10-Q/A 1 form10qa.txt POMEROY IT SOLUTIONS 10-Q/A 1 7-5-2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 1) (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, 2005 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 NO X --- --- 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, 2005 was 12,579,159

POMEROY IT SOLUTIONS, INC. TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements: Page ---- Consolidated Balance Sheets as of July 5, 2005 (Unaudited) and January 5, 2005 2 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended July 5, 2005 and 2004 (Unaudited) 4 Consolidated Statements of Income for the Six Months Ended July 5, 2005 and 2004 (Unaudited) 5 Consolidated Statements of Comprehensive Income for the Six Months Ended July 5, 2005 and 2004 (Unaudited) 6 Consolidated Statements of Cash Flows for the Six Months Ended July 5, 2005 and 2004 (Unaudited) 7 Notes to Consolidated Financial Statements (Unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosure about Market Risk 23 Item 4. Controls and Procedures 23 Part II. Other Information Item 1. Legal Proceedings 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 26 Item 6. Exhibits 26 SIGNATURES 27

EXPLANATORY NOTE Pomeroy IT Solutions, Inc. (the "Company") is filing this amendment No. 1 (the "Amendment") to its quarterly report on form 10-Q for the quarterly period ended July 5, 2005, originally filed on August 15, 2005 (the "original filing date"), As described in Note 12 to the Consolidated Financial Statements, the Company is restating its previously filed consolidated financial statements as of and for the three months and six months ended July 5, 2005 Form 10-Q dated August 15, 2005, Subsequent to the filing of the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 5, 2005, the Company determined that there were accounting errors related to service revenue and cost calculations and capitalized costs and depreciation expense related to internal-use software. The Company reviewed the service revenue and cost calculations and has concluded that they were improperly recorded as of and for the three and six months ended July 5, 2005. The errors primarily related to problems with new information technology systems and processes for service revenues and costs, which were implemented during the quarterly period ended April 5, 2005. The new information technology systems converted and integrated the prior systems and processes used by the Company and Alternative Resources Corporation, the services business acquired by the Company during its fiscal year ended January 5, 2005. In addition, the Company has reviewed and adjusted depreciation expense related to internal use software. During the fourth quarter of 2005, the Company re-aligned the structure of its internal organization and began operating under one business segment. Previously, the Company operated under three operating segments: products, services and leasing. The aggregation of segments reflects the manner in which management and the board of directors now evaluate operating results in accordance with Statement of Financial Accounting Standards No.131, "Disclosures about Segments of an Enterprise and Related Information". The consolidated financial statements for the three and six months ended July 5, 2005 contained in this Amendment have been amended to reflect this change. The restatement affects disclosures and tabular amounts in Part I Item 1, Financial Statements and Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. This Amendment speaks as of the original filing date. This Amendment should be read together with other documents that the Company has filed with the Securities and Exchange Commission subsequent to the original filing. 1

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) July 5, January 5, 2005 2005 --------------------- --------------------- (Restated-Unaudited) ASSETS Current Assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 4,218 $ 13,108 Certificates of deposit. . . . . . . . . . . . . . . . . . . . 4,595 4,561 Accounts receivable: Trade, less allowance of $2,031 at July 5, 2005 and $1,462 at January 5, 2005 . . . . . . . . . . . . . . . . . . . . 142,662 143,113 Vendor receivables, less allowance of $100 at July 5, 2005 and January 5, 2005 . . . . . . . . . . . . . 7,301 5,790 Net investment in leases . . . . . . . . . . . . . . . . . . 2,480 3,814 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,134 2,902 --------------------- --------------------- Total receivables. . . . . . . . . . . . . . . . . . . . . 154,577 155,619 --------------------- --------------------- Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 18,206 17,188 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,672 10,302 --------------------- --------------------- Total current assets . . . . . . . . . . . . . . . . . . . 190,268 200,778 --------------------- --------------------- Equipment and leasehold improvements: Furniture, fixtures and equipment. . . . . . . . . . . . . . 30,513 30,113 Leasehold improvements . . . . . . . . . . . . . . . . . . . 6,474 6,187 --------------------- --------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 36,987 36,300 Less accumulated depreciation. . . . . . . . . . . . . . . . 22,932 21,061 --------------------- --------------------- Net equipment and leasehold improvements . . . . . . . . . 14,055 15,239 --------------------- --------------------- Net investment in leases, net of current portion . . . . . . . 1,741 1,650 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,514 109,913 Intangible assets, net . . . . . . . . . . . . . . . . . . . . 3,242 3,702 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,593 1,606 --------------------- --------------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 322,413 $ 332,888 ===================== =====================

See notes to consolidated financial statements. 2

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) July 5, January 5, 2005 2005 --------------------- --------------------- (Restated-Unaudited) LIABILITIES AND EQUITY Current Liabilities: Current portion of notes payable . . . . . . . . . . . . . . $ - $ 912 Short-term borrowings. . . . . . . . . . . . . . . . . . . . 17,652 20,153 Accounts payable . . . . . . . . . . . . . . . . . . . . . . 67,996 72,656 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 3,103 3,490 Employee compensation and benefits . . . . . . . . . . . . . 4,263 8,245 Accrued restructuring and severance charges. . . . . . . . . 4,111 7,585 Other current liabilities. . . . . . . . . . . . . . . . . . 5,985 6,778 --------------------- --------------------- Total current liabilities. . . . . . . . . . . . . . . . 103,110 119,819 --------------------- --------------------- Notes payable, less current portion. . . . . . . . . . . . . - 250 Deferred income taxes. . . . . . . . . . . . . . . . . . . . 1,597 97 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 (13,368 and 13,188 shares issued at July 5, 2005 and January 5, 2005, respectively) . . . . . . . . . . . . . 134 132 Paid-in capital. . . . . . . . . . . . . . . . . . . . . . 87,556 85,231 Accumulated other comprehensive income (loss). . . . . . . 24 (78) Retained earnings. . . . . . . . . . . . . . . . . . . . . 139,114 136,183 --------------------- --------------------- 226,828 221,468 Less treasury stock, at cost ( 810 and 778 shares at July 5 2005 and January 5, 2005, respectively). . . . . . . . . 9,122 8,746 --------------------- --------------------- Total equity . . . . . . . . . . . . . . . . . . . . . 217,706 212,722 --------------------- --------------------- Total liabilities and equity . . . . . . . . . . . . . $ 322,413 $ 332,888 ===================== =====================

See notes to consolidated financial statements. 3

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands,except earnings per share data) Three Months Ended -------------------------------------------- July 5, July 5, 2005 2004 --------------------- --------------------- (Restated-Unaudited) (Unaudited) Net sales and service revenues: Sales-equipment, supplies and leasing $ 135,093 $ 143,722 Service 56,932 34,433 --------------------- --------------------- Total net sales and service revenues 192,025 178,155 --------------------- --------------------- Cost of sales and service: Sales-equipment, supplies and leasing 124,956 133,444 Service 41,922 24,980 --------------------- --------------------- Total cost of sales and service 166,878 158,424 --------------------- --------------------- Gross profit 25,147 19,731 --------------------- --------------------- Operating expenses: Selling, general and administrative 18,748 12,785 Rent expense 790 777 Depreciation 1,236 1,027 Amortization 192 39 --------------------- --------------------- Total operating expenses 20,966 14,628 --------------------- --------------------- Income from operations 4,181 5,103 --------------------- --------------------- Other expense (income): Interest , net 206 (19) Other - 21 --------------------- --------------------- Total other expense (income) 206 2 --------------------- --------------------- Income before income tax 3,975 5,101 Income tax expense 1,610 2,015 --------------------- --------------------- Net income and comprehensive income $ 2,365 $ 3,086 ===================== ===================== Weighted average shares outstanding: Basic 12,573 12,258 ===================== ===================== Diluted 12,656 12,401 ===================== ===================== Earnings per common share: Basic $ 0.19 $ 0.25 ===================== ===================== Diluted $ 0.19 $ 0.25 ===================== =====================

See notes to consolidated financial statements. 4

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except earnings per share data) Six Months Ended -------------------------------------------- July 5, July 5, 2005 2004 --------------------- --------------------- (Restated-Unaudited) (Unaudited) Net sales and service revenues: Sales-equipment, supplies and leasing $ 246,336 $ 268,321 Service 111,521 65,048 --------------------- --------------------- Total net sales and service revenues 357,857 333,369 --------------------- --------------------- Cost of sales and service: Sales-equipment, supplies and leasing 227,380 248,017 Service 82,514 47,252 --------------------- --------------------- Total cost of sales and service 309,894 295,269 --------------------- --------------------- Gross profit 47,963 38,100 --------------------- --------------------- Operating expenses: Selling, general and administrative 37,856 25,752 Rent expense 1,726 1,545 Depreciation 2,437 1,916 Amortization 460 79 Restructuring and severance charges 132 - --------------------- --------------------- Total operating expenses 42,611 29,292 --------------------- --------------------- Income from operations 5,352 8,808 --------------------- --------------------- Other expense (income): Interest, net 427 (31) Other 1 23 --------------------- --------------------- Total other expense (income) 428 (8) --------------------- --------------------- Income before income tax 4,924 8,816 Income tax expense 1,994 3,454 --------------------- --------------------- Net income $ 2,930 $ 5,362 ===================== ===================== Weighted average shares outstanding: Basic 12,521 12,245 ===================== ===================== Diluted 12,661 12,362 ===================== ===================== Earnings per common share: Basic $ 0.23 $ 0.44 ===================== ===================== Diluted $ 0.23 $ 0.43 ===================== =====================

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, 2005 2004 --------------------- --------------------- (Restated-Unaudited) (Unaudited) Net income. . . . . . . . . . . . . . . . . . . . . . $ 2,930 $ 5,362 Other comprehensive income: Foreign currency translation adjustment, net of tax 102 - --------------------- --------------------- Comprehensive income. . . . . . . . . . . . . . . . . $ 3,032 $ 5,362 ===================== =====================

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, 2005 2004 ------------ ------------ (Restated- (Unaudited) Unaudited) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,930 $ 5,362 Adjustments to reconcile net income to net cash from operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . 2,437 1,916 Amortization . . . . . . . . . . . . . . . . . . . . . . . 460 79 Restructuring and severance charges. . . . . . . . . . . . 132 - Deferred income taxes. . . . . . . . . . . . . . . . . . . 2,641 (395) Loss on sale of fixed assets . . . . . . . . . . . . . . . 8 22 Changes in working capital accounts, net of effects of acquisitions: Accounts receivable. . . . . . . . . . . . . . . . . . . (1,765) 668 Inventories. . . . . . . . . . . . . . . . . . . . . . . (1,841) (5,793) Other current assets . . . . . . . . . . . . . . . . . . 489 (462) Net investment in leases . . . . . . . . . . . . . . . . 2,413 254 Accounts payable . . . . . . . . . . . . . . . . . . . . (4,065) 5,332 Deferred revenue . . . . . . . . . . . . . . . . . . . . (387) (908) Income tax payable . . . . . . . . . . . . . . . . . . . 18 290 Employee compensation and benefits . . . . . . . . . . . (3,982) (286) Other, net . . . . . . . . . . . . . . . . . . . . . . . (5,068) 1,133 ------------ ------------ Net operating activities . . . . . . . . . . . . . . . . . (5,580) 7,212 ------------ ------------ Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . (1,033) (1,062) Proceeds from sale of fixed assets . . . . . . . . . . . . 6 20 Purchases of certificates of deposit . . . . . . . . . . . (34) (1,517) Acquisition of businesses, net of cash acquired. . . . . . . . . . . . . . . . . . . . . . (1,139) (541) ------------ ------------ Net investing activities . . . . . . . . . . . . . . . . . (2,200) (3,100) ------------ ------------ Cash flows from financing activities: Payments of notes payable. . . . . . . . . . . . . . . . . (662) (663) Proceeds from exercise of stock options and related tax benefit. . . . . . . . . . . . . . . . . 2,327 396 Purchase of treasury stock . . . . . . . . . . . . . . . . (376) (349) Proceeds from employee stock purchase plan . . . . . . . . - 160 Net payments of short-term borrowings. . . . . . . . . . . (2,501) - ------------ ------------ Net financing activities . . . . . . . . . . . . . . . . . (1,212) (456) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents 102 - ------------ ------------ Change in cash and cash equivalents. . . . . . . . . . . . . (8,890) 3,656 Cash and cash equivalents: Beginning of period. . . . . . . . . . . . . . . . . . . . 13,108 37,183 ------------ ------------ End of period. . . . . . . . . . . . . . . . . . . . . . . $ 4,218 $ 40,839 ============ ============

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, 2005. 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 six-month period ended July 5, 2005 are not necessarily indicative of the results that may be expected for future interim periods or for the year ending January 5, 2006. 2. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, "Inventory Pricing," that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes that implementing SFAS No. 151 should not have any material impact on its financial condition, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period of an entity's first fiscal year beginning after June 15, 2005, with early adoption encouraged. The Company expects to adopt SFAS No. 123R effective January 6, 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. SFAS No. 123R will apply to awards granted or modified by the Company after January 5, 2006. Compensation cost will also be recorded for prior option grants that vest after that date. The effect of adopting SFAS 123 on the Company's consolidated results of operations will depend on the level of future option grants and the fair value of the options granted at such future dates, as well as the vesting periods provided by such awards and, therefore, cannot currently be estimated. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"). SAB No. 107 covers key topics related to the implementation of SFAS No. 123R which include the valuation models, expected volatility, expected option term, income tax effects of SFAS No. 123R, classification of stock-based compensation cost, capitalization of compensation costs, and disclosure requirements. 8 In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" (FIN No. 47). FIN No. 47 clarifies that a company should record a liability for a conditional asset retirement obligation when incurred if the fair value of the obligation can be reasonably estimated. This interpretation further clarified conditional asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 is effective for companies no later than the end of their fiscal years ending after December 15, 2005. The Company does not expect the adoption of FIN No. 47 to have a material impact on the Company's financial position, results of operations or cash flows. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." This statement requires that an entity apply the retrospective method in reporting a change in an accounting principle of the reporting entity. The standard only allows for a change in accounting principle if it is required by a newly issued accounting pronouncement or the entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable. This statement also requires that corrections for errors discovered in prior period financial statements be reported as a prior period adjustment by restating the prior period financial statements. Additional disclosures are required when a change in accounting principle or reporting entity occurs, as well as when a correction for an error is reported. The statement is effective for the Company for fiscal 2006. No material impact is anticipated as a result of the adoption of this statement. 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. 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, 2005, the Company had an outstanding balance under the Company's credit facility of $17.7 million. As of January 5, 2005, the Company had an outstanding balance under the Company's credit facility of $20.2 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 maximum net loss after tax. As of July 5, 2005, the Company was in compliance with those financial covenants. 4. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is 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 adopted SFAS No. 123 for disclosure purposes and for non-employee stock options. 9 Had compensation cost for the Company's stock option plans been determined based on the fair value of the awards at the grant date consistent with the provisions of SFAS No. 123, as amended by SFAS No.148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:

(in thousands, except per Three Months Ended July 5, share amounts) 2005 2004 -------------- ------------- (Restated) Net income - as reported $ 2,365 $ 3,086 Stock-based compensation expense-net of tax 266 261 -------------- ------------- Net income - pro forma $ 2,099 $ 2,825 ============== ============= Net income per common share - as reported Basic $ 0.19 $ 0.25 ============== ============= Diluted $ 0.19 $ 0.25 ============== ============= Net income per common share - pro forma Basic $ 0.17 $ 0.23 ============== ============= Diluted $ 0.17 $ 0.23 ============== =============

(in thousands, except per Six Months Ended July 5, share amounts) 2005 2004 ------------ -------------- (Restated) Net income - as reported $ 2,930 $ 5,362 Stock-based compensation expense-net of tax 1,358 800 ------------ -------------- Net income - pro forma $ 1,572 $ 4,562 ============ ============== Net income per common share - as reported Basic $ 0.23 $ 0.44 ============ ============== Diluted $ 0.23 $ 0.43 ============ ============== Net income per common share - pro forma Basic $ 0.13 $ 0.37 ============ ============== Diluted $ 0.12 $ 0.37 ============ ==============

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) 10

Three Months Ended July 5, --------------------------------------- 2005 2004 ------------------- ------------------ Per Share Per Share Shares Amount Shares Amount ------ ----------- ------ ---------- (Restated) Basic EPS 12,573 $ 0.19 12,258 $ 0.25 Effect of dilutive stock options 83 - 143 - ------ ----------- ------ ---------- Diluted EPS 12,656 $ 0.19 12,401 $ 0.25 ====== =========== ====== ==========

Six Months Ended July 5, ---------------------------------------- 2005 2004 ------------------- ------------------- Per Share Per Share Shares Amount Shares Amount ------ ----------- ------ ----------- (Restated) Basic EPS 12,521 $ 0.23 12,245 $ 0.44 Effect of dilutive stock options 140 - 117 (0.01) ------ ----------- ------ ----------- Diluted EPS 12,661 $ 0.23 12,362 $ 0.43 ====== =========== ====== ===========

6. Goodwill and Long-Lived Assets Intangible assets with definite lives are amortized using straight-line and accelerated methods over their estimated useful lives. The following table provides a summary of the Company's intangible assets with definite lives as of July 5, 2005 and January 5, 2005:

(in thousands) Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount 7/5/2005 7/5/2005 7/5/2005 1/5/2005 1/5/2005 1/5/2005 ----------------------------------- ----------------------------------- Amortized intangible assets: Covenants not-to-compete $ 2,024 $ 1,841 $ 183 $ 2,024 $ 1,769 $ 255 Customer lists 2,877 861 2,016 2,877 559 2,318 Other intangibles 1,200 157 1,043 1,200 71 1,129 --------- ------------- --------- --------- ------------- --------- Total amortized intangibles $ 6,101 $ 2,859 $ 3,242 $ 6,101 $ 2,399 $ 3,702 ========= ============= ========= ========= ============= =========

Amortized intangible assets are being amortized over periods ranging from 1 to 15 years for covenants not-to-compete, 7 to 15 years for customer lists and 7 years for other intangibles. For the quarter ended July 5, 2005, amortization expense related to intangible assets was $192 thousand. For the quarter ended July 5, 2004, amortization expense related to intangible assets was $39 thousand. For the six months ended July 5, 2005, amortization expense related to intangible assets with definite lives was $460 thousand. For the six months ended July 5, 2004, amortization expense related to intangible assets with definite lives was $79 thousand. 11 Projected future amortization expense related to intangible assets with definite lives is as follows:

(in thousands) Fiscal Years: 2005 $ 304 July 6, 2005 - January 5, 2006 2006 543 2007 504 2008 461 2009 421 2010 + 1,009 ------ Total $3,242 ======

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

(in thousands) Net carrying amount as of 1/5/05 $109,913 Net goodwill recorded during first quarter (11) --------- Net carrying amount as of 4/5/05 109,902 Net goodwill recorded during second quarter 612 --------- Net carrying amount as of 7/5/05 $110,514 =========

7. 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, ------------------------- 2005 2004 ------------ ----------- Interest paid $ 520 $ 162 ============ =========== Income taxes paid $ 1,088 $ 2,364 ============ =========== Adjustments to purchase price of acquired assets and goodwill $ (538) $ 70 ============ =========== Business combinations accounted for as purchases: Assets acquired $ 1,139 $ 541 Liabilities assumed - - ------------------------- Net cash paid $ 1,139 $ 541 =========================

8. 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. 12 9. 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. 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. 10. Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current period presentation. 11. Restructuring and Severance Charges During the first quarter of 2005, the Company recorded severance charges of $0.1 million resulting from the realignment of the structure of the Company's internal organization. During the third quarter of 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 have or will become duplicative or redundant as Alternative Resources Corporation ("ARC") operations are 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 three and nine-month periods ended October 5, 2004. Going forward, any 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 the third quarter of 2004 a non-recurring, one-time charge for severance in the amount of $1.447 million related to the resignation of founder and former CEO David B. Pomeroy II. Mr. Pomeroy will continue to serve as Chairman of the Board and as a consultant. 13 As of July 5, 2005, the restructuring and severance charge accrual consisted of the following:

Total Initial Cash Accrued balance (in thousands) Accrual payments at July 5, 2005 -------------------------------------------- Severance $ 1,979 $ (1,700) $ 279 -------------------------------------------- Facility consolidations 576 (345) 231 -------------------------------------------- $ 2,555 $ (2,045) $ 510 ============================================

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 July 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 of executing the currently approved plans of restructuring through July 23, 2005 will be recorded as an increase or decrease in goodwill with any increases in estimates thereafter charged to operations.

Total Initial Cash Liability balance (in thousands) Liability payments at July 5, 2005 ---------------------------------------------- Severance $ 2,682 $ (2,256) $ 426 ---------------------------------------------- Facility consolidations 3,715 (605) 3,110 ---------------------------------------------- $ 6,397 $ (2,861) $ 3,536 ==============================================

Additionally, as part of the acquisition of ARC, the Company acquired the remaining obligations of ARC's existing restructuring plans, which were initially recorded by ARC in fiscal 2003 and fiscal 2002. The total obligations assumed in connection with these restructuring plans were $2.1 million at July 23, 2004. As of July 5, 2005, the balance of the ARC fiscal 2003 and fiscal 2002 accrued restructuring costs recorded consisted of the following:

(in thousands) Fiscal 2003 Restructuring Charge Total Accrual as Cash Balance at July 5, of 7/23/04 payments 2005 -------------------------------------------------- Severance $ 647 $ (647) $ - -------------------------------------------------- $ 647 $ (647) $ - ================================================== Fiscal 2002 Restructuring Charge Total Accrual as Cash Balance at July 5, of 7/23/04 payments 2005 -------------------------------------------------- Facility consolidations $ 756 $ (722) $ 34 -------------------------------------------------- Other charges 696 (666) 31 -------------------------------------------------- $ 1,452 $ (1,388) $ 65 ==================================================

14 12. Restatement Subsequent to the filing of the Company's Quarterly Report on Form 10-Q for the quarterly period ended July 5, 2005, the Company determined that there were accounting errors related to service revenue and cost calculations, In addition, the Company has reviewed and adjusted depreciation expense related to internal use software. The following table sets forth the consolidated statements of income and selected balance sheet data previously reported on Form 10-Q for the three months and six months ended July 5, 2005, and the restated amounts:

Pomeroy IT Solutions, Inc. Consolidated Statements of Income (in thousands, except earnings per share data) Three months ended Six months ended July 5, 2005 July 5, 2005 ---------------------- ---------------------- Previously Previously Reported Restated Reported Restated ----------- --------- ----------- --------- Total net sales and service revenues $ 193,671 $ 192,025 $ 359,261 $ 357,857 Total cost of sales and service 167,449 166,878 308,603 309,894 ----------- --------- ----------- --------- Gross profit 26,222 25,147 50,658 47,963 Total operating expenses 20,788 20,966 42,061 42,611 ----------- --------- ----------- --------- Income from operations 5,434 4,181 8,597 5,352 Total other expense 207 206 428 428 ----------- --------- ----------- --------- Income before income tax 5,227 3,975 8,169 4,924 Income tax expense 2,116 1,610 3,308 1,994 ----------- --------- ----------- --------- Net income $ 3,111 $ 2,365 $ 4,861 $ 2,930 =========== ========= =========== ========= Earnings per share: Basic $ 0.25 $ 0.19 $ 0.39 $ 0.23 =========== ========= =========== ========= Diluted $ 0.25 $ 0.19 $ 0.38 $ 0.23 =========== ========= =========== =========

Pomeroy IT Solutions, Inc. Selected Consolidated Balance Sheet Data As of July 5, 2005 (in thousands) Previously Reported Restated ----------- --------- Total current assets $ 190,209 $ 190,268 ----------- --------- Total assets $ 322,741 $ 322,413 =========== ========= Total current liabilities $ 102,601 $ 103,110 Total long-term liabilities 504 1,597 Total equity 219,636 217,706 ----------- --------- Total liabilities and equity $ 322,741 $ 322,413 =========== =========

15 13. Subsequent Events On November 15, 2005, the Company disclosed that it was unable to complete its financial statements for the third quarter of fiscal 2005 because it has identified errors relating to service billing and cost calculations. The errors relate to problems with new IT systems and processes for services revenues that were implemented during the latter part of the first quarter of fiscal 2005. The new IT systems converted and integrated the prior systems and processes used by the Company and Alternative Resources Corporation, the services business acquired by the Company during fiscal 2004. On November 23, 2005, the Company received a Nasdaq Staff Determination notice from the Nasdaq Listing Qualifications Department that the Company was not in compliance with the continued listing requirements of NASD Marketplace Rule 4310(c)(14). The Company requested a hearing before the Nasdaq Listing Qualifications Hearings Panel (the "Panel") to review the Staff Determination, which was held on December 22, 2005. As a result of that hearing, on January 30, 2006, the Company received a decision letter from Nasdaq informing the Company that the Panel determined to grant the Company's request for continued listing on The Nasdaq National Market provided that the Company filed its quarterly report on Form 10-Q for the period ended October 5, 2005 (the "Third Quarter Form 10-Q") and all required restatements, by February 28, 2006. On February 17, 2006, in accordance with the Company's Plan submitted to the Panel, the Company notified the Panel that Pomeroy's Audit Committee had concluded that the financial statements for the Company's quarters ended April 5, 2005 and July 5, 2005 should be restated and requested that the Panel grant an additional extension of time to file the Third Quarter Form 10-Q and restatements. On February 23, 2006, the Company reported on Form 8-K the conclusion of the Audit Committee that the financial statements for the Company's quarters ended April 5, 2005 and July 5, 2005 should be restated. On February 28, 2006, the Company received a decision letter from Nasdaq informing the Company that the Panel determined to grant the Company's request for continued listing on The Nasdaq National Market provided that the Company files the Third Quarter Form 10-Q and all required restatements by March 31, 2006. In order to fully comply with the terms of this exception, the Company must provide prompt notification to the Panel of any significant events that occur during the exception period and demonstrate compliance with all requirements for continued listing on The Nasdaq National Market. If the Company fails to satisfy the terms of the exception, its securities may be delisted. 16 ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement This section has been updated to give effect to the restatement as discussed in Note 12 to the Notes to Consolidated Financial Statements included in Item 1. 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. 17 RESULTS OF OPERATIONS The following table sets forth for the periods presented information derived from our consolidated statements of income expressed as a percentage of net sales and service revenues:

Percentage of net sales and service revenues -------------------------------------------------------------------------------------- Financial Results Three months ended Six months ended July 5, July 5, 2005 2004 2005 2004 -------------------- -------------------- -------------------- -------------------- (Restated- (Unaudited) (Restated- (Unaudited) Unaudited) Unaudited) Net sales and service revenues: Sales-equipment, supplies and leasing 70.4% 80.7% 68.8% 80.5% Service 29.6% 19.3% 31.2% 19.5% -------------------- -------------------- -------------------- -------------------- Total net sales and service revenues 100.0% 100.0% 100.0% 100.0% ==================== ==================== ==================== ==================== Cost of sales and service: Sales-equipment, supplies and leasing 65.1% 74.9% 63.5% 74.4% Service 21.8% 14.0% 23.1% 14.2% -------------------- -------------------- -------------------- -------------------- Total cost of sales and service 86.9% 88.9% 86.6% 88.6% ==================== ==================== ==================== ==================== Gross profit 13.1% 11.1% 13.4% 11.4% -------------------- -------------------- -------------------- -------------------- Operating expenses: Selling, general and administrative 9.8% 7.2% 10.6% 7.7% Rent expense 0.4% 0.4% 0.5% 0.5% Depreciation 0.6% 0.6% 0.7% 0.6% Amortization 0.1% 0.0% 0.1% 0.0% -------------------- -------------------- -------------------- -------------------- Total operating expenses 10.9% 8.2% 11.9% 8.8% -------------------- -------------------- -------------------- -------------------- Income from operations 2.2% 2.9% 1.5% 2.6% Net other expense 0.1% 0.0% 0.1% 0.0% -------------------- -------------------- -------------------- -------------------- Income before income tax 2.1% 2.9% 1.4% 2.6% Income tax expense 0.9% 1.2% 0.6% 1.0% -------------------- -------------------- -------------------- -------------------- Net income 1.2% 1.7% 0.8% 1.6% ==================== ==================== ==================== ====================

18 POMEROY IT SOLUTIONS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TOTAL NET SALES AND SERVICE REVENUES. Total net sales and service revenues increased $13.8 million, or 7.7%, to $192.0 million in the second quarter of fiscal 2005 from $178.2 million in the second quarter of fiscal 2004. Product sales decreased $8.6 million, or 6.0%, to $135.1 million in the second quarter of fiscal 2005 from $143.7 million in the second quarter of fiscal 2004. This decrease is due to year over year decline as a result of reductions in IT spending. Service revenues increased $22.5 million, or 65.4%, to $56.9 million in the second quarter of fiscal 2005 from $34.4 million in the second quarter of fiscal year 2004. This increase reflects both organic growth and the acquisition of Alternative Resources Corporation ("ARC") on July 23, 2004. Total net sales and service revenues increased $24.5 million, or 7.3%, to $357.9 million in the first six months of fiscal 2005 from $333.4 million in the first six months of fiscal 2004. Product sales decreased $22.0 million, or 8.2%, to $246.3 million in the first six months of fiscal 2005 from $268.3 million in the first six months of fiscal 2004. Service revenues increased $46.5 million, or 71.5%, to $111.5 million in the first six months of fiscal 2005 from $65.0 million in the first six months of fiscal year 2004. GROSS PROFIT. Gross profit increased $5.4 million, or 27.4%, to $25.1 million in the second quarter of fiscal 2005 from $19.7 million in the second quarter of fiscal 2004. The increase resulted primarily from increases in service revenues as a result of the acquisition of ARC. Gross profit, as a percentage of revenue, increased to 13.1% in the second quarter of fiscal 2005 as compared to 11.1% in the second quarter of fiscal 2004. The increase in gross margin percentage resulted primarily from a change in product/service mix, that yielded a higher gross margin. The product/service mix change can be attributed to an increase in higher margin service revenues primarily as a result of the acquisition of ARC. Going forward the Company will continue to be aggressive in its pricing in order to increase market share, which could have an unfavorable impact on overall gross margin in the future. The Company expects to continue increasing the breadth and depth of its offerings, which will have a continued impact on gross margin. Factors that may have an impact on gross margin in the future include changes in personnel utilization rates, the mix of products sold and services provided, start-up costs on large service contracts, a change in unit prices, the percentage of sales with lower-margin customers, and the Company's decision to aggressively price certain products and services. Gross profit increased $9.9 million, or 26.0%, to $48.0 million in the first six months of fiscal 2005 from $38.1 million in the first six months of fiscal 2004. The increase was primarily due to increased total net sales and service revenues offset somewhat by lower product gross profit in 2005. Gross profit, as a percentage of revenue, increased to 13.4% in the first six months of fiscal 2005 as compared to 11.4% in the first six months of fiscal 2004. The increase in gross margin percentage resulted primarily from a change in product/service mix, that yielded a higher gross margin. The product/service mix change can be attributed primarily to the acquisition of ARC. On a forward looking basis, the Company expects to be aggressive in it's pricing in order to increase market share, which could have an unfavorable impact on overall gross margin. Additionally, the Company expects to continue increasing the breadth and depth of its offerings, which will have a continued favorable impact on gross margin. Factors that may have an impact on gross margin in the future include changes in personnel utilization rates, the mix of products sold and services provided, a change in unit prices, the percentage of sales with lower-margin customers, and the Company's decision to aggressively price certain products and services. OPERATING EXPENSES. Selling, general and administrative expenses (including rent expense) expressed as a percentage of total net sales and service revenues increased to 10.2% in the second quarter of fiscal 2005 from 7.6% in the second quarter of fiscal 2004. Total operating expenses expressed as a percentage of total net sales and service revenues increased to 10.9% in the second quarter of fiscal 2005 from 8.2% in the second quarter of fiscal 2004. The increases are primarily attributable to increased payroll costs and related benefits, resulting from the acquisition of ARC in 2004. 19 Selling, general and administrative expenses (including rent expense) expressed as a percentage of total net sales and service revenues increased to 11.1% in the first six months of fiscal 2005 from 8.2% in the first six months of fiscal 2004. Total operating expenses expressed as a percentage of total net sales and revenues increased to 11.9% in the first six months of fiscal 2005 from 8.8% in the first six months of fiscal 2004. The increases are primarily attributable to increased payroll costs and related benefits, resulting from the acquisition of ARC in 2004. INCOME FROM OPERATIONS. Income from operations decreased $0.9 million, or 17.6%, to $4.2 million in the second quarter of fiscal 2005 from $5.1 million in the second quarter of fiscal 2004. The Company's operating margin decreased to 2.2% in the second quarter of fiscal 2005 as compared to 2.9% in the second quarter of fiscal 2004. This decrease is a result of the increase in operating expenses. Income from operations decreased $3.4 million, or 38.6%, to $5.4 million in the first six months of fiscal 2005 from $8.8 million in the first six months of fiscal 2004. The Company's operating margin decreased to 1.5% in the first six months of fiscal 2005 as compared to 2.6% in the first six months of fiscal 2004. This decrease is primarily due to the increase in operating expenses. INTEREST INCOME/EXPENSE. Net interest expense was $206 thousand during the second quarter of fiscal 2005 as compared to net interest income of $19 thousand during second quarter of fiscal 2004. This increase in net interest expense was a result of increased borrowings under our credit facility and lower interest rates on invested funds. Net interest expense was $427 thousand in the first six months of fiscal 2005 compared to net interest income of $31 thousand in the first six months of fiscal 2004. This increase in net interest expense was a result of increased borrowings under our credit facility. INCOME TAXES. The Company's effective income tax rate was 40.5% in the second quarter of fiscal 2005 compared to 39.5% in the second quarter of fiscal 2004. This increase was principally related to the increased rate in calculating state and local income taxes. The Company's effective income tax rate was 40.5% in the first six months of fiscal 2005 compared to 39.2% in the first six months of fiscal 2004. This increase was principally related to the increased rate in calculating state and local income taxes. NET INCOME. Net income decreased $0.7 million, or 22.6%, to $2.4 million in the second quarter of fiscal 2005 from $3.1 million in the second quarter of fiscal 2004 due to the factors described above. Net income decreased $2.4 million, or 45.3%, to $2.9 million in the first six months of fiscal 2005 from $5.4 million in the first six months of fiscal 2004 due to the factors described above. 20 LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $5.6 million in the first six months of fiscal 2005. Cash used in investing activities was $2.2 million, which included $1.1 million for prior year acquisitions and $1.0 million for capital expenditures. Cash used in financing activities was $1.2 million which included $2.5 million for repayment of short-term borrowings, $0.4 million for the purchase of treasury stock and $0.7 million for payments of notes payable offset by $2.3 million of proceeds from the exercise of stock options. The amount of cash derived from operating activities will vary based on a number of business factors which may change from time to time, including terms of available financing from vendors, downturns in the Company's business and/or downturns in the businesses of the Company's customers. However, a growth or decline in services revenue in conjunction with a change in the proportion of services revenue to total revenue is an underlying driver of operating cash flow during the period of change 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 stock of 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. Operating cash flows used in the six months ended July 5, 2005 were $5.6 million as compared to cash flows provided by operating activities of $7.2 million for the corresponding period of fiscal 2004. The decrease in cash flows from operating activities in the first six months of 2005 resulted primarily from increases in inventory, slower collection of trade accounts receivables and timing of payments on accounts payable. In addition acquisition-related expenditures were made for restructuring charges (primarily facility consolidation) and payment of year-end employee compensation, bonuses and severance. A significant part of the Company's inventories are financed by floor plan arrangements with third parties. At July 5, 2005, these lines of credit totaled $85.0 million, including $75.0 million with GE Commercial Distribution Finance ("GECDF") and $10.0 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 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, 2005, the adjusted LIBOR rate was 5.34%. This credit facility expires June 28, 2007. As of July 5, 2005, the Company had an outstanding balance under the Company's credit facility of $17.7 million. As of January 5, 2005, the Company had an outstanding balance under the Company's credit facility of $20.2 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 21 subject to various financial covenants. As of July 5, 2005 the Company was not in violation of any financial covenants. The Company believes that the anticipated cash flow from operations and current financing arrangements will be sufficient to satisfy the Company's capital requirements for the next twelve months. Historically, the Company has financed acquisitions using a combination of cash, deferred earn-out payments, shares of its Common Stock and seller financing. The Company anticipates that future acquisitions will be financed in a similar manner. On October 11, 2004, the Board of Directors approved the repurchase of up to 100,000 shares of the Company's common stock. This stock redemption program was approved to remain in place and in full force/effect for a period of one year. 22 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 2005. 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 Rules 13(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 more fully described in Item 9A of the Company's Annual Report on Form 10-K/A for the year ended January 5, 2005, the Company reported that it identified material weaknesses in its internal control over financial reporting related to (1) the accuracy of service billing calculations and revenue recognition related to service activity, and (2) appropriately applying generally accepted accounting principles ensuring the adequacy and completeness of disclosures in the consolidated financial statements as of January 5, 2005. As a result, the Company's management, including its Chief Executive Officer and Chief Financial Officer, concluded that as of January 5, 2005, 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 a result of the identified material weaknesses and subsequently identified errors related service revenue and cost calculations, the Company is taking steps to enhance its internal control over financial reporting in an effort to prevent a recurrence of the errors which led to the restatements of the Company's consolidated financial statements for the quarters ended April 5, 2005 and July 5,2005. The Audit Committee and management have discussed the matters in detail with Pomeroy's auditor as part of their efforts to enhance Pomeroy's internal controls over financial reporting. Management has developed a plan for addressing each of the material weaknesses; however, as of July 5, 2005, the material weaknesses and subsequently identified errors had not been remediated and management does not believe all material weaknesses will be remediated by year end. Accordingly, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 5, 2005, our 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 the material weaknesses and subsequently identified errors, the financial statements reported on Form 10-Q for the fiscal quarter ended July 5, 2005, fairly present, in all material respects, the consolidated financial condition and results of operations of the Company for the fiscal quarters presented. Changes in Internal Control Over Financial Reporting Pomeroy IT Solutions, Inc. acquired Alternative Resources Corporation ("ARC") in July of 2004. As previously disclosed in the Company's Form 10-K/A for the year ended January 5, 2005, ARC, whose core competency was the staffing of technical resources for customers, was excluded from management's assessment of internal control over financial reporting. During the three-month period ended April 5, 2005, the integration of the two companies was substantially completed. This integration involved implementing a packaged resource 23 management job order application, and interfacing it with Pomeroy's financial and payroll legacy systems. As of July 5, 2005, this system had not been fully tested from an internal control perspective. However, management believes that testing of these controls may reveal material weaknesses. 24 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 2-UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On October 11, 2004, the Board of Directors approved the repurchase of up to 100,000 shares of the Company's common stock. This stock redemption program was approved to remain in place and in full force/effect for a period of one year.

Issuer Purchases of Equity Securities (c) Total number (d) Maximum of shares number of shares (a) Total number (b) Average purchased as that may yet be of shares price paid part of publicly purchased under Period purchased per share announced plan the plan 4/6/05 - 5/5/05 - $ - - 100,000 5/6/05 - 6/5/05 27,400 $ 12.18 27,400 72,600 6/6/05 - 7/5/05 3,900 $ 10.79 3,900 68,700 ---------------- ---------------------------------- Total 31,300 31,300 68,700 ================ ==================================

During 2004 and through July 5, 2005, 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 16, 2005, 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 Option Plan. 25 The voting on the above matters by the stockholders was as follows: Matter ------

Election of Directors: For Withheld ---------------------- ---------- --------- David B. Pomeroy, II 7,619,804 2,878,925 James H. Smith III 7,613,725 2,885,004 Michael E. Rohrkemper 7,622,409 2,876,320 Stephen E. Pomeroy 7,670,639 2,828,090 William H. Lomicka 10,160,356 338,373 Vincent D. Rinaldi 7,620,637 2,878,092 Debra E. Tibey 10,181,168 317,561 Edward E. Faber 10,326,264 172,465 Kenneth R. Waters 10,390,406 108,323 David G. Boucher 10,421,176 77,553

APPROVE THE AMENDMENT TO THE COMPANY'S 2002 AMENDED AND RESTATED OUTSIDE DIRECTORS' STOCK OPTION PLAN 5,255,420 shares were voted in favor of the forgoing proposal and 3,895,122 shares were voted against the forgoing proposal. Stockholders holding 19,230, shares abstained from voting in 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

31.1 Section 302 CEO Certification 31.2 Section 302 CFO Certification 32.1 Section 906 CEO Certification 32.2 Section 906 CFO Certification

26 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: March 31, 2006 By: /s/ Stephen E. Pomeroy -------------- ------------------------------------- Stephen E. Pomeroy Chief Executive Officer and Chief Accounting Officer 27