FORM
10-Q





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549








(Mark
One)


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





For the
quarterly period ended April 5, 2008





OR





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





For the
transition period
from              to





Commission
file number 0-20022





POMEROY
IT SOLUTIONS, INC.


(Exact
name of registrant as specified in its charter)





DELAWARE


31-1227808


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





1020
Petersburg Road, Hebron, KY 41048


(Address
of principal executive offices)





(859)
586-0600


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such requirements for the
past 90 days.





YES  S  NO  £





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





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





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





YES £  NO
S





The
number of shares of common stock outstanding as of April 5, 2008 was
11,994,109.












POMEROY
IT SOLUTIONS, INC.


TABLE OF CONTENTS




Part
      I.
            Financial
      InformationItem
      1.
            Financial
      Statements:
            PageConsolidated Balance Sheets as
      of  April  5,  2008 and January 5,
      2008
            3Consolidated Statements of Operations for the Three Months
      Ended April 5, 2008 and 2007
            5Consolidated Statements of Comprehensive Income (Loss) for
      the Three Months Ended  April 5, 2008 and
    2007
            6Consolidated Statements of Cash Flows for the Three Months
      Ended April 5, 2008 and  2007
            7Notes to Consolidated Financial
    Statements
            8Item
      2.
            Management's Discussion and Analysis of Financial
      Condition and Results of Operations
            16Item
      3.
            Quantitative and Qualitative Disclosure about Market
      Risk
            23Item
      4.
            Controls and Procedures
            23Part
      II.Other
      InformationItem
      1.
            Legal Proceedings
            24Item
      1A.
            Risk Factors
            24Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            25Item
      3.
            Defaults Upon Senior Securities
            25Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            25Item
      5.
            Other Information
            26Item
      6.
            Exhibits
            27SIGNATURE
            
            27


Table of Contents




PART
I. FINANCIAL INFORMATION


ITEM
1. FINANACIAL STATEMENTS





POMEROYIT SOLUTIONS,
INC.


CONSOLIDATED
BALANCESHEETS


(UNAUDITED)





(in
      thousands)April 5,
            
            
            January 5,2008
            
            
            2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            1,658
            
            
            $
            13,282Certificates
      of deposit
            
            
            1,121
            
            
            
            1,113Accounts
      receivable:Trade,
      less allowance of $3,067 and $3,522, respectively
            
            
            120,297
            
            
            
            140,167Vendor,
      less allowance of $538 and $562, respectively
            
            
            12,790
            
            
            
            11,352Net
      investment in leases
            
            
            422
            
            
            
            756Other
            
            
            646
            
            
            
            1,288Total
      receivables
            
            
            134,155
            
            
            
            153,563Inventories
            
            
            15,552
            
            
            
            15,811Other
            
            
            10,483
            
            
            
            10,196Total
      current assets
            
            
            162,969
            
            
            
            193,965Equipment
      and leasehold improvements:Furniture,
      fixtures and equipment
            
            
            16,424
            
            
            
            15,180Leasehold
      Improvements
            
            
            7,262
            
            
            
            7,262Total
            
            
            23,686
            
            
            
            22,442Less
      accumulated depreciation
            
            
            13,743
            
            
            
            12,645Net
      equipment and leasehold improvements
            
            
            9,943
            
            
            
            9,797Intangible
      assets, net
            
            
            1,874
            
            
            
            2,017Other
      assets
            
            
            909
            
            
            
            805Total
      assets
            
            $
            175,695
            
            
            $
            206,584





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




3
 Table of Contents




POMEROY
IT SOLUTIONS, INC.
 CONSOLIDATED
BALANCE SHEETS
 (UNAUDITED)
 
 (in
      thousands)April 5,
              
              
              January 5,2008
              
              
              2008LIABILITIES
      AND EQUITYCurrent
      Liabilities:Accounts
      payable:Floor
      plan financing
              
              $
              14,190
              
              
              $
              26,328Trade
              
              
              42,231
              
              
              
              57,016Total
      accounts payable
              
              
              56,421
              
              
              
              83,344Credit
      facility payable
              
              
              6,919
              
              
              
              -Deferred
      revenue
              
              
              2,093
              
              
              
              1,949Employee
      compensation and benefits
              
              
              6,437
              
              
              
              10,248Accrued
      facility closing cost and severance
              
              
              1,249
              
              
              
              1,678Other
      current liabilities
              
              
              13,513
              
              
              
              15,542Total
      current liabilities
              
              
              86,632
              
              
              
              112,761Accrued
      facility closing cost and severance
              
              
              1,037
              
              
              
              1,056Equity:Preferred
      stock,  $.01 par value; authorized 2,000 shares, (no shares
      issued or outstanding)
              
              
              -
              
              
              
              -Common
      stock, $.01 par value; authorized 20,000 shares, (13,539 and 13,513 shares
      issued, respectively)
              
              
              141
              
              
              
              140Paid
      in capital
              
              
              92,326
              
              
              
              91,399Accumulated
      other comprehensive income
              
              
              12
              
              
              
              20Retained
      earnings
              
              
              9,999
              
              
              
              14,200102,478
              
              
              
              105,759Less
      treasury stock, at cost (1,544 and 1,323 shares,
    respectively)
              
              
              14,452
              
              
              
              12,992Total
      equity
              
              
              88,026
              
              
              
              92,767Total
      liabilities and equity
              
              $
              175,695
              
              
              $
              206,584
  (The
accompanying notes are an integral part of the financial
statements.)
  4
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)





(in
      thousands, except per share data)
            
            Three
      Months EndedApril 5,
            
            
            April 5,2008
            
            
            2007Net
      revenues:Product
            
            $
            81,477
            
            
            $
            92,210Service
            
            
            62,152
            
            
            
            49,783Total
      net revenues
            
            
            143,629
            
            
            
            141,993Cost
      of revenues:Product
            
            
            73,499
            
            
            
            84,280Service
            
            
            54,908
            
            
            
            40,472Total
      cost of revenues
            
            
            128,407
            
            
            
            124,752Gross
      profit
            
            
            15,222
            
            
            
            17,241Operating
      expenses:Selling,
      general and administrative
            
            
            18,138
            
            
            
            13,280Depreciation
      and amortization
            
            
            1,216
            
            
            
            1,120Total
      operating expenses
            
            
            19,354
            
            
            
            14,400Income
      (loss) from operations
            
            
            (4,132
            )
            
            
            2,841Interest
      income
            
            
            85
            
            
            
            310Interest
      expense
            
            
            (155
            )
            
            
            (138
            )Interest
      income (expense)
            
            
            (70
            )
            
            
            172Income
      (loss) before income tax
            
            
            (4,202
            )
            
            
            3,013Income
      tax expense
            
            
            -
            
            
            
            1,188Net
      income (loss)
            
            $
            (4,202
            )
            
            $
            1,825Weighted
      average shares outstanding:Basic
            
            
            12,061
            
            
            
            12,349Diluted
      (1)
            
            
            12,061
            
            
            
            12,604Earnings
      (loss) per common share:Basic
            
            $
            (0.35
            )
            
            $
            0.15Diluted
      (1)
            
            $
            (0.35
            )
            
            $
            0.14





(1)
Dilutive loss per common share for the 3 months ended April 5, 2008 would have
been anti-dilutive if the number of weighted average shares outstanding were
adjusted to reflect the dilutive effect of outstanding stock options and
unearned restricted shares.





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


5
 Table of Contents


POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVEINCOME (LOSS)


(UNAUDITED)





(in
      thousands)
            
            Three
      Months EndedApril 5,
            
            
            April 5,2008
            
            
            2007Net
      Income (loss)
            
            $
            (4,202
            )
            
            $
            1,825Other
      comprehensive (loss):Foreign
      currency translation adjustment
            
            
            (8
            )
            
            
            (82
            )Comprehensive
      Income (loss)
            
            $
            (4,210
            )
            
            $
            1,743





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


6
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASHFLOWS


(UNAUDITED)





(in
      thousands)Three
      Months EndedCash
      Flows from Operating Activities:
            
            April 5,
      2008
            
            
            April 5,
      2007Net
      income (loss)
            
            $
            (4,202
            )
            
            $
            1,825Adjustments
      to reconcile net income (loss) to net cash flows from (used in) operating
      activities:Depreciation
      and amortization
            
            
            1,250
            
            
            
            1,336Stock
      option, restricted stock compensation and employee purchase plan
      expense
            
            
            755
            
            
            
            242Facility
      closing cost and severance
            
            
            581
            
            
            
            -Provision
      for doubtful accounts
            
            
            300
            
            
            
            150Amortization
      of unearned income
            
            
            (2
            )
            
            
            (20
            )Deferred
      income taxes
            
            
            -
            
            
            
            727Loss
      on disposal of fixed assets
            
            
            (2
            )
            
            
            -Changes
      in working capital accounts:Accounts
      receivable
            
            
            18,775
            
            
            
            (1,938
            )Inventories
            
            
            259
            
            
            
            147Other
      current assets
            
            
            (390
            )
            
            
            1,585Net
      investment in leases
            
            
            336
            
            
            
            330Accounts
      payable - floor plan financing
            
            
            (12,138
            )
            
            
            (6,590
            )Accounts
      payable trade
            
            
            (14,785
            )
            
            
            1,073Deferred
      revenue
            
            
            144
            
            
            
            160Income
      tax payable
            
            
            -
            
            
            
            5Employee
      compensation and benefits
            
            
            (3,811
            )
            
            
            2,154Other,
      net
            
            
            (3,112
            )
            
            
            (946
            )Net
      operating activities
            
            
            (16,042
            )
            
            
            240Cash
      Flows used in Investing Activities:Capital
      expenditures
            
            
            (1,244
            )
            
            
            (1,155
            )Purchases
      of certificate of deposits
            
            
            (8
            )
            
            
            (9
            )Net
      investing activities
            
            
            (1,252
            )
            
            
            (1,164
            )Cash
      Flows from Financing Activities:Increase
      in short-term debt, net
            
            
            6,919
            
            
            
            -Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            7Purchase
      of treasury stock
            
            
            (1,413
            )
            
            
            (357
            )Proceeds
      from issuance of common shares for employee stock purchase
      plan
            
            
            172
            
            
            
            146Net
      financing activities
            
            
            5,678
            
            
            
            (204
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            (8
            )
            
            
            (81
            )Decrease
      in cash and cash equivalents
            
            
            (11,624
            )
            
            
            (1,209
            )Cash
      and cash equivalents:Beginning
      of period
            
            
            13,282
            
            
            
            13,562End
      of period
            
            $
            1,658
            
            
            $
            12,353





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


7
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTESTO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)






1.
            Basis
      of Presentation





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





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





The
amounts from the first quarter of fiscal 2007 have been reclassified in the
consolidated financial statements to conform to the current period
presentation.  The reclassified amounts include cost of revenues and
operating expenses.  In the Company’s 10K for the 2007 year the
historical financial statements were revised to reclassify revenue and cost
related to the sale of third party manufacture warranty and service
agreements.  Below is the first quarter of fiscal 2007, as previously
reported in the Company’s 10K for 2007 fiscal year and the first quarter of
2007, after the reclassifications to conform to the current period
presentation.





(in
      thousands)
            
            For
      The Three Months Ended April 5, 2007As
      Previously Reported
            
            
            As
              RestatedNet
      revenues
            
            $
            141,993
            
            
            $
            141,993Cost
      of revenues
            
            
            118,291
            
            
            
            124,752Gross
      profit
            
            
            23,702
            
            
            
            17,241Operating
      expenses
            
            
            20,861
            
            
            
            14,400Income  from
      operations
            
            
            2,841
            
            
            
            2,841Net
      Interest - income
            
            
            172
            
            
            
            172Income
      taxes
            
            
            1,188
            
            
            
            1,188Net
      Income
            
            $
            1,825
            
            
            $
            1,825


8
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





2.
            Recent
      Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (“SFAS 157”).  SFAS 157 establishes a framework for measuring
fair value, and expands disclosure about such fair value measurements. 
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. In February of 2008, the FASB issued FASB
Staff position 157-2 which delays the effective date of SFAS157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008. We determined there was no impact from the adoption of SFAS No. 157 on
our consolidated financial statement and note disclosures.





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





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





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





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” an Amendment of ARB No. 51,
“Consolidated Financial Statements.” SFAS 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. This statement is
effective as of the beginning of an entity’s first fiscal year that begins after
December 15, 2008.   The Company has determined there should
be no impact on its financial statements by adopting SFAS No.
160.


9
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)






3.
            Cash
      and Short-Term Borrowings





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





Effective
April 15, 2008, the Credit Facility was amended.  The primary changes made
to the Credit Facility by the  amendment are as follows:  (i) 
decrease in the total Credit Facility from $100 million to $68.7 million with a
maximum of $68.7 million (previously $80.0 million) available under the floor
plan loan facility and the revolving loan, both of which are collateralized
primarily by the Company’s accounts receivable up to a maximum of $68.7 million
(previously $80 Million); (ii) memorialize the departure of certain lenders from
the Credit Facility and the assignment of their respective commitments under the
Credit Facility to the remaining lenders, GECDF and National City Bank, and
(iii) revise the tangible net worth covenant on the last day of each fiscal
quarter to  be no less than  $70 million (previously $85.4
million).  The Credit Facility allows for either the Company or GECDF,
in its capacity as agent for the lenders, to require participating lenders to
assign their respective commitments under the Credit Facility to either GECDF or
another participating lender.  In accordance with the amendment to the
Credit Facility, GECDF is extending 72.78% of the credit to the Company and
National City Bank is extending 27.22% of the credit to the
Company.





A
significant part of the Company’s inventory is financed under the floor plan
loan facility provided under the Credit Facility.  In addition, the Company
also finances certain inventory under a separate line of credit with IBM Credit
Corporation (“ICC”).  At April 5, 2008, the Company’s aggregate line of
credit for financing inventory totaled $91.5 million, including $80.0 million
under the Credit Facility and $3.5 million with ICC.   Borrowings
under the Credit Facility floor plan loan facility are made on 30 day notes.
Borrowings under the ICC floor plan arrangement are made on 15 day notes. All
such borrowings by the Company are secured by the related inventory. Financing
on substantially all the advances made under either of these floor plan
arrangements is interest free. The Company classifies amounts outstanding under
the Credit Facility and ICC floor plan arrangements as accounts payable.
 As noted above, the amendment to the Credit Facility that was made
effective on April 15, 2008, decreased the availability under the floor plan
loan facility from a maximum of $80.0 million to a maximum of $68.7
million.





As of
April 5, 2008 the balance outstanding under the Credit Facility was $6.9
million. As of January 5, 2008, the Company had no outstanding balance under the
Credit Facility.  At April 5, 2008 and January 5, 2008 the amounts
available under the Credit Facility were $49.7 million and $56.7 million,
respectively.  Interest on outstanding borrowings under the Credit Facility
is payable monthly based on the LIBOR rate and a pricing grid.  As of April
5, 2008 and January 5, 2008, the adjusted LIBOR rate was 4.95% and 7.57%
respectively.


10
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








The terms
of the Credit Facility subject the Company to certain financial covenants which
include (i) maintaining a minimum level of tangible net worth (as mentioned
above, the amendment to the Credit Facility that was made effective on April 15,
2008, decreased the tangible net worth covenant on the last day of each fiscal
quarter from $85.4 million to $70 million), (ii) maintaining a minimum fixed
charge coverage ratio, (iii) restricting the level of funded indebtedness to
EBITDA, and (iv) restricting the amount of net loss after tax.  For the
fiscal quarter ended April 5, 2008, the Company was in violation of its
financial covenants.  The Company requested and received a waiver for the
breach of the tangible net worth covenant, the fixed charge coverage ratio
covenant and the amount of net loss after tax covenant.  The Company also
violated the level of funded indebtedness to EBITDA covenant as of April 5,
2008.  The Company has requested and expects to receive a wavier for
violation of this covenant.  At January 5, 2008, the Company was in
violation of its financial covenants; the Company requested and has received a
waiver.





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








4.
            Stock-Based
      Compensation





During
the three months ended April 5, 2008, the Company awarded 55,175 shares of
restricted common stock, which vest over a 4-year period.  Restricted
stock awards are valued at the closing market value of the Company’s common
stock on the date of the grant, and the total value of the award is recognized
as expense ratably over the vesting period. Total compensation expense
recognized for unvested shares was $492 thousand and $116 thousand for the three
months ended April 5, 2008 and April 5, 2007, respectively.  As of
April 5, 2008, the total amount of unrecognized compensation expense related to
nonvested restricted stock awards was approximately $2.5 million, which is
expected to be recognized over a weighted-average period of approximately 2.8
years.






Weighted
      averageShares
            
            
            fair
      value at grant dateRestricted
      common stock outstanding January 6, 2008
            
            
            338,614
            
            
            $
            9.21Granted
            
            
            55,175
            
            
            
            6.09Vested
            
            
            (25,938
            )
            
            
            8.20Forfeitures
            
            
            (2,500
            )
            
            
            7.08Restricted
      common stock outstanding April  5, 2008
            
            
            365,351
            
            
            $
            9.83








For the
three months ended April 5, 2008 and April 5, 2007, the Company recognized
approximately $232 thousand and $112 thousand respectively, in expense related
to stock options. The approximate unamortized stock option compensation as of
April 5, 2008, which will be recorded as expense in future periods, is $872
thousand. The weighted average time over which this expense will be recorded is
approximately 28.3 months.





For
the three months ended April 5, 2008 and April 5, 2007, the Company recognized
approximately $31 thousand and $14 thousand respectively, in expense related to
the employee stock purchase plan due to it being compensatory under FAS
123R.


11
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








5.
            Earnings
      per Common Share





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





(in
      thousands, except per share data)Three
      Months Ended April 5,2008
            
            
            2007Per
      Share
            
            
            
            
            
            Per
      ShareShares
            
            
            Amount
            
            
            Shares
            
            
            AmountBasic
      EPS
            
            
            12,061
            
            
            $
            (0.35
            )
            
            
            12,349
            
            
            $
            0.15Effect
      of dilutive stock options and unvested restricted shares
            
            
            -
            *
            
            
            -
            *
            
            
            255
            
            
            
            (0.01
            )Diluted
      EPS
            
            
            12,061
            
            
            $
            (0.35
            )
            
            
            12,604
            
            
            $
            0.14





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






6.
            Treasury
      Stock





On
December 3, 2007, the Board of Directors of the Company authorized a program to
repurchase up to $5.0 million of its outstanding common stock.  The
Company intends to effect such repurchases, in compliance with Rule 10b-18 under
the Securities Exchange Act of 1934 (“Act”).  The acquired shares will
be held in treasury or cancelled.  The Company anticipates financing
the repurchase program out of working capital and its available credit
facility.  This stock redemption program was approved to remain in
place and in full force/effect through December 5, 2008, or the date on which $5
million in repurchases is completed, whichever comes first.  In
addition, the Board adopted a written trading plan under Rule 10b5-1 of the Act
to facilitate the repurchase of its common stock pursuant to the stock
repurchase program. Rule 10b5-1 allows the Company to purchase its shares at
times when the Company would not ordinarily be in the market because of the
Company’s trading policies or the possession of material non-public information.
To the extent that the $5 million limit has not been reached by December 5,
2008, the Company will remain authorized to repurchase additional shares under
the stock repurchase program following termination of the 10b5-1 plan, without
further announcement, or may adopt further 10b5-1 plans pursuant to Board
authorization.  Under this repurchase plan the Company purchased
222,526 shares at a cost of $1.4 million during the first quarter of 2008. In
addition during the first quarter of fiscal 2008, the Company purchased an
additional 8,416 shares withheld at the election of certain holders of
restricted stock, from the vested portion of restricted stock awards with a
market value approximating the amount of the withholding taxes due from such
restricted stock holders.





During
the first quarter of fiscal 2007, the Company repurchased 42,200 shares of
common stock at a total cost of $357 thousand under its share repurchase program
that expired October 31, 2007.


12
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








7.
            Supplemental
      Cash Flow Disclosures





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




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





(in
      thousands)
            
            Three
      Months Ended April 5,2008
            
            
            2007Interest
      paid
            
            $
            155
            
            
            $
            97Income
      taxes paid
            
            $
            9
            
            
            $
            9








8.
            Litigation





On April 9, 2008, we filed
a report on Form 8-K reporting that our Board of Directors received a letter
from David B. Pomeroy, II, a director of the Company and its largest
stockholder, proposing to acquire, with Charlesbank Equity Fund VI, LP, all of
the outstanding common stock of the Company not owned by him for a price of
$7.05 per share and that the non-binding indication of interest was referred to
a Special Committee for review and consideration.    On May 6,
2008, a purported class action complaint was filed in the Commonwealth of
Kentucky Boone Circuit Court against the Company, each of its directors and two
executive officers.  Charlesbank Equity Fund VI Limited Partnership and
Charlesbank Capital Partners LLC were also named as defendants in the
lawsuit.  The action was brought by Kenneth Hanninen, an alleged Pomeroy
shareholder, on behalf of himself and all others similarly situated.  The
complaint alleges, among other things, that the directors and officers of the
Company are in breach of their fiduciary duties to shareholders in connection
with the offer letter that the Company received from Mr. Pomeroy.  The
complaint seeks, among other things, injunctive relief to enjoin the Company,
its directors and named executive officers from consummating the acquisition
proposed by Mr. Pomeroy and Charlesbank Equity Fund VI, LP, along with
attorneys’ fees and costs.





The
Company believes that the allegations in the complaint are without merit and
intend to vigorously defend the Company and its directors and officers in this
matter.





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





9.
            Restructuring
      and Severance Charges





In the
fourth quarter of fiscal 2007 and the first quarter of fiscal 2008, the Company
recorded $355 thousand and $581 thousand respectively, for severance due to the
realignment of the Company’s operations. As of April 5, 2008 the remaining
balance of severance payments is $266 thousand which will be paid out in fiscal
2008.


13
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





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





In 2004
the Company recorded a restructuring charge liability in connection with the
merger with the Alternative Resources Corporation (“ARC”) acquisition to
eliminate certain duplicative activities and reduce facility
requirements.  As a result, approximately $6.4 million of costs
were recorded as part of the liabilities assumed in the ARC acquisition in
October 2004. The restructuring charge consisted of costs of vacating
duplicative leased facilities of ARC and severance costs associated with exiting
activities.  These costs are accounted for under EITF 95-3,
"Recognition of Liabilities in Connection with Purchase Business Combinations."
These costs were recognized as a liability assumed in the purchase business
combination and included in the allocation of the cost to acquire ARC. As of
April 5, 2008 the remaining balance of the restructuring liability was $1.97
million.





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




(in
      thousands)
            
            TotalLiability
      balance at January 6, 2007
            
            $
            3,599Cash
      payments and write offs
            
            
            (1,220
            )Charges
      accrued
            
            
            355Liability
      balance at January 5, 2008
            
            $
            2,734Cash
      payments and write offs
            
            
            (1,029
            )Charges
      accrued
            
            
            581Liability
      balance at April 5, 2008
            
            $
            2,286






10.
            Income
      Taxes





For the
first quarter of 2008, the Company had no income tax expense or income tax
benefit. During the first quarter of fiscal 2008, the Company increased its tax
valuation allowance by $1.6 million for a total allowance of $16.6 million at
April 5, 2008. The tax valuation allowance is due to the future uncertainty of
the Company’s ability to utilize its deferred tax assets.  For the
first quarter of fiscal 2008, the $1.6 million increase in tax valuation reserve
offset what would have been an income tax benefit; the effective income tax rate
would have been 37.5% prior to the recording of the tax valuation
reserve.  The effective income tax rate for the first quarter of
fiscal 2007 was 39.4%.





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





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





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


14
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








11.
            Asof April 5, 2008 and January 5,
      2008 the other current liabilities consisted of the
      following:





(in
      thousands)Other
      current liabilities:
            
            April 5,
      2008
            
            
            January 5,
      2008Customers
      inventory
            
            $
            2,740.7
            
            
            $
            2,490.6Due
      subcontractors
            
            
            1,230.1
            
            
            
            3,630.8Loss
      contracts accrual
            
            
            1,187.0
            
            
            
            2,093.0Legal
      fees accrual
            
            
            274.7
            
            
            
            1,436.7Over
      billed audit accrual
            
            
            1,126.0
            
            
            
            -Other
      accruals
            
            
            6,954.5
            
            
            
            5,890.9Total
      other current liabilities
            
            $
            13,513.0
            
            
            $
            15,542.0








12.
            Segment
      Information





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





(in
      thousands)Service
      Revenue:
            
            For
      the Three Months Ended April 5,2008
            
            
            2007Technical
      Staffing Services
            
            $
            31.0
            
            
            $
            20.5Infrastructure
      Services
            
            
            31.2
            
            
            
            29.3Total
      Service Revenue
            
            $
            62.2
            
            
            $
            49.8


15
 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.


16
 Table of Contents




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





RESULTS
OF OPERATIONS


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





(in
      thousands)
            
            Net
      Product and Service RevenuesFor
      the Three Months Ended April 5,2008
            
            
            %
      of Revenues
            
            
            
            2007
            
            
            %
      of RevenuesNet
      revenues:Product
            
            $
            81,477
            
            
            
            56.7
            %
            
            
            $
            92,210
            
            
            
            64.9
            %Service
            
            
            62,152
            
            
            
            43.3
            %
            
            
            
            49,783
            
            
            
            35.1
            %Total
      net revenues
            
            
            143,629
            
            
            
            100.0
            %
            
            
            
            141,993
            
            
            
            100.0
            %Gross
      profitProduct
            
            
            7,978
            
            
            
            5.6
            %
            
            
            
            7,930
            
            
            
            5.6
            %Service
            
            
            7,244
            
            
            
            5.0
            %
            
            
            
            9,311
            
            
            
            6.6
            %Total
      gross profit
            
            
            15,222
            
            
            
            10.6
            %
            
            
            
            17,241
            
            
            
            12.2
            %Gross
      profit %Product
      %
            
            
            9.8
            %
            
            
            
            
            
            
            
            8.6
            %Service
      %
            
            
            11.7
            %
            
            
            
            
            
            
            
            18.7
            %Operating
      expenses:Selling,
      general and administrative
            
            
            18,138
            
            
            
            12.6
            %
            
            
            
            13,280
            
            
            
            9.4
            %Depreciation
      and amortization
            
            
            1,216
            
            
            
            0.8
            %
            
            
            
            1,120
            
            
            
            0.8
            %Total
      operating expenses
            
            
            19,354
            
            
            
            13.4
            %
            
            
            
            14,400
            
            
            
            10.2
            %Income
      (loss) from operations
            
            
            (4,132
            )
            
            
            -2.8
            %
            
            
            
            2,841
            
            
            
            2.0
            %Interest
      income
            
            
            85
            
            
            
            0.0
            %
            
            
            
            310
            
            
            
            0.2
            %Interest
      expense
            
            
            (155
            )
            
            
            -0.1
            %
            
            
            
            (138
            )
            
            
            -0.1
            %Net
      interest income (expense)
            
            
            (70
            )
            
            
            -0.1
            %
            
            
            
            172
            
            
            
            0.1
            %Income
      (loss) before income tax
            
            
            (4,202
            )
            
            
            -2.9
            %
            
            
            
            3,013
            
            
            
            2.1
            %Income
      tax expense
            
            
            -
            
            
            
            -
            
            
            
            
            1,188
            
            
            
            0.8
            %Net
      income (loss)
            
            $
            (4,202
            )
            
            
            -2.9
            %
            
            
            $
            1,825
            
            
            
            1.3
            %


17
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








First
Quarter 2008 versus First Quarter 2007





Total Net Revenues:Total
net revenues increased $1.6 million or 1.1% in the first quarter of fiscal 2008
as compared to the first quarter of fiscal 2007.  For the first
quarters of fiscal 2008 and fiscal 2007, the net revenues were $143.6 million
and $142.0 million, respectively.





Product
revenue was $81.5 million and $92.2 million, respectively, for the first
quarters of fiscal 2008 and fiscal 2007. Product revenue decreased $10.7
million, a decrease of 11.6% in the first quarter of fiscal 2008 as compared to
the first quarter of fiscal 2007.  This decrease was due primarily to
the delays of several large customer purchases.




Service
revenue was $62.2 million in the first quarter of fiscal 2008 compared to $49.8
million in the first quarter of fiscal 2007, an increase of $12.4 million or
24.9% from fiscal 2007. The Company groups services revenue into Technical
Staffing and Infrastructure Services. Technical Staffing Services support
clients’ project requirements, ensures regulatory and customer compliance
requirements and promotes success of the staffing
projects.  Infrastructure Services help clients optimize the various
elements of distributed computing environments.  Encompassing the
complete IT lifecycle, these services include desktop and mobile
computing, server and network environments.





Technical
Staffing revenue was $31.0 million and accounted for approximately 49.8% of
total service revenues in the first quarter of fiscal 2008, compared to $20.5
million and 41.1% in for the first quarter of fiscal 2007.  This
increase is primarily the result of recognizing revenue for billings on
subcontractor personnel which historically have been recorded as fee based
services in our vendor management business.  Initially this revenue
has very low incremental margin but as we convert these subcontractors to
Pomeroy resources gross margins improve.





Infrastructure
Service revenue was $31.2 million and $29.3 million, respectively, for the first
three months of fiscal 2008 and 2007. Infrastructure Service revenues were
approximately 50.2% of total service revenues in the first quarter of fiscal
2008, compared to 58.9% for the first quarter of fiscal 2007.  The
increase in revenue is primarily the result of new service engagements started
at the beginning of 2008.





Gross
Profit:  Gross profit was $15.2 million in the first quarter of
fiscal 2008, compared to $17.2 million in the first quarter of 2007. Gross
profit, as a percentage of revenue, was 10.6% in first quarter of fiscal 2008,
compared to 12.2% in the first quarter of fiscal 2007.





The
product gross profit was $8.0 million for the first three months of fiscal
2008, compared to $7.9 million for the same period of fiscal 2007. Product gross
profit as a percentage of product revenue increased to 9.8% in the first quarter
of fiscal 2008, compared to 8.6% for the same period of fiscal 2007. The
increase in product gross margin is due primarily to margin improvements as a
result of the rebates from OEM partner promotional initiatives.





Service
gross profit was $7.2 million for the first three months of fiscal 2008,
compared to $9.3 million in the first three months of fiscal
2007.  The decline in service gross profit of $2.1 million was the
result of reduced utilization and productivity of Infrastructure Services
technical resources.  Service gross profit as a percentage of service
revenue decreased to 11.7% in the first quarter of fiscal 2008, compared to
18.7% for the same period of fiscal 2007.  A decrease of approximately
300 basis points in the service gross profit margin relates to two
factors.  First, the decline in the service gross profit margin
was the result of engagements that generated revenue of approximately $1.4
million during the quarter at zero gross profit.  We are performing on
these contracts until termination in July of fiscal 2008.  Second, the
conversion of Technical Staffing subcontractors' personnel that generated
revenue of approximately $11.9 million during the quarter, that initially had
very low incremental gross profit, but as these resources are converted to
Pomeroy resources, typically after six months, gross profit improves
significantly and gross profit margin should be in the
mid-teens.  The rest of the decline in the service gross
profit margin relates to reduced utilization and productivity of
Infrastructure Service technical resources.


18
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS






Operating
Expenses





Total
operating expenses were $19.4 million in the first quarter of 2008, compared to
$14.4 million in the first quarter of 2007, an increase of $5.0
million.  This increase is primarily driven by an increase of $0.6
million in sales costs related to increase in the sales force headcounts and
commissions; an increase of $1.5 million in costs related to investments in
personnel to support our product and service businesses and investments to
improve customer, vendor and back office support functions; an increase of $0.4
million related to increased professional and outside service provider fees; a
charge of approximately $1.0 million to reserve against the
collection  of amounts over billed  by subcontractors for
years 2005 and 2006, identified as a result of an audit by our largest staffing
customer, the collection of these amounts is uncertain as we no longer do
business with many of these subcontractors;  an increase related to
severance charges of $0.6 million; an increase of $0.3 million related to
additional accruals for loss contracts; an increase $0.3 million for start up
expenses related to new engagements; and an increase of $0.2 million related to
costs for the retirement of directors.


Operating
expenses as a percentage of revenue were 13.4% for the first quarter of fiscal
2008 compared to 10.2% for the first quarter of fiscal 2007.




Income
(Loss) from Operations





Loss from
operations was ($4.1) million in the first quarter of 2008, as compared to
income of $2.8 million for the same period of 2007. This decrease is a result of
the lower service profit margins for the first three months of fiscal 2008 and
the increase in operating expenses, as described above.




Net
Interest Income (Expense)





Net
interest expense was $70 thousand during the first quarter of 2008 as compared
to income of $172 thousand during the first quarter of 2007. During the first
quarter of 2008, the Company had amounts outstanding under its credit facility
due to the timing of payments of accounts payables and payroll.





Income
Tax





For the
first quarter of 2008, the Company had no income tax expense or income tax
benefit. During the first quarter of fiscal 2008, the Company increased its tax
valuation allowance by $1.6 million for a total allowance of $16.6 million at
April 5, 2008. The tax valuation allowance is due to the future uncertainty of
the Company’s ability to utilize its deferred tax assets.  For the
first quarter of fiscal 2008, the $1.6 million increase in tax valuation reserve
offset what would have been an income tax benefit; the effective income tax rate
would have been 37.5% prior to recording the tax valuation
reserve.  The effective income tax rate for the first quarter of
fiscal 2007 was 39.4%.





Net
Income (Loss)





Net loss
was ($4.2) million in the first quarter of 2008 as compared to net income of
$1.8 million in the first quarter of 2007.  The change is 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 $16.0 million for the first three months of 2008.
Cash used in investing activities was $1.3 million, which included $1.2 million
for capital expenditures.  Cash provided from financing activities was
$5.7 million, which includes short-term borrowings of $6.9 million, the issuance
of common shares for $0.2 million, offset by $1.4 million for the purchase of
treasury stock.





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





Cash
flows used  by operating activities in first three months of 2008 was
$16.0 million, compared to cash flows generated by operating activities of $0.2
million, for the same period of 2007.  The decrease in cash flows from
operating activities for the first three months of fiscal 2008, compared to the
first three months of 2007 was due in part to the timing of payments on accounts
payable.  Changes in accounts payables accounted for $26.9 million of
the decrease in the operating cash flow for the first three month of fiscal
2008, compared to $5.5 million decrease for the same period of fiscal
2007.  The liability for employee compensation and benefits decreased
$3.8 million in the first three months of fiscal 2008, compared to an increase
of $2.2 million for the same period of fiscal 2007. Decrease in accounts
receivables during the first quarter was due to increased receipts in the
quarter and lower sales in the first quarter of 2008 compared to the fourth
quarter sales in 2007.





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


20
 Table of Contents


POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








LIQUIDITY
AND CAPITAL RESOURCES





Effective
April 15, 2008, the Credit Facility was amended.  The primary changes made
to the Credit Facility by the  amendment are as follows:  (i) 
decrease in the total Credit Facility from $100 million to $68.7 million with a
maximum of $68.7 million (previously $80.0 million) available under the floor
plan loan facility and the revolving loan, both of which are collateralized
primarily by the Company’s accounts receivable up to a maximum of $68.7 million
(previously $80 Million); (ii) memorialize the departure of certain lenders from
the Credit Facility and the assignment of their respective commitments under the
Credit Facility to the remaining lenders, GECDF and National City Bank; and
(iii) revise the tangible net worth covenant on the last day of each fiscal
quarter to  be no less than  $70 million (previously $85.4
million).  The Credit Facility allows for either the Company or GECDF,
in its capacity as agent for the lenders, to require participating lenders to
assign their respective commitments under the Credit Facility to either GECDF or
another participating lender.  In accordance with the amendment to the
Credit Facility, GECDF is extending 72.78% of the credit to the Company and
National City Bank is extending 27.22% of the credit to the Company





A
significant part of the Company’s inventory is financed under the floor plan
loan facility provided under the Credit Facility.  In addition, the Company
also finances certain inventory under a separate line of credit with IBM Credit
Corporation (“ICC”).  At April 5, 2008, the Company’s aggregate line of
credit for financing inventory totaled $91.5 million, including $80.0 million
under the Credit Facility and $3.5 million with ICC.   Borrowings
under the Credit Facility floor plan loan facility are made on 30 day notes.
Borrowings under the ICC floor plan arrangement are made on 15 day notes. All
such borrowings by the Company are secured by the related inventory. Financing
on substantially all the advances made under either of these floor plan
arrangements is interest free. The Company classifies amounts outstanding under
the Credit Facility and ICC floor plan arrangements as accounts payable.
 As noted above, the amendment to the Credit Facility that was made
effective on April 15, 2008, decreased the availability under the floor plan
loan facility from a maximum of $80.0 million to a maximum of $68.7
million.





As of
April 5, 2008 the balance outstanding under the Credit Facility was $6.9
million. As of January 5, 2008, the Company had no outstanding balance under the
Credit Facility.  At April 5, 2008 and January 5, 2008 the amounts
available under the Credit Facility were $49.7 million and $56.7 million,
respectively.  Interest on outstanding borrowings under the Credit Facility
is payable monthly based on the LIBOR rate and a pricing grid.  As of April
5, 2008 and January 5, 2008, the adjusted LIBOR rate was 4.95% and 7.57%
respectively.





The terms
of the Credit Facility subject the Company to certain financial covenants which
include (i) maintaining a minimum level of tangible net worth (as mentioned
above, the amendment to the Credit Facility that was made effective on April 15,
2008, decreased the tangible net worth covenant on the last day of each fiscal
quarter from $85.4 million to $70 million), (ii) maintaining a minimum fixed
charge coverage ratio, (iii) restricting the level of funded indebtedness to
EBITDA, and (iv) restricting the amount of net loss after tax.  For the
fiscal quarter ended April 5, 2008, the Company was in violation of its
financial covenants.  The Company requested and received a waiver for the
breach of the tangible net worth covenant, the fixed charge coverage ratio
covenant and the amount of net loss after tax covenant.  The Company also
violated the level of funded indebtedness to EBITDA covenant as of April 5,
2008.  The Company has requested and expects to receive a wavier for
violation of this covenant.  At January 5, 2008, the Company was in
violation of its financial covenants; the Company requested and has received a
waiver.





The
Company authorized the purchase of a new ERP software system in October
2007.  It is anticipated that the cost of the system will be
approximately $7.0 million, as of April 5, 2008; the Company has spent $1.9
million, which $0.9 million was spent in the first quarter of fiscal 2008. The
Company began designing the ERP software system in fiscal 2007 and intends to
begin deployment in 2009.  The full amount of the cost will be
incurred over this migration period. 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.


21
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








On
December 3, 2007, the Board of Directors of the Company authorized a program to
repurchase up to $5.0 million of its outstanding common stock.  The
Company intends to effect such repurchases, in compliance with Rule 10b-18 under
the Securities Exchange Act of 1934 (“Act”).  The acquired shares will
be held in treasury or cancelled.  The Company anticipates financing
the repurchase program out of working capital and its available credit
facility.  This stock redemption program was approved to remain in
place and in full force/effect through the later of December 5, 2008, or the
date on which $5 million in repurchases is completed, whichever comes
first.  In addition, the Board adopted a written trading plan under
Rule 10b5-1 of the Act to facilitate the repurchase of its common stock pursuant
to the stock repurchase program. Rule 10b5-1 allows the Company to purchase its
shares at times when the Company would not ordinarily be in the market because
of the Company’s trading policies or the possession of material non-public
information. To the extent that the $5 million limit has not been reached by
December 5, 2008, the Company will remain authorized to repurchase additional
shares under the stock repurchase program following termination of the 10b5-1
plan, without further announcement, or may adopt further 10b5-1 plans pursuant
to Board authorization.  Under this repurchase plan the Company
purchased 222,526 shares at a cost of $1.4 million during the first quarter of
2008. In addition during the first quarter of fiscal 2008, the Company purchased
an additional 8,416 shares withheld at the election of certain holders of
restricted stock, from the vested


portion
of restricted stock awards with a market value approximating the amount of the
withholding taxes due from such restricted stock holders.





During
the first quarter of fiscal 2007, the Company repurchased 42,200 shares of
common stock at a total cost of $357 thousand under its share repurchase program
that expired October 31, 2007.


22
 Table of Contents




Item
3-Quantitativeand Qualitative Disclosures about Market
Risk





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





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





Item
4-Controlsand Procedures





Management’s
Evaluation of Disclosure Controls and Procedures





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





Changes
in Internal Control Over Financial Reporting





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


23
 Table of Contents




PART II -
OTHER INFORMATION






Item
1-LegalProceedings





On April
9, 2008, we filed a report on Form 8-K reporting that our Board of Directors
received a letter from David B. Pomeroy, II, a director of the Company and its
largest stockholder, proposing to acquire, with Charlesbank Equity Fund VI, LP,
all of the outstanding common stock of the Company not owned by him for a price
of $7.05 per share and that the non-binding indication of interest was referred
to a Special Committee for review and consideration.    On May 6,
2008, a purported class action complaint was filed in the Commonwealth of
Kentucky Boone Circuit Court against the Company, each of its directors and two
executive officers.  Charlesbank Equity Fund VI Limited Partnership and
Charlesbank Capital Partners LLC were also named as defendants in the
lawsuit.  The action was brought by Kenneth Hanninen, an alleged Pomeroy
shareholder, on behalf of himself and all others similarly situated.  The
complaint alleges, among other things, that the directors and officers of the
Company are in breach of their fiduciary duties to shareholders in connection
with the offer letter that the Company received from Mr. Pomeroy.  The
complaint seeks, among other things, injunctive relief to enjoin the Company,
its directors and named executive officers from consummating the acquisition
proposed by Mr. Pomeroy and Charlesbank Equity Fund VI, LP, along with
attorneys’ fees and costs.   The Company believes that the allegations
in the complaint are without merit and intend to vigorously defend the Company
and its directors and officers in this matter.





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





Item
1A-RiskFactors





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


24
 Table of Contents




PART II -
OTHER INFORMATION






Item
2-UnregisteredSales of Equity Securities and Use of
Proceeds





a.
            None





b.
            None





c.
            Repurchase
      of Securities





On
December 5, 2007, the Company announced a program to repurchase up to $5.0
million of its outstanding common stock.  The Company intends to
effect such repurchases, in compliance with Rule 10b-18 under the Securities
Exchange Act of 1934 (“Act”).  The acquired shares will be held in
treasury or cancelled.  The Company anticipates financing the
repurchase program out of working capital and its available credit
facility.  This stock redemption program was approved to remain in
place and in full force/effect through the later of December 5, 2008, or the
date on which $5 million in repurchases is completed, whichever comes
first.  In addition, the Board adopted a written trading plan under
Rule 10b5-1 of the Act to facilitate the repurchase of its common stock pursuant
to the stock repurchase program. Rule 10b5-1 allows the Company to purchase its
shares at times when the Company would not ordinarily be in the market because
of the Company’s trading policies or the possession of material non-public
information. To the extent that the $5 million limit has not been reached by
December 5, 2008, the Company will remain authorized to repurchase additional
shares under the stock repurchase program following termination of the 10b5-1
plan, without further announcement, or may adopt further 10b5-1 plans pursuant
to Board authorization.





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




Period
            
            Totalnumber ofsharespurchased
            
            
            Average
      pricepaidper
      share ($)
            
            
            Total
      number ofshares purchasedas
      part ofpublicly announcedplan
      (1)
            
            
            The
      maximumamountthat may yet bepurchased underthe plan (1)($)
      (thousands)December 6,
      2007 - January 5, 2008
            
            
            145,266
            
            
            $
            6.78
            
            
            
            145,266
            
            
            $
            4,015January 6,
      2008 - February 5, 2008
            
            
            113,740
            
            
            $
            6.36
            
            
            
            113,740
            
            
            $
            3,291February 6,
      2008 - March 5, 2008
            
            
            57,734
            
            
            $
            6.67
            
            
            
            57,734
            
            
            $
            2,906March 6,
      2008 - April 5, 2008
            
            
            51,052
            
            
            $
            5.83
            
            
            
            51,052
            
            
            $
            2,609367,792
            
            
            $
            6.50
            
            
            
            367,792
            
            
            $
            2,609








The
Company purchased 222,526 shares at a cost of $1.4 million during the first
quarter of 2008, under the program authorized by the Board of Directors on
December 5, 2007. In addition, during the first quarter of 2008 the Company
purchased 8,416 shares withheld at the election of certain holders of restricted
stock, from the vested portion of restricted stock awards with a market value
approximating the amount of the withholding taxes due from such restricted stock
holders.





During
the first quarter of fiscal 2007, the Company repurchased 42,200 shares of
common stock at a total cost of $357 thousand under its share repurchase program
that expired October 31, 2007.





Item
3-DefaultsUpon Senior Securities





None





Item
4-Submissionof Matters to a Vote of Security
Holders





None


25
 Table of Contents




PART II -
OTHER INFORMATION






Item
5-OtherInformation





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




(in
      thousands)Second
      Quarter of Fiscal 2007
            
            
            
            
            Third
      Quarter of Fiscal 2007As
      Previously Reported
            
            
            As Restated
            
            
            
            
            As
      Previously Reported
            
            
            As RestatedNet
      revenues
            
            $
            138,261
            
            
            $
            138,261
            
            
            Net
      revenues
            
            $
            144,392
            
            
            $
            144,392Cost
      of revenues
            
            
            116,238
            
            
            
            122,653
            
            
            Cost
      of revenues
            
            
            123,662
            
            
            
            129,637Gross
      profit
            
            
            22,023
            
            
            
            15,608
            
            
            Gross
      profit
            
            
            20,730
            
            
            
            14,755Operating
      expenses
            
            
            23,434
            
            
            
            17,019
            
            
            Operating
      expenses
            
            
            124,265
            
            
            
            118,290Loss
      from operations
            
            
            (1,411
            )
            
            
            (1,411
            )
            
            Loss
      from operations
            
            
            (103,535
            )
            
            
            (103,535
            )Net
      Interest - income
            
            
            90
            
            
            
            90
            
            
            Net
      Interest - income
            
            
            70
            
            
            
            70Income
      taxes benefit
            
            
            (468
            )
            
            
            (468
            )
            
            Income
      taxes benefit
            
            
            (11,671
            )
            
            
            (11,671
            )Net
      loss
            
            $
            (853
            )
            
            $
            (853
            )
            
            Net
      loss
            
            $
            (91,794
            )
            
            $
            (91,794
            )Fourth
      Quarter of Fiscal 2007
            
            
            
            
            2007
      Fiscal YearAs
      Previously Reported
            
            
            As Restated
            
            
            
            
            As
      Previously Reported
            
            
            As RestatedNet
      revenues
            
            $
            162,261
            
            
            $
            162,261
            
            
            Net
      revenues
            
            $
            586,907
            
            
            $
            586,907Cost
      of revenues
            
            
            144,731
            
            
            
            152,155
            
            
            Cost
      of revenues
            
            
            502,922
            
            
            
            529,197Gross
      profit
            
            
            17,530
            
            
            
            10,106
            
            
            Gross
      profit
            
            
            83,985
            
            
            
            57,710Operating
      expenses
            
            
            26,691
            
            
            
            19,267
            
            
            Operating
      expenses
            
            
            195,251
            
            
            
            168,976Loss
      from operations
            
            
            (9,161
            )
            
            
            (9,161
            )
            
            Loss
      from operations
            
            
            (111,266
            )
            
            
            (111,266
            )Net
      Interest - income
            
            
            119
            
            
            
            119
            
            
            Net
      Interest - income
            
            
            451
            
            
            
            451Income
      taxes
            
            
            12,369
            
            
            
            12,369
            
            
            Income
      taxes
            
            
            1,418
            
            
            
            1,418Net
      loss
            
            $
            (21,411
            )
            
            $
            (21,411
            )
            
            Net
      loss
            
            $
            (112,233
            )
            
            $
            (112,233
            )








On
September 10, 2007, the Board of Directors of the Company amended Article III,
Section 6 of the Bylaws to permit an outside director to serve as Chairman of
the Board and to provide for selection of the Chairman at the first meeting of
the Board held after the Annual Meeting of Stockholders.  This
amendment was inadvertently omitted from the copy of the Bylaws filed with the
Company’s annual report on Form 10-K and was not reported on a Form
8-K.  A corrected copy of the amended Bylaws is filed with this
quarterly report on Form 10-Q.


26
 Table of Contents




PART II -
OTHER INFORMATION






Item
6-Exhibits





(a)
            Exhibits





3.2
            Bylaws
      of the Company as amended on September 10, 2007 and January 24,
      2008.





10.1
            Amendment
      No. 5 to Amended and Restated Credit Facilities Agreement (incorporated by
      reference to Exhibit 10.1 to the Company’s Form 8-K Report filed on April
      17, 2008).





10.2
            Employment
      Agreement by and between the Company and Keith Blachowiak, (incorporated
      by reference to Exhibit 10.1 to the Company’s Form 8-K Report filed on
      April 30, 2008).





11.1
            Statement
      regarding computation of per share
earnings




31.1
            Section
      302 CEO Certification




31.2
            Section
      302 CFO Certification




32.1
            Section
      906 CEO Certification




32.2
            Section
      906 CFO Certification







SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








POMEROY
      IT SOLUTIONS, INC.(Registrant)Date:
      May 15, 2008
            
            By:  /s/
      Kevin G. GregoryKevin
      G. GregorySenior
      Vice President and CFO






27