FORM
10-Q





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
D.C. 20549







(Mark
One)


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





For the
quarterly period ended October 5, 2008





OR





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





For the
transition period
from              to





Commission
file number 0-20022





POMEROY
IT SOLUTIONS, INC.


(Exact
name of registrant as specified in its charter)





DELAWARE


31-1227808


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





1020
Petersburg Road, Hebron, KY 41048


(Address
of principal executive offices)





(859)
586-0600


(Registrant's
telephone number, including area code)





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





YES  T  NO  £





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





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





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





YES  £  NO  T





The
number of shares of common stock outstanding as of November 6, 2008 was
12,009,478.















POMEROY IT SOLUTIONS, INC.


TABLE OF
CONTENTS


Part
      I.
                                            Financial
      InformationItem
      1.
                                            Financial Statements:
                                            PageConsolidated Balance Sheets as
      of  October  5,  2008 and January 5,
      2008
                                            3Consolidated Statements of Income (Loss) for the Three Months
      Ended October 5, 2008 and 2007
                                            5Consolidated Statements of Comprehensive Income (Loss) for the
      Three Months Ended  October 5,  2008
      and  2007
                                            6Consolidated Statements of Income (Loss) for the Nine Months
      Ended October 5, 2008 and 2007
                                            7Consolidated Statements of Comprehensive Income (Loss) for the
      Nine Months Ended  October 5,  2008
      and  2007
                                            8Consolidated Statements of Cash Flows for the Nine Months Ended
      October 5, 2008 and  2007
                                            9Notes to Consolidated Financial Statements
                                            10Item
      2.
                                            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                                            20Item
      3.
                                            Quantitative and Qualitative Disclosure about Market
      Risk
                                            29Item
      4.
                                            Controls and Procedures
                                            29Part
      II.Other
      InformationItem
      1.
                                            Legal Proceedings
                                            30Item
      1A.
                                            Risk Factors
                                            30Item
      2.
                                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                                            31Item
      3.
                                            Defaults Upon Senior Securities
                                            31Item
      4.
                                            Submission of Matters to a Vote of Security
      Holders
                                            32Item
      5.
                                            Other Information
                                            32Item
      6.
                                            Exhibits
                                            34SIGNATURE
                                            
                                            34




Table of Contents





PART
I. FINANCIAL INFORMATION


ITEM 1. FINANACIAL STATEMENTS





POMEROYIT SOLUTIONS,
INC.


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)


(in
thousands)


October 5,
                          2008
                        
                        
                        January 5,
                          2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        17,286
                        
                        
                        $
                        13,282Certificates
      of deposit
                        
                        
                        1,133
                        
                        
                        
                        1,113Accounts
      receivable:Trade,
      less allowance of $3,290 and $3,522, respectively
                        
                        
                        121,131
                        
                        
                        
                        140,167Vendor,
      less allowance of $1,157 and $562, respectively
                        
                        
                        2,188
                        
                        
                        
                        11,352Net
      investment in leases
                        
                        
                        100
                        
                        
                        
                        756Other
                        
                        
                        911
                        
                        
                        
                        1,288Total
      receivables
                        
                        
                        124,330
                        
                        
                        
                        153,563Inventories
                        
                        
                        9,436
                        
                        
                        
                        15,811Other
                        
                        
                        6,540
                        
                        
                        
                        10,196Total
      current assets
                        
                        
                        158,725
                        
                        
                        
                        193,965Equipment
      and leasehold improvements:Furniture,
      fixtures and equipment
                        
                        
                        16,492
                        
                        
                        
                        15,180Leasehold
      Improvements
                        
                        
                        5,055
                        
                        
                        
                        7,262Total
                        
                        
                        21,547
                        
                        
                        
                        22,442Less
      accumulated depreciation
                        
                        
                        12,045
                        
                        
                        
                        12,645Net
      equipment and leasehold improvements
                        
                        
                        9,502
                        
                        
                        
                        9,797Intangible
      assets, net
                        
                        
                        1,596
                        
                        
                        
                        2,017Other
      assets
                        
                        
                        661
                        
                        
                        
                        805Total
      assets
                        
                        $
                        170,484
                        
                        
                        $
                        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)


October 5,
                      2008
                    
                    
                    January 5,
                      2008LIABILITIES
      AND EQUITYCurrent
      Liabilities:Floor
      plan financing
                    
                    $
                    13,891
                    
                    
                    $
                    26,328Accounts
      payable - trade
                    
                    
                    41,799
                    
                    
                    
                    57,016Deferred
      revenue
                    
                    
                    1,982
                    
                    
                    
                    1,949Employee
      compensation and benefits
                    
                    
                    6,367
                    
                    
                    
                    10,248Accrued
      facility closing cost and severance
                    
                    
                    1,497
                    
                    
                    
                    1,678Other
      current liabilities
                    
                    
                    13,163
                    
                    
                    
                    15,542Total
      current liabilities
                    
                    
                    78,699
                    
                    
                    
                    112,761Accrued
      facility closing cost and severance
                    
                    
                    -
                    
                    
                    
                    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, (13,693 and 13,513 shares
      issued, respectively)
                    
                    
                    142
                    
                    
                    
                    140Paid
      in capital
                    
                    
                    93,553
                    
                    
                    
                    91,399Accumulated
      other comprehensive income
                    
                    
                    25
                    
                    
                    
                    20Retained
      earnings
                    
                    
                    13,307
                    
                    
                    
                    14,200107,027
                    
                    
                    
                    105,759Less
      treasury stock, at cost (1,683 and 1,323 shares,
    respectively)
                    
                    
                    15,242
                    
                    
                    
                    12,992Total
      equity
                    
                    
                    91,785
                    
                    
                    
                    92,767Total
      liabilities and equity
                    
                    $
                    170,484
                    
                    
                    $
                    206,584




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





4
 Table of Contents




POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


(UNAUDITED)





(in
      thousands, except per share data)
                
                Three Months EndedOctober 5,
                  2008
                
                
                October 5,
                  2007Net
      revenues:Product
                
                $
                87,401
                
                
                $
                96,495Service
                
                
                57,806
                
                
                
                47,897Total
      net revenues
                
                
                145,207
                
                
                
                144,392Cost
      of revenues:Product
                
                
                78,878
                
                
                
                87,349Service
                
                
                48,066
                
                
                
                42,113Total
      cost of revenues
                
                
                126,944
                
                
                
                129,462Gross
      profit
                
                
                18,263
                
                
                
                14,930Operating
      expenses:Selling,
      general and administrative
                
                
                15,390
                
                
                
                18,609Depreciation
      and amortization
                
                
                830
                
                
                
                1,367Goodwill
      impairment
                
                
                -
                
                
                
                98,314Total
      operating expenses
                
                
                16,220
                
                
                
                118,290Income
      (loss) from operations
                
                
                2,043
                
                
                
                (103,360
                )Interest
      income
                
                
                47
                
                
                
                169Interest
      expense
                
                
                (272
                )
                
                
                (274
                )Net
      interest expense
                
                
                (225
                )
                
                
                (105
                )Income
      (loss) before income tax
                
                
                1,818
                
                
                
                (103,465
                )Income
      tax expense (benefit)
                
                
                -
                
                
                
                (11,671
                )Net
      income (loss)
                
                $
                1,818
                
                
                $
                (91,794
                )Weighted
      average shares outstanding:Basic
                
                
                11,994
                
                
                
                12,335Diluted
      (1)
                
                
                12,217
                
                
                
                12,335Earnings
      (loss) per common share:Basic
                
                $
                0.15
                
                
                $
                (7.44
                )Diluted
      (1)
                
                $
                0.15
                
                
                $
                (7.44
                )





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








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





5
 Table of Contents




POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





(in
      thousands)
                    
                    Three
      Months EndedOctober
      5,
                    
                    
                    October
      5,2008
                    
                    
                    2007Net
      income (loss)
                    
                    $
                    1,818
                    
                    
                    
                    (91,794
                    )Other
      comprehensive income:Foreign
      currency translation adjustment
                    
                    
                    (14
                    )
                    
                    
                    3Comprehensive
      income (loss)
                    
                    $
                    1,804
                    
                    
                    
                    (91,791
                    )




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





6
 Table of Contents




POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


(UNAUDITED)





(in
      thousands, except per share data)
                                                  
                                                  Nine Months EndedOctober 5,
                                                    2008
                                                  
                                                  
                                                  October 5,
                                                    2007Net
      revenues:Product
                                                  
                                                  $
                                                  261,556
                                                  
                                                  
                                                  $
                                                  280,304Service
                                                  
                                                  
                                                  183,813
                                                  
                                                  
                                                  
                                                  144,342Total
      net revenues
                                                  
                                                  
                                                  445,369
                                                  
                                                  
                                                  
                                                  424,646Cost
      of revenues:Product
                                                  
                                                  
                                                  235,542
                                                  
                                                  
                                                  
                                                  255,624Service
                                                  
                                                  
                                                  156,695
                                                  
                                                  
                                                  
                                                  120,958Total
      cost of revenues
                                                  
                                                  
                                                  392,237
                                                  
                                                  
                                                  
                                                  376,582Gross
      profit
                                                  
                                                  
                                                  53,132
                                                  
                                                  
                                                  
                                                  48,064Operating
      expenses:Selling,
      general and administrative
                                                  
                                                  
                                                  50,066
                                                  
                                                  
                                                  
                                                  47,759Depreciation
      and amortization
                                                  
                                                  
                                                  3,265
                                                  
                                                  
                                                  
                                                  3,636Goodwill
      impairment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  98,314Total
      operating expenses
                                                  
                                                  
                                                  53,331
                                                  
                                                  
                                                  
                                                  149,709Loss
      from operations
                                                  
                                                  
                                                  (199
                                                  )
                                                  
                                                  
                                                  (101,645
                                                  )Interest
      income
                                                  
                                                  
                                                  174
                                                  
                                                  
                                                  
                                                  700Interest
      expense
                                                  
                                                  
                                                  (869
                                                  )
                                                  
                                                  
                                                  (828
                                                  )Net
      interest expense
                                                  
                                                  
                                                  (695
                                                  )
                                                  
                                                  
                                                  (128
                                                  )Loss
      before income tax
                                                  
                                                  
                                                  (894
                                                  )
                                                  
                                                  
                                                  (101,773
                                                  )Income
      tax expense (benefit)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (10,952
                                                  )Net
      loss
                                                  
                                                  $
                                                  (894
                                                  )
                                                  
                                                  $
                                                  (90,821
                                                  )Weighted
      average shares outstanding:Basic
                                                  
                                                  
                                                  12,016
                                                  
                                                  
                                                  
                                                  12,338Diluted
      (1)
                                                  
                                                  
                                                  12,016
                                                  
                                                  
                                                  
                                                  12,338Earnings
      (loss) per common share:Basic
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (7.36
                                                  )Diluted
      (1)
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (7.36
                                                  )





(1)
Dilutive loss per common share for the nine months ended October 5, 2008 and
2007 would have been anti-dilutive if the number of weighted average shares
outstanding were adjusted to reflect the dilutive effect of outstanding stock
options and unearned restricted shares.








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





7
 Table of Contents




POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(UNAUDITED)





(in
      thousands)
                
                Nine Months EndedOctober 5,
                  2008
                
                
                October 5,
                  2007Net
      loss
                
                
                (894
                )
                
                
                (90,821
                )Other
      comprehensive income (loss):Foreign
      currency translation adjustment
                
                
                5
                
                
                
                (75
                )Comprehensive
      income (loss)
                
                
                (889
                )
                
                
                (90,896
                )




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





8
 Table of Contents




POMEROY IT SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)


(in
thousands)


Nine Months EndedCash
      Flows from (used in) Operating Activities:
                    
                    October 5, 2008
                    
                    
                    October 5, 2007Net
      loss
                    
                    
                    (894
                    )
                    
                    
                    (90,821
                    )Adjustments
      to reconcile net loss to net cash flows from (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    3,345
                    
                    
                    
                    3,929Stock
      option, restricted stock compensation and employee purchase plan
      expense
                    
                    
                    1,842
                    
                    
                    
                    468Restructuring
      and severance
                    
                    
                    1,388
                    
                    
                    
                    (921
                    )Goodwill
      impairment
                    
                    
                    -
                    
                    
                    
                    98,314Provision
      for doubtful accounts
                    
                    
                    900
                    
                    
                    
                    3,063Amortization
      of unearned income
                    
                    
                    (5
                    )
                    
                    
                    (31
                    )Deferred
      income taxes
                    
                    
                    -
                    
                    
                    
                    (9,609
                    )Loss
      on disposal of fixed assets
                    
                    
                    -
                    
                    
                    
                    1,828Changes
      in working capital accounts:Accounts
      receivable
                    
                    
                    27,676
                    
                    
                    
                    4,721Inventories
                    
                    
                    6,375
                    
                    
                    
                    (3,436
                    )Other
      current assets
                    
                    
                    3,657
                    
                    
                    
                    (667
                    )Net
      investment in leases
                    
                    
                    661
                    
                    
                    
                    808Accounts
      payable trade
                    
                    
                    (15,217
                    )
                    
                    
                    (7,291
                    )Deferred
      revenue
                    
                    
                    33
                    
                    
                    
                    (296
                    )Employee
      compensation and benefits
                    
                    
                    (3,881
                    )
                    
                    
                    (1,806
                    )Other,
      net
                    
                    
                    (4,857
                    )
                    
                    
                    (4,603
                    )Net
      operating activities
                    
                    
                    21,023
                    
                    
                    
                    (6,350
                    )Cash
      Flows used in Investing Activities:Capital
      expenditures
                    
                    
                    (2,629
                    )
                    
                    
                    (1,898
                    )Purchases
      of certificate of deposits
                    
                    
                    (21
                    )
                    
                    
                    (27
                    )Net
      investing activities
                    
                    
                    (2,650
                    )
                    
                    
                    (1,925
                    )Cash
      Flows from (used in) Financing Activities:Net
      increase (reduction) in floor plan financing
                    
                    
                    (12,437
                    )
                    
                    
                    512Proceeds
      from exercise of stock options
                    
                    
                    -
                    
                    
                    
                    96Purchase
      of treasury stock
                    
                    
                    (2,250
                    )
                    
                    
                    (405
                    )Proceeds
      from issuance of common shares for employee stock purchase
      plan
                    
                    
                    313
                    
                    
                    
                    313Net
      financing activities
                    
                    
                    (14,374
                    )
                    
                    
                    516Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    5
                    
                    
                    
                    (75
                    )Increase
      (decrease) in cash and cash equivalents
                    
                    
                    4,004
                    
                    
                    
                    (7,834
                    )Cash
      and cash equivalents:Beginning
      of period
                    
                    
                    13,282
                    
                    
                    
                    13,562End
      of period
                    
                    $
                    17,286
                    
                    
                    $
                    5,728




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





9
 Table of Contents





POMEROY IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.
            Basis
      of Presentation





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





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





During
fiscal 2008, the Company determined that certain payroll costs previously
classified as operating expenses related to service employees directly
generating revenues. As such, these payroll costs should have been classified as
cost of sales. Also, a portion of the amounts paid under our floor plan
financing arrangement should have been classified as interest expense to reflect
the financing nature of this transaction.  In addition, as our floor
plan financing arrangement is with a third party lender and does provide us with
a modest extension of the credit terms over what we might obtain directly with a
supplier, we have concluded that cash flows under the floor plan financing
arrangement should be classified as a financing activity in our statement of
cash flows. The following information discloses the impact of these corrections
on our statement of operations for the four quarters of fiscal 2007 as well as
for the full fiscal years ended January 5, 2008, 2007 and 2006, and our
statement of cash flows for the full fiscal years ended January 5, 2008, 2007
and 2006. These corrections did not change the Company’s reported net income
(loss) or earnings (loss) per share for any of these periods.





10
 Table of Contents




(in
      thousands)
                            
                            First
      Quarter of Fiscal 2007
                            
                            
                            Second
      Quarter of Fiscal 2007As
      Previously Reported
                            
                            
                            As
      Reported First Quarter Fiscal 2008
                            
                            
                            As
      Restated Third Quarter Fiscal 2008
                            
                            
                            As
      Previously Reported
                            
                            
                            As
      Reported Second Quarter Fiscal 2008
                            
                            
                            As
      Restated Third Quarter Fiscal 2008Net
      revenues
                            
                            $
                            141,993
                            
                            
                            $
                            141,993
                            
                            
                            $
                            141,993
                            
                            
                            $
                            138,261
                            
                            
                            $
                            138,261
                            
                            
                            $
                            138,261Cost
      of revenues
                            
                            
                            118,291
                            
                            
                            
                            124,752
                            
                            
                            
                            124,594
                            
                            
                            
                            116,238
                            
                            
                            
                            122,653
                            
                            
                            
                            122,526Gross
      profit
                            
                            
                            23,702
                            
                            
                            
                            17,241
                            
                            
                            
                            17,399
                            
                            
                            
                            22,023
                            
                            
                            
                            15,608
                            
                            
                            
                            15,735Operating
      expenses
                            
                            
                            20,861
                            
                            
                            
                            14,400
                            
                            
                            
                            14,400
                            
                            
                            
                            23,434
                            
                            
                            
                            17,019
                            
                            
                            
                            17,019Income
      (loss) from operations
                            
                            
                            2,841
                            
                            
                            
                            2,841
                            
                            
                            
                            2,999
                            
                            
                            
                            (1,411
                            )
                            
                            
                            (1,411
                            )
                            
                            
                            (1,284
                            )Net
      Interest income (expense)
                            
                            
                            172
                            
                            
                            
                            172
                            
                            
                            
                            14
                            
                            
                            
                            90
                            
                            
                            
                            90
                            
                            
                            
                            (37
                            )Income
      taxes
                            
                            
                            1,188
                            
                            
                            
                            1,188
                            
                            
                            
                            1,188
                            
                            
                            
                            (468
                            )
                            
                            
                            (468
                            )
                            
                            
                            (468
                            )Net
      income
                            
                            $
                            1,825
                            
                            
                            $
                            1,825
                            
                            
                            $
                            1,825
                            
                            
                            $
                            (853
                            )
                            
                            $
                            (853
                            )
                            
                            $
                            (853
                            )






Third
      Quarter of Fiscal 2007
                          
                          
                          Fourth
      Quarter of Fiscal 2007
                          
                          
                          2007
      Fiscal YearAs
      Previously Reported
                          
                          
                          As
      Restated
                          
                          
                          As
      Previously Reported
                          
                          
                          As
      Restated
                          
                          
                          As
      Previously Reported
                          
                          
                          As
      RestatedNet
      revenues
                          
                          $
                          144,392
                          
                          
                          $
                          144,392
                          
                          
                          $
                          162,261
                          
                          
                          $
                          162,261
                          
                          
                          $
                          586,907
                          
                          
                          $
                          586,907Cost
      of revenues
                          
                          
                          123,662
                          
                          
                          
                          129,462
                          
                          
                          
                          144,731
                          
                          
                          
                          151,981
                          
                          
                          
                          502,922
                          
                          
                          
                          528,563Gross
      profit
                          
                          
                          20,730
                          
                          
                          
                          14,930
                          
                          
                          
                          17,530
                          
                          
                          
                          10,280
                          
                          
                          
                          83,985
                          
                          
                          
                          58,344Operating
      expenses
                          
                          
                          124,265
                          
                          
                          
                          118,290
                          
                          
                          
                          26,691
                          
                          
                          
                          19,267
                          
                          
                          
                          195,251
                          
                          
                          
                          168,976Loss
      from operations
                          
                          
                          (103,535
                          )
                          
                          
                          (103,360
                          )
                          
                          
                          (9,161
                          )
                          
                          
                          (8,987
                          )
                          
                          
                          (111,266
                          )
                          
                          
                          (110,632
                          )Net
      Interest income (expense)
                          
                          
                          70
                          
                          
                          
                          (105
                          )
                          
                          
                          119
                          
                          
                          
                          (55
                          )
                          
                          
                          451
                          
                          
                          
                          (183
                          )Income
      taxes benefit
                          
                          
                          (11,671
                          )
                          
                          
                          (11,671
                          )
                          
                          
                          12,369
                          
                          
                          
                          12,369
                          
                          
                          
                          1,418
                          
                          
                          
                          1,418Net
      loss
                          
                          $
                          (91,794
                          )
                          
                          $
                          (91,794
                          )
                          
                          $
                          (21,411
                          )
                          
                          $
                          (21,411
                          )
                          
                          $
                          (112,233
                          )
                          
                          $
                          (112,233
                          )






2006
      Fiscal Year
                        
                        
                        2005
      Fiscal YearAs
      Previously Reported
                        
                        
                        As
      Restated
                        
                        
                        As
      Previously Reported
                        
                        
                        As
      RestatedNet
      revenues
                        
                        $
                        592,981
                        
                        
                        $
                        592,981
                        
                        
                        $
                        683,670
                        
                        
                        $
                        683,670Cost
      of revenues
                        
                        
                        500,945
                        
                        
                        
                        527,823
                        
                        
                        
                        591,940
                        
                        
                        
                        616,440Gross
      profit
                        
                        
                        92,036
                        
                        
                        
                        65,158
                        
                        
                        
                        91,730
                        
                        
                        
                        67,230Operating
      expenses
                        
                        
                        89,339
                        
                        
                        
                        61,853
                        
                        
                        
                        107,578
                        
                        
                        
                        82,578Income
      (loss) from operations
                        
                        
                        2,697
                        
                        
                        
                        3,305
                        
                        
                        
                        (15,848
                        )
                        
                        
                        (15,348
                        )Net
      Interest income (expense)
                        
                        
                        (567
                        )
                        
                        
                        (1,175
                        )
                        
                        
                        (835
                        )
                        
                        
                        (1,335
                        )Income
      taxes
                        
                        
                        987
                        
                        
                        
                        987
                        
                        
                        
                        (6,021
                        )
                        
                        
                        (6,021
                        )Net
      income (loss)
                        
                        $
                        1,143
                        
                        
                        $
                        1,143
                        
                        
                        $
                        (10,662
                        )
                        
                        $
                        (10,662
                        )






Impact on Cash Flow from Operating
      activities:
                  
                  
                  Impact on Cash Flow from Financing
      activities:2007
      Fiscal Year
                  
                  
                  2006
      Fiscal Year
                  
                  
                  2005
      Fiscal Year
                  
                  
                  2007
      Fiscal Year
                  
                  
                  2006
      Fiscal Year
                  
                  
                  2005
      Fiscal YearAs
      reported
                  
                  $
                  4,294
                  
                  
                  $
                  30,101
                  
                  
                  $
                  (4,428
                  )
                  
                  $
                  (973
                  )
                  
                  $
                  (17,285
                  )
                  
                  $
                  (3,524
                  )Adjustment
      for correction of  floor plan financing
                  
                  
                  (9,102
                  )
                  
                  
                  (1,775
                  )
                  
                  
                  3,943
                  
                  
                  
                  9,102
                  
                  
                  
                  1,775
                  
                  
                  
                  (3,943
                  )Corrected
      Amount
                  
                  $
                  (4,808
                  )
                  
                  $
                  28,326
                  
                  
                  $
                  (485
                  )
                  
                  $
                  8,129
                  
                  
                  $
                  (15,510
                  )
                  
                  $
                  (7,467
                  )
  11
 Table of Contents


POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








2.
            Recent
      Accounting Pronouncements





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





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





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





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





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





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





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





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





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





12
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








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





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





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





3.
            Cash
      and Short-Term Borrowings





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





Effective
April 15, 2008, the Credit Facility was amended.  The primary changes made
to the Credit Facility by this  amendment were as follows:  (i) 
decrease in the total Credit Facility from $100 million to $68.7 million with a
maximum of $68.7 million (previously $80.0 million) available under the floor
plan loan facility and the revolving loan, both of which were 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 extended 72.78% of the credit to the Company and National
City Bank extended 27.22% of the credit to the Company.





13
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








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





A
significant part of the Company’s inventory is financed under the floor plan
loan facility provided under the Credit Facility.  In addition, the Company
also finances certain inventory under a separate line of credit with IBM Credit
Corporation (“ICC”).  At October 5, 2008, the Company’s aggregate line of
credit for financing inventory totaled $88.0 million, including $80.0 million
under the Credit Facility and $8.0 million with ICC.   Borrowings
under the Credit Facility floor plan loan facility are made on 30 day notes.
Borrowings under the ICC floor plan arrangement are made on 15 day notes. All
such borrowings by the Company are secured by the related inventory. Outstanding
amounts under floor plan financing arrangements totaled $14.0 million and $26.3
million as of October 5, 2008 and January 5, 2008, respectively. Financing on
substantially all the advances made under either of these floor plan
arrangements is interest free. Interest was imputed on these borrowings at a
rate of 6.0% per annum for the nine months ended October 5, 2008 and 6.0% per
annum for the nine months ended October 5, 2007.   Related
interest expense totaled $164 thousand and $487 thousand, respectively, for the
three and nine month periods ended October 5, 2008, and totaled $175 thousand
and $460 thousand, respectively, for the three and nine month periods ended
October 5, 2007.





As of
October 5, 2008 and January 5, 2008, there was no balance outstanding under the
Credit Facility other than our floor plan financing.  At October 5, 2008
and January 5, 2008 the amounts available under the Credit Facility were $64.6
million and $56.7 million, respectively.  Interest on outstanding
borrowings under the Credit Facility is payable monthly based on the LIBOR rate
and a pricing grid.  As of October 5, 2008 and January 5, 2008, the
adjusted LIBOR rate was 6.22% and 7.57% respectively.





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





4.
            Stock-Based
      Compensation





During
the nine months ended October 5, 2008, the Company awarded 133,821 shares of
restricted common stock, which vest over a 4-year period.  During the
nine months ended October 5, 2007, the Company awarded 218,253 shares of
restricted common stock. Restricted stock awards are valued at the closing
market value of the Company’s common stock on the date of the grant, and the
total value of the award is recognized as expense ratably over the vesting
period. During the nine months ended October 5, 2008 there were 12,325
restricted shares that were forfeited.  During the nine months ended
October 5, 2007 there were 138,208 restricted shares that were
forfeited.  The forfeitures for the nine months ended October 5, 2007
resulted in the reversal of accrued expense of approximately $0.3
million.  Total compensation expense recognized for unvested shares
was $405 thousand and $139 thousand for the three months ended October 5, 2008
and 2007, respectively.  Total compensation expense recognized for
unvested shares was $1.1 million and $126 thousand for the nine months ended
October 5, 2008 and 2007, respectively.  As of October 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 2.4
years.





14
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








Shares
                      
                      
                      Weighted average
                        fair value at grant dateRestricted
      common stock outstanding January 6, 2008
                      
                      
                      338,614
                      
                      
                      $
                      9.21Granted
                      
                      
                      55,175
                      
                      
                      
                      6.09Vested
                      
                      
                      (25,938
                      )
                      
                      
                      8.20Forfeitures
                      
                      
                      (2,500
                      )
                      
                      
                      7.08Restricted
      common stock outstanding April  5, 2008
                      
                      
                      365,351
                      
                      
                      $
                      9.83Granted
                      
                      
                      78,646
                      
                      
                      
                      5.99Vested
                      
                      
                      (26,400
                      )
                      
                      
                      8.48Forfeitures
                      
                      
                      (9,825
                      )
                      
                      
                      9.22Restricted
      common stock outstanding July  5, 2008
                      
                      
                      407,772
                      
                      
                      $
                      7.72Granted
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (45,500
                      )
                      
                      
                      7.92Forfeitures
                      
                      
                      -
                      
                      
                      
                      -Restricted
      common stock outstanding October  5, 2008
                      
                      
                      362,272
                      
                      
                      $
                      7.31








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





For the
three months ended October 5, 2008 and 2007, the Company recognized
approximately $192 thousand and $81 thousand, respectively, in expense related
to stock options.  For the nine months ended October 5, 2008 and 2007,
the Company recognized approximately $646 thousand and $283 thousand,
respectively, in expense related to stock options. The approximate unamortized
stock option compensation as of October 5, 2008, which will be recorded as
expense in future periods, is $634 thousand. The weighted average time over
which this expense will be recorded is approximately 2.2 years.





For the
three months ended October 5, 2008 and 2007, the Company recognized
approximately $8 thousand and $23 thousand, respectively, in expense related to
the employee stock purchase plan being compensatory under FAS
123R.  For the nine months ended October 5, 2008 and 2007, the Company
recognized approximately $71 thousand and $59 thousand, respectively, in expense
related to the employee stock purchase plan due to it being compensatory under
FAS 123R.





15
 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 October 5,2008
                    
                    
                    2007Shares
                    
                    
                    Per Share
                      Amount
                    
                    
                    Shares
                    
                    
                    Per Share
                      AmountBasic
      EPS
                    
                    
                    11,994
                    
                    
                    $
                    0.15
                    
                    
                    
                    12,335
                    
                    
                    $
                    (7.44
                    )Effect
      of dilutive stock options and unvested restricted shares
                    
                    
                    223
                    
                    
                    
                    -
                    
                    
                    
                    -
                    *
                    
                    
                    -
                    *Diluted
      EPS
                    
                    
                    12,217
                    
                    
                    $
                    0.15
                    
                    
                    
                    12,335
                    
                    
                    $
                    (7.44
                    )





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




Nine Months Ended October
5,2008
                    
                    
                    2007Shares
                    
                    
                    Per Share
                      Amount
                    
                    
                    Shares
                    
                    
                    Per Share
                      AmountBasic
      EPS
                    
                    
                    12,016
                    
                    
                    $
                    (0.07
                    )
                    
                    
                    12,338
                    
                    
                    $
                    (7.36
                    )Effect
      of dilutive stock options and unvested restricted shares
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    -
                    *
                    
                    
                    -
                    *Diluted
      EPS
                    
                    
                    12,016
                    
                    
                    $
                    (0.07
                    )
                    
                    
                    12,338
                    
                    
                    $
                    (7.36
                    )
  *Not
presented herein since effect on loss per common share is anti-dilutive for the
nine months endedOctober 5,
2008 and 2007.




For the
quarter and nine month periods ended October 5, 2008, a total of 1,430,834 stock
options were excluded from the diluted EPS calculations as their effect would
have been anti-dilutive.  For the nine-month period ended October 5,
2008, a total of 362,272 unvested restricted share awards were excluded from the
diluted EPS calculation as their effect would have been
anti-dilutive.





For the
quarter and nine-month periods ended October 5, 2007, a total of 888,912 stock
options and 263,564 unvested restricted share awards were excluded from the
diluted EPS calculation as their effect would have been
anti-dilutive.





6.
            Treasury
      Stock





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





16
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








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





7.
            Supplemental
      Cash Flow Disclosures





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




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





(in
      thousands)
                  
                  Nine
      Months Ended October 5,2008
                  
                  
                  2007Interest
      paid
                  
                  $
                  791
                  
                  
                  $
                  713Income
      taxes paid (refunded)
                  
                  $
                  (3,254
                  )
                  
                  $
                  (560
                  )





8.
            Litigation





On
October 9, 2008, we filed a Form 8-K with the SEC reporting that the purported
class action complaint that was filed in the Commonwealth of Kentucky Boone
Circuit Court against the Company, its directors, two of its executive officers,
and ComVest Investment Partners III LP (“ComVest”), was, upon motions made to
the Court by the various defendants in the case, dismissed without prejudice by
an order entered in the case on October 6, 2008. As previously reported in a
Form 8-K filing made with the SEC on May 9, 2008, and Form 10-Q filings made
with the SEC on May 15, 2008 and August 8, 2008, the complaint, as originally
filed and thereafter amended and restated by the plaintiff, alleged, among other
things, that the directors and officers of the Company were in breach of their
fiduciary duties to shareholders in connection with the letter that the Company
received from Mr. Pomeroy, proposing to acquire, with his financial partner, all
of the outstanding stock of the Company not owned by him.





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





9.
            Restructuring
      and Severance Charges





During
the first nine months of fiscal 2008, the Company recorded $1.4 million for
severance due to the realignment of the Company’s operations. As of October 5,
2008 the remaining balance of severance payments is $114 thousand which will be
paid out in fiscal 2008.





During
fiscal 2004, the Company recorded a charge for severance in the amount of $1.4
million, related to the resignation of David B. Pomeroy II as Chief Executive
Officer. As of October 5, 2008 the remaining balance due to Mr. Pomeroy was $50
thousand, which will be paid out in fiscal 2008.





17
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








In 2004
the Company recorded a restructuring charge liability in connection with the
merger with Alternative Resources Corporation (“ARC”) 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 October 5, 2008 the remaining balance of the
restructuring liability was $1.3 million.





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





(in
      thousands)
                  
                  TotalLiability
      balance at January 5, 2008
                  
                  $
                  2,734Cash
      payments and write offs
                  
                  
                  (1,029
                  )Charges
      accrued
                  
                  
                  581Liability
      balance at April 5, 2008
                  
                  $
                  2,286Cash
      payments and write offs
                  
                  
                  (601
                  )Charges
      accrued
                  
                  
                  308Liability
      balance at July 5, 2008
                  
                  $
                  1,993Cash
      payments and write offs
                  
                  
                  (995
                  )Charges
      accrued
                  
                  
                  499Liability
      balance at October 5, 2008
                  
                  $
                  1,497








10.
            Income
      Taxes





For the
three and nine months ended October 5, 2008, the Company had no income tax
expense or income tax benefit. For the three and nine months ended October 5,
2008, the Company decreased its tax valuation allowance by $690 thousand and
increased its tax valuation allowance by $241 thousand, respectively, for a
total allowance of $15.2 million at October 5, 2008. The tax valuation allowance
is due to the future uncertainty of the Company’s ability to utilize its
deferred tax assets.  For the three and nine months ended October 5,
2008, these adjustments to the tax valuation allowance offset what would have
been an income tax expense and benefit, respectively.  The effective
income tax rate would have been 37.9% for the three month period and 27.0% for
the nine month period, prior to the recording of the tax valuation
reserve.





As of
October 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 October 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.





18
 Table of Contents




POMEROY
IT SOLUTIONS, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








11.
            Segment
      Information





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





(in
thousands)





Service
      Revenue:
                    
                    For
      the Three Months Ended October 5,2008
                    
                    
                    2007Technical
      Staffing Services
                    
                    $
                    28,337
                    
                    
                    $
                    19,919Infrastructure
      Services
                    
                    
                    29,469
                    
                    
                    
                    27,978Total
      Service Revenue
                    
                    
                    57,806
                    
                    
                    $
                    47,897






Service
      Revenue:
                    
                    For
      the Nine Months Ended October 5,2008
                    
                    
                    2007Technical
      Staffing Services
                    
                    $
                    92,401
                    
                    
                    $
                    59,291Infrastructure
      Services
                    
                    $
                    91,412
                    
                    
                    $
                    85,051Total
      Service Revenue
                    
                    $
                    183,813
                    
                    
                    $
                    144,342




19
 Table of Contents




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





Special Cautionary Notice
Regarding Forward-Looking Statements





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




20
 Table of Contents





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





RESULTS
OF OPERATIONS


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




(in
      thousands)
                                                                                                                  
                                                                                                                  Net
      Product and Service Revenues
                                                                                                                  
                                                                                                                  
                                                                                                                  Net
      Product and Service RevenuesFor
      the Three Months Ended October 5,
                                                                                                                  
                                                                                                                  
                                                                                                                  For
      the Nine Months Ended October 5,2008
                                                                                                                  
                                                                                                                  
                                                                                                                  %
      of Revenues
                                                                                                                  
                                                                                                                  
                                                                                                                  2007
                                                                                                                  
                                                                                                                  
                                                                                                                  %
      of Revenues
                                                                                                                  
                                                                                                                  
                                                                                                                  2008
                                                                                                                  
                                                                                                                  
                                                                                                                  %
      of Revenues
                                                                                                                  
                                                                                                                  
                                                                                                                  2007
                                                                                                                  
                                                                                                                  
                                                                                                                  %
      of RevenuesNet
      revenues:Product
                                                                                                                  
                                                                                                                  $
                                                                                                                  87,401
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  60.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  $
                                                                                                                  96,495
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  66.8
                                                                                                                  %
                                                                                                                  
                                                                                                                  $
                                                                                                                  261,556
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  58.7
                                                                                                                  %
                                                                                                                  
                                                                                                                  $
                                                                                                                  280,304
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  66.0
                                                                                                                  %Service
                                                                                                                  
                                                                                                                  
                                                                                                                  57,806
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  39.8
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  47,897
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  33.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  183,813
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  41.3
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  144,342
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  34.0
                                                                                                                  %Total
      net revenues
                                                                                                                  
                                                                                                                  
                                                                                                                  145,207
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  100.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  144,392
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  100.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  445,369
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  100.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  424,646
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  100.0
                                                                                                                  %Gross
      profitProduct
                                                                                                                  
                                                                                                                  
                                                                                                                  8,523
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5.9
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  9,146
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6.3
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  26,014
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5.8
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  24,680
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5.8
                                                                                                                  %Service
                                                                                                                  
                                                                                                                  
                                                                                                                  9,740
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6.7
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  5,784
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  4.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  27,118
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6.1
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  23,384
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5.5
                                                                                                                  %Total
      gross profit
                                                                                                                  
                                                                                                                  
                                                                                                                  18,263
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12.6
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  14,930
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  10.3
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  53,132
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11.9
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  48,064
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11.3
                                                                                                                  %Gross
      profit %Product
      %
                                                                                                                  
                                                                                                                  
                                                                                                                  9.8
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  9.5
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  9.9
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  8.8
                                                                                                                  %Service
      %
                                                                                                                  
                                                                                                                  
                                                                                                                  16.8
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12.1
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  14.8
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  16.2
                                                                                                                  %Operating
      expenses:Selling,
      general and administrative
                                                                                                                  
                                                                                                                  
                                                                                                                  15,390
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  10.6
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  18,609
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12.9
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  50,066
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11.3
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  47,759
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11.2
                                                                                                                  %Depreciation
      and amortization
                                                                                                                  
                                                                                                                  
                                                                                                                  830
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.6
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  1,367
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.9
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  3,265
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.7
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  3,636
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.9
                                                                                                                  %Goodwill
      impairment
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  98,314
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  68.1
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  98,314
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  23.2
                                                                                                                  %Total
      operating expenses
                                                                                                                  
                                                                                                                  
                                                                                                                  16,220
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  11.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  118,290
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  81.9
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  53,331
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  149,709
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  35.3
                                                                                                                  %Income
      (loss) from operations
                                                                                                                  
                                                                                                                  
                                                                                                                  2,043
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1.4
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (103,360
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -71.6
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (199
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (101,645
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -23.9
                                                                                                                  %Interest
      income
                                                                                                                  
                                                                                                                  
                                                                                                                  47
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  169
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.1
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  174
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  700
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.2
                                                                                                                  %Interest
      expense
                                                                                                                  
                                                                                                                  
                                                                                                                  (272
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (274
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (869
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (828
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %Net
      interest expense
                                                                                                                  
                                                                                                                  
                                                                                                                  (225
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (105
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.1
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (695
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (128
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %Income
      (loss) before income tax
                                                                                                                  
                                                                                                                  
                                                                                                                  1,818
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1.3
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (103,465
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -71.7
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (894
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (101,773
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -24.0
                                                                                                                  %Income
      tax expense
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (11,671
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -8.1
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  0.0
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  (10,952
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -2.6
                                                                                                                  %Net
      income (loss)
                                                                                                                  
                                                                                                                  $
                                                                                                                  1,818
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1.3
                                                                                                                  %
                                                                                                                  
                                                                                                                  $
                                                                                                                  (91,794
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -63.6
                                                                                                                  %
                                                                                                                  
                                                                                                                  $
                                                                                                                  (894
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -0.2
                                                                                                                  %
                                                                                                                  
                                                                                                                  $
                                                                                                                  (90,821
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  -21.4
                                                                                                                  %





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





21
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








Third
Quarter 2008 versus Third Quarter 2007





Total Net Revenues:Total
net revenues increased $815 thousand, or 0.6%, in the third quarter of fiscal
2008 as compared to the third quarter of fiscal 2007.  For the third
quarters of fiscal 2008 and fiscal 2007, the net revenues were $145.2 million
and $144.4 million, respectively.





Product
revenue was $87.4 million and $96.5 million, respectively, for the third
quarters of fiscal 2008 and fiscal 2007. Product revenue decreased $9.1 million,
a decrease of 9.4% in the third quarter of fiscal 2008 as compared to the third
quarter of fiscal 2007.  This decrease was primarily due to continued
delays in product purchases and deployments in several financial services and
manufacturing industry accounts as a result of the challenging economic
environment.





Service
revenue was $57.8 million in the third quarter of fiscal 2008 compared to $47.9
million in the third quarter of fiscal 2007, an increase of $9.9 million or
20.7% from fiscal 2007. The Company groups services revenue into Technical
Staffing and Infrastructure Services. Technical Staffing Services support
clients’ project requirements, ensures regulatory and customer compliance
requirements and fulfills interim and permanent staffing requirements of the
staffing projects.  Infrastructure Services helps 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 $28.3 million and accounted for approximately 49.0% of
total service revenues in the third quarter of fiscal 2008, compared to $19.9
million and 41.5% for the third quarter of fiscal 2007.  This increase
is primarily the result of recognizing revenue for the gross billings on
personnel which historically have been recorded as fee based services in our
vendor management business, as the Company has shifted from the use of
subcontractors to employees.





We
experienced a sequential decline of $3.3 million in technical staffing revenue
in the third quarter of fiscal 2008 as compared to the second quarter of fiscal
2008 as a result of the announcement made in June 2008 that we elected to not
renew a technical staffing services contract with a major customer because the
terms they required meant this business would not be profitable for our company.
We anticipate a continued decrease in technical staffing revenue in subsequent
quarters as a result. We estimate technical staffing revenue will range
between $9 million and $11 million in the fourth quarter of fiscal year
2008.





Infrastructure
Service revenue was $29.5 million and accounted for approximately 51.0% of total
service revenues in the third quarter of fiscal 2008, compared to $28.0 million
and 58.5% for the third quarter of fiscal 2007. The increase in revenue is
primarily the result of new service engagements started at the beginning of
2008, and incremental project related services during the quarter.





Gross
Profit:  Gross profit was $18.3 million in the third quarter of
fiscal 2008, compared to $14.9 million in the third quarter of 2007. Gross
profit margin was 12.6% in the third quarter of fiscal 2008, compared to 10.3%
in the third quarter of fiscal 2007.





Product
gross profit was $8.5 million for the third quarter of fiscal 2008, compared to
$9.1 million for the same period of fiscal 2007. The decrease in gross profit
was due to decreased sales previously mentioned.  Product gross profit
margin increased to 9.8% in the third quarter of fiscal 2008, compared to 9.5%
for the same period of fiscal 2007. This increase in gross profit margin is due
to increased rebates associated with improved tracking of OEM partner
promotional initiatives, and targeting more profitable product segments such as
networking, server, storage, and peripheral products.





Service
gross profit was $9.7 million for the third quarter of fiscal 2008,
compared to $5.8 million in the third quarter of fiscal
2007.  Service gross profit margin increased to 16.8% in the
third quarter of fiscal 2008, compared to 12.1% for the same period of fiscal
2007.





Gross
profit from Technical Staffing Services was $3.5 million for the third quarter
of fiscal 2008, compared to $2.9 million for the third quarter of fiscal
2007.  This increase of $0.6 million is primarily due to increased use
of higher-margin Pomeroy employees on staffing projects. Gross profit
margin decreased to 12.3% in the third quarter of fiscal 2008 from 14.3% in the
third quarter of fiscal 2007.  This decrease in gross margin is
primarily the result of recognizing revenue at very low incremental margin for
billings on subcontractor personnel which historically have been recorded as fee
based services in our vendor management business.





22
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








Gross
profit from Infrastructure Services was $6.2 million for the third quarter of
fiscal 2008 compared to $2.9 million for the third quarter of fiscal
2007.  Gross profit margin increased to 21.2% in the third quarter of
fiscal 2008 from 10.5% in the third quarter of fiscal 2007.  This
increase in gross profit and margin is primarily the result of driving higher
utilization of technical personnel, recent personnel reductions, and the
renegotiation and/or termination of certain unprofitable contracts.





Operating
Expenses





Total
operating expenses were $16.2 million in the third quarter of 2008, compared to
$118.3 million in the third quarter of fiscal 2007, a decrease of $102.1
million.  During the third quarter of fiscal 2007, the Company
finalized its annual goodwill valuation and recorded a goodwill impairment
charge of $98.3 million, recorded a charge to write-off certain software assets
and a change in the useful life of other existing software assets of $2.1
million, resolved several outstanding lawsuits, claims, costs for corporate
matters including the contested Proxy solicitation of $0.7 million and recorded
an increase to the trade receivable allowance account of $2.4
million.  These decreases in operating expenses were offset by
increases in operating expenses during the third quarter of fiscal 2008
primarily driven by an increase of $1.0 million in personnel-related costs, and
related selling, general and administrative expenses, to support our product and
service businesses in order to improve customer, vendor and back office support
functions.  We also recorded an increase to the trade receivable
allowance account of $0.3 million and severance charges of $0.7
million.





Operating
expenses as a percentage of revenue were 11.2% for the third quarter of fiscal
2008 compared to 81.9% for the third quarter of fiscal
2007.  Excluding the goodwill impairment charge in the third quarter
of fiscal 2007, operating expenses as a percentage of revenue were
13.8%.





Income
(Loss) from Operations





Income
from operations was $2.0 million in the third quarter of 2008, as compared to a
loss of $103.4 million for the same period of 2007. This increase is a result of
the increase in gross profit and decrease in operating expenses in the third
quarter of 2008, as described above.





Net
Interest Income (Expense)





Net
interest expense was $225 thousand during the third quarter of 2008 as compared
to $105 thousand during the third quarter of 2007. During the third quarter
of 2008, the Company had amounts outstanding under its credit facility due to
the timing of payments of accounts payables and payroll and collections of
receivables.  Additionally, during the third quarter of 2008, we
corrected the accounting treatment for floor plan financing, resulting in the
recognition of interest charges of $164 thousand for the third quarter of 2008
compared to $175 thousand for the same period in 2007.  The 2007
amounts have been reclassified to reflect this correction. The change in
treatment of the floor plan financing was made due to determining that the floor
plan financing does provide us with a modest extension of the credit terms over
what we might obtain directly with a supplier. We have therefore concluded
that cash flows under the floor plan arrangement should be classified as a
financing activity. As a result of this change in classification, certain
amounts paid under floor plan financings have been charged to interest
expense and were reclassified from cost of sales.





Income
Tax





For the
third quarter of 2008, the Company had no income tax expense or income tax
benefit. During the third quarter of fiscal 2008, the Company decreased its tax
valuation allowance by $0.7 million for a total allowance of $15.2 million at
October 5, 2008. The tax valuation allowance results from the future uncertainty
of the Company’s ability to utilize its deferred tax assets.  For the
third quarter of fiscal 2008, the $0.7 million decrease in tax valuation reserve
offset what would have been an income tax expense; the effective income tax rate
would have been 37.9% prior to recording the tax valuation
reserve.  The effective income tax rate for the third quarter of
fiscal 2007 was 11.3% due to the effect of permanent differences, primarily
goodwill impairment, in the calculation of federal income taxes for the
period.





Net
Income (Loss)





Net
income was $1.8 million in the third quarter of fiscal 2008 as compared to a net
loss of $91.8 million in the third quarter of 2007, resulting from the factors
described above.








23
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








October
5, 2008 YTD versus October 5, 2007 YTD





Total Net Revenues:Total
net revenues increased $20.8 million or 4.9% in the first nine months of fiscal
2008 as compared to the same period of fiscal 2007.  For the first
nine months of fiscal 2008 and fiscal 2007, the net revenues were $445.4 million
and $424.6 million, respectively.





Product
revenue was $261.6 million and $280.3 million, respectively, for the first nine
months of fiscal 2008 and fiscal 2007. Product revenue decreased $18.7 million,
a decrease of 6.7% in the first nine months of fiscal 2008 as compared to the
first nine months of fiscal 2007.  This decrease was primarily due to
continued delays in product purchases and deployments in several financial
services and manufacturing industry accounts as a result of the challenging
economic environment.





Service
revenue was $183.8 million in the first nine months of fiscal 2008 compared to
$144.3 million in the first nine months of fiscal 2007, an increase of $39.5
million or 27.3% 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 fulfills interim and permanent staffing requirements
of the staffing projects.  Infrastructure Services help clients
optimize the various elements of distributed computing
environments.  Encompassing the complete IT lifecycle, these
services include desktop and mobile computing, server and network
environments.





Technical
Staffing revenue was $92.4 million and accounted for approximately 50.3% of
total service revenues in the first nine months of fiscal 2008, compared to
$59.3 million and 41.1% for the first nine months of fiscal
2007.  This increase is primarily the result of recognizing revenue
for the gross billings on subcontractor personnel which historically have been
recorded as fee based services in our vendor management business.





Infrastructure
Service revenue was $91.4 million and accounted for approximately 49.7% of total
service revenues in the first nine months of fiscal 2008, compared to $85.0
million and 58.9% for the first nine months of fiscal 2007.  The
increase in revenue is primarily the result of new long-term service engagements
started at the beginning of 2008 offset by a decline in short-term project
engagements.





Gross
Profit:  Gross profit was $53.1 million in the first nine
months of fiscal 2008, compared to $48.1 million in the first nine months of
2007. Gross profit margin was 11.9% in the first nine months of fiscal 2008,
compared to 11.3% in the first nine months of fiscal 2007.





Product
gross profit was $26.0 million for the first nine months of fiscal 2008,
compared to $24.7 million for the same period of fiscal 2007. Product gross
profit margin increased to 9.9% in the first nine months of fiscal 2008,
compared to 8.8% for the same period of fiscal 2007. This increase is due
primarily to the improvements as a result of increased rebates from improved
tracking of OEM partner promotional initiatives and targeting more profitable
growth segments such as networking, server, storage and
peripherals.





Service
gross profit was $27.1 million for the first nine months of fiscal 2008,
compared to $23.4 million in the first nine months of fiscal 2007 for an
increase in service gross profit of $3.7 million.  Service gross
profit margin decreased to 14.8% in the first nine months of fiscal 2008,
compared to 16.2% for the same period of fiscal 2007.





Gross
profit from Technical Staffing Services was $9.7 million for the first nine
months of fiscal 2008, compared to $9.6 million for the first nine months of
fiscal 2007.  Gross profit margin decreased to 10.5% in the first nine
months of fiscal 2008 from 16.2% in the first nine months of fiscal
2007.  This decrease in gross margin is primarily the result of
recognizing revenue at very low incremental margin for billings on subcontractor
personnel which historically have been recorded as fee based services in our
vendor management business.





Gross
profit from Infrastructure Services was $17.4 million for the first nine months
of fiscal 2008 compared to $13.8 million for the first nine months of fiscal
2007 due to the increase in revenue related to new service engagements started
at the beginning of 2008.  Gross profit margin increased to 19.0% in
the first nine months of fiscal 2008 from 16.2% in the first nine months of
fiscal 2007.  This increase in gross profit margin is primarily the
result of increased utilization and productivity of infrastructure services
technical resources offset by unprofitable customer contracts during the first
quarter that were exited during the second quarter.





24
 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 $53.3 million in the first nine months of 2008, compared
to $149.7 million in the first nine months of 2007, a decrease of $96.4
million.  During the third quarter of fiscal 2007, the Company
finalized its annual goodwill valuation and recorded a goodwill impairment
charge of $98.3 million, recorded a charge to write-off certain software assets
and a change in the useful life of other existing software assets of $2.1
million, resolved several outstanding lawsuits, claims, costs for corporate
matters including the contested Proxy solicitation and recorded an increase to
the trade receivable allowance account of $5.2 million.  These
decreases in operating expenses were offset by increases in operating expenses
during the first three quarters of fiscal 2008 primarily driven by an increase
of $5.9 million in personnel-related costs, and related selling, general and
administrative expenses, to support our product and service businesses and
investments to improve customer, vendor and back office support functions. We
also recorded an increase to the trade receivable allowance account of $0.9
million, severance charges of $1.4 million, a net charge of approximately $0.5
million to reserve against the collection  of amounts incorrectly
billed  by subcontractors in our technical staffing business for years
2005 and 2006,  an increase of $0.3 million for start up expenses
related to new engagements; and an increase of $0.2 million related to costs for
the retirement of three members of our Board of Directors.





Operating
expenses as a percentage of revenue were 12.0% for the first nine months of
fiscal 2008 compared to 35.3% for the first nine months of fiscal
2007.  Excluding the goodwill impairment charge during the first nine
months of fiscal 2007, operating expenses as a percentage of revenue were
12.1%.





Loss
from Operations





Loss from
operations was $0.2 million in the first nine months of 2008, as compared to
$101.6 million for the same period of 2007. This decrease is primarily
the result of an increase in gross profit and decrease in operating
expenses for the first nine months of fiscal 2008, as described
above.





Net
Interest Expense





Net
interest expense was $695 thousand during the first nine months of 2008 as
compared to $128 thousand during the first nine months of 2007. During the first
nine months of 2008, the Company had amounts outstanding under its credit
facility due to the timing of payments of accounts payables and payroll and
collections of receivables.  Additionally, during the third quarter of
2008, we corrected the accounting treatment for floor plan financing, resulting
in the recognition of an interest charge of $488 thousand for the first nine
months of 2008 compared to $460 thousand for the first nine months of
2007.  The 2007 amounts presented have been reclassified to reflect
this correction. The change in treatment of the floor plan financing was made
due to determining that the floor plan financing does provide us with a modest
extension of the credit terms over what we might obtain directly with a
supplier. We have therefore concluded that cash flows under the floor plan
arrangement should be classified as a financing activity. As a result of this
change in classification, certain amounts paid under the floor plan financings
have been charged to interest expense and were reclassified from cost of
sales.





Income
Tax





For the
first nine months of 2008, the Company had no income tax expense or income tax
benefit. During the first nine months of fiscal 2008, the Company increased its
tax valuation allowance by $241 thousand for a total allowance of $15.2 million
at October 5, 2008. The tax valuation allowance results from the future
uncertainty of the Company’s ability to utilize its deferred tax
assets.  For the first nine months of fiscal 2008, the $241 thousand
increase in tax valuation reserve offset what would have been an income tax
benefit; the effective income tax rate would have been 27.0% prior to recording
the tax valuation reserve.  The effective income tax rate for the
first nine months of fiscal 2007 was 10.8% due to the effect of permanent
differences, primarily goodwill impairment, in the calculation of federal income
taxes for the period.





Net
Loss





Net loss
was $0.9 million in the first nine months of 2008 as compared to $90.8 million
in the first nine months of 2007, resulting from the factors described
above.





25
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








LIQUIDITY
AND CAPITAL RESOURCES





Cash
generated by operating activities was $21.0 million for the first nine months of
2008. Cash used in investing activities was $2.7 million, which included $2.6
million for capital expenditures.  Cash used in financing activities
was $14.4 million, which includes a $12.4 million net reduction in floor plan
financing liability, $2.3 million for the purchase of treasury stock, offset by
$0.3 million for the issuance of common shares.





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





Cash
flows generated by operating activities in nine months of 2008 was $21.0
million, compared to cash flows used by operating activities of $6.4 million,
for the same period of 2007.  A reduction in accounts receivable,
inventories and other current assets generated $27.7 million, $6.4 million, and
$3.7 million, respectively, in operating cash flows during the nine months ended
October 5, 2008.  This was offset by a decrease in accounts payable
during the same period of $15.2 million.  The reduction in inventories
is due to timing of shipments and the reduction in accounts receivable is due to
improved collections. For the same period in 2007, a reduction in accounts
receivable generated $4.7 million in cash.  This was offset by an
increase in inventories of $3.4 million and a decrease in accounts payable of
$7.3 million.





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





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





26
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





LIQUIDITY
AND CAPITAL RESOURCES





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





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





A
significant part of the Company’s inventory is financed under the floor plan
loan facility provided under the Credit Facility.  In addition, the Company
also finances certain inventory under a separate line of credit with IBM Credit
Corporation (“ICC”).  At October 5, 2008, the Company’s aggregate line of
credit for financing inventory totaled $88.0 million, including $80.0 million
under the Credit Facility and $8.0 million with ICC.   Borrowings
under the Credit Facility floor plan loan facility are made on 30 day notes.
Borrowings under the ICC floor plan arrangement are made on 15 day notes. All
such borrowings by the Company are secured by the related
inventory.  Outstanding amounts under floor plan financing
arrangements totaled $14.0 million as of October 5, 2008. Financing on
substantially all the advances made under either of these floor plan
arrangements is interest free. Interest was imputed on these borrowings at a
rate of 6.0% per annum for the nine months ended October 5, 2008 and 6.0% per
annum for the nine months ended October 5, 2007.   Related
interest expense totaled $164 thousand and $488 thousand, respectively, for the
three and nine month periods ended October 5, 2008, and totaled $175 thousand
and $460 thousand, respectively, for the three and nine month periods ended
October 5, 2007.





As of
October 5, 2008 and January 5, 2008, there was no balance outstanding under the
Credit Facility other than our floor plan financing.  At October 5, 2008
and January 5, 2008 the amounts available under the Credit Facility were $64.6
million and $56.7 million, respectively.  Interest on outstanding
borrowings under the Credit Facility is payable monthly based on the LIBOR rate
and a pricing grid.  As of October 5, 2008 and January 5, 2008, the
adjusted LIBOR rate was 6.22% and 7.57% respectively.





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





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





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





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





27
 Table of Contents




POMEROY
IT SOLUTIONS, INC.


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








On
December 3, 2007, the Board of Directors of the Company authorized a program to
repurchase up to $5.0 million of its outstanding common stock. Pomeroy suspended
this stock repurchase program on June 3, 2008.  Prior to the
suspension, a total of 497,572 shares of the Company’s common stock, with an
aggregate cost of $3.2 million, had been repurchased under this
program.  The acquired shares will be held in treasury or
cancelled.  This stock redemption program was initially approved to
remain in place through December 5, 2008, or the date on which $5 million in
repurchases was completed, whichever came first.  In addition, the
Board adopted a written trading plan under Rule 10b5-1 of the Securities
Exchange Act of 1934 to facilitate the repurchase of its common stock pursuant
to the stock repurchase program.  Rule 10b5-1 allowed the Company to
purchase its shares at times when the Company would not ordinarily be in the
market because of the Company’s trading policies or the possession of material
non-public information.  -0- and 360,722 shares were repurchased
during the respective three month and nine month periods ended October 5,
2008.  In addition during the first nine months of fiscal 2008, the
Company purchased 8,416 shares withheld at the election of certain holders
of restricted stock, from the vested portion of restricted stock awards with a
market value approximating the amount of the withholding taxes due from such
restricted stock holders.





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





28
 Table of Contents





Item 3-Quantitative and Qualitative Disclosures about Market
Risk





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





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





Item 4-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
October 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.





29
 Table of Contents




PART II -
OTHER IFORMATION





Item 1-Legal Proceedings





On
October 9, 2008, we filed a Form 8-K with the SEC reporting that the purported
class action complaint that was filed in the Commonwealth of Kentucky Boone
Circuit Court against the Company, its directors, two of its executive officers,
and ComVest Investment Partners III LP (“ComVest”), was, upon motions made to
the Court by the various defendants in the case, dismissed without prejudice by
an order entered in the case on October 6, 2008.    As previously
reported in a Form 8-K filing made with the SEC on May 9, 2008, and Form 10-Q
filings made with the SEC on May 15, 2008 and August 8, 2008, the complaint, as
originally filed and thereafter amended and restated by the plaintiff, alleged,
among other things, that the directors and officers of the Company were in
breach of their fiduciary duties to shareholders in connection with the letter
that the Company received from Mr. Pomeroy,  proposing to acquire,
with his financial partner, all of the outstanding stock of the Company not
owned by him.





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-Risk Factors





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.





30
 Table of Contents




PART II -
OTHER INFORMATION





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





a.
            None





b.
            None





c.
            Repurchase
      of Securities





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





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





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





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





Item 3-Defaults Upon Senior Securities





None





31
 Table of Contents




PART II -
OTHER INFORMATION





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





None.





Item 5-Other Information





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





None.





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





None.





(c)
            Other
      Information





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





(2)
            During
      fiscal 2008, the Company determined that certain payroll costs previously
      classified as operating expenses related to service employees directly
      generating revenues. As such, these payroll costs should have been
      classified as cost of sales. Also, a portion of the amounts paid under our
      floor plan financing arrangement should have been classified as interest
      expense to reflect the financing nature of this transaction.  In
      addition, as our floor plan financing arrangement is with a third party
      lender and does provide us with a modest extension of the credit terms
      over what we might obtain directly with a supplier, we have concluded that
      cash flows under the floor plan financing arrangement should be classified
      as a financing activity in our statement of cash flows. The following
      information discloses the impact of these corrections on our statement of
      operations for the four quarters of fiscal 2007 as well as for the full
      fiscal years ended January 5, 2008, 2007 and 2006, and our statement of
      cash flows for the full fiscal years ended January 5, 2008, 2007 and 2006.
      These corrections did not change the Company’s reported net income (loss)
      or earnings (loss) per share for any of these
  periods.





32
 Table of Contents




(in
      thousands)
                            
                            First
      Quarter of Fiscal 2007
                            
                            
                            Second
      Quarter of Fiscal 2007As
      Previously Reported
                            
                            
                            As
      Reported First Quarter Fiscal 2008
                            
                            
                            As
      Restated Third Quarter Fiscal 2008
                            
                            
                            As
      Previously Reported
                            
                            
                            As
      Reported Second Quarter Fiscal 2008
                            
                            
                            As
      Restated Third Quarter Fiscal 2008Net
      revenues
                            
                            $
                            141,993
                            
                            
                            $
                            141,993
                            
                            
                            $
                            141,993
                            
                            
                            $
                            138,261
                            
                            
                            $
                            138,261
                            
                            
                            $
                            138,261Cost
      of revenues
                            
                            
                            118,291
                            
                            
                            
                            124,752
                            
                            
                            
                            124,594
                            
                            
                            
                            116,238
                            
                            
                            
                            122,653
                            
                            
                            
                            122,526Gross
      profit
                            
                            
                            23,702
                            
                            
                            
                            17,241
                            
                            
                            
                            17,399
                            
                            
                            
                            22,023
                            
                            
                            
                            15,608
                            
                            
                            
                            15,735Operating
      expenses
                            
                            
                            20,861
                            
                            
                            
                            14,400
                            
                            
                            
                            14,400
                            
                            
                            
                            23,434
                            
                            
                            
                            17,019
                            
                            
                            
                            17,019Income
      (loss) from operations
                            
                            
                            2,841
                            
                            
                            
                            2,841
                            
                            
                            
                            2,999
                            
                            
                            
                            (1,411
                            )
                            
                            
                            (1,411
                            )
                            
                            
                            (1,284
                            )Net
      Interest income (expense)
                            
                            
                            172
                            
                            
                            
                            172
                            
                            
                            
                            14
                            
                            
                            
                            90
                            
                            
                            
                            90
                            
                            
                            
                            (37
                            )Income
      taxes
                            
                            
                            1,188
                            
                            
                            
                            1,188
                            
                            
                            
                            1,188
                            
                            
                            
                            (468
                            )
                            
                            
                            (468
                            )
                            
                            
                            (468
                            )Net
      income
                            
                            $
                            1,825
                            
                            
                            $
                            1,825
                            
                            
                            $
                            1,825
                            
                            
                            $
                            (853
                            )
                            
                            $
                            (853
                            )
                            
                            $
                            (853
                            )






Third
      Quarter of Fiscal 2007
                          
                          
                          Fourth
      Quarter of Fiscal 2007
                          
                          
                          2007
      Fiscal YearAs
      Previously Reported
                          
                          
                          As Restated
                          
                          
                          As
      Previously Reported
                          
                          
                          As Restated
                          
                          
                          As
      Previously Reported
                          
                          
                          As RestatedNet
      revenues
                          
                          $
                          144,392
                          
                          
                          $
                          144,392
                          
                          
                          $
                          162,261
                          
                          
                          $
                          162,261
                          
                          
                          $
                          586,907
                          
                          
                          $
                          586,907Cost
      of revenues
                          
                          
                          123,662
                          
                          
                          
                          129,462
                          
                          
                          
                          144,731
                          
                          
                          
                          151,981
                          
                          
                          
                          502,922
                          
                          
                          
                          528,563Gross
      profit
                          
                          
                          20,730
                          
                          
                          
                          14,930
                          
                          
                          
                          17,530
                          
                          
                          
                          10,280
                          
                          
                          
                          83,985
                          
                          
                          
                          58,344Operating
      expenses
                          
                          
                          124,265
                          
                          
                          
                          118,290
                          
                          
                          
                          26,691
                          
                          
                          
                          19,267
                          
                          
                          
                          195,251
                          
                          
                          
                          168,976Loss
      from operations
                          
                          
                          (103,535
                          )
                          
                          
                          (103,360
                          )
                          
                          
                          (9,161
                          )
                          
                          
                          (8,987
                          )
                          
                          
                          (111,266
                          )
                          
                          
                          (110,632
                          )Net
      Interest income (expense)
                          
                          
                          70
                          
                          
                          
                          (105
                          )
                          
                          
                          119
                          
                          
                          
                          (55
                          )
                          
                          
                          451
                          
                          
                          
                          (183
                          )Income
      taxes benefit
                          
                          
                          (11,671
                          )
                          
                          
                          (11,671
                          )
                          
                          
                          12,369
                          
                          
                          
                          12,369
                          
                          
                          
                          1,418
                          
                          
                          
                          1,418Net
      loss
                          
                          $
                          (91,794
                          )
                          
                          $
                          (91,794
                          )
                          
                          $
                          (21,411
                          )
                          
                          $
                          (21,411
                          )
                          
                          $
                          (112,233
                          )
                          
                          $
                          (112,233
                          )






2006
      Fiscal Year
                            
                            
                            2005
      Fiscal YearAs
      Previously Reported
                            
                            
                            As Restated
                            
                            
                            As
      Previously Reported
                            
                            
                            As RestatedNet
      revenues
                            
                            $
                            592,981
                            
                            
                            $
                            592,981
                            
                            
                            $
                            683,670
                            
                            
                            $
                            683,670Cost
      of revenues
                            
                            
                            500,945
                            
                            
                            
                            527,823
                            
                            
                            
                            591,940
                            
                            
                            
                            616,440Gross
      profit
                            
                            
                            92,036
                            
                            
                            
                            65,158
                            
                            
                            
                            91,730
                            
                            
                            
                            67,230Operating
      expenses
                            
                            
                            89,339
                            
                            
                            
                            61,853
                            
                            
                            
                            107,578
                            
                            
                            
                            82,578Income
      (loss) from operations
                            
                            
                            2,697
                            
                            
                            
                            3,305
                            
                            
                            
                            (15,848
                            )
                            
                            
                            (15,348
                            )Net
      Interest income (expense)
                            
                            
                            (567
                            )
                            
                            
                            (1,175
                            )
                            
                            
                            (835
                            )
                            
                            
                            (1,335
                            )Income
      taxes
                            
                            
                            987
                            
                            
                            
                            987
                            
                            
                            
                            (6,021
                            )
                            
                            
                            (6,021
                            )Net
      income (loss)
                            
                            $
                            1,143
                            
                            
                            $
                            1,143
                            
                            
                            $
                            (10,662
                            )
                            
                            $
                            (10,662
                            )






Impact on Cash Flow from Operating
      activities:
                  
                  
                  Impact on Cash Flow from Financing
      activities:2007
      Fiscal Year
                  
                  
                  2006
      Fiscal Year
                  
                  
                  2005
      Fiscal Year
                  
                  
                  2007
      Fiscal Year
                  
                  
                  2006
      Fiscal Year
                  
                  
                  2005
      Fiscal YearAs
      reported
                  
                  $
                  4,294
                  
                  
                  $
                  30,101
                  
                  
                  $
                  (4,428
                  )
                  
                  $
                  (973
                  )
                  
                  $
                  (17,285
                  )
                  
                  $
                  (3,524
                  )Adjustment
      for correction of floor plan financing
                  
                  
                  (9,102
                  )
                  
                  
                  (1,775
                  )
                  
                  
                  3,943
                  
                  
                  
                  9,102
                  
                  
                  
                  1,775
                  
                  
                  
                  (3,943
                  )Corrected
      Amount
                  
                  $
                  (4,808
                  )
                  
                  $
                  28,326
                  
                  
                  $
                  (485
                  )
                  
                  $
                  8,129
                  
                  
                  $
                  (15,510
                  )
                  
                  $
                  (7,467
                  )




33
 Table of Contents





PART II -
OTHER INFORMATION





Item 6-Exhibits





(a)
            Exhibits





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





31.1
            Section
      302 CEO Certification





31.2
            Section
      302 CFO Certification





32.1
            Section
      906 CEO Certification





32.2
            Section
      906 CFO Certification








SIGNATURE





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








POMEROY IT SOLUTIONS,
  INC.(Registrant)Date:
      November 7, 2008
                        By:  /s/
      Craig J. PropstCraig
      J. PropstVice
      President, Treasurer and Interim Chief Financial
  Officer





34