the stock purchase plan
      due
      to it being compensatory under FAS 123R.








5.
            Earnings
                per Common Share





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





10
 *Table
            of Contents*




(in
                  thousands, except per share data)Three
                  Months Ended July 5,2007
              
              
              2006Per
                  Share
              
              
              
              
              
              Per
                  ShareShares
              
              
              Amount
              
              
              Shares
              
              
              AmountBasic
                  EPS
              
              
              12,330
              
              
              $
              (0.07
              )
              
              
              12,629
              
              
              $
              0.16Effect
                  of dilutive  stock options
              
              
              -
              *
              
              
              -
              *
              
              
              8
              
              
              
              -Diluted
                  EPS
              
              
              12,330
              
              
              $
              (0.07
              )
              
              
              12,637
              
              
              $
              0.16




*Not
        presented herein since effect on loss per common share is anti-dilutive for
        the  three months ended July 5, 2007.  Had effect on loss
        per common share not been anti-dilutive,  the number of diluted shares
        would have been 12,699 for the three months ended July 5,
        2007.




(in
                  thousands, except per share data)Six
                  Months Ended July 5,2007
              
              
              2006Per
                  Share
              
              
              
              
              
              Per
                  ShareShares
              
              
              Amount
              
              
              Shares
              
              
              AmountBasic
                  EPS
              
              
              12,339
              
              
              $
              0.08
              
              
              
              12,622
              
              
              $
              0.05Effect
                  of dilutive stock options
              
              
              308
              
              
              
              -
              
              
              
              17
              
              
              
              -Diluted
                  EPS
              
              
              12,647
              
              
              $
              0.08
              
              
              
              12,639
              
              
              $
              0.05







6.
            Treasury
                Stock





On
      March
      31, 2006, the Board of Directors of the Company authorized a program to
      repurchase up to 500,000 shares at an aggregate price of no more than $5.0
      million. The Company intends to effect such repurchases in compliance with
      Rule
      10b-18 under the Securities Exchange Act of 1934.  The acquired shares
      will be held in treasury or cancelled.  The Company anticipates
      financing the repurchase program out of working capital. This stock redemption
      program was approved to remain in place and in full force/effect for a period
      of
      18 months.  The Company purchased 47,400 shares at an average price
      per share of $8.50 during the first six months ended July 5, 2007 and 367,815
      shares at an average price per share of $7.83 since the buy back program
      inception.








7.
            Goodwill
                and Long-Lived Assets





Intangible
      assets with definite lives are amortized over their estimated useful
      lives.





Pursuant
      to the
      provisions of SFAS 142, the Company prepares its goodwill impairment testing
      on
      an annual basis, and reflects the results of that testing in its annual
      consolidated financial statements included in its Annual Report on Form
      10-K.  As part of its goodwill impairment testing, the Company reviews
      various factors, such as the market price of the Company’s common stock,
      discounted cash flows from projected earnings and values for comparable
      companies to determine whether impairment exists. Based on our financial results
      and stock price the Company will be performing its annual goodwill impairment
      testing during the third quarter and it is possible that a goodwill impairment
      may result.





11
 *Table
            of Contents*




8.
            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 5,2007
              
              
              2006Interest
                  paid
              
              $
              92
              
              
              $
              671Income
                  taxes paid
              
              $
              (560
              )
              
              $
              89Business
                    combinations accounted foras purchases:Assets
                  acquired
              
              $
              -
              
              
              $
              738








9.
            Litigation







On
      July
      5, 2007, we filed a report on Form 8-K reporting that (i) Stephen E. Pomeroy's
      employment with the Company was terminated on July 3, 2007; (ii) pursuant to
      his
      employment agreement, Stephen Pomeroy was entitled to receive his base salary,
      at the current rate, as well as all other unpaid amounts that were owed to
      him,
      including amounts under our compensation plans and programs, certain business
      expense reimbursements and certain life insurance payments, through July 20,
      2007; and (iii) in connection with his termination of employment, Stephen
      Pomeroy would forfeit restricted stock grants of 99,000 shares of the Company's
      common stock. On July 23, 2007, we received a letter from legal counsel for
      Mr.
      Stephen Pomeroy stating that he disputes the bases for his termination. Mr.
      Stephen Pomeroy's counsel also sent a letter to the Company purporting to give
      a
      "notice of dispute" as provided for in the employment agreement.




The
      company disagrees with Mr. Stephen Pomeroy's assertions and intends to defend
      its position vigorously. If it is subsequently determined that Mr. Stephen
      Pomeroy was not properly terminated, then the company would owe compensation
      to
      Mr. Stephen Pomeroy that would include his full base salary, bonuses, and all
      employee benefits for the balance of his term of employment as in effect
      immediately prior to his termination of employment, plus his legal fees and
      expenses incurred in disputing his termination.




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








10.
            Restructuring
                and Severance Charges








The
      Company recorded during fiscal 2004 a charge for severance in the amount of
      $1.447 million related to the resignation of David B. Pomeroy II as CEO of
      the
      Company.  Mr. David Pomeroy will continue to serve as Chairman of the
      Board of the Company.  Mr. David Pomeroy will continue to receive
      severance payments through January 2009.





12
 *Table
            of Contents*




As
      of
      July 5, 2007, the restructuring and severance charge accrual, consisted of
      the
      following:




(in
                  thousands)
              
              SeveranceAccrual
                  balance at January 5, 2007
              
              $
              160Cash
                  payments
              
              
              (60
              )Accrual
                  balance at April 5, 2007
              
              $
              100Cash
                  payments
              
              
              -Accrual
                  balance at July 5, 2007
              
              $
              100








Also,
      the
      Company recorded a restructuring charge liability in connection with the ARC
      acquisition to eliminate certain duplicative activities and reduced facility
      requirements.  As a result, approximately $6.4 million of costs
      were recorded as part of the liabilities assumed in the ARC acquisition in
      October 2004. The restructuring charge consisted of costs of vacating
      duplicative leased facilities of ARC and severance costs associated with exiting
      activities.  These costs are accounted for under EITF 95-3,
      "Recognition of Liabilities in Connection with Purchase Business Combinations."
      These costs were recognized as a liability assumed in the purchase business
      combination and included in the allocation of the cost to acquire ARC. Changes
      to the estimates primarily for acquired leases included in the currently
      approved plans of restructuring through July 23, 2005 were recorded as an
      increase or decrease in goodwill, with any increases in estimates thereafter
      charged to operations.




(in
                  thousands)
              
              Facility
                consolidationLiability
                  balance at January 5, 2007
              
              $
              3,425Cash
                  payments
              
              
              (278
              )Liability
                  balance at April 5, 2007
              
              $
              3,147Cash
                  payments
              
              
              (280
              )Liability
                  balance at July 5, 2007
              
              $
              2,867


13
 *Table
            of Contents*




**Item
      2-Management’sDiscussion 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.


14
 *Table
            of Contents*





**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 product
      and service revenues:





Net
                  Product and Service Revenues
              
              
              Net
                  Product and Service RevenuesFinancial
                  Results
              
              For
                  the Three Months Ended July 5,
              
              
              For
                  the Six Months Ended July 5,2007
              
              
              %
                  of
                Revenues
              
              
              2006
              
              
              %
                  of
                Revenues
              
              
              2007
              
              
              %
                  of
                Revenues
              
              
              2006
              
              
              %
                  of
                RevenuesNet
                  product and service revenues:Product
              
              $
              91,599
              
              
              
              60.7
              %
              
              $
              92,081
              
              
              
              56.1
              %
              
              $
              183,810
              
              
              
              61.6
              %
              
              $
              180,958
              
              
              
              57.5
              %Service
              
              
              59,228
              
              
              
              39.3
              %
              
              
              72,037
              
              
              
              43.9
              %
              
              
              114,801
              
              
              
              38.4
              %
              
              
              133,852
              
              
              
              42.5
              %Total
                  revenues
              
              
              150,827
              
              
              
              100.0
              %
              
              
              164,118
              
              
              
              100.0
              %
              
              
              298,611
              
              
              
              100.0
              %
              
              
              314,810
              
              
              
              100.0
              %Gross
                  profitProduct
              
              
              7,555
              
              
              
              5.0
              %
              
              
              7,759
              
              
              
              4.7
              %
              
              
              15,699
              
              
              
              5.3
              %
              
              
              14,651
              
              
              
              4.7
              %Service
              
              
              14,468
              
              
              
              9.6
              %
              
              
              17,024
              
              
              
              10.4
              %
              
              
              30,027
              
              
              
              10.1
              %
              
              
              31,168
              
              
              
              9.9
              %Total
                  gross profit
              
              
              22,023
              
              
              
              14.6
              %
              
              
              24,783
              
              
              
              15.1
              %
              
              
              45,726
              
              
              
              15.3
              %
              
              
              45,819
              
              
              
              14.6
              %Gross
                  profit %Product
                  %
              
              
              8.2
              %
              
              
              
              
              
              
              8.4
              %
              
              
              
              
              
              
              8.5
              %
              
              
              
              
              
              
              8.1
              %Service
                  %
              
              
              24.4
              %
              
              
              
              
              
              
              23.6
              %
              
              
              
              
              
              
              26.2
              %
              
              
              
              
              
              
              23.3
              %Operating
                  expenses:Selling,
                  general and administrative
              
              
              22,285
              
              
              
              14.8
              %
              
              
              20,157
              
              
              
              12.3
              %
              
              
              42,026
              
              
              
              14.1
              %
              
              
              41,776
              
              
              
              13.3
              %Depreciation
                  and amortization
              
              
              1,149
              
              
              
              0.8
              %
              
              
              1,235
              
              
              
              0.8
              %
              
              
              2,269
              
              
              
              0.8
              %
              
              
              2,569
              
              
              
              0.8
              %Total
                  operating expenses
              
              
              23,434
              
              
              
              15.5
              %
              
              
              21,392
              
              
              
              13.0
              %
              
              
              44,295
              
              
              
              14.8
              %
              
              
              44,345
              
              
              
              14.1
              %Income
                  from operations
              
              
              (1,411
              )
              
              
              -0.9
              %
              
              
              3,391
              
              
              
              2.1
              %
              
              
              1,431
              
              
              
              0.5
              %
              
              
              1,474
              
              
              
              0.5
              %Interest
                  income
              
              
              220
              
              
              
              0.1
              %
              
              
              161
              
              
              
              0.1
              %
              
              
              530
              
              
              
              0.2
              %
              
              
              308
              
              
              
              0.1
              %Interest
                  expense
              
              
              (130
              )
              
              
              -0.1
              %
              
              
              (323
              )
              
              
              -0.2
              %
              
              
              (269
              )
              
              
              -0.1
              %
              
              
              (779
              )
              
              
              -0.2
              %Interest
                  income (expense), net
              
              
              90
              
              
              
              0.1
              %
              
              
              (162
              )
              
              
              -0.1
              %
              
              
              261
              
              
              
              0.1
              %
              
              
              (471
              )
              
              
              0.0
              %Income
                  before income tax
              
              
              (1,321
              )
              
              
              -0.9
              %
              
              
              3,229
              
              
              
              2.0
              %
              
              
              1,692
              
              
              
              0.6
              %
              
              
              1,003
              
              
              
              0.3
              %Income
                  tax expense (benefit)
              
              
              (468
              )
              
              
              -0.3
              %
              
              
              1,198
              
              
              
              0.7
              %
              
              
              719
              
              
              
              0.2
              %
              
              
              391
              
              
              
              0.1
              %Net
                  income (loss)
              
              $
              (853
              )
              
              
              -0.6
              %
              
              $
              2,031
              
              
              
              1.3
              %
              
              $
              973
              
              
              
              0.3
              %
              
              $
              612
              
              
              
              0.2
              %





15
 *Table
            of Contents*





POMEROY
        IT SOLUTIONS, INC.
 MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF
 FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS
 
 
 **Second
        Quarter 2007 versus Second Quarter 2006**
 
 *Revenues*
 
 Total
        Revenue in the second quarter of fiscal 2007 was $150.8 million compared
        to
        $164.1 million in the second quarter of 2006 a decline of $13.3
        million.
 
 Product
        Revenue:
 Product
        Revenue accounted for $0.5 million of the decline in Total
        Revenue.  Product Revenue was $91.6 million in the second quarter of
        2007.  During the second quarter, approximately 36% of our product
        revenue came from Advanced Technology sales.  Our Advanced Technology
        sales increased by approximately 10% or $3 million compared to the second
        quarter of 2006. This growth was offset by a decline in the sale of Commodity
        Technologies.
 
 Service
        Revenue:
 Service
        Revenue accounted for $12.8 million of the Total Revenue
        decline.  Service Revenue was $59.2 million in the second quarter of
        2007.  The majority of the decline in the second quarter of 2007 was
        the result of a reduction in placements at a large staffing engagement and
        project work that occurred in the second quarter of 2006 that was not repeated
        in the second quarter of 2007.
 
 Staff
        Sourcing revenue accounted for approximately 30% of our Service Revenue in
        the second quarter.  Staff Sourcing revenue declined $5.5 million,
        compared to the second quarter of 2006.  This decline was the result
        of a reduction of $6.3 million in placements at a large staffing
        engagement.  Exclusive of this one engagement Staff Sourcing revenue
        grew approximately 15% or $0.8 million.
 
 OEM
        Warranty revenue was approximately 22% of our Services Revenue in the second
        quarter.  OEM Warranty revenue was down $0.2 million or 1.5% compared
        to the second quarter of 2006.  The OEM Warranty revenue is closely
        linked to our product sales and growth is generally in line with product
        growth.
 
 Outsourcing
        and Project revenue accounted for 48% of Services Revenue in the second
        quarter.  Outsourcing and Project revenue declined $7.1 million
        compared to the second quarter of 2006.  The majority of this decline
        relates to project work that occurred in the second quarter of 2006 and was
        not
        repeated in the second quarter of 2007.
 
 *Gross
        Profit*
 
 Gross
        Profit was $22.0 million in the second quarter of 2007 compared to $24.8
        million
        in the second quarter of 2006.  Gross Profit, as a percentage of
        revenue, was 14.6% in the second quarter of 2007 as compared to 15.1% in
        the
        second quarter of 2006.  The decline in gross profit is primarily due
        to revenue mix with more of the revenue coming from lower margin product
        revenue
        this year (60.7%) versus last year (56.1%).
 
 Product
        Gross Profit:
 Product
        Gross Profit was $7.6 million in the second quarter of 2007 compared to $7.8
        million in the second quarter of 2006.  Gross profit margins were 8.2%
        in the second quarter of 2007 compared to 8.4% in the second quarter of
        2006.  Continuing pricing pressures impacted our Product Gross Profit
        margins.
 
 Service
        Gross Profit:
 Service
        Gross Profit was $14.5 million in the second quarter of 2007 compared to
        $17.0
        million in the second quarter of 2006.  The decline in Service Gross
        Profit of $2.5 million was driven by the decline in Staff Sourcing revenue
        (resulted in approximately $0.9 million decline in Gross Profit) and Outsourcing
        and Project revenue (resulted in approximately $2.1 million decline in Gross
        Profit) offset by improved utilization and productivity.  Service
        margins increased to 24.4% in the second quarter of 2007 from 23.6% in the
        second quarter of 2006 as a result of higher margin sales and steps taken
        to
        improve utilization and productivity.
  16
 *Table
            of Contents*
  POMEROY
        IT SOLUTIONS, INC.
 MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF
 FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS
 
 **Second
        Quarter 2007 versus Second Quarter 2006 (Continued)**
 
 *Operating
        Expenses*
 
 Total
        operating expenses were $23.4 million in the second quarter of 2007 compared
        to
        $21.4 million in the second quarter of 2006.  Operating expenses were
        impacted by $2.8 million in non-routine expenses including payments related
        to
        prior acquisitions; legal, consulting and settlement costs related to
        non-routine corporate matters including the contested Proxy; bad debts and
        others accruals.  The Company did not resolve several of these issues
        until the third quarter and, therefore, expects additional cost associated
        with
        these items in the third quarter.
 
 Expressed
        as a percentage of total net product and service revenues, operating expenses
        increased to 15.5% in the second quarter of 2007 from 13.0% for the second
        quarter of 2006.
 
 *Income
        (Loss) from Operations*
 
 Income
        (loss) from operations was $(1.4) million in the second quarter of 2007 as
        compared to $3.4 million in the second quarter of 2006. The Company's operating
        margin was (0.9%) in the second quarter of 2007 as compared to 2.1% in the
        second quarter of 2006.  This decrease is a result of the decline in
        gross profit and an increase in operating expenses as described
        above.
 
 *Net
        Interest Income (Expense)*
 
 Net
        interest income was $0.1 million during the second quarter of 2007 as compared
        to expense of ($0.2) million during the second quarter of 2006. The increase
        in
        net interest income was a result of decreased borrowings under the Company’s
        credit facility and an increase in interest earned due to cash on
        hand.  Cash on hand has improved due to increased efforts to collect
        accounts receivable and improvements in cash forecasting.
 
 *Income
        Taxes*
 
 The
        Company’s effective income tax rate was 38.0% in the second quarter 2007
        compared to 37.1 % for the second quarter 2006.  This fluctuation was
        principally related to the effect of permanent differences in the calculation
        of
        federal income taxes.  There was an Income Tax benefit of $0.5 million
        during the second quarter 2007 as compared to Income Tax expense of $1.2
        million
        during the second quarter 2006.
 
 *Net
        Income (Loss)*
 
 Net
        income was $(0.9) million in the second quarter of 2007 as compared to $2.0
        million in the second quarter of 2006.  The increase was a result of
        the factors described above.
  17
 *Table
            of Contents*
  POMEROY
        IT SOLUTIONS, INC.
 MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF
 FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS
 
 
 **July
        5, 2007 YTD versus July 5, 2006 YTD**
 
 *Revenues*
 
 Revenue
        in the first six months of 2007 was $298.6 million compared to $314.8 million
        in
        the first six months of 2006 a decline of $16.2 million.
 
 Product
        Revenue:
 Product
        Revenue increased $2.9 million compared to the first six months of 2006,
        growth
        of 1.6%.  Product Revenue was $183.8 million in the first six months
        of 2007.   During the first six months of 2007 approximately 38%
        of our product revenue came from Advanced Technology sales.  Our
        Advanced Technology sales increased by approximately 13% or $8 million compared
        to the first six months of 2006.  This growth was offset by declines
        in sales of Commodity Technologies.
 
 Service
        Revenue:
 Service
        Revenue accounted for $19.1 million of the Total Revenue
        decline.  Service Revenue was $114.8 million for the first six months
        of 2007.  The majority of the decline in the second quarter of 2007
        was the result of a reduction in placements at a large staffing engagement
        and
        project work that occurred in the second quarter of 2006 that was not repeated
        in the second quarter of 2007.
 
 Staff
        Sourcing revenue accounted for approximately 32% of our Service Revenue in
        the first six months of 2007.  Staff Sourcing revenue declined $6.5
        million compared to the second quarter of 2006.  This decline was
        primarily the result of a $5.9 million reduction in Staff Sourcing revenue
        at a
        large staffing engagement.
 
 OEM
        Warranty revenue was approximately 16% of our Services Revenue in the first
        six months of 2007.  Compared to the first six months of 2006,
        Warranty revenue declined $2.5 million as a result of weak first quarter
        results.
 
 Outsourcing
        and Project revenue accounted for 52% of Services Revenue in the first six
        months of 2007.  Outsourcing and Project revenue declined $10.1
        million compared to the first six months of 2006.  The majority of
        this decline relates to project work that occurred during the first six months
        of 2006 and was not repeated in the first six months of 2007.
 
 *Gross
        Profit*
 
 Gross
        Profit was $45.7 million in the first six months of 2007 as compared to $45.8
        million in the first six months of 2006.   Gross profit, as a
        percentage of revenue, increased to 15.3% in the first six months of 2007
        from
        14.6% in the first six months of 2006.  The increase in Gross Profit
        margins is the result of gross margin improvements on both product and service
        revenue.
 
 Product
        Gross Profit:
 Product
        Gross Profit was $15.7 million in the first six months of 2007 compared to
        $14.7
        million in the first six months of 2007.  Gross Profit margins
        increased to 8.5% in the first six months of 2007 from 8.1% in the first
        six
        months of 2006.  The improvement in Product Gross Profit and Product
        Gross Profit margins is related to increased sales of higher margin Advanced
        Technology products.
 
 Service
        Gross Profit:
 Service
        Gross Profit was $30.0 million in the first six months of 2007 compared to
        $31.2
        million in the first six months of 2006.  Product Gross Profit was
        adversely impacted by declines in Service Revenue.   Service
        Gross Profit margins increased to 26.2% in the first six months of 2007 from
        23.3% in the first six months of 2006.  Service Gross Profit margins
        improved due to increased utilization and productivity.
  18
 *Table
            of Contents*
  POMEROY
        IT SOLUTIONS, INC.
 MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF
 FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS
 
 
 **July
        5, 2007 YTD versus July 5, 2006 YTD (Continued)**
 
 *Operating
        Expenses*
 
 Operating
        Expenses were $44.3 million in both the first six months of 2007 and
        the first six months of 2006.   For the first six months of 2007,
        Operating Expenses included $2.8 million in non-routine expenses
        including payments related to prior acquisitions; legal, consulting and
        settlement costs related to corporate matters including the contested Proxy;
        bad
        debts and others accruals.  The Company did not resolve several of
        these issues until the third quarter and, therefore, expects additional cost
        associated with these items in the third quarter.
 
 Expressed
        as a percentage of revenues, operating expenses increased to 14.8% in the
        first
        six months of 2007 from 14.1% for the first six months of 2006.
 
 *Income
        (Loss) from Operations*
 
 Income
        from operations was $1.4 million in both the first six months of 2007 and
        the
        first six months of 2006. The Company's operating margin was 0.5% in the
        first
        six months of 2007 as compared to 0.5% in the first six months of
        2006.
 
 *Net
        Interest Income (Expense)*
 
 Net
        interest income was $0.3 million during the first six months of 2007 as compared
        to net interest expense of ($0.5) million during the first six months of
        2006.
        This increase in net interest income was a result of decreased borrowings
        under
        the Company’s credit facility and an increase in interest earned due to cash on
        hand.  Cash on hand has improved due to increased efforts to collect
        accounts receivable and improvements in cash forecasting.
 
 *Income
        Taxes*
 
 The
        Company’s effective income tax rate was 40.4% in the first six months of fiscal
        2007 compared to 39.0% in the first six month of fiscal 2006.  Income
        tax expense was $0.7 million during the first six months of fiscal 2007 as
        compared to $0.4 million during the first six months of fiscal
        2006.
 
 *Net
        Income (Loss)*
 
 Net
        income increased $0.3 million, to $1.0 million in the first six months of
        2007
        from $0.6 million in the first six months of 2006.  The increase was a
        result of the factors described above.





19
 *Table
            of Contents*





POMEROY
      IT SOLUTIONS, INC.


MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF


FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS








LIQUIDITY
      AND CAPITAL RESOURCES





Cash
      used
      by operating activities was $.5 million in the first six months of 2007. Cash
      used in investing activities was $1.7 million, which included $1.7 million
      for
      capital expenditures.  Cash used in financing activities was $.2
      million which included $.4 million for the purchase of treasury stock, and
      was
      offset by $.2 million proceeds from the employee stock purchase
      plan.





The
      amount of cash derived from operating activities will vary based on a number
      of
      business factors which may change from time to time, including terms of
      available financing from vendors, downturns in the Company’s business and/or
      downturns in the businesses of the Company’s customers.  However, a
      growth or decline in services revenue in conjunction with a change in the
      proportion of services revenue to total revenue is an underlying driver of
      operating cash flow during the period of growth because a majority of the
      Company’s service revenue is generated based upon the billings of the Company’s
      technicians.  The cash outlay for these labor/payroll costs is
      incurred bi-weekly with each pay period.  The invoicing for the
      service is generated on various billing cycles as dictated by the customers,
      and
      the respective cash inflow typically follows within 30 to 60 days of invoice
      date, which may be as long as 60 to 120 days from the time the services are
      performed.   This differs from product revenue in that the time
      period between the time that the Company incurs the cost to purchase the
      products and collects the revenue from its customer is typically shorter,
      usually from 0 to 60 days, and the Company primarily orders inventory for a
      particular customer rather than stocking large amounts of
      inventory.  If an increase in service revenue and in the proportion of
      service revenue to total revenue occurs, it may result in a significant decrease
      in cash flows from operating activities during periods of significant growth
      or
      periods of excess technical capacity.  In addition, certain services,
      primarily outsourcing contracts for the Company’s Life Cycle Services, require
      that the Company maintain a specific parts inventory for servicing the customer;
      thus, an increase or decrease in the type of services provided can impact
      inventory levels and operating cash flows.





Cash
      flows consumed by operating activities in first six months of 2007 were $.5
      million as compared to cash flows generated in operating activities of $16.1
      million in the first six months of 2006.  The decrease in cash flows
      from operating activities resulted primarily from timing of payments on accounts
      payable and receivable.   Changes in timing of payables accounted
      for $32 million of the decrease in the operating cash
      flow.  Collection of receivables accounted for an improvement of $9.6
      million in operating cash flow.  Changes in other current liabilities
      accounted for an improvement of $6 million in operating cash flow.





A
      significant part of Pomeroy's inventories are financed by floor plan
      arrangements with third parties. At July 5, 2007, these lines of credit totaled
      $91.5 million, including $80.0 million with GE Commercial Distribution Finance
      (“GECDF”), $8 million with Hewlett-Packard Company and $3.5 million with IBM
      Credit Corporation (“ICC”). Borrowings under the GECDF floor plan arrangements
      are made on thirty-day notes. Borrowings under the ICC floor plan arrangements
      are made on fifteen-day notes. All such borrowings are secured by the related
      inventory. Financing on substantially all of the arrangements is interest free.
      Overall, the average rate on these arrangements is less than 1.0%. The Company
      classifies amounts outstanding under the floor plan arrangements as accounts
      payable.





Effective
      June 25, 2007, the Company amended its Syndicated Credit Facility Agreement
      with
      GE Commercial Distribution Finance. The primary provisions of  the
      Amendment were to:   (i)  to extend the Revolving Credit
      Termination Date from June 25, 2007 to June 25, 2008; (ii)  to
      decrease the total credit facility to $100 million (previously $165 million)
      with a maximum of $80.0 million  (previously $75.0 million) for
      inventory financing and revolver collateralized primarily by accounts
      receivable, of up to $80.0 million (previously $100 million);
      (iii)  to revise the participating lenders so that as amended GECDF
      (also known as the “Agent”) will extend fifty percent of the credit with the
      continuing banks extending credit in the following percentages: National City
      Bank at 18.7%, PNC Bank at 18.7% and Bank of America at 12.6%; and (iv) allows
      for either the Company or Agent, with a certain notice period, to require that
      the continuing Lenders assign their commitments to either the GECDF or another
      Lender.  The credit facility also provides a letter of credit facility
      of $5.0 million.





Interest
      on outstanding borrowings under the credit facility is payable monthly based
      on
      the LIBOR rate and a pricing grid.  As of July 5, 2007, the adjusted
      LIBOR rate was 7.57%.





20
 *Table
            of Contents*





At
      July
      5, 2007 and 2006 the Company did not have a balance outstanding under the credit
      facility although the company had several outstanding letters of credit issued
      to Workers Compensation providers totaling $1.8 million and $1.4 million
      respectively.  At July 5, 2007 the amount available was $51.9
      million.   The credit facility is collateralized by substantially
      all of 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,
      2007 the Company was in compliance with those 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.





On
      March
      31, 2006, the Board of Directors of the Company authorized a program to
      repurchase up to 500,000 shares, at an aggregate price of no more than $5.0
      million. The Company intends to effect such repurchases, in compliance with
      Rule
      10b-18 under the Securities Exchange Act of 1934.  The acquired shares
      will be held in treasury or cancelled.  The Company anticipates
      financing the repurchase program out of working capital. This stock redemption
      program was approved to remain in place and in full force/effect for a period
      of
      18 months.  The Company purchased 47,400 shares at an average price
      per share of $8.50 during the first six months ended July 5, 2007 and 367,815
      shares at an average price per share of $7.83 since the buy back program
      inception.





**Item3-Quantitative and Qualitative Disclosures about Market
      Risk.**





The
      Company is exposed to interest rate risk primarily through its credit facility
      with GECDF.  Due to the Company’s current debt position, the Company
      did not experience a material impact from interest rate risk for the first
      six
      months of fiscal 2007.





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




**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. Based
      on
      such evaluation, our principal executive and principal financial officers have
      concluded that such disclosure controls and procedures were effective, as of
      July 5th, 2007 (the end of the period covered by this Quarterly Report on Form
      10-Q).





**Changes
      in Internal Control Over Financial Reporting**





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


21
 *Table
            of Contents*




PART
      II - OTHERINFORMATION





**Item
      1-LegalProceedings**




On
      July
      5, 2007, we filed a report on Form 8-K reporting that (i) Stephen E. Pomeroy's
      employment with the Company was terminated on July 3, 2007; (ii) pursuant to
      his
      employment agreement, Stephen Pomeroy was entitled to receive his base salary,
      at the current rate, as well as all other unpaid amounts that were owed to
      him,
      including amounts under our compensation plans and programs, certain business
      expense reimbursements and certain life insurance payments, through July 20,
      2007; and (iii) in connection with his termination of employment, Stephen
      Pomeroy would forfeit restricted stock grants of 99,000 shares of the Company's
      common stock. On July 23, 2007, we received a letter from legal counsel for
      Mr.
      Pomeroy stating that he disputes the bases for his termination. Mr. Pomeroy's
      counsel also sent a letter to the Company purporting to give a "notice of
      dispute" as provided for in the employment agreement.




We
      disagree with Mr. Pomeroy's assertions and the Company intends to defend its
      position vigorously. If it is subsequently determined that Mr. Pomeroy was
      not
      properly terminated, then we would owe compensation to Mr. Pomeroy that would
      include his full base salary, bonuses, and all employee benefits for the balance
      of his term of employment as in effect immediately prior to his termination
      of
      employment, plus his legal fees and expenses incurred in disputing his
      termination.




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





**Item
      1A-RiskFactors**




There
      are
      no material changes in the risk factors previously disclosed in our annual
      report on Form 10-K for the fiscal year ended January 5, 2007.





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





(c)
      On
      March 31, 2006, the Board of Directors of the Company authorized a program
      to
      repurchase up to 500,000 shares, at an aggregate price of no more than $5.0
      million. The Company intends to effect such repurchases in compliance with
      Rule
      10b-18 under the Securities Exchange Act of 1934.  The acquired shares
      will be held in treasury or cancelled.  The Company anticipates
      financing the repurchase program out of working capital. This stock redemption
      program was approved to remain in place and in full force/effect for a period
      of
      18 months.


22
 *Table
            of Contents*




Issuer
      Purchases of Equity Securities




Period
              
              (a)
                  Total number of
                shares
                  purchased
              
              
              (b)
                  Average
                price
                  paid pershare
              
              
              (c)
                  Total number
                of
                  shares
                purchased
                  as part
                of
                  publicly
                announced
                  plan
              
              
              (d)
                  Maximum number
                of
                  shares that may yet
                be
                  purchased under the
                plan4/6/06
                  - 5/5/06
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              500,0005/6/06
                  - 6/5/06
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              500,0006/6/06
                  - 7/5/06
              
              
              20,000
              
              
              $
              7.17
              
              
              
              20,000
              
              
              
              480,0007/6/06-8/5/06
              
              
              11,980
              
              
              $
              7.21
              
              
              
              11,980
              
              
              
              468,0208/6/06-9/5/06
              
              
              49,750
              
              
              $
              7.78
              
              
              
              49,750
              
              
              
              418,2709/6/06-10/5/06
              
              
              90,908
              
              
              $
              7.97
              
              
              
              90,908
              
              
              
              327,36210/6/06-11/5/06
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              327,36211/6/06-12/5/06
              
              
              50,399
              
              
              $
              7.42
              
              
              
              50,399
              
              
              
              276,96312/6/06-1/5/07
              
              
              97,378
              
              
              $
              7.63
              
              
              
              97,378
              
              
              
              179,5851/6/07-2/5/07
              
              
              14,000
              
              
              $
              8.00
              
              
              
              14,000
              
              
              
              165,5852/6/07-3/5/07
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              165,5853/6/07-4/5/07
              
              
              28,200
              
              
              $
              8.69
              
              
              
              28,200
              
              
              
              137,3854/6/07
                  - 5/5/07
              
              
              5,200
              
              
              $
              9.28
              
              
              
              5,200
              
              
              
              132,1855/6/07
                  - 6/5/07
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              
              132,1856/6/07
                  - 7/5/07
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              
              132,185Total
              
              
              367,815
              
              
              
              
              
              
              
              367,815
              
              
              
              132,185





During
      the six months ended July 5, 2007, the Company did not pay any cash
      dividends.  The Company has no plans to pay cash dividends in the
      foreseeable future, and the payment of such dividends is restricted under the
      Company’s current credit facility.  Under such credit facility, cash
      dividends and stock redemptions are limited to $5 million annually.





**Item
      3-Defaults Upon SeniorSecurities**




None





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





The
      Company’s 2007 Annual Meeting of Shareholders (the "Annual Meeting") was held on
      July 31, 2007.  Proxies for the Annual Meeting were solicited pursuant
      to Regulation 14A under the Exchange Act.    A revised proxy
      was issued on July 16th, 2007 to shareholders of record as of June 6, 2007
      for
      voting on the following matters:





In
      connection with the July 31, 2007 annual meeting of the Company’s stockholders,
      D.F. King & Co., Inc. received executed proxies from stockholders of record
      as of the close of business on June 6, 2007.  The total number of
      issued and outstanding shares as of the record date was 12,701,863 shares,
      each
      one vote per share.





The
      following individuals were elected to serve as directors:





Director:
            FOR
            WITHHELDDavid
                B. Pomeroy, II
            7,897,052
            1,923,216Kevin
                G. Gregory
            8,430,988
            1,389,280William
                H. Lomicka
            9,781,695
            38,573Vincent
                D. Rinaldi
            9,701,841
            118,427Debra
                E. Tibey
            9,724,184
            96,084Kenneth
                R. Waters
            9,781,695
            38,573David
                G. Boucher
            9,781,695
            38,573Ronald
                E. Krieg
            9,781,695
            38,573Jonathan
                Starr
            9,743,824
            76,444Richard
                S. Press
            9,778,355
            41,913Michael
                A. Ruffolo
            9,778,905
            41,363


23
 *Table
            of Contents*




These
      eleven directors that were nominated to the Company’s Board of Directors will
      serve until the 2008 Annual General Meeting of Shareholders.





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





For
            9,782,665Against
            35,538Abstain
            2,065








As
      previously reported by the Company in its Form 8-K and Supplement to its Proxy
      Statement, both filed on July 16, 2007, the Company entered into a Settlement
      Agreement on July 12, 2007 with Flagg Street Capital LLC, Flagg Street Partners
      LP, Flagg Street Partners Qualified LP, Flagg Street Offshore LP, Jonathon
      Starr, Michael A, Ruffolo, and Richard S. Press.  The settlement
      Agreement settled the proxy contest between the Company and Flagg Street in
      connection with the Company’s 2007 Annual Meeting of Stockholders.





**Item
      5-OtherInformation**




None





**Item
      6-Exhibits**





(a)
            Exhibits




10.1
              2007
                  Compensation Plan of Kevin Gregory, dated May 22, 2007, incorporated
                  by
                  reference to Exhibit 10.(iii)(o)(2) to the Company’s Form 8-K filed May
                  29, 2007.10.2
              Amendment
                  No. 4 to Amended and Restated Credit Facilities Agreement, incorporated
                  by
                  reference to Exhibit 10.(i)(mm)(i) to the Company’s Form 8-K filed June
                  29,2007.10.3
              Settlement
                  Agreement, dated July 12,2007, by and among Flagg Street Capital
                  LLC,
                  Flagg Street Partners LP, Flagg Street Partners Qualified LP, Flagg
                  Street
                  Offshore, LP, Jonathan Starr (collectively, “Flagg Street”), Michael A.
                  Ruffolo, Richard S. Press and the Company, incorporated by reference
                  to
                  Exhibit 99.1 to the Company’s Form 8-K filed July 13,
                  2007.31.1
              Section
                  302 CEO Certification31.2
              Section
                  302 CFO Certification32.1
              Section
                  906 CEO Certification32.2
              Section
                  906 CFO Certification




24
 *Table
            of Contents*





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 14, 2007
            
            By:  /s/
                Kevin G. GregoryKevin
                G. GregoryPresident,
                Chief Executive Officer and Chief Financial Officer




25