10-Q 1 form10-q.txt POMEROY IT SOLUTIONS 10-Q 07-05-2006 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 5, 2006 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-20022 POMEROY IT SOLUTIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 31-1227808 (State or other jurisdiction of incorporation (IRS Employer or organization) Identification No.) 1020 Petersburg Road, Hebron, KY 41048 (Address of principal executive offices) (859) 586-0600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer X Non-accelerated filer --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- The number of shares of common stock outstanding as of August 5, 2006 was 12,633,912

POMEROY IT SOLUTIONS, INC. TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements: Page Consolidated Balance Sheets as of July 5, 2006 (Unaudited) and January 5, 2006 1 Consolidated Statements of Income for the Three Months Ended July 5, 2006 and 2005 3 (Unaudited) Consolidated Statements of Comprehensive Income for the Three Months Ended July 5, 4 2006 and 2005 (Unaudited) Consolidated Statements of Income for the Six Months Ended July 5, 2006 and 2005 5 (Unaudited) Consolidated Statements of Comprehensive Income for the Six Months Ended July 5, 6 2006 and 2005 (Unaudited) Consolidated Statements of Cash Flows for the Six Months Ended July 5, 2006 and 2005 7 (Unaudited) Notes to Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosure about Market Risk 22 Item 4. Controls and Procedures 22 Part II. Other Information Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 25 Item 6. Exhibits 25 SIGNATURES 26

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) July 5, January 5, 2006 2006 ------------- ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 85 $ 447 Certificates of deposit 4,227 4,668 Accounts receivable: Trade, less allowance of $4,112 at July 5, 2006 and $4,355 at January 5, 2006 133,239 130,814 Vendor receivables, less allowance of $100 at July 5, 2006 and January 5, 2006 5,974 4,952 Net investment in leases 2,334 1,998 Other 1,984 2,894 ------------- ------------ Total receivables 143,531 140,658 ------------- ------------ Inventories 14,941 13,665 Other 11,351 11,730 ------------- ------------ Total current assets 174,135 171,168 ------------- ------------ Equipment and leasehold improvements: Furniture, fixtures and equipment 31,481 32,655 Leasehold improvements 8,768 6,796 ------------- ------------ Total 40,249 39,451 Less accumulated depreciation 26,629 24,656 ------------- ------------ Net equipment and leasehold improvements 13,620 14,795 ------------- ------------ Net investment in leases, net of current portion 187 995 Goodwill 101,786 101,048 Intangible assets, net 2,963 3,007 Other assets 3,645 4,132 ------------- ------------ Total assets $ 296,336 $ 295,145 ============= ============ See notes to consolidated financial statements.

1

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) July 5, January 5, 2006 2006 ------------ ------------ (Unaudited) LIABILITIES AND EQUITY Current Liabilities: Short-term borrowings $ - $ 15,304 Cash overdraft 1,992 - Accounts payable 65,873 46,638 Deferred revenue 2,822 3,444 Employee compensation and benefits 8,326 8,039 Accrued restructuring and severance charges 4,655 5,791 Other current liabilities 6,468 11,443 ------------ ------------ Total current liabilities 90,136 90,659 ------------ ------------ Commitments and contingencies Equity: Preferred stock, $.01 par value; authorized 2,000 shares (no shares issued or outstanding) - - Common stock, $.01 par value; authorized 20,000 shares (13,453 and 13,400 shares issued at July 5, 2006 and January 5, 2006, respectively) 135 135 Paid-in capital 89,179 89,126 Unearned compensation (1,198) Accumulated other comprehensive income 20 24 Retained earnings 126,133 125,521 ------------ ------------ 215,467 213,608 Less treasury stock, at cost ( 830 and 810 shares at July 5, 2006 and January 5, 2006) 9,267 9,122 ------------ ------------ Total equity 206,200 204,486 ------------ ------------ Total liabilities and equity $ 296,336 $ 295,145 ============ ============ See notes to consolidated financial statements.

2

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Three Months Ended -------------------------- July 5, July 5, 2006 2005 ------------ ------------ (Unaudited) (Unaudited) Product and service revenues: Product $ 92,081 $ 135,093 Service 72,037 56,932 ------------ ------------ Total revenues 164,118 192,025 ------------ ------------ Cost of product and service revenues: Product 84,322 124,956 Service 55,013 41,922 ------------ ------------ Total cost of revenues 139,335 166,878 ------------ ------------ Gross profit 24,783 25,147 ------------ ------------ Operating expenses: Selling, general and administrative 20,151 19,538 Depreciation and amortization 1,235 1,428 Other 6 - ------------ ------------ Total operating expenses 21,392 20,966 ------------ ------------ Income from operations 3,391 4,181 Interest expense, net 162 206 ------------ ------------ Income before income tax 3,229 3,975 Income tax expense 1,198 1,610 ------------ ------------ Net income $ 2,031 $ 2,365 ============ ============ Weighted average shares outstanding: Basic 12,629 12,573 ============ ============ Diluted 12,637 12,656 ============ ============ Earnings per common share: Basic $ 0.16 $ 0.19 ============ ============ Diluted $ 0.16 $ 0.19 ============ ============ See notes to consolidated financial statements.

3

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended -------------------------- July 5, July 5, 2006 2005 ------------ ------------ (Unaudited) (Unaudited) Net income $ 2,031 $ 2,365 Other comprehensive income: Foreign currency translation adjustment (4) - ------------ ------------ Comprehensive income $ 2,027 $ 2,365 ============ ============

4

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Six Months Ended -------------------------- July 5, July 5, 2006 2005 ------------ ------------ (Unaudited) (Unaudited) Product and service revenues: Product $ 180,958 $ 246,336 Service 133,852 111,521 ------------ ------------ Total revenues 314,810 357,857 ------------ ------------ Cost of product and service revenues: Product 166,307 227,380 Service 102,684 82,514 ------------ ------------ Total cost of revenues 268,991 309,894 ------------ ------------ Gross profit 45,819 47,963 ------------ ------------ Operating expenses: Selling, general and administrative 41,632 39,582 Depreciation and amortization 2,569 2,897 Restructuring and severance charges 133 132 Other 11 1 ------------ ------------ Total operating expenses 44,345 42,612 ------------ ------------ Income from operations 1,474 5,351 Interest expense, net 471 427 ------------ ------------ Income before income tax 1,003 4,924 Income tax expense 391 1,994 ------------ ------------ Net income $ 612 $ 2,930 ============ ============ Weighted average shares outstanding: Basic 12,622 12,521 ============ ============ Diluted 12,639 12,661 ============ ============ Earnings per common share: Basic $ 0.05 $ 0.23 ============ ============ Diluted $ 0.05 $ 0.23 ============ ============ See notes to consolidated financial statements.

5

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Six Months Ended -------------------------- July 5, July 5, 2006 2005 ------------ ------------ (Unaudited) (Unaudited) Net income $ 612 $ 2,930 Other comprehensive income: Foreign currency translation adjustment (4) 102 ------------ ------------ Comprehensive income $ 608 $ 3,032 ============ ============ See notes to consolidated financial statements.

6

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended -------------------------- July 5, July 5, 2006 2005 (Unaudited) (Unaudited) ------------ ------------ Cash flows from operating activities: Net income $ 612 $ 2,930 Adjustments to reconcile net income to net cash from operating activities: Depreciation 2,240 2,437 Amortization 329 460 Stock option and restricted stock compensation 896 - Restructuring and severance charges 133 132 Deferred income taxes 605 2,641 Loss on disposal of fixed assets 11 8 Changes in working capital accounts, net of effects of acquisitions: Accounts receivable (2,585) (1,765) Inventories (1,558) (1,841) Other current assets 62 489 Net investment in leases 520 2,413 Cash overdraft 1,992 - Accounts payable 19,235 (4,065) Deferred revenue (622) (387) Income tax payable (58) 18 Employee compensation and benefits 287 (3,982) Other, net (5,988) (5,068) ------------ ------------ Net operating activities 16,111 (5,580) ------------ ------------ Cash flows from investing activities: Capital expenditures (793) (1,033) Proceeds from sale of fixed assets - 6 Proceeds from redemption of certificates of deposit 531 - Purchases of certificates of deposit (91) (34) Payment for covenant not-to-compete (285) - Acquisition of businesses (738) (1,139) ------------ ------------ Net investing activities (1,376) (2,200) ------------ ------------ Cash flows from financing activities: Net payments of short-term borrowings (15,304) (2,501) Payments of acquisition notes payable - (662) Proceeds from exercise of stock options and related tax benefit 192 2,327 Purchase of treasury stock (144) (376) Proceeds from employee stock purchase plan 163 - ------------ ------------ Net financing activities (15,093) (1,212) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (4) 102 ------------ ------------ Change in cash and cash equivalents (362) (8,890) Cash and cash equivalents: Beginning of period 447 13,108 ------------ ------------ End of period $ 85 $ 4,218 ------------ ------------ See notes to consolidated financial statements.

7 POMEROY IT SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. Except as disclosed herein, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended January 5, 2006. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made. The results of operations for the three and six-month period ended July 5, 2006 are not necessarily indicative of the results that may be expected for future interim periods or for the year ending January 5, 2007. 2. Recent Accounting Pronouncements In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, "Accounting for Income Taxes" ("FASB No. 109"). FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently in the process of determining the impact, if any, that the adoption of FIN 48 will have on the consolidated financial statements. 3. Cash and Short-Term Borrowings The Company has a $165.0 million Syndicated Credit Facility Agreement with GE Commercial Distribution Finance. The credit facility has a three-year term and its components include a maximum of $75.0 million for inventory financing and a revolver, collateralized primarily by accounts receivable, of up to $110.0 million. The credit facility also provides a letter of credit facility of $5.0 million. Interest on outstanding borrowings under the credit facility is payable monthly based on the LIBOR rate and a pricing grid. As of July 5, 2006, the adjusted LIBOR rate was 7.58%. This credit facility expires June 28, 2007. The Company maintains a sweep account with its bank whereby daily cash receipts are automatically transferred as payment towards balances outstanding under the Company's credit facility. As of July 5, 2006, the Company had no outstanding balance under the Company's credit facility. As of January 5, 2006, the Company had an outstanding balance under the Company's credit facility of $15.3 million. Under the terms of the credit facility, the Company is subject to various financial covenants including maintenance of a minimum level of tangible net worth, a minimum fixed charge coverage ratio, a maximum ratio of total funded indebtedness to EBITDA, and a maximum net loss after tax. As of July 5, 2006, Pomeroy was in compliance with those financial covenants. 4. Stock-Based Compensation Prior to January 6, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. The Company previously adopted SFAS No. 123 for disclosure purposes and for non-employee stock options. 8 The Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS 123R) effective January 6, 2006. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments and recognize this cost over the period during which the employee is required to provide the services. The Company has adopted SFAS 123R using the modified prospective method and, therefore, results for periods prior to January 6, 2006 have not been restated. The table below illustrates the effect of stock compensation expense on the periods presented as if the Company had always applied the fair value method:

Three Months Ended July 5, (In thousands, except per share data) 2005 -------------------- Income before stock compensation expense $ 2,365 Stock compensation expense (266) -------------------- Proforma net income $ 2,099 ==================== Basic earnings per common share: Income before stock compensation expense $ 0.19 Stock compensation expense (0.02) -------------------- Proforma net income $ 0.17 ==================== Diluted earnings per common share: Income before stock compensation expense $ 0.19 Stock compensation expense included in net income (0.02) -------------------- Proforma net income $ 0.17 ====================

Six Months Ended July 5, (In thousands, except per share data) 2005 ------------------ Income before stock compensation expense $ 2,930 Stock compensation expense (1,358) ------------------ Pro forma net income $ 1,572 ================== Basic earnings per common share: Income before stock compensation expense $ 0.23 Stock compensation expense (0.10) ------------------ Pro forma net income $ 0.13 ================== Diluted earnings per common share: Income before stock compensation expense $ 0.23 Stock compensation expense (0.11) ------------------ Pro forma net income $ 0.12 ==================

9 No stock-based compensation was capitalized into inventory or fixed assets. The approximate unvested stock option expense as of July 5, 2006, which will be recorded as expense in future periods, is $1,038. The weighted average time over which this expense will be recorded is approximately 26.2 months. Expense for the quarter and six months ended July 5, 2006 and estimated expense for future periods is net of the effect of estimated forfeitures of 18.5%. The Company estimates the fair value of each option on the date of grant using the Black-Scholes option pricing model. The Company has elected the simplified method to calculate the expected life of stock awards as permitted under SFAS 123R. This method calculates an expected term based on the midpoint between the vesting date and the end of the contractual term of the stock award. The weighted-average assumptions listed below were used for grants made in the six months ended July 5, 2006 and 2005:

Three months ended Three months ended July 5, 2006 July 5, 2005 Expected volatility 48.44% 59.51% Risk-free interest rate 5.00% 3.69% Expected life (years) 3.50 3.00 Dividend yield 0.00% 0.00%

Six months ended Six months ended July 5, 2006 July 5, 2005 Expected volatility 52.48% 44.74% Risk-free interest rate 4.73% 3.73% Expected life (years) 2.46 3.66 Dividend yield 0.00% 0.00%

Information related to all stock options for the six months ended July 5, 2006 is shown in the table below:

Weighted- Weighted-Average Average Exercise Remaining Contractual Shares Price Term Outstanding at January 5, 2006 2,926,503 $ 13.31 Granted 241,250 $ 9.33 Forfeitures (591,086) $ 13.77 Exercised (29,167) $ 5.98 ---------- Outstanding at July 5, 2006 2,547,500 $ 12.92 2.76 years ========== Exercisable at July 5, 2006 2,209,251 $ 13.08 2.57 years ==========

Information related to unvested stock options for the six months ended July 5, 2006 is shown in the table below:

Weighted-Average Weighted-Average Grant-Date Fair Remaining Contractual Shares Value Term Outstanding unvested stock options at January 5, 2006 416,794 $ 4.63 Granted 241,250 $ 3.41 Vested (265,433) $ 3.72 Forfeitures (54,362) $ 4.89 --------- Outstanding unvested stock options at July 5, 2006 338,249 $ 4.44 3.98 years =========

The Company did not issue any restricted shares in the six months ended July 5, 2006. Such shares are valued based on the quoted price of the Company's stock on the date of grant and recorded as compensation 10 expense over the related vesting period, which is generally four years. Compensation cost, net of an estimated forfeiture rate of 18.5%, related to previously-issued restricted shares totaled $64 thousand during the three months ended July 5, 2006 and $116 thousand during the six months ended July 5, 2006. No similar expense was recorded during the three months or six months ended July 5, 2005. In connection with the adoption of SFAS123R, unearned compensation aggregating $1,081 associated with previously-issued restricted shares has been reclassified to paid-in capital in the accompanying consolidated balance sheet as of July 5, 2006. 5. Earnings per Common Share The following is a reconciliation of the number of shares used in the basic EPS and diluted EPS computations:

Three Months Ended July 5, ------------------------------------------------ 2006 2005 ----------------------- ----------------------- Per Share Per Share Shares Amount Shares Amount ---------- ----------- ---------- ----------- Basic EPS 12,629 $ 0.16 12,573 $ 0.19 Effect of dilutive stock options 8 - 83 - ---------- ----------- ---------- ----------- Diluted EPS 12,637 $ 0.16 12,656 $ 0.19 ========== =========== ========== ===========

Six Months Ended July 5, ------------------------------------------------ 2006 2005 ----------------------- ----------------------- Per Share Per Share Shares Amount Shares Amount ---------- ----------- ---------- ----------- Basic EPS 12,622 $ 0.05 12,521 $ 0.23 Effect of dilutive stock options 17 - 140 - ---------- ----------- ---------- ----------- Diluted EPS 12,639 $ 0.05 12,661 $ 0.23 ========== =========== ========== ===========

6. Treasury Stock On March 31, 2006, the Board of Directors of the Company authorized a program to repurchase up to 500,000 shares, at an aggregate price of no more than $5.0 million. The Company intends to effect such repurchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The acquired shares will be held in treasury or cancelled. The Company anticipates financing the repurchase program out of working capital. This stock redemption program was approved to remain in place and in full force/effect for a period of 18 months. The Company purchased 20,000 shares at an average price per share of $7.17 during the fiscal quarter ended July 5, 2006. 11 7. Goodwill and Long-Lived Assets Intangible assets with definite lives are amortized over their estimated useful lives. The following table provides a summary of the Company's intangible assets with definite lives as of July 5, 2006 and January 5, 2006:

(in thousands) Gross Gross Net Carrying Accumulated Net Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount 7/5/2006 7/5/2006 7/5/2006 1/5/2006 1/5/2006 1/5/2006 ------------------------------------------ ----------------------------------------- Amortized intangible assets: Covenants not-to-compete $ 2,309 $ 1,907 $ 402 $ 2,024 $ 1,859 $ 165 Customer lists 2,877 1,248 1,629 2,877 1,061 1,816 Other intangibles 1,268 336 932 1,268 242 1,026 ------------ ------------- ------------- ------------ ------------- ------------ Total amortized intangibles $ 6,454 $ 3,491 $ 2,963 $ 6,169 $ 3,162 $ 3,007 ============ ============= ============= ============ ============= ============

Amortized intangible assets are being amortized over periods ranging from 1.5 to 15 years for covenants not-to-compete, 10 to 15 years for customer lists and 4 to 7 years for other intangibles. For the quarter ended July 5, 2006, amortization expense related to intangible assets was $173 thousand. For the quarter ended July 5, 2005, amortization expense related to intangible assets was $192 thousand. For the six months ended July 5, 2006, amortization expense related to intangible assets with definite lives was $329 thousand. For the six months ended July 5, 2005, amortization expense related to intangible assets with definite lives was $460 thousand. Projected future amortization expense related to intangible assets with definite lives is as follows:

(in thousands) Fiscal Years: 2006 $ 344 July 6, 2006 thru January 5, 2007 2007 674 2008 651 2009 587 2010 408 2011+ 299 ------ Total $2,963 ======

The change of the net carrying amount of goodwill for the six months ended July 5, 2005 is as follows:

(in thousands) Net carrying amount as of 1/5/06 $101,048 Goodwill recorded during first quarter 250 -------- Net carrying amount as of 4/5/06 101,298 -------- Goodwill recorded during second quarter 488 -------- Net carrying amount as of 7/5/06 $101,786 ========

As part of its goodwill impairment testing, the Company reviews various factors, such as the market price of the Company's common stock, discounted cash flows from projected earnings and values for comparable companies to determine whether impairment exists. The Company has worked with a valuation firm to assess goodwill impairment and has determined there is impairment. The second step of the goodwill impairment 12 test is not yet complete. The Company recognized a charge of $16.0 million as a reasonable estimate of the impairment loss in its fiscal 2005 financial statements. The actual impairment loss, once determined by the Company, may differ significantly from this estimate. Any adjustment to this estimated impairment loss based on the completion of the measurement of the impairment loss will be recognized in the subsequent reporting period as a change in estimate. During the six months ended July 5, 2006, the Company recorded a net of $738 thousand of goodwill. The amounts recorded consisted of $825 thousand and $10 thousand for payments under earn-out agreements and a miscellaneous charge, related to prior acquisitions, respectively, offset by $97 thousand in collections of overpayments. 8. Supplemental Cash Flow Disclosures Supplemental disclosures with respect to cash flow information and non-cash investing and financing activities are as follows:

(in thousands) Six Months Ended July 5, ----------------------------- 2006 2005 ------------- -------------- Interest paid $ 671 $ 520 ============= ============== Income taxes paid $ 89 $ 1,088 ============= ============== Adjustment to purchase price of acquired assets and goodwill $ - $ (538) ============= ============== Business combinations accounted for as purchases: Assets acquired $ 738 $ 1,139 Liabilities (assumed)/paid - - ------------- -------------- Net cash paid $ 738 $ 1,139 ============= ==============

9. Litigation There are various legal actions arising in the normal course of business that have been brought against the Company. Management believes these matters will not have a material adverse effect on the Company's financial position or results of operations. 10. Segment Information Effective in the fourth quarter of 2005, the Company re-aligned its business segments and operating segments into one business segment, which includes both product and service offerings. 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's operating segments have similar economic characteristics and therefore can be aggregated into one reporting segment. Two or more operating segments may be aggregated into a single operating segment if the segments are similar in each of the following areas: (1) the nature of the products and services (2) the nature of the production processes (3) the type of class of customer for the products and service and (4) the nature of the regulatory environment. Prior to fiscal year 2005, the Company disclosed three reporting segments: products, services and leasing. Monthly income statements were generated and reviewed by management for both the products and service businesses for decision making purposes. The segment reporting (product and services) are no longer reviewed by management on a regular basis and required significant manual work to develop the information solely for quarterly external financial statement reporting purposes. 13 During the fourth quarter of 2005, the Company realigned its management and reporting responsibilities into functional lines: Sales, Service Operations, Finance and Administrative. The Company also aligned sales and service delivery into five domestic geographic regions and finance and administration is centralized. Each of the geographic regions sell both products and services and each geographic region has similar economic characteristics. As a result the Company now reports one reportable segment and the information in this report has been revised to reflect the Company's current segment reporting. 11. Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current period presentation. 12. Restructuring and Severance Charges During the first six months of fiscal 2006 and during fiscal 2005, the Company recorded severance charges totaling $0.1 million and $0.9 million respectively, resulting primarily from a re-alignment of the structure of the Company's organization. During fiscal 2004, in connection with certain strategic initiatives, the Company recorded restructuring and severance charges aggregating $1.0 million. The restructuring and severance charges were associated with legacy Pomeroy costs of facilities and processes that had become duplicative or redundant as Alternative Resources Corporation ("ARC") operations were integrated into the Company. These costs consisted of facility closing and involuntary employee reduction severance costs of $576 thousand and $400 thousand, respectively. These costs were accounted for under FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," and were included as a charge to the results of operations for the year ended January 5, 2005. Any subsequent changes to the estimates of executing the currently approved plans of restructuring will be reflected in current results of operations. The Company also recorded during fiscal 2004 a non-recurring, one-time charge for severance in the amount of $1.447 million related to the resignation of David B. Pomeroy II as CEO of the Company. Mr. Pomeroy will continue to serve as Chairman of the Board of the Company. Mr. Pomeroy will continue to receive severance payments thru January 2009. As of July 5, 2006, the restructuring and severance charge accrual, consisted of the following:

(in thousands) Facility Severance consolidation Total ------------------------------------------------- Accrual balance at January 5, 2006 $ 876 $ 125 $ 1,001 Charges accrued 133 - 133 Cash payments (322) (51) (373) ------------------------------------------------- Accrual balance at April 5, 2006 687 74 761 Charges accrued - - Cash payments (221) (74) (295) ------------------------------------------------- Accrual balance at July 5, 2006 $ 466 $ - $ 466 =================================================

Also, the Company's management recorded a restructuring charge liability in connection with the ARC acquisition to eliminate certain duplicative activities and reduced facility requirements. As a result, approximately $6.4 million of costs were recorded as part of the liabilities assumed in the ARC acquisition in October 2004. The restructuring charge consisted of costs of vacating duplicative leased facilities of ARC and severance costs associated with exiting activities. These costs are accounted for under EITF 95-3, "Recognition of Liabilities in Connection with Purchase Business Combinations." These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire ARC. Changes to the estimates primarily for acquired leases included in the currently approved plans of restructuring through July 23, 2005 were recorded as an increase or decrease in goodwill, with any increases in estimates thereafter charged to operations. 14

Facility (in thousands) consolidation --------------- Total initial liability $ 3,715 Adjustments of initial liability 2,165 Cash payments (1,159) --------------- Liability balance at January 5, 2006 4,721 Cash payments (278) --------------- Liability balance at April 5, 2006 4,443 Cash payments (273) --------------- Liability balance at July 5, 2006 $ 4,170 ===============

Additionally, as part of the acquisition of ARC, the Company acquired the remaining obligations of ARC's existing restructuring plan, which was initially recorded by ARC in fiscal 2002. The total obligations assumed in connection with this restructuring plan was $1.5 million at July 23, 2004. As of July 5, 2006, the balance of the ARC fiscal 2002 accrued restructuring costs recorded consisted of the following:

Facility Other consolidations charges Total ---------------------------------------------------- Total liability as of July 23, 2004 $ 756 $ 696 $ 1,452 Adjustment of initial liability 100 - 100 Cash payments (812) (671) (1,483) ---------------------------------------------------- Balance at January 5, 2006 44 25 69 Cash payments (33) (3) (36) ---------------------------------------------------- Balance at April 5, 2006 11 22 33 Cash payments (11) (3) (14) ---------------------------------------------------- Balance at July 5, 2006 $ - $ 19 $ 19 ====================================================

15 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 this document including, without limitation, those statements made in conjunction with the forward-looking statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations". All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by such factors. 16 RESULTS OF OPERATIONS The following table sets forth for the periods presented information derived from our consolidated statements of operations expressed as a percentage of product and service revenues:

Three Months Ended Six Months Ended ------------------------ ------------------------ July 5, July 5, 2006 2005 2006 2005 ------------------------ ------------------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) Product and service revenues: Product 56.1% 70.4% 57.5% 68.8% Service 43.9% 29.6% 42.5% 31.2% ----------- ----------- ----------- ----------- Total revenues 100.0% 100.0% 100.0% 100.0% ----------- ----------- ----------- ----------- Cost of sales and service: Product 51.4% 65.1% 52.8% 63.5% Service 33.5% 21.8% 32.6% 23.1% ----------- ----------- ----------- ----------- Total cost of revenues 84.9% 86.9% 85.4% 86.6% ----------- ----------- ----------- ----------- Gross profit 15.1% 13.1% 14.6% 13.4% ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative 12.3% 10.2% 13.3% 11.1% Depreciation and amortization 0.7% 0.7% 0.8% 0.8% Restructuring and severance charges 0.0% 0.0% 0.0% 0.0% Other 0.0% 0.0% 0.0% 0.0% ----------- ----------- ----------- ----------- Total operating expenses 13.0% 10.9% 14.1% 11.9% ----------- ----------- ----------- ----------- Income from operations 2.1% 2.2% 0.5% 1.5% Interest expense, net 0.1% 0.1% 0.2% 0.1% ----------- ----------- ----------- ----------- Income before income tax 2.0% 2.1% 0.3% 1.4% Income tax expense 0.7% 0.9% 0.1% 0.6% ----------- ----------- ----------- ----------- Net income 1.3% 1.2% 0.2% 0.8% =========== =========== =========== ===========

17 POMEROY IT SOLUTIONS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TOTAL PRODUCT AND SERVICE REVENUES. QUARTER-TO-DATE. Total product and service revenues decreased $27.9 million, or 14.5%, to $164.1 million in the second quarter of fiscal 2006 from $192.0 million in the second quarter of fiscal 2005. Product sales decreased $43.0 million, or 31.8%, to $92.1 million in the second quarter of fiscal 2006 from $135.1 million in the second quarter of fiscal 2005. The decrease in product sales is primarily attributable to several factors: continuing competitive pressure in the marketplace; reduction in IT spending by our customers; and delays in IT project deployments by our customers. The product margins, however, have increased due to the mix of product sales. Service revenues increased $15.1 million, or 26.5%, to $72.0 million in the second quarter of fiscal 2006 from $56.9 million in the second quarter of fiscal year 2005. The increase in service revenues relates primarily to the growth from new service agreements. Although service margins declined compared to the second quarter of 2005, service margins did increase 75 basis points over the first quarter of 2006, as the Company has taken steps to improve utilization and margins. YEAR-TO-DATE. Total product and service revenues decreased $43.1 million, or 12.0%, to $314.8 million in the first six months of fiscal 2006 from $357.9 million in the first six months of fiscal 2005. Product sales decreased $65.3 million, or 26.5%, to $181.0 million in the first six months of fiscal 2006 from $246.3 million in the first six months of fiscal 2005. The decrease in product sales is primarily attributable to several factors: continuing competitive pressure in the marketplace; reduction in IT spending by our customers; and delays in IT project deployments by our customers. The product margins, however, have increased due to the mix of product sales. Service revenues increased $22.4 million, or 20.1%, to $133.9 million in the first six months of fiscal 2006 from $111.5 million in the first six months of fiscal year 2005. This increase in service revenues relates primarily to the growth from new service agreements. Service margins declined compared to 2005 due to lower profitability on the start up on several newer engagements. The Company has taken steps to improve utilization and margins have increased subsequently in both the first and second quarter. GROSS PROFIT. QUARTER-TO-DATE. Gross profit decreased $0.3 million, or 1.2%, to $24.8 million in the second quarter of fiscal 2006 from $25.1 million in the second quarter of fiscal 2005. The decrease resulted primarily from the decrease in product sales. Gross profit, as a percentage of revenue, increased to 15.1% in the second quarter of fiscal 2006 as compared to 13.1% in the second quarter of fiscal 2005. This increase in gross margin is primarily due to a change in the product/service sales mix, with a greater percentage from higher margin service revenue that produced higher gross margins. YEAR-TO-DATE. Gross profit decreased $2.2 million, or 4.6%, to $45.8 million in the first six months of fiscal 2006 from $48.0 million in the first six months of fiscal 2005. The decrease resulted primarily from the decrease in product sales. Gross profit, as a percentage of revenue, increased to 14.6% in the first six months of fiscal 2006 as compared to 13.4% in the first six months of fiscal 2005. This increase in gross margin is primarily due to a change in the product/service sales mix, with a greater percentage from higher margin service revenue that produced higher gross margins. 18 OPERATING EXPENSES. QUARTER-TO-DATE. Operating expenses increased to $21.4 million in the second quarter of fiscal 2006, compared to $21.0 million in the second quarter of fiscal 2005. Operating expenses increased as a result of increased professional fees, medical claims and equity compensation expense. No comparable expense was recognized in the second quarter of fiscal 2005 for equity compensation expenses. Expressed as a percentage of total product and service revenues, these expenses were 13.0% in the second quarter of fiscal 2006 compared to 10.9% in the second quarter of fiscal 2005. YEAR-TO-DATE. Operating expenses increased $1.7 million, or 4.0%, to $44.3 million in the first six months of fiscal 2006 from $42.6 million in the first six months of fiscal 2005. The increase is primarily attributable to increased medical claims, professional fees, and equity compensation expense. No comparable expense was recognized in the first six months of fiscal 2005 for equity compensation expenses. Expressed as a percentage of total product and service revenues, these expenses were 14.1% in the first six months of fiscal 2006 compared to 11.9% in the first six months of fiscal 2005. INCOME FROM OPERATIONS. QUARTER-TO-DATE. Income from operations decreased $0.8 million, or 19.1%, to $3.4 million in the second quarter of fiscal 2006 from $4.2 million in the second quarter of fiscal 2005. The Company's operating margin was 2.1% in the second quarter of fiscal 2006 as compared to 2.2% in the second quarter of fiscal 2005. This decrease is the result of increased operating expenses, partially offset by an increase in gross profit. YEAR-TO-DATE. Income from operations decreased $3.9 million, or 72.2%, to $1.5 million in the first six months of fiscal 2006 from $5.4 million in the first six months of fiscal 2005. The Company's operating margin was 0.5% in the first six months of fiscal 2006 as compared to 1.5% in the first six months of fiscal 2005. This decrease is the result of increased operating expenses, partially offset by an increase in gross profit. INTEREST EXPENSE. QUARTER-TO-DATE. Net interest expense was $162 thousand during the second quarter of fiscal 2006 as compared to net interest expense of $206 thousand during second quarter of fiscal 2005. This decrease in net interest expense was a result of decreased borrowings under the Company's credit facility offset by an increase due to the accretion of interest of future rental payments that were accrued for a leased facility that was part of the ARC acquisition. YEAR-TO-DATE. Net interest expense was $471 thousand in the first six months of fiscal 2006 compared to net interest expense of $427 thousand in the first six months of fiscal 2005. This increase in net interest expense was due to the accretion of interest on future rental payments that were accrued for a leased facility that was part of the ARC acquisition. INCOME TAXES. QUARTER-TO-DATE. The Company's effective income tax rate was 37.1% in the second quarter of fiscal 2006 compared to 40.5% in the second quarter of fiscal 2005. This fluctuation was principally related to the fluctuation in the calculation of state and local income taxes. YEAR-TO-DATE. The Company's effective tax rate was 39.0% in the first six months of fiscal 2006 compared to 40.5% in the first six months of fiscal 2005. This fluctuation was principally related to the fluctuation in the calculation of state and local income taxes. NET INCOME. QUARTER-TO-DATE. Net income was $2.0 million in the second quarter of fiscal 2006 compared to $2.4 million in the second quarter of fiscal 2005 due to the factors described above. YEAR-TO-DATE. Net income was $0.6 million in the first six months of fiscal 2006 compared to $2.9 million in the first six months of fiscal 2005 due to the factors described above. 19 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $16.1 million in the first six months of fiscal 2006. Cash used in investing activities was $1.4 million, which included $0.7 million for prior year acquisitions and $0.8 million for capital expenditures. Net cash used in financing activities was $15.1 million, which included $15.3 million for net repayments of short-term borrowings, $0.1 million for the purchase of treasury stock, offset by $0.3 million of proceeds from exercise of stock options and employee stock purchase plan. The amount of cash derived from operating activities will vary based on a number of business factors which may change from time to time, including terms of available financing from vendors, downturns in the Company's business and/or downturns in the businesses of the Company's customers. However, a growth or decline in service revenue in conjunction with a change in the proportion of service revenue to total revenue is an underlying driver of operating cash flow during the period of growth because a majority of the Company's service revenue is generated based upon the billings of the Company's technicians. The cash outlay for these labor/payroll costs is incurred bi-weekly with each pay period. The invoicing for the service is generated on various billing cycles as dictated by the customers, and the respective cash inflow typically follows within 30 to 60 days of invoice date, which may be as long as 60 to 120 days from the time the services are performed. This differs from product revenue in that the time period between the time that the Company incurs the cost to purchase the products and collects the revenue from its customer is typically shorter, usually from 0 to 60 days, and the Company primarily orders inventory for a particular customer rather than stocking large amounts of inventory. The Company anticipates an increase in service revenue and in the proportion of service revenue to total revenue which, if it occurs, may result in a significant decrease in cash flows from operating activities during periods of significant growth or periods of excess technical capacity. In addition, certain services, primarily outsourcing contracts for the Company's Life Cycle Services, require that the Company maintain a specific parts inventory for servicing the customer; thus, an increase or decrease in the type of services provided can impact inventory levels and operating cash flows. Cash flows provided by operating activities in the six months ended July 5, 2006 were $16.1 million as compared to cash flows used by operating activities of $5.6 million for the corresponding period of fiscal 2005. The increase in cash flows from operating activities in the first six months of 2006 compared to the first six months of 2005 resulted primarily from the timing of payments on accounts payable, offset by timing of receipts on accounts netting to $22.5 million increase in cash provided over the corresponding period in 2005. Other major factors impacting net cash flows from operating activities are fluctuations in net income, deferred income taxes, net investment in leases, employee compensation and benefits as well as from changes in items classified as other, net. A significant part of Pomeroy's inventories are financed by floor plan arrangements with third parties. At July 5, 2006, these lines of credit totaled $78.5 million, including $75.0 million with GE Commercial Distribution Finance ("GECDF") and $3.5 million with IBM Credit Corporation ("ICC"). Borrowings under the GECDF floor plan arrangements are made on thirty-day notes. Borrowings under the ICC floor plan arrangements are made on fifteen-day notes. All such borrowings are secured by the related inventory. Financing on substantially all of the arrangements is interest free due to subsidies by manufacturers. Overall, the average interest rate on these arrangements is less than 1.0%. The Company classifies amounts outstanding under the floor plan arrangements as accounts payable. The Company has a $165.0 million Syndicated Credit Facility Agreement with GECDF. The credit facility has a three-year term and its components include a maximum of $75.0 million for inventory financing as described above and a revolving line of credit, collateralized primarily by accounts receivable, of up to $110.0 million; provided that the total amount outstanding at any time under the inventory financing facility and the revolving line of credit may not exceed $165.0 million. The credit facility also provides a letter of credit facility of $5.0 million. The interest rate under the credit facility is based on the London InterBank Offering Rate ("LIBOR") and a pricing grid. As of July 5, 2006, the adjusted LIBOR rate was 7.58%. This credit facility expires June 28, 2007. As of July 5, 2006, the Company had no outstanding balance under the Company's credit facility. As of January 5, 2006, the Company had an outstanding balance under the Company's credit facility of $15.3 million. The credit facility is collateralized by substantially all of the assets of Pomeroy, except those assets that collateralize certain other financing arrangements. Under the terms of the credit facility, Pomeroy is subject to various financial covenants. As of July 5, 2006, Pomeroy was in compliance with those financial covenants. Pomeroy believes that the anticipated cash flow from operations and current financing arrangements will be sufficient to satisfy Pomeroy's capital requirements for the next twelve months. 20 On March 31, 2006, the Board of Directors of the Company authorized a program to repurchase up to 500,000 shares, but no more than $5.0 million. The Company intends to effect such repurchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The acquired shares will be held in treasury or cancelled. The Company anticipates financing the repurchase program out of current cash and investments or working capital. As of July 5, 2006, 20,000 shares have been repurchased. This stock repurchase program was approved to remain in place and in full force/effect for a period of 18 months. 21 ITEM 3-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to interest rate risk primarily through its credit facility with GECDF. Due to the Company's current debt position, the Company did not experience a material impact from interest rate risk for the second quarter of fiscal 2006. 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 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined in Rules13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) designed to provide reasonable assurance that the information required to be reported in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission, including controls and procedures designed to ensure that this information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, the Company's disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met. As described in Item 9A of the Company's Annual Report on Form 10-K for the year ended January 5, 2006, the Company reported that it identified four material weaknesses in its internal control over financial reporting. As a result, the Company's management, including its Chief Executive Officer and Chief Financial Officer, concluded that as of January 5, 2006, the Company's disclosure controls and procedures were not effective at a reasonable level of assurance, based on the evaluation of these controls and procedures required by Exchange Act Rules 13(a)-15(e) or 15(d)-15(e). As of July 5, 2006, the four material weaknesses have not been remediated. Accordingly, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of July 5, 2006, the Company's disclosure controls and procedures were not effective in providing reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's forms and rules. Despite these material weaknesses, the financial statements reported on Form 10-Q for the fiscal quarter ended July 5, 2006 , fairly present, in all material respects, the consolidated financial condition and results of operations of the Company. MATERIAL WEAKNESSES REMEDIATION PLANS: Management is committed to the remediation of the four material weaknesses as well as the continued improvement of the Company's overall internal controls over financial reporting. Management has developed remediation plans for each of the four identified material weaknesses. The Company currently is executing a remediation plan for each of the material weaknesses set forth below that includes the following: Actions Relating to Maintaining Effective Control Over The Accrual of Service -------------------------------------------------------------------------------- Billing Calculations and Service Revenue Recognition. ---------------------------------------------------------- We have assessed our service revenue and expense recognition processes and procedures. We have developed and will be implementing a remediation plan during the third quarter of 2006. Our remediation work is focusing on service parts, service contracts, service invoicing and subcontracting processes to improve their internal controls over financial reporting. The Company's goal is to have the remediation completed during the early part of the fourth quarter with remediation testing commencing during November 2006. Actions Relating to Maintaining Effective Control Over Financial Close and -------------------------------------------------------------------------------- Reporting Process. ------------------- During the second quarter we have developed and implemented several new accounting policies and procedures. During the third and fourth quarters of 2006 we will continue to develop and implement more accounting policies. We have developed and implemented more structured and meaningful general ledger account reconciliations that now reflect reconciling items that will lead to more timely resolution and proper account classifications. A detailed finance 22 organization training plan on financial controls, policies and procedures, account reconciliations, GAAP and SEC disclosure checklists has been implemented during the second quarter of 2006. These training plans will begin during the third quarter of 2006. In the second quarter the Company has replaced five accounting positions with qualified individuals. During the third quarter of 2006 remediation testing will be conducted over these controls. Actions Related to Maintaining Effective Control Over Computer Applications Used -------------------------------------------------------------------------------- in Financial Reporting. ------------------------- The Company has developed and implemented controls over system changes and upgrades that will be tested during October 2006. In addition, the Company has addressed the necessary changes to resolve the application issues associated with improper system access rights by developing and implementing an IT Security Access Policy. Our remediation testing of this control weakness will be performed during the fourth quarter of 2006 or earlier. Actions Related to Maintaining Effective Controls Over the Payroll Process. -------------------------------------------------------------------------------- We have implemented new payroll policies and procedures for timely notification of terminated employees. The Company will continue to improve the internal controls over payroll during 2006 by implementing additional procedures that will hold one-up managers accountable and responsible for timely notifications of terminated employees. The Company will be performing payroll remediation testing during the third quarter of 2006. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING The Company's remediation plan for three of the four material weaknesses has not been in place long enough to show meaningful results. It is expected, however, that the remediation of these four material weaknesses will significantly improve the Company's internal controls over financial reporting during the latter part of 2006 and beyond. 23 PART II - OTHER INFORMATION ITEM 1-LEGAL PROCEEDINGS There are various 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 NONE ITEM 2-UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On March 31, 2006, the Board of Directors of the Company authorized a program to repurchase up to 500,000 shares, but no more than $5.0 million. The Company intends to effect such repurchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The acquired shares will be held in treasury or cancelled. The Company anticipates financing the repurchase program out of working capital. This stock redemption program was approved to remain in place and in full force/effect for a period of 18 months.

Issuer Purchases of Equity Securities (c) Total number of shares (d) Maximum number (b) Average purchased as part of shares that may yet (a) Total number of price paid per of publicly be purchased under the Period shares purchased share announced plan plan 4/6/06 - 5/5/06 - $ - - 500,000 5/6/06 - 6/5/06 - $ - - 500,000 6/6/06 - 7/5/06 20,000 $ 7.17 20,000 480,000 ------------------- ----------------------------------------- Total 20,000 20,000 480,000 =================== =========================================

During the six months ended July 5, 2006, the Company did not pay any cash dividends. Pomeroy has no plans to pay cash dividends in the foreseeable future, and the payment of such dividends is restricted under Pomeroy's current credit facility. Under such credit facility, cash dividends and stock redemptions are limited to $5 million annually. ITEM 3-DEFAULTS UPON SENIOR SECURITIES None ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 20, 2006, the Company held its annual meeting of stockholders for the following purposes: 1. To elect ten directors; and 2. To approve certain amendments to the 2002 Amended and Restated Outside Directors' Stock Incentive Plan. The voting on the above matters by the stockholders was as follows: 24 Matter: -------

Election of Directors: For Withheld ---------------------- --------- --------- David B. Pomeroy, II 9,014,920 1,787,225 Stephen E. Pomeroy 8,997,750 1,804,395 Kevin G. Gregory 8,994,646 1,807,499 James H. Smith III 8,974,995 1,827,150 William H. Lomicka 8,886,738 1,915,407 Vincent D. Rinaldi 4,562,525 6,239,620 Debra E. Tibey 8,732,542 2,069,603 Kenneth R. Waters 9,037,376 1,764,769 David G. Boucher 9,037,613 1,764,532 Ronald E. Krieg 8,815,302 1,986,843

Approve the Amendment to the Company's 2002 Amended and Restated ---------------------------------------------------------------- Outside Directors' Stock Incentive Plan: ---------------------------------------- With regards to the vote, 6,963,390 shares were voted in favor of the forgoing proposal and 1,744,411 shares were voted against the forgoing proposal. There were 1,814,137 broker nonvotes and stockholders holding 280,207, shares abstained from voting on this proposal. The number of shares voted in favor of the proposal was sufficient for its passage. ITEM 5-OTHER INFORMATION None ITEM 6-EXHIBITS (a) Exhibits 10(i)(mm) Amendment No.3 (With Waiver) to Amended and Restated Credit (16) Facilities Agreement 31.1 Section 302 CEO Certification 31.2 Section 302 CFO Certification 32.1 Section 906 CEO Certification 32.2 Section 906 CFO Certification 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POMEROY IT SOLUTIONS, INC. -------------------------- (Registrant) Date: August 14, 2006 By: /s/ Kevin G. Gregory ------------------------------------------ Kevin G. Gregory Senior Vice President and Chief Financial Officer 26