Pomeroy IT Solutions, Inc. Reports Third Quarter 2008 Results

Pomeroy IT Solutions, Inc. (NASDAQ:PMRY) an information technology ("IT") solutions provider with a comprehensive portfolio of hardware, software, technical staffing services, as well as infrastructure and lifecycle services, today reported third quarter revenue of $145.2 million and net income of $1.8 million, or $0.15 per fully diluted share.

"We are very pleased to announce our second consecutive quarter of increasing profitability for the year. Our product margin percentages remained solid, but the volume of product sales declined sequentially and year over year due to purchase delays resulting from the challenging economic environment. Our technical staffing and infrastructure services profitability was comparable on sequential basis while generating substantially higher gross profit amounts than in Q3 last year. Our balance sheet remains strong reflecting $18.4 million of cash and equivalents with no outstanding debt, other than our floor plan financing, which positions our company well for opportunities that may materialize in the slowing economy,” said Keith Coogan, CEO and President of Pomeroy IT Solutions.

CONSOLIDATED FINANCIAL RESULTS

Third Quarter Financial Results

Third Quarter 2008 versus Third Quarter 2007

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

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

Service revenue was $57.8 million in the third quarter of fiscal 2008 compared to $47.9 million in the third quarter of fiscal 2007, an increase of $9.9 million or 20.7% from fiscal 2007. The Company groups services revenue into Technical Staffing and Infrastructure Services. Technical Staffing Services support clients’ project requirements, ensures regulatory and customer compliance requirements and fulfills interim and permanent staffing requirements of the staffing projects. Infrastructure Services helps clients optimize the various elements of distributed computing environments. Encompassing the complete IT lifecycle, these services include desktop and mobile computing, server and network environments.

Technical Staffing revenue was $28.3 million and accounted for approximately 49.0% of total service revenues in the third quarter of fiscal 2008, compared to $19.9 million and 41.5% for the third quarter of fiscal 2007. This increase is primarily the result of recognizing revenue for the gross billings on personnel which historically have been recorded as fee based services in our vendor management business, as the Company has shifted from the use of subcontractors to employees.

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

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

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

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

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

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

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

Operating Expenses

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

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

Income (Loss) from Operations

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

Net Interest Income (Expense)

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

Income Tax

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

Net Income (Loss)

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

Other Third Quarter Financial Information

-- Working Capital		$ 80.0 million
-- Cash Flow Generated by Operating Activities		$ 14.0 million
-- Cash, Cash Equivalents and CD's		$ 18.4 million
-- Capital Expenditures		$  0.2 million
-- Outstanding Floor Plan Financing		$ 13.9 million
-- Book Value per Share		$ 7.64

October 5, 2008 YTD versus October 5, 2007 YTD

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

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

Service revenue was $183.8 million in the first nine months of fiscal 2008 compared to $144.3 million in the first nine months of fiscal 2007, an increase of $39.5 million or 27.3% from fiscal 2007. The Company groups services revenue into Technical Staffing and Infrastructure Services. Technical Staffing Services support clients’ project requirements, ensures regulatory and customer compliance requirements and fulfills interim and permanent staffing requirements of the staffing projects. Infrastructure Services help clients optimize the various elements of distributed computing environments. Encompassing the complete IT lifecycle, these services include desktop and mobile computing, server and network environments.

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

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

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

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

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

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

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

Operating Expenses

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

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

Loss from Operations

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

Net Interest Expense

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

Income Tax

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

Net Loss

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

CONFERENCE CALL

To participate in a conference call and questions and answer session with senior management regarding the third quarter of fiscal 2008 results, call 1-877-842-7108, using conference identification number 71573120 at 4:30 p.m. (ET) on Wednesday, November 5, 2008. For your convenience, a replay will be available shortly after the call by dialing 1-800-642-1687.

ABOUT POMEROY IT SOLUTIONS, INC.

Pomeroy IT Solutions, Inc. is a leading provider of IT infrastructure solutions focused on enterprise, network and end-user technologies. Leveraging its core competencies in IT Outsourcing and Professional Services, Pomeroy delivers consulting, deployment, operational, staffing and product sourcing solutions through the disciplines of Six-Sigma, program and project management, and industry best practices. Pomeroy's consultative approach and adaptive methodology enables Fortune 2000 corporations, government entities, and mid-market clients to realize their business goals and objectives by leveraging information technology to simplify complexities, increase productivity, reduce costs, and improve profitability. For more information, go to www.pomeroy.com.

FORWARD-LOOKING STATEMENTS

Certain of the statements in the preceding paragraphs regarding financial results constitute forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our markets' actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements, expressed or implied by such forward-looking statements. These risks, and other factors you should specifically consider, include but are not limited to: changes in customer demands or industry standards; existing market and competitive conditions, including the overall demand for IT products and services; the nature and volume of products and services anticipated to be delivered; the mix of the products and services businesses; the type of services delivered; the ability to fully utilize personnel and increase the use of higher-margin service employees; the ability to successfully attract and retain customers, sell additional products and services to existing customers; the ability to timely bill and collect receivables; the ability to avoid non-profitable service contracts; the ability to maintain a broad customer base to avoid dependence on any single customer; the need to successfully attract and retain outside consulting services; new acquisitions by the Company; terms of vendor agreements and certification programs and the assumptions regarding the ability to perform there under; the ability to implement the Company's best practices strategies; the ability to manage costs and expenses; the ability to manage risks associated with customer projects; adverse or uncertain economic conditions; loss of key personnel; litigation; and the ability to attract and retain technical and other highly skilled personnel. In some cases, you can identify forward-looking statements by such terminology as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue", "projects", "intends", "prospects", "priorities", or negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
		October 5,		January 5,
		2008		2008
ASSETS
Current Assets:
Cash and cash equivalents		$ 17,286		$ 13,282
Certificates of deposit		1,133		1,113
Accounts receivable:
Trade, less allowance of $3,290 and $3,522, respectively		121,131		140,167
Vendor, less allowance of $1,157 and $562, respectively		2,188		11,352
Net investment in leases		100		756
Other		911		1,288
Total receivables		124,330		153,563
Inventories		9,436		15,811
Other		6,540		10,196
Total current assets		158,725		193,965
Equipment and leasehold improvements:
Furniture, fixtures and equipment		16,492		15,180
Leasehold Improvements		5,055		7,262
Total		21,547		22,442
Less accumulated depreciation		12,045		12,645
Net equipment and leasehold improvements		9,502		9,797
Intangible assets, net		1,596		2,017
Other assets		661		805
Total assets		$ 170,484		$ 206,584

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
		October 5,		January 5,
		2008		2008
LIABILITIES AND EQUITY
Current Liabilities:
Floor plan financing		$ 13,891		$ 26,328
Accounts payable - trade		41,799		57,016
Deferred revenue		1,982		1,949
Employee compensation and benefits		6,367		10,248
Accrued facility closing cost and severance		1,497		1,678
Other current liabilities		13,163		15,542
Total current liabilities		78,699		112,761
Accrued facility closing cost and severance		-		1,056
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares, (no shares issued or outstanding)
		-		-
Common stock, $.01 par value; authorized 20,000 shares, (13,693 and 13,513 shares issued, respectively)
		142		140
Paid in capital		93,553		91,399
Accumulated other comprehensive income		25		20
Retained earnings		13,307		14,200
		107,027		105,759
Less treasury stock, at cost (1,683 and 1,323 shares, respectively)		15,242		12,992
Total equity		91,785		92,767
Total liabilities and equity		$ 170,484		$ 206,584

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

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

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

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

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
		Nine Months Ended
Cash Flows from (used in) Operating Activities:		October 5, 2008			October 5, 2007
Net loss		(894	)		(90,821	)
Adjustments to reconcile net loss to net cash flows from (used in) operating activities:
Depreciation and amortization		3,345			4,055
Stock option, restricted stock compensation and employee purchase plan expense
		1,842			342
Restructuring and severance		1,388			(921	)
Goodwill impairment		-			98,314
Provision for doubtful accounts		900			3,063
Amortization of unearned income		(5	)		(31	)
Deferred income taxes		-			(9,609	)
Loss on disposal of fixed assets		-			1,828
Changes in working capital accounts:
Accounts receivable		27,676			4,721
Inventories		6,375			(3,436	)
Other current assets		3,657			(667	)
Net investment in leases		661			808
Accounts payable trade		(15,217	)		(7,291	)
Deferred revenue		33			(296	)
Employee compensation and benefits		(3,881	)		(1,806	)
Other, net		(4,857	)		(4,603	)
Net operating activities		21,023			(6,350	)
Cash Flows used in Investing Activities:
Capital expenditures		(2,629	)		(1,898	)
Purchases of certificate of deposits		(21	)		(27	)
Net investing activities		(2,650	)		(1,925	)
Cash Flows from (used in) Financing Activities:
Net increase (reduction) in floor plan financing		(12,437	)		512
Proceeds from exercise of stock options		-			96
Purchase of treasury stock		(2,250	)		(405	)
Proceeds from issuance of common shares for employee stock purchase plan
		313			313
Net financing activities		(14,374	)		516
Effect of exchange rate changes on cash and cash equivalents		5			(75	)
Increase (decrease) in cash and cash equivalents		4,004			(7,834	)
Cash and cash equivalents:
Beginning of period		13,282			13,562
End of period		$ 17,286			$ 5,728

POMEROY IT SOLUTIONS, INC. 2007, 2006 and 2005 FINANCIAL STATEMENT RECLASSIFICATIONS (UNAUDITED)
During fiscal 2008, the Company determined that certain payroll costs previously classified as operating expenses related to service employees directly generating revenues. As such, these payroll costs should have been classified as cost of sales. Also, a portion of the amounts paid under our floor plan financing arrangement should have been classified as interest expense to reflect the financing nature of this transaction. In addition, as our floor plan financing arrangement is with a third party lender and does provide us with a modest extension of the credit terms over what we might obtain directly with a supplier, we have concluded that cash flows under the floor plan financing arrangement should be classified as a financing activity in our statement of cash flows. The following information discloses the impact of these corrections on our statement of operations for the four quarters of fiscal 2007 as well as for the full fiscal years ended January 5, 2008, 2007 and 2006, and cash flows for the full fiscal years ended January 5, 2008, 2007 and 2006. These corrections did not change the Company’s reported net income (loss) or earnings (loss) per share for any of these periods.
(in thousands)	First Quarter of Fiscal 2007						Second Quarter of Fiscal 2007
	As Previously Reported		As Reported First Quarter Fiscal 2008		As Restated Third Quarter Fiscal 2008		As Previously Reported			As Reported Second Quarter Fiscal 2008			As Restated Third Quarter Fiscal 2008
Net revenues	$ 141,993		$ 141,993		$ 141,993		$ 138,261			$ 138,261			$ 138,261
Cost of revenues	118,291		124,752		124,594		116,238			122,653			122,526
Gross profit	23,702		17,241		17,399		22,023			15,608			15,735
Operating expenses	20,861		14,400		14,400		23,434			17,019			17,019
Income (loss) from operations	2,841		2,841		2,999		(1,411	)		(1,411	)		(1,284	)
Net Interest income (expense)	172		172		14		90			90			(37	)
Income taxes	1,188		1,188		1,188		(468	)		(468	)		(468	)
Net income	$ 1,825		$ 1,825		$ 1,825		$ (853	)		$ (853	)		$ (853	)

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

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

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